BBC Worldwide Ltd / Channel Four Television Corporation / ITV plc (OFT)

OFT closed case: Joint venture between BBC Worldwide Limited, Channel Four Television Corporation and ITV plc.

Affected market: Video on demand

No. ME/3634/08

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 commercial confidentiality.

PARTIES

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 VOD platforms.

TRANSACTION

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.

JURISDICTION

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 transaction.

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.

ASSESSMENT

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 downstream consumers.

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.

DECISION

This merger will therefore be referred to the Competition Commission under section 33(1) of the Act.

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