Never a Sporting Chance: Vertical Integration and Broadband and Content Bundling in the Sky-Vodafone Merger

22 Pages Posted: 21 Nov 2017

Date Written: November 19, 2017

Abstract

In February 2017, the New Zealand Commerce Commission declined to give clearance for the proposed merger between Vodafone New Zealand and Sky Network Television, because it could not exclude the possibility that the merged entity would leverage its market power over premium live sports content to foreclose competition in broadband and mobile services markets by supplying bundles of pay television broadband and mobile services in bundles with which its rivals would be unable to effectively compete.

We contend that the Commission has erred in substance in its assessment of this merger. By not taking the nature and quantum of extant contractual bundling by Sky and Vodafone dating from 2009 into account, the Commission has attributed to the merger all of the possible effects of bundling content and infrastructure, rather than just the marginal effects of the ownership integration of the two firms. Hence the potential risks posed by the merger have been overstated. Furthermore, the Commission appears not to have taken into account observations about the type of bundling (mixed), the degree of complementarity (imperfect), the number of content and broadband products purchased by consumers (multiple) and the nature of product differentiation and competitive intensity in each of the content and broadband markets when assessing either the likelihood of its presumed foreclosure strategy being successful or the expected effects on consumer and total welfare. Hence, the probability of bundling leading to foreclosure in broadband markets, either with or without mergers, has also been overestimated. In the absence of any empirical analysis, the material effect cannot be estimated. However, the extent of the mismatch between market observations and the assumptions underpinning theoretical models of foreclosure is sufficient to suggest it may be substantial.

We further contend that the Commission was predisposed to making these errors because the analytical and computational complexities involved in defining markets and assessing the extent of market power using small but significant and non-transitory increase in price (SSNIP) and likelihood, extent and timeliness of entry and expansion by existing or new competitors (LET) tests where bundling is involved, militate against the use of classical econometric analysis. We propose that further investigation is warranted into the use of simulation and numerical analysis to assist competition authorities making decisions in markets where bundling is a feature.

Keywords: Merger, Content Distribution Networks, Broadband, New Zealand, Bundling

JEL Classification: L11, L12, L41, L42, L96

Suggested Citation

Howell, Bronwyn E. and Potgieter, Petrus H, Never a Sporting Chance: Vertical Integration and Broadband and Content Bundling in the Sky-Vodafone Merger (November 19, 2017). Available at SSRN: https://ssrn.com/abstract=3074144 or http://dx.doi.org/10.2139/ssrn.3074144

Petrus H Potgieter

University of South Africa ( email )

P.O. Box 392
UNISA
Pretoria, Gauteng 0003
South Africa
+27 12 433 4622 (Phone)

No contact information is available for Bronwyn E. Howell

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