Regulators look set to approve two controversial deals – Rupert Murdoch’s proposed takeover of BSkyB and AT&T’s T-Mobile deal. IBA Global Insight analyses the far-reaching implications.
When Rupert Murdoch’s News Corporation unveiled its plan in 2010 to take full control of UK satellite broadcaster BSkyB, there were protests from rival UK media companies. The companies behind two national newspapers, the Daily Telegraph and the Daily Mail, united with the owners of newspapers on the opposite side of the political spectrum, the Guardian and the Daily Mirror, to urge the Business Secretary Vince Cable to consider blocking the move.
In their letter to Cable, the companies argued that an integrated News Corporation/BSkyB operation, which would include The Sun, the News of the World and The Times newspapers along with book publisher HarperCollins, could have ‘serious and far-reaching consequences for media plurality’. The document was backed by a memo prepared by law firm Slaughter & May, setting out the legal arguments for the minister to intervene.
Allegations that journalists at the News of the World (NoW) employed private detectives to intercept messages left on the mobile phones of celebrities, politicians and sports stars only served to add to the controversy. Andy Coulson, the editor of the NoW at the time the alleged phone hacking took place, had since gained significant political influence as Prime Minister David Cameron’s director of communications.
The Financial Times also urged Cable to take action, arguing that ‘together, News and BSkyB would be a truly formidable beast’ and that the merger would ‘threaten plurality in several ways’. Media analyst Claire Enders described the merger as the UK’s ‘Berlusconi moment’.
Cable subsequently decided to issue an intervention notice under the 2002 Enterprise Act ordering the UK’s media regulator, Ofcom, to investigate whether there could be a public interest case to answer over the proposed deal. If Ofcom were to raise concerns, this could have led to a lengthy and more detailed investigation by the UK’s competition authority, the Competition Commission.
EU regulators disappointed the deal’s detractors by giving it their seal of approval in December 2010. ‘I am confident that this merger will not weaken competition in the UK,’ said Joaquin Almunia, the member of the European Commission responsible for competition. However, he added that its effects on media plurality would be a matter for the UK authorities.
This news was somewhat overshadowed, to say the least, by the revelation on the same day that two undercover reporters had secretly taped Cable admitting that he had ‘declared war’ on Rupert Murdoch. This made it impossible for him to continue as the ultimate arbiter of whether the deal should proceed, and that part of his job was handed over to Jeremy Hunt, the Secretary of State for Culture, Media and Sport.
Ofcom’s report on the proposed deal, which Hunt published in January 2011, identified potential threats to media plurality and recommended exposing the merger to a Competition Commission investigation. Hunt said that he was ‘minded’ to accept this recommendation, but gave News Corporation extra time to address Ofcom’s concerns.
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To counter what was perceived as the main threat from the takeover, the potential undermining of the editorial independence of the award-winning Sky News channel, News Corporation undertook to spin off the channel. Under the terms of the company’s proposal, the loss-making service would be independently governed and funded under a long-term promise of payments from News Corporation, in an effort to ensure its journalism would not suffer. In March, Hunt announced that he intended to accept News Corporation’s undertakings, rather than refer the deal to the Competition Commission. A brief consultation on the proposal was launched, but at the time of writing, few were expecting Hunt to change his mind.
The proposal was described by some as an ‘elegant’ way of avoiding a long, costly investigation by lawyers. ‘The secretary of state in this case was careful to do everything in line with Ofcom’s concerns, and having addressed those absolutely straight down the middle with the solution of hiving off Sky News, he can say he’s saved everyone a full Competition Commission inquiry and met Ofcom’s concerns,’ says Michael Grenfell, an antitrust, competition and regulatory partner with Norton Rose.
‘Just because people get upset politically, that does not mean they have a case’
Jones Day; Vice-Chair, of the IBA's Communications Law Committee
Alan Davis, competition partner at Pinsent Masons, told the Guardian that the proposed solution was ‘a very sensible approach’. He argued that it was ‘consistent with the approach the Office of Fair Trading or the European Commission would take, a policy to encourage merging parties to come forward as early as possible with any remedies. Referral to the Competition Commission is costly and extremely time-consuming and often has a chilling effect on the deal.’
Other observers were less impressed, arguing that concerns remained over whether Ofcom had been given enough time to produce its report. In addition, some lawyers have noted that Hunt accepted the undertakings from News Corporation in closed sessions without providing an opportunity for them to be discussed before an independent and transparent inquiry.
Robert Bell, head of EU and competition law at Speechly Bircham, suggests that Hunt has left himself open to criticism that he unduly hurried the process because political considerations were in favour of avoiding a Competition Commission inquiry. ‘It is vitally important that political imperatives do not compromise due process in the media plurality review system,’ Bell told IBA Global Insight. ‘In politically charged cases such as this, it is infinitely preferable for a full and transparent inquiry to be held before the Competition Commission.’
One way of strengthening public scrutiny of media mergers, Bell says, might be to take certain decisions away from the Secretary of State and leave them to Ofcom and the Competition Commission. This would mirror the reforms to the general UK merger regime under the Enterprise Act, when the secretary of state lost their role in standard merger cases. However, the practical problem would be constructing a definition that only catches relevant cases.
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One of the key lessons of the saga seems to be that reforms are needed. Hunt admitted as much in March when he said that the UK’s media plurality review system ‘may not be as robust as it should be’. Ofcom Chief Executive Ed Richards has added that as existing law only allows for a plurality review when a merger situation arises, there is no way to break up a media company deemed to have become dominant through organic growth.
Richards thinks a dynamic system is needed in which a plurality review could be triggered because of a change in audience levels or viewing share. In theory, that would allow any media group to be subject to an investigation that could lead to enforced disposals or other measures designed to promote media plurality.
Grenfell thinks that proposed reforms of the competition regulation regime currently being discussed in the UK may help introduce greater flexibility in this regard. ‘One of the reforms they’ve proposed is that the new competition authority in a market investigation should be able to consider public interest issues alongside competition issues,’ he says. ‘That may well be a way of saying that you should be able to look at media plurality as a market investigation – not just where you have a merger, or a transaction as in this case, but at any time at all if concerns arise. That would cover concerns that News Corporation has become too powerful.’
Alexandre Verheyden, a partner based in the Brussels office of Jones Day and Vice- Chair of the IBA’s Communications Law Committee, sees an unavoidable trend towards vertical integration. ‘Just because people get upset politically, that does not mean they have a case,’ he says. Although News Corporation is undoubtedly powerful, ‘the written press is not the only medium available to people,’ he says. ‘Although the shrinking of the newspaper market may suggest reduced plurality, if you take some distance, this is not the case.’
Verheyden says that the News Corporation/BSkyB proposal is a controversial one partly because competition law does not worry about wider public interest issues. It simply analyses a legal problem. ‘The political rationale for any given deal does not really matter that much,’ he says. ‘You either restrict competition or you don’t, and if you don’t, competition law can’t do much about it.’
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Another large deal that has proved controversial this year is US telecoms giant AT&T’s offer to acquire rival telecoms firm T-Mobile USA for US$39 billion. If, and it’s a big if, the transaction goes ahead, the new company would leapfrog Verizon to become the largest mobile operator in the US.
In a recent filing with US regulator the Federal Communications Commission (FCC), AT&T and T-Mobile’s parent company Deutsche Telekom argued that the merger was necessary to reach the Obama administration’s stated goal of bringing next-generation wireless internet access to 97 per cent of Americans. The companies also claimed the deal would make it easier for them to offer faster and cheaper wireless services to customers.
‘It is vitally important that political imperatives do not compromise due process in the media plurality review system’
Inevitably, however, the deal has attracted plenty of criticism. Many have argued that it will create a wireless duopoly, with two companies – AT&T and Verizon – sharing 80 per cent of the market. There is the possibility, which some would see as a likelihood and perhaps an absolute certainty, that the deal would raise prices, while stifling economic growth and innovation and swelling the ranks of the unemployed.
Sprint, the third largest wireless provider in the US, argues that the transaction ‘would reverse nearly three decades of actions by the US Government and the courts that modernised and opened US communications markets to competition. The wireless industry has sparked unprecedented levels of competition, innovation, job creation and investment for the American economy, all of which could be undone by this transaction.’
The regulatory issues raised by the proposed deal are easier to articulate than to solve, says Judith O’Neill, former Chair of the telecoms department at Greenberg Traurig and now an entrepreneur in an emergency mobile alert company. She also represents North America on the IBA’s Communications Law Committee. ‘First and foremost for the FCC and the Department of Justice (DoJ) is the impact on competition in the mobile telecommunications and possibly mobile internet markets. This, of course, is the first area to which all would look in considering if such a bold merger were at all capable of approval by the regulators. At least one commentator has said that if this merger is approved, one would have to wonder what the purpose of the DoJ or the FCC actually is.’
However, O’Neill also says that if the deal is approved, the market share of the new entity is estimated to be about 40 per cent. ‘In EU studies by consultancy Ovum, the EU mobile market is discussed as being entirely competitive because no single operator typically has more than 40 per cent market share,’ she says. ‘This would support the argument that the US mobile market remains fully competitive if this merger is approved.’
Among public interest groups reacting to the transaction, Public Knowledge offered what appeared to be the consensus view, asserting that the wireless market, currently dominated by four big companies, would have only three at the top, says Patrick S Campbell, a partner in the communications and technology department at US law firm Paul, Weiss, Rifkind, Wharton & Garrison. ‘They also said that the consequence of the AT&T/T-Mobile deal would be higher prices, fewer choices and less innovation,’ he says.
Campbell believes that while the deal will face high regulatory hurdles at the DoJ and the FCC, ‘most analysts agree that the companies’ willingness to consider significant divestitures of overlapping spectrum and their pledge to extend broadband to 95 per cent of US households may tip the scales in favour of merger approval’.
Would a duopoly necessarily be such a bad thing? In a recent article published in the IBA’s journal, Business Law International, A Neil Campbell of McMillan in Canada and J William Rowley QC of 20 Essex Street Chambers in the UK note that in the Trinko decision of 2004, the US Supreme Court recognised that monopoly may be good as well as bad. ‘The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only lawful; it is an important element of the free-market system,’ the Court said. ‘The opportunity to charge monopoly prices – at least for a short period – is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth.’
So is AT&T, by creating a monster telecoms firm, simply inspiring its competitors to do better? ‘On balance, this is a very tight call,’ says O’Neill. ‘If I were forced to bet on this one, I would bet in favour of FCC approval but no one would be shocked with either decision.’
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With such a wide range of business deals taking place across the globe, it is difficult to pick out specific regulatory trends. In many countries, multinationals have encountered merger, cartel and dominance laws that are significantly different from those prevailing in the jurisdictions they know. In Brazil, for instance, a dominant position is presumed to exist once a firm has a 20 per cent market share, while in China, new competition laws adopted in 2008 are designed to operate in a ‘socialist market economy’ and are very different again.
However, there are plenty of indications in many jurisdictions of competition regulators who do not shy away from action. The Japan Fair Trade Commission took action against Intel in a high-profile decision in 2005, for example, and amendments to Japanese competition law in 2006 expanded the tools available for enforcement in general and monopolisation in particular. The Korean Fair Trade Commission (KFTC) also took action on the international cases involving Microsoft and Intel and concluded two major abuses of dominance cases involving large domestic firms in recent years (carmaker Hyundai and SK Telecom).
Google is one of the latest companies to face antitrust complaints in South Korea as mobile phones using its Android software gain dominance. NHN and Daum Communications, operators of South Korea’s two largest internet search sites, have filed complaints against Google with the KFTC for blocking local phone carriers and manufacturers from embedding their search applications in devices using the Android operating system.
In the EU, the European Commission launched an investigation into allegations of anti-competitive practices by Google in November 2010, at the behest of several internet companies, including Ciao, a shopping site owned by Microsoft. Since then, Microsoft has taken an anti-competition complaint against Google to Brussels, claiming that Google has used its dominant position in the search market to restrict the growth of Microsoft services.
All this follows a 2004 Commission ruling that Microsoft had unfairly advantaged its Windows Media Player software over other streaming technologies by embedding it into the Windows operating system. The company was fined €497 million, followed by a further €899 million in 2008 for failing to comply with elements of the original ruling. To date, the largest fine levied by the Commission is just over €1 billion, imposed on Intel in 2009. The microchip maker was found to have offered financial incentives to manufacturers to favour its products over those of its rivals.
While developments in the UK and US may provide some indication of a more relaxed approach from regulators, multinationals would be unwise to assume that this is a global trend.
Jonathan Watson is a journalist specialising in European business, legal and regulatory developments. He can be contacted by e-mail at firstname.lastname@example.org.
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