ComCom probes vertical, conglomerate effects of Sky TV/Vodafone merger

The Commerce Commission is assessing whether a merger between Sky Network Television and Vodafone Group's New Zealand unit would let the combined companies engage in behaviour that either forecloses rivals or renders them less able to compete.

In its statement of preliminary issues, the commission said the main focus of its investigation to decide whether to clear the proposed merger is the so-called vertical and conglomerate effects, which would enable the combined companies a greater ability or incentive to engage in conduct that prevents or hinders rivals from competing effectively.

"The proposed merger would combine New Zealand's largest pay-TV supplier (which, among other content rights, holds the broadcasting rights to some significant sports content) with one of New Zealand's major suppliers of telecommunications services. The proposed merger raises both vertical and conglomerate effects," the commission said.

"We will consider whether the proposed merger would give the merged entity the ability and incentive to engage in behaviour that might foreclose rivals (in pay-TV and/or telecommunications services) or otherwise render them less competitively effective and result in a substantial lessening of competition in a relevant market."

A vertical merger, between firms operating at different levels of a supply chain, could result in the merged entity refusing to supply an input to a downstream competitor or raise the price of the input, or disadvantage an upstream competitor in the sale of that competitor's products by limiting access to customers.

The commission will look at whether the merged company could discriminate against other online content providers such as Lightbox or Netflix by preventing Vodafone customers from accessing the content or by blocking website access or deciding not to host rival content providers on Vodafone's network. That could see Sky's rivals lose scale and become less competitive.

A conglomerate merger, between firms that supply complementary products, could hurt rivals by providing bundled discounts to customers that buy the merging parties' products together rather than separately, or by tying, where the merged entity refuses to sell one of the merging parties' products unless customers also buy the other parties' product.

If such expansion would be likely without the merger, then any potential competitive constraint from this would be lost as a result of the proposed merger.

The commission will consider whether the merged company could profitably make Sky content only available to Vodafone customers and whether it may only offer Sky content to Vodafone customers at a predatory bundled price. This could hurt competing suppliers of telecommunications services, which could lose scale and become less competitive.

Vodafone and Sky have said there is no prospect of the merged entity pursuing a credible foreclosure strategy that reduces competition because the merged group wouldn't supply "must-have" inputs that competitors require to participate in the telco or pay-TV markets, it wouldn't have the ability or incentive to engage in any foreclosure strategy, Sky currently makes its pay-TV service available to other parties on a wholesale basis and would continue to do so, and the group would be strongly incentivised to sell pay-TV and telecommunications services to consumers on an unbundled basis.

The commission said it will also assess the so-called unilateral effects which assess whether the merged entity will be able to raise prices or reduce quality by itself, although it said a merger between suppliers who aren't direct competitors and operate in related markets is less likely to result in unilateral effects.

This could result in higher prices or decreased service levels relative to the without the merger scenario.

The regulator is also asking for views on any other sources of market power that the merged entity may have and be able to leverage post-merger, such as bidding for the rights to broadcasting content, in filming sports content, and in sponsoring major sporting events.

Vodafone and Sky have told the commission there is currently no meaningful competitive overlap between them. However, the commission said it will look at whether they would become more meaningful competitors without the merger, for example if Vodafone might start providing content on a standalone basis or whether Sky might start providing telco services on a standalone basis.

"If such expansion would be likely without the merger, then any potential competitive constraint from this would be lost as a result of the proposed merger," the commission said.

"This could result in higher prices or decreased service levels relative to the without the merger scenario."

It expects to make a decision on the merger by Nov. 11.