The biggest pay TV firm in the UK, BSkyB, recently bought a 17.9% stake in the biggest free to air TV firm in the UK, ITV. The UK Office of Fair Trading (OFT) has completed its initial investigation of the partial merger and decided there are enough competition concerns to refer the merger to the Competition Commission for a detailed inquiry lasting up to five and a half months.

The OFT’s report raises a number of interesting issues such as the effect of partial mergers, how to analyse competition between television companies in the current dynamic climate, and the impact of internal company documents on a merger investigation.

BSkyB’s internal documents

The OFT sought confidential comment from BSkyB on its rationale for the transaction and requested production of relevant BSkyB documents, particularly those at board level. The OFT has not made those documents public but it did comment that ‘while the internal documentary evidence discloses no anticompetitive rationale, there is also no evidence to support the view that BSkyB projected any efficiencyenhancing or otherwise pro-competitive benefits’1.

The OFT appeared to give these documents more weight than BSkyB’s public statement of the reason for the merger. The lesson here is that firms considering a merger should remember that their internal documents may be requested by the ACCC and used in a merger inquiry.

Analysing the effect of a partial ownership

The OFT does not have jurisdiction over the merger unless BSkyB has ‘material influence’ over ITV. The main grounds for the OFT’s conclusion that BSkyB has acquired material influence over ITV is the evidence that voting turnout at recent AGMs was around 65%. Therefore, a shareholder with a 17.9% stake in ITV would have exercised more than 25% of the votes cast. As a result, that shareholder could have blocked special resolutions. This ability has historically been used as an important criterion for determining whether a firm has material influence. The OFT also believe that BSkyB may obtain board representation and it would be ITV’s largest shareholder.

Theories of harm

In working out the theories of harm the OFT recognised that the markets in question are dynamic and under technological transformation. In particular, the UK television broadcasting sector is preparing for digital switchover in 2008. This may, for example, increase the extent to which free to air and pay TV compete against each other.

The OFT’s main concern was that BSkyB’s stake in ITV posed a risk of a material reduction in strategic competition between BSkyB and ITV. The key points supporting this concern can be summarised as follows:

  • As a result of BSkyB's material influence over ITV, the two can no longer be considered independent strategic rivals.
  • BSkyB holds its stake in ITV at a time when digital switchover is likely to result in an equilibrium shift in the balance between free to air and pay TV.
  • An independent ITV, free to strengthen its digital free to air offering, presents a materially greater threat to BSkyB's market power in premium pay TV markets.
  • There is evidence to suggest that an independent ITV could be an important potential entrant into pay TV in direct competition with BSkyB's business model.

In relation to the sale of TV advertising, the OFT considered that the acquisition would provide the parties with the ability and incentive to share sensitive information and coordinate their behaviour in order to reduce future discounting and/or to reduce innovation within the advertising sector.

The OFT was also concerned that third parities may be deterred from partnering with ITV to bid jointly for sports rights in competition with BSkyB, due to the deterrent effect that BSkyB might obtain sensitive information relating to the bid (or other activities of the third party) as a result of the structural link with ITV. This is an area of particular sensitivity given that joint bidding in relation to a small number of key rights - and in particular rights to the FA Premier League - may be central to any future attempt by ITV to challenge BSkyB’s long standing market power in premium pay TV.

Analysis of media plurality

The Competition Commission will not only consider competition issues. It has been directed by the government to consider how the public interest might be affected through a reduction in plurality. This factor would not be analysed separately from the competition issues if a similar merger were to take place in Australia, since the ACCC would use a substantial lessening of competition test only. That is, the ACCC would consider whether the merger would have the effect or likely effect of substantially lessening competition.

Footnotes

1 Paragraph 45 of ‘Acquisition by British Sky Broadcasting Group plc of a 17.9 per cent stake in ITV plc’ by the OFT.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.