Drama, conflict - TV merger fight has it all

Is there a pay TV market or not? If the ACCC rules yes, Foxtel and Austar's bid to merge will be in strife - and perhaps bound for court, writes Elisabeth Sexton.

Is there a pay TV market or not? If the ACCC rules yes, Foxtel and Austar's bid to merge will be in strife - and perhaps bound for court, writes Elisabeth Sexton.

Ten years ago, Fox Sports produced an internal marketing plan for the sports programs it was selling to pay television providers Foxtel and Austar.

It concluded: "We must therefore wherever possible provide consumers with what they want to watch, how and when they want to watch it. The question must always be asked, what are consumers prepared to pay for? Not just what are they prepared to watch. This is the fundamental point of difference between pay television and free-to-air television."

If that fundamental point of difference still exists, it could be a big hurdle for the hopes of Foxtel and Austar to merge.

Last week, the Australian Competition and Consumer Commission said its preliminary view was that the merger would breach the law by substantially reducing competition in the pay TV market.

The would-be partners argue strenuously no such market exists.

Austar's chairman, Mike Fries, said on Tuesday: "Everywhere we operate, it is well accepted that free-to-air TV players compete head-to-head with pay TV providers for content and for viewers.

"The regulator's position on this is hard to understand, to say the least."

Unfortunately for Fries, the ACCC's position not only accords with the views of overseas competition regulators, but also the judgments of Australian courts.

When the ACCC released its issues paper last Friday, Foxtel's chief executive, Kim Williams, said: "What we have in the commission's statement of issues is a recital of opinions which do not have recourse to any kind of evidence.

"Parts of the commission are entitled to have their own personal opinions, but fortunately our legal system doesn't operate that way."

As this battle plays out, Williams might find that his own evidence to the Federal Court a few years ago might come back to haunt him.

In 2007 the court ruled that pay TV was a separate market to free-to-air. An appeal heard by a full court of the Federal Court later left that finding undisturbed.

The case was the Seven Network's epic, failed attempt to prove that its competitors colluded to kill its fledgling pay television arm, C7.

Seven suffered a comprehensive loss, but it did persuade Justice Ronald Sackville that there was "an Australia-wide market for the retail supply of pay television services".

This is almost identical to the ACCC's definition of where its concerns about Foxtel and Austar lie, "a national market for the supply of subscription television services".

The battle between the ACCC and the two pay TV companies is likely to focus on how much the markets have changed since the C7 days and how they could develop in the future.

Merger disputes rarely reach court, but this one could be the second this year, after the grocery wholesaler Metcash decided to fight the ACCC's opposition to its takeover of the Franklins supermarket chain.

The Federal Court's decision in that case is pending.

If the Foxtel-Austar merger goes before a judge, an obvious factor will be the advent of digital broadcasting, which has allowed the free-to-air networks to offer multiple channels.

Another is the development of new ways of delivering content, particularly over the internet.

Williams said last week: "Foxtel faces vigorous competition from the reinvigorated commercial and national broadcasters and their digital multi-channels, new IPTV and on-line competitors such as streaming services over broadband networks (such as Fetch TV), ISPs that provide content themselves together with online movie rental and download services, and DVD rental and sales."

In 2007 Justice Sackville threw out Seven's complaint against Foxtel and its owners, Telstra, News Ltd and Publishing and Broadcasting Ltd, because he did not accept that their conduct had the purpose or effect of reducing competition in the retail pay TV market, where C7 was trying to establish itself. Nor did Foxtel misuse its power in that market.

These were claims under sections 45 and 46 of the then Trade Practices Act, dealing with anti-competitive conduct.

This time around, the ACCC is raising concerns under section 50 of what is now the Competition and Consumer Act, which deals with mergers and acquisitions.

Notwithstanding that distinction, there will be many common issues because all three sections involve defining "a market".

Justice Sackville considered evidence of the competitive landscape between 1999 and 2001, the period of C7's short life. Then, as now, Foxtel offered pay TV services in metropolitan areas and Austar in regional Australia. They compete directly only on the Gold Coast.

In his judgment, Sackville quoted from the Fox Sports marketing plan and its insistence on the "fundamental point of difference". He concluded it was not correct to say that pay and free-to-air TV simply competed for viewers.

Pay's emphasis was not so much on mass audiences "but on offering channels and programs that appeal to strong minority preferences that are not catered for, or are catered for insufficiently, on free-to-air television," the judge said.

"The fact that pay television seeks to attract viewers from the general body of free-to-air television viewers (virtually everyone) ... does not mean that free-to-air television operators constrain pay television platforms from profitably imposing price increases."

He did not accept Foxtel's argument that it was closely constrained by the free-to-air networks. Foxtel argued it competed by "counter-scheduling" against the free networks and spent money on exclusive content, behaviour it said was only rational if it was responding to close competition by the networks.

Rejecting this, he said "the critical point is that pay television offers subscribers something that free-to-air television (and other forms of entertainment) cannot: a very wide choice among a range of programs in the subscriber's own home.

"In my opinion, it is the capacity of pay television to satisfy intense, but diverse, consumer preferences, together with its ability to offer exclusive programming in the key subscription-driving area of premium sports and movies, that sets it apart from free-to-air pay television and other forms of home entertainment."

In reaching this conclusion, he referred to evidence given during the hearing by Williams, who was asked about sports as a subscription driver.

Williams said in the witness box: "My personal view is that the proposition of choice in subscription television is the primary driver, and that is informed from sport, from movies and from other genres, particularly documentary and areas that we can own, such as music and children's programming."

The judge said: "The subscriber is prepared to pay for the choice and opportunity to access exclusive content within that field of choice."

In its issues paper, the ACCC conceded that closeness of competition between pay and free TV operators "appears to have increased in recent years as digital free-to-air multichannels have been launched".

"However, the ACCC's preliminary view is that free-to-air television is not a sufficiently close substitute to be considered in the relevant market for the purposes of this competition analysis," it said.

If the ACCC is right in its view of market definition, Foxtel and Austar, as by far the largest pay companies, will have to argue that technology is changing so fast that their merger will not substantially lessen competition.

This is where arguments about internet streaming and the NBN will come in.

Much of competition law involves judges deciding what is likely to happen in future.

Section 50 of the Competition and Consumer Act says an acquisition must not be made "if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in a market".

A frequently quoted view is one expressed by Justice William Deane in a 1979 case when he said "likely" meant "a real chance or possibility".

The last section-50 case to reach a court before Metcash was AGL's challenge to the ACCC's opposition to its plan to acquire a 35 per cent stake in the Loy Yang A power station in Victoria in 2003.

In his judgment in AGL's favour, Justice Robert French (now the Chief Justice of Australia) said: "In determining whether it could be said that there is likely to be a substantial lessening of competition in a market it is necessary to consider the future state of the relevant market with and without the proposed acquisition."

This necessity inevitably leads to debate about hypothetical developments, which has fed some of the intensity of this week's reaction by Fries and Williams to the ACCC's issues paper.

In the Metcash case, the ACCC accepted that the South African owner of Franklins, Pick 'n Pay Retailers, was determined to leave the Australian market.

This meant the status quo was irrelevant. Much of the hearing was devoted to theorising about how the grocery market would develop if Metcash bought Franklins or if someone else did.

For Foxtel and Austar, the big hypothetical is the impact of the national broadband network.

Fries said on Tuesday the ACCC's view of the NBN was that "only Foxtel and Austar will be the beneficiaries, by entering the other's market".

Surely the point of the network was that "dozens of companies will use the advanced infrastructure to innovate and compete in content, broadband, television and similar communications services," Fries said.

The ACCC's chairman, Graeme Samuel, responded on Wednesday that technological development would deliver no benefit to consumers if all the audiovisual content was locked up "in one or two hands, in monopolistic hands".

"Then newcomers, new entrants, can't take advantage of the technology to provide real competition," Samuel said.

At least for Samuel the crystal ball-gazing will be someone else's problem, as will the outcome of the Metcash case.

Today is his last day as ACCC chairman.

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