Liberty/Ziggo and Liberty/DeVijver: Phase II cable mergers in the Netherlands and Belgium

Transcription

1 Liberty/Ziggo and Liberty/DeVijver: Phase II cable mergers in the Netherlands and Belgium Discussion Gregory S. Crawford Dept. of Economics University of Zurich Association of Competition Economists Conference Bocconi University November 27, 2015 (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

2 Context I: M&A in Europe $ 16 bn. $ 6.7 bn. $ 10.2 bn. $ 10 bn. (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

3 Context II: M&A in the US $ 13.8 bn. $ 45.2 bn. (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

4 Context III: OTT Lurking in the Background OTT = Over-the-top (Internet) television (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

5 Context IV: Common Economics What links these cases are the common underlying economics of television markets... (Wholesale) markets for TV channels (Retail, Distribution) markets for TV services (linear, OTT) Accompanied by increased consolidation... Horizontally: within the markets for TV channels Retail distributors Vertically: Between them (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

6 Context IV: Common Economics What links these cases are the common underlying economics of television markets... (Wholesale) markets for TV channels (Retail, Distribution) markets for TV services (linear, OTT) Accompanied by increased consolidation... Horizontally: within the markets for TV channels Retail distributors (Liberty/Ziggo) Vertically: Between them (Liberty/DiVijver) (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

7 What to Cover Lots of meat in both cases Must inevitably pare down Concentrate comments on the most disputed (?) parts of each 1 Liberty/Ziggo 1 Input foreclosure in film channels 2 Increased bargaining power and competition between linear and OTT 2 Liberty/DiVijver 1 Input foreclosure 2 Customer foreclosure (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

8 Input Foreclosure Basics Economic mechanism: Integrated firm trades off Lost wholesale profit from not supplying downstream rival Increased retail profit from consumers switching to integrated downstream unit to get access to integrated upstream content Important here: size of integrated downstream unit s footprint Key determinant: critical switching threshold above which complete foreclosure would be profitable (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

9 (1.1) Liberty/Ziggo Input foreclosure: Case conclusions Ability: Market power in the input market Premium Film Market, Film1 and HBO Nederland both owned by merged LG/Ziggo Case focuses on Film1 due to 50% ownership of HBO Nederland Incentive: Wholesale margins low, retail margins high, increased downstream footprint due to merger critical threshold low (only 5x downstream rival KPN s churn rate) Also concludes partial foreclosure (raising rivals costs) possible (Though brief and not quantified) (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

10 (1.1) Liberty/Ziggo Input foreclosure: Assessment Solid economics Comments/Questions: 1 Market definition based on industry surveys? SSNIP? Precedents? Discussion? 2 Why conclude no efficiency gains? Similarity of Chellomedia contracts between UPC (integrated) and Ziggo (unintegrated) a sufficient argument? 3 Is some content so important that a channel is a market unto itself? In which case should the Commission also have demanded divestiture of Sport1? And HBO Nederland? (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

11 (1.1) Liberty/Ziggo Input Foreclosure: Related Literature Commission analysis partially in line with our ongoing study looking at Regional Sports Networks in the US (Crawford, Lee, Whinston, and Yurukoglu (2015)) Estimate both efficiency and foreclosure incentives (both present) Find foreclosure would occur in 4.5 of 16 markets absent regulatory safeguards And costs to rivals would rise by almost 40% in other markets (Tho note: still welfare-enhancing in aggregate due to efficiency gains) Key factors: margins and downstream footprint of integrated distributor (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

12 (1.2) Liberty/Ziggo Bargaining power: Case conclusions Bigger means more bargaining power Citing internal documents and correlation between size and expenditure on content Impact Lowers costs (thus prices) for existing content (Good!) Restricts entry by Pay TV competitors (Bad!) (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

13 (1.2) Liberty/Ziggo Bargaining power: Assessment Again, solid economics Comments and questions: 1 Theory literature unsettled on relationship between buyer size and bargaining power So documentary support very important (and interesting) here 2 The Commission finds that it is unlikely that TV broadcasters would be able to resist contractual clauses that hamper their ability to launch... OTT services by adapting a coordinated market response... Each TV broadcaster is likely to weigh its short term gain derived from not losing income from the merged entity in the form of higher licence fees - if it agrees to such clauses against the longer-term gain that could be derived from... facilitating entry at the downstream level. This is the definition of Naked Exclusion (Aghion and Bolton (1987), Rasmusen, Ramseyer, and J. Wiley (1991), Segal and Whinston (2000)). Why not cite? (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

14 (1.2) Liberty/Ziggo Bargaining power: Assessment Comments and questions, cont: 3 Distinguishing between (efficient) monetization strategies for content and (anticompetitive) naked exclusion is a difficult identification problem Social losses more for the latter (?) so err on the side of preventing that? 4 Relevance of this argument internationally? I don t believe it has arisen in US cases (tho different institutional details) Note coordination problem bigger the larger the TV bundle necessary to compete downstream - interesting! 5 Commission concluded commitments to maintain interconnection capacity sufficient to prevent Network Access Foreclosure Is this right? (Analysis is brief) (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

15 (2.1) Liberty/DeVijver Input foreclosure: Case conclusions Are Vier and Vijf must-have content? Surveys and detailed viewing data suggest yes Ability: Telenet dominant, but what of shared ownership of DVM? Commission concludes they could be compensated (Note difference with HBO Nederland) Incentive: Mechanism same as for LG/Ziggo. Key switching threshold significantly exceeded by estimate from Belgacom survey Partial foreclosure more (?) likely: predict several-fold increase in license fees (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

16 (2.1) Liberty/DeVijver Input foreclosure: Assessment Again, (same) solid economics Comments and questions: What defines must-have content? Somehow reasonable for premium film and sport content (?),. Here also for key broadcast content. Are customer surveys enough? Precedent? Why must RRC profit necessarily be higher than total foreclosure? We have the opposite in our work (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

17 Customer foreclosure Basics Economic mechanism: Integrated firm trades off Increased wholesale profit from consumers on integrated retail platform watching more integrated content Both advertising revenues and affiliate fees Lost retail profit from consumers switching to downstream rivals unit in order to get access to foreclosed rival upstream content. Offset by affiliate fee payments not paid to rival content As before, key determinant: critical switching threshold above which complete foreclosure would be possible (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

18 (2.2) Liberty/DeVijver Customer foreclosure: Case conclusions Based on its market dominance, Telenet clearly a must-have distributor for channels Telenet has the ability to decide not only carriage, but also channel position and VOD treatment ( quality ) Analysis crucially connects quality degradation (e.g. poor channel positions) to lost viewership, advertising revenue Incentives? Not clear. Cite my work (Crawford (2015)); two studies in British TV market. Conclude complete foreclosure unlikely (too much customer switching), but partial foreclosure possible Also highlights long-run investment incentives of customer foreclosure (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

19 (2.2) Liberty/DeVijver Customer foreclosure: Assessment Much less solid economics (imho) Comments and questions: Evidence of quality degradation in the data? In the industry? Crawford, Lee, Viera, Whinston, and Yurukoglu (2015) find Integrated distributors carry own more (but don t carry rivals less) Integrated distributors put own in better channel positions (but don t disadvantage rivals more) Channel position important for viewership Why not quantify the partial foreclosure effects using the same bargaining approach used for the input foreclosure analysis? I m sympathetic to long-run effects, but no evidence on this in the literature (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

20 Conclusion Two in a long (and continuing?) line of TV merger cases Economic analysis generally solid... Tho methods used to measure key inputs into the decisions worth further discussion If you didn t follow all this... Time to invest! Lots more work to come. Thank You (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

21 Liberty/Ziggo: Topics Briefly Evaluated 1 Horizontal non-coordinated effects / Sequential pricing Logically consistent, but a bit implausible (IMHO) e.g., no example of such a model in the academic literature Skipped 2 Horizontal coordinated effects / Increased symmetry Logically consistent, more academic support e.g., Marshall and Marx (2007) Skipped 3 Increased bargaining power with broadcasters: waterbed effect Logically consistent, but takes a special model Skipped (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

22 Input Foreclosure Basics I The economic mechanism: a straightforward vertical externality Suppose no vertical links A TV channel (U) licenses content to two symmetric TV distributors (D 1, D 2 ) U and Ds bargain over affiliate fees, (τ 1,τ 2 ) Ds compete in prices (p 1, p 2 ) after contracting Competition downstream ifτ 2, p 2, Demand for firm 1 Without integration, U ignores this and negotiates symmetric τs With (U : D 1 ) integration, U sets a higherτ 2 ( Partial foreclosure, Raising rivals costs ) May even decide it s better not to supply D 2 at all (τ 2 =, Complete foreclosure, Exclusion ) (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22

23 Aghion, P., and P. Bolton (1987): Contracts as a Barrier to Entry, American Economic Review, 77, Crawford, G. S. (2015): The Economics of Television and Online Video Markets, Working paper, University of Zurich, forthcoming in the Handbook of Media Economics. Crawford, G. S., R. Lee, B. Viera, M. Whinston,and A. Yurukoglu (2015): Channel 5 or 500? Vertical Integration, Favoritism, and Discrimination in Multichannel Television, Work in progress, University of Zurich. Crawford, G. S., R. Lee, M. Whinston, and A. Yurukoglu (2015): The Welfare Effects of Vertical Integration in Multichannel Television Markets, Work in progress, University of Zurich. Marshall, R., and L. Marx (2007): Bidder Collusion, Journal of Economic Theory, 133(1), Rasmusen, E., J. M. Ramseyer, and J. J. Wiley (1991): Naked Exclusion, American Economic Review, 81(5), Segal, I., and M. Whinston (2000): Naked Exclusion: Comment, American Economic Review, 90(1), (Crawford Discussion) LG/Ziggo and LG/DeVijver November 27, / 22