Background
The ACCC released its draft media merger guidelines in August 2016. Given the previous merger guidelines were released in 2006, these drafts outline the first proposed changes in over ten years. Critically these guidelines come in the wake of Australian government’s media reform package, which seeks to abolish both the ‘reach’ rule and the ‘two of three’ media ownership rules. In particular, these ownership rules currently prevent regional broadcasters from being acquired by the main broadcasting networks due to the 75% ‘reach’ rule.
These change to the Broadcasting Services Act 1992 (Cth) (BSA), the revised ownership laws are likely to lead to mergers in the television broadcasting sector between each of the networks and their regional affiliates. The ACCC draft guidelines thus illustrate the changes in approach that the ACCC may potentially take in the face of incoming merger activity.
Scope
The media merger guidelines are noted by the ACCC as complementary to the ACCC’s existing general merger guidelines. The guidelines purport to assist merger parties with understanding the key issues to be considered by the ACCC, in turn ensuring more ‘relevant and targeted submissions’ by the merger parties themselves.
While the ACCC notes in the draft that a merger update is ‘timely’ due to the ‘significant changes to the way media is delivered and consumed over the past ten years’, the merger guidelines do not reflect a wholesale shift in approach. Within the draft guidelines, the ACCC has stated that “The ACCC will not base its merger analysis on predictions or speculation about hypothetical technological changes.” Rather, the ACCC will “base its decisions on the best available evidence about current and likely future competition in the market”. This tempered approach remains consistent with the current approach outlined in the existing media merger guidelines. Both the current and proposed iterations of the media merger guidelines emphasise the difficulty in predicting precisely how technology will impact competition.
Overview
The draft merger guidelines have identified six key issues for potential merger parties to understand.
- Competition and media diversity
As previously discussed, the proposed amendments to the BSA would eliminate the ‘75% reach’ rule and the ‘2 out of 3’ rule. However, the ACCC notes that the three remaining rules still operate to preserve diversity and regulate concentration in media markets. These rules are;
- The ‘5/4’ rule Whereby “at least five independent media voices must be present in metropolitan commercial radio licence areas (the mainland state capital cities), and at least four in regional commercial radio licence areas”
- The ‘one to a market rule’ – “a person, either in their own right or as a director of one or more companies, must not be able to exercise control of more than one commercial television broadcasting licence in a licence area”
- The ‘two to a market rule’ – “a person, either in their own right or as a director of one or more companies, must not be able to exercise control of more than two commercial radio broadcasting licences in the same licence area”
Diversity and concentration form an initial indicator in determining market power changes for the ACCC. From the standpoint of the ACCC, these elements affect a number of relevant factors, particularly the quality of product and the existence of barriers to entry.
- Impact of technological change and future developments in the market
The ACCC recognises that technology can “have a significant influence on the competitive landscape.” Similarly, by noting the rise of social media and digital media, the ACCC notes that technology can dramatically “shift the competitive dynamics of media markets”.
Technology is seen as capable of:
- Increasing the ‘closeness of competition’ between products that were previously in less direct competition
- Impacting the existence and effectiveness of barriers to entry
- Amplifying the disruptive influence of small but innovative competitors
- Access to key content
The ACCC recognisers that ‘premium or key’ content is a critical element in attracting consumers. For instance, premium live-sports coverage are integral components of television networks (an example being Optus’ purchase of premier league football rights). According to the ACCC, the inability to obtain such content can form a significant barrier to entry.
Thus competition concerns arise where mergers concentrate key content, or enable merged firms to acquire content. In assessing this the ACCC will consider:
- The temporal element of programming content (periods between contract renewal, changing consumer preferences)
- Whether access to content through merger will inhibit competition from rivals
- Whether the holders of key content sell through a single package, thereby precluding smaller participants.
- Two sided markets and network effects
Two sided markets are defined as a “platform or intermediary brings together two distinct groups of users which interact with each other.” Where users gain value from the use and presence of other users, there is also a ‘network effect’ present within the market.
Network effects are noted as potentially raising a barrier to entry as they provide the opportunity for a ‘first mover advantage’ in establishing a dominant position within markets. For instance, once a business establishes a ‘critical mass’ of users, the network effect benefits provided by these users will create a significant competitive burden for potential new entrants.
The 2016 draft media merger guidelines mark the first time the ACCC media merger guidelines have referenced the influence of network effects upon media industries. This change in focus by the ACCC likely reflects the large shift in consumer preference toward online platforms. For instance, the draft guidelines reference the ACCC opposition of the trading post brand by Carsales.com in 2013. The ACCC concluded that the acquisition would ‘reinforce the network effects in a virtuous cycle’ that Carsales.com already enjoyed through their large market audience. The acquisition was unacceptable as achieving ‘critical mass’ in classified advertising was found to be difficult given the high barriers to entry (marketing and brand awareness).
- Bundling and foreclosure
The ACCC closely examines media mergers that “enable the merged entity to leverage its market power in one market to substantially lessen competition in another market.” The example given is where a free-to-air network can substantially lessen competition by merging with a content supplier that competitors need in order to compete effectively. The ACCC notes the competition concerns also arise where rival firms are foreclosed, for instance restricting access to key content.
- Minority Shareholdings
The draft guidelines refer users to the general ACCC merger guidelines in providing details.
The potential influence of the Australian Competition Tribunal
Finally, with regard to media mergers, it is pertinent to note the interplay between the Australian Competition Tribunal and the ACCC. Where informal merger clearance is sought, the tribunal process provides for an alternative to the application of s50 of the CCA. The decision by the Australian Competition Tribunal on July 2016 to authorise the acquisition of Toll Marine in Sea Swift Pty Limited, serves to emphasise the validity of the tribunal process.
The validity of the tribunal process is significant as it appears that the competition tribunal and the ACCC hold potentially differing views upon key concepts. For instance, in Sea Swift, the merger was approved by the tribunal directly against the views of the ACCC. For instance, the ACCC did not believe that the competitive detriment of the merger would be insignificant, given that the exit (and breaking up of assets) of toll marine would open up a ‘unique opportunity’ to lower entry costs for new entrants. However, the tribunal found that this was ‘not a realistic proposition’ after a close examination of the tender process for Toll Marine’s largest customers. While clearly not a media merger, the decision demonstrates the ability of the tribunal to reach highly divergent views from the ACCC upon the same facts.
