Affected market: Video on demand
The OFT’s decision on reference under section 33(1) given on 30 June
2008. Full text of decision published on 14 July 2008.
Please note that square brackets indicate figures or text which have
been deleted or replaced at the request of the parties for reasons of
BBC Worldwide Limited (BBCW) is a wholly-owned subsidiary of the British
Broadcasting Corporation (BBC). BBCW engages in a wide range of
commercial activities in the audiovisual sector, mainly involving the
commercial exploitation of material produced or commissioned by the BBC,
including syndication of archived television content to video on demand
(VOD) providers. BBCW is also involved in book and magazine publishing.
Channel 4 Television Corporation (C4) is a publicly-owned corporation
active in the audiovisual sector. It owns and operates a number of
commercial channels, including Channel 4, and a website through which
VOD can be accessed (www.channel4.com). C4 also operates 4oD, a VOD
platform which is accessed online or through certain closed VOD
platforms (for example, Virgin Media) as a branded VOD channel.
ITV plc (ITV) has a range of activities in the audiovisual sector,
including the operation of television channels, in-house content
production via ITV Productions (formerly Granada Productions),
advertising sales, interests in Freeview and SDN, a digital terrestrial
television multiplex operator, and various internet activities. ITV
operates a website (www.itv.com) through which a wide range of ITV
content is available via VOD. ITV also syndicates VOD content to other
The parties propose to establish Vod[…], a joint venture […]. The
joint venture will provide an internet-based VOD service to enable users
to view and own audiovisual material, sell internet advertising space,
and syndicate content to third party VOD service providers.
Plans for the joint venture were publicly announced through a press
release in November 2007. The OFT accepted a satisfactory informal
submission from the parties on 29 April 2008. The extended
administrative deadline is 27 June 2008.
The joint venture project is known publicly by the term Kangaroo, and is
on occasion referred to as such below.
As a result of this transaction the VOD activities of BBCW, ITV and C4
will cease to be distinct. The parties will transfer content,
syndication rights and the technology required to operate a VOD service
to the joint venture.
The parties' activities overlap in the supply of UK catch-up television
VOD content. Catch-up content may broadly be defined as content made
available via VOD within a window of zero to seven days or zero to 30
days following initial broadcast on television. The parties have
indicated that the joint venture will account for more than 25 per cent
of catch-up hours available on a VOD basis in the UK. Moreover, the OFT
considers that where the parties continue to operate activities of the
same type as those undertaken by the joint venture, such activities are
taken into account for the share of supply test. In this case, the
parties between them currently account for more than 25 per cent of
catch-up hours available on a VOD basis in the UK, and so the OFT
considers that it is or may be the case that the share of supply test in
section 23 of the Enterprise Act 2002 (the Act) is met.
The OFT therefore believes that it is or may be the case that
arrangements are in progress or in contemplation which, if carried into
effect, will result in the creation of a relevant merger situation.
THIRD PARTY VIEWS
The OFT received 30 submissions from third parties involved in the
supply of content, the supply of VOD services and advertising.
Respondents involved in advertising did not raise concerns regarding the
The majority of third parties were concerned about the joint venture and
expressed concerns about both the horizontal and vertical aspects of the
transaction, anticipating that the joint venture would give rise to
market power at the wholesale supply level and the potential for
increased incentives to foreclose downstream rivals. It should be noted,
however, that due to the confidentiality of the joint venture
arrangements, third parties were not usually fully clear as to how the
joint venture would operate. Consequently, the concerns put to us were
based on a worst case scenario.
The joint venture brings together the VOD services of the three leading
UK public service broadcasters. The joint venture will provide ITV, BBC
and C4 archive content and ITV and C4 catch up content to computer users
via the internet. The joint venture will also be responsible for the
joint selling of archive and catch-up content owned by the parties to
third party VOD service providers.
Arguments that the joint venture is neutral or pro-competitive
The parties consider that the joint venture is the best way for them to
compete against what they see as extremely well placed competitors, some
of whom (such as Apple or Microsoft) have advantages with respect to
integrated hardware offerings and can offer premium content and popular
US shows. They argue, in effect, that the downstream retail market on
which they compete is a broad and dynamic one, in which UK consumers
could and would switch between an array of video content - including US
TV content and film - and from an array of delivery mechanisms - via a
website, TV subscription, PVR and/or DVD rental or purchase. If the
joint venture has no prospect of market power downstream because of this
broad array of choices, then unilateral price effects in transactional
(DTO, DTR) content could safely be discounted at the retail level.
Moreover, wholesale syndication customers could arguably also do without
Kangaroo-held content and switch to other content or delivery sources,
or discipline the joint venture's pricing in the syndication market if
it were correct that final consumers would switch between an array of
content and delivery mechanisms. However, while the OFT has little
evidence of consumer preferences and their willingness to pay for UK TV
content controlled by the parties, the OFT has received widespread
concern from wholesale customers who dispute the large majority of
material points necessary to the parties' case for clearance.
Arguments that the joint venture may be anti-competitive
While the concerns of wholesalers are those of downstream competitors to
the parties, they relate not simply to foreclosure, about which rivals
often complain to the OFT, frequently without merit. Rather, they relate
to the horizontal unilateral effects of the merger on them as customers,
because the merger may create or enhance market power at the syndication
level, by combining close substitutes for VOD content rights. As
insufficient evidence is before the OFT to rebut such concerns, the OFT
cannot rule our a realistic prospect of a substantial lessening of
competition (SLC) in VOD rights syndication in the UK, based on the
combination of the parties' rights portfolios to UK TV content. In a
horizontal merger that occurs in a market upstream of end-consumers, it
is sufficient for the SLC test that intermediate customers are harmed by
the lessening of rivalry; that is what makes the lessening substantial,
and there is no need for the OFT to establish pass-on of such harm to
In this case, the OFT has also been unable to establish at the retail
level whether the ‘one-stop UK TV library of VOD' consumer benefit of
the joint venture would outweigh the concerns of potentially higher
transactional prices resulting from a combination of the parties’ VOD
retail services. The potential vertical effect of raising rival's costs
- flowing from market power created by the merger at wholesale level -
could aggravate retail concerns. While there are serious question marks
as to whether the joint venture would have the incentive to do so, the
hypothesis of downstream market power might make this concern valid,
because Kangaroo may gain from inflated DTO and DTR prices which rivals
could not undercut.
Overall, the lack of suitable evidence on consumer preferences and
substitution patterns in the nascent VOD sector, including on the
importance of UK TV content relative to other content, and the
importance of VOD relative to other delivery channels for video content,
have led the OFT to adopt a cautious approach consistent with the Court
of Appeal's judgment in IBA Health, because a clearance cannot be
objectively justified with relevant facts. Once a candidate VOD market
based on UK TV rights and their exploitation cannot be ruled out,
neither can horizontal concerns because of the parties' high collective
share, and high increments created by Kangaroo, on any reasonable
measure, consistent with widespread customer concerns about market power
in respect of rights syndication, corroborated by the views of
independent UK TV producers.
Consequently, the OFT believes that it is or may be the case that the
merger may be expected to result in a substantial lessening of
competition within a market or markets in the United Kingdom.
UNDERTAKINGS IN LIEU
Where the duty to make a reference under section 33(1) of the Act
applies, pursuant to section 73(2) of the Act the OFT may, instead of
making such a reference, and for the purpose of remedying, mitigating or
preventing the substantial lessening of competition concerned or any
adverse effect which has or may have resulted from it or may be expected
to result from it, accept from such of the parties concerned
undertakings as it considers appropriate.
The OFT has therefore considered whether there might be undertakings in
lieu of reference which would address the competition concerns outlined
above. The OFT’s Mergers Substantive Assessment Guidance states that,
‘undertakings in lieu of reference are appropriate only where the
competition concerns raised by the merger and the remedies proposed to
address them are clear cut, and those remedies are capable of ready
implementation.’ (para 8.3).
The parties offered two sets of undertakings for the OFT to consider,
The OFT did not consider that these undertakings were sufficient to
solve the potential competition concerns raised by the transaction. Most
notably, the OFT's concerns centre around the ability of the parties to
control access to content seen as desirable by VOD users and is thus
considered essential by VOD service providers to create an attractive
offering. […] consequently the OFT did not consider the undertakings
offered by the parties sufficient to solve the OFT’s concerns and
therefore avoid a reference.
This merger will therefore be referred to the Competition Commission
under section 33(1) of the Act.