On 20 May 2019, the Italian Competition Authority (“ICA”) concluded its Phase II investigation into the acquisition, by Sky Italian Holdings S.p.A. (“Sky”), of the DTT technical platform R2 Srl (“R2”), from Mediaset Premium S.p.A (“MP”). R2 provides technical and administrative services for the DTT broadcasting of pay-tv channels, which enable the packaging of a retail pay-tv offer, such as the cryptography of the signal (conditional access services), commercial and customer support services (call centers, etc.) and administrative services (activation/de-activation of subscriptions, etc.).
However, according to the ICA, the acquisition of R2 was economically and functionally intertwined with a set of commercial agreements that were entered into between the two parties in March 2018. These related, in particular, to the licensing of MP’s pay-tv channels to Sky, the transfer to Sky of the rights to the use of DTT’s Logical Channel Numbering (LCN) 301-399, in addition to transitory agreements for the de facto exclusive provision of the MP/R2 technical platform services. Considering these interconnected agreements, the ICA has maintained that, overall, this concentration was equivalent in the substance to the suppression of MP as a competitor.
Relevant factual and procedural background (which makes this case peculiar and controversial)
It is notable that the acquisition of R2 by Sky was initially completed on 30 November 2018, immediately after the concentration was notified to the ICA (on 28 November 2018), as permitted by the Italian merger control regime. However, the agreement with MP provided for a termination condition that could be triggered if there were the imposition of remedies by the ICA. Consequently, after receiving a statement of the ICA’s objections in April 2019, which envisaged the imposition of substantive remedies in order to clear the concentration, the parties announced their withdrawal from the merger and organized the return of R2 to Mediaset. In addition, Sky announced its intention to discontinue the acquisition of LCN 301-399, and its intention to migrate its channels to other LCNs.
Notwithstanding this, the Authority has found that such transactions were inadequate to effectively and completely undo the merger, because the return of R2 to MP was partial (as it did not include certain assets), and the migration of Sky’s channels to another LCN was also insufficient, considering the exclusive licensing of MP’s pay-tv channels to Sky.
Moreover, according to the ICA, the execution of the concentration has generated certain “irreversible” effects, and this has required a substantive assessment by the ICA and, according to Italian merger control legislation, the imposition of measures to restore effective competition to the market as well as to remove the distorting effects that were created by the implementation of the concentration (Article 18, Para. 3, of Law 287/90).
The remedies imposed on Sky by the ICA
At the end of the investigation, to restore competition in the overall pay-tv market, the ICA prohibited Sky from including exclusivity in relation to the internet channels, or from including equivalent clauses in new agreements for the acquisition of audiovisual content and linear channels from third parties in Italy, for three years.
Moreover, in the hypothesis in which Sky establishes a new proprietary technical platform for DTT’s pay operations that is compatible with R2’s assets (as modified during Sky’s control of R2), the ICA imposed on Sky the obligation to provide third party access to this platform at FRAND and on cost-oriented terms, plus a general prohibition from using R2’s information and the assets it had gained through the acquisition of R2 to create commercial pay-tv offers from the Sky group.
On the alleged anti-competitive effects of the concentration
According to the ICA’s investigation, Sky currently has a dominant position in the Italian retail pay-tv market, with market shares of 77% in 2017 and 75-80% in 2018. Historically, the only effective competitor to Sky was MP (with a market share that had been around 10%), with other smaller operators holding in aggregate a combined market share that ranges from 5 to 10%.
The ICA has argued that, even though the concentration at hand did not formally, and in itself, determine the entire acquisition of MP by Sky, overall it had an equivalent effect. In fact, the concentration, as it is, would determine the disappearance of MP as the Sky’s main competitor, considering that the agreements with MP, combined with the acquisition of R2, would determine the migration of all, or almost all, of MP’s subscribers to Sky.
With respect to horizontal effects, the ICA also established that the concentration would have determined a considerable loss for consumer welfare due to unilateral price effects (i.e., the incentive to increase prices), which would not occur without the merger, and which, in turn, would also be likely to reduce the number of potential subscribers to pay-tv services.
With respect to vertical effects, according to the ICA’s assessment, the strengthened dominance of Sky in the retail pay-tv market would further reinforce Sky’s market power across the entire pay-tv supply chain (i.e., as the purchaser of premium content or linear channels, as well as being the retailer of pay-tv services and the technical platform provider).
In particular, increased buying power of Sky in the market for the acquisition of premium content would further increase the Sky’s ability to impose exclusivities, or other unfair terms, on content suppliers, thus also potentially leading to foreclosure of Sky’s competitors from indispensable inputs, who, as a result, might be unable to find valuable premium content (either films or live sport events, such as Serie A matches) to enable them to attract a sufficient number of subscribers of retail pay-tv services.
Further, with the acquisition of the R2 technical platform, Sky would become the only provider of wholesale technical access services (such as conditional access services, smart cards, etc.), which are indispensable to pay-tv retailers in order to reach final customers through the DTT and DTH technologies that are predominant in Italy, and would have the ability (and the incentive) to partially or totally preclude competitors from accessing such services.
Observations on the remedial measures imposed on Sky by the ICA
In its decision, the ICA explained that the measures exclusively addressed the purported horizontal effects of the proposed concentration, which could not be eliminated through the (partial) return of R2 to MP.
As mentioned above, the first set of remedies are the prohibition of Sky acquiring exclusive rights to audiovisual content and linear channels for internet broadcasting in Italy. The rationale of this measure is to avoid Sky acquiring the vast majority of the content that is available on the wholesale market, and to ensure that other players, especially those operating online, can also provide a diversified offer of content to their audience. In particular, the measure aims at reducing mere complementarity between the OTT and pay-tv offers through the expansion of the content that might be acquired by OTT operators, thus enabling them to exert the greater competitive pressure that would limit Sky’s strengthened market power. As the ICA explained, OTT platforms are, as a matter of fact, the only players on the Italian pay-tv market who can exert a certain degree of competitive pressure on Sky, though their limited offers in terms of content genre (mainly films, series and documentaries) versus the whole range of content (including premium live sports) which is offered by Sky on DTT and DTH, makes them complementary services to Sky’s rather than direct substitutes.
Interestingly, with respect to the duration of this obligation, the ICA has argued that the “the three-year term appears to be appropriate in relation to the technological evolution of internet platforms and the sales cycle of certain rights that are of a premium nature”.
The second set of obligations addresses the need to ensure third-party access to a technical platform for DTT (which, together with DTH, the ICA deems to be indispensable in Italy in relation to providing premium live sports events). However, this measure is only necessary if Sky will be able to create its own technical platform by using the modified assets it has acquired irreversibly from R2, despite its partial restitution of assets to MP.
Apparently, Sky has announced its intention to appeal against the decision.