Review of the Australian Competition and Consumer Commission annual report 1996-97 Submissions

Submission No 5: Australian Competition and Consumer Commission

THE ACCC AND THE FOXTEL/AUSTRALIS MEDIA MERGER

Did the ACCC cause Australis' financial difficulties?

No. The commercial decisions of Australis have caused it to lose $691 million thus far. In particular:

• it bid $184 million to win pay TV licences;
• by international standards it paid extremely high prices for Hollywood movies;
• it supplied expensive pay TV services to customers at prices well below cost. Set top box units costing many hundreds of dollars were supplied for prices below $50. The more customers that Australis acquired the greater were the losses.

Australis failed to anticipate being caught in a squeeze play form of competition driven by powerful telecommunications companies.

In short, Australis, not the ACCC, caused its own problems.

Why was the merger opposed?

Briefly, because Optus would have withdrawn from pay TV and, even more importantly, from local telephone competition.

This would have been a far greater disaster for jobs, investment and the prices paid by all Australians for local telephone services.

Some commentators have failed to mention this key issue at all, ie that the ACCC was faced with an unpleasant choice between possible Australis Media failure and possible Optus failure.

Why did the ACCC go to Court?

The ACCC advised the parties to the merger on several occasions of the authorisation procedures available under the Act. Authorisation is granted where public benefits outweigh the detriments, particularly anti competitive detriments, of certain conduct such as a merger. The grant of authorisation protects the conduct from Court action for potential breaches of the Act and is an ideal process to consider issues such as failing company arguments.

However, the parties never approached the ACCC for authorisation. Instead, they advised the ACCC that the merger would proceed unless the ACCC sought an injunction. When the ACCC advised them in October 1997 of its concerns and requested undertakings that they not take further steps to complete the merger without giving seven days advance notice to the ACCC, the parties would not give those undertakings. The ACCC had no option but to apply to the Court for an injunction. Why was the proposed merger anticompetitive and why would Optus have withdrawn?

If the ACCC had not moved against the proposed merger, future competition in pay TV would have been jeopardised. The merger would give Foxtel and Australis a market share more than twice that of Optus. Foxtel/Australis would control the largest cable network, satellite delivery and almost all MDS delivery.

Such market access would quickly have led to severe curtailment or likely collapse of the Optus pay TV business. High market share is the key to gaining movie and sports programs. Hollywood does not supply exclusive movie rights to pay TV companies with few viewers. As programming contracts came up for renewal, Optus' exclusive program suppliers would move to the dominant firm to ensure widespread distribution. Any new channels of programming would also prefer Foxtel/Australis.

Why would any pay TV subscriber choose Optus? It would have no programming which was not available on its rival's system and would not have Foxtel's range of channels. A "death spiral" would result - few customers, fewer programs, even fewer customers etc.

The outcome would quickly be pay TV dominance which would disadvantage not only customers, in terms of higher prices, but also local content suppliers. With only one program buyer, Australian sporting groups and local TV production companies would have only one client and the price they received could be lower.

Very importantly the merger's effects would go far beyond pay TV. If Optus was unable to survive in pay TV, its telephony business would also be at risk. Telstra and Optus plan to package telephony services with pay TV. If Optus had no pay TV to offer customers it would have been very difficult to compete against Telstra to provide telephony services. If Optus could not compete in pay TV, it is likely that Australia's only significant chance of local telephony competition, and therefore cheaper local calls, would be lost.

This is not some theoretical idea. Optus spent several billion to provide pay TV and telephone services by cable. Telstra responded by spending several billion on cable for "local telephony defence" as its CEO Mr Blount stated publicly. Pay TV was the battleground for local telephone competition, the most important area in which Australia needs competition. In this situation, the ACCC has concerns at the involvement of the dominant telephone company in what would be a dominant pay TV company.

What of the employment effects?

While Australis' failure will cause job losses, the merger would also have led to job losses in Australis as duplicate staff were sacked. It would also have led to Optus job losses as its pay TV business, then telephony business, was withdrawn.

Who are the losers?

The big losers are the US junk bond holders who bought into a Australis already on a life- support drip from its exhausted shareholders. They knew they took a high risk, as evidenced by the potential 15% return on the bonds, but they took a chance on a company which lost money every time it signed up a subscriber. The ultimate losers, if the merger went ahead, would be Australian telephone users.

Did the ACCC protect Optus?

No, it protected competition in pay TV and telephones to the ultimate benefit of consumers. The ACCC protects competition, not individual competitors. However, the distinction is a narrow one when there are only two competitors.

How does the merger of Australis' satellite operations affect Optus' battle for cable customers?

A fundamental concern of the merger is the adverse effect it will have on Optus' ability to obtain and retain programming. The addition of Australis' satellite subscribers would give the merged entity a high market share (nearly 70%), which is the key to gaining quality programming.

As Optus' programming is likely to be substantially weakened by the merger, it will consequently have a flow-on effect in the battle for cable TV customers since Optus will have the weaker content. Of course, there will then be the flow-on effects into local telephony.

What is the position regarding investment by Optus?

There are two somewhat conflicting criticisms of the ACCC.

The first is that Optus technology does not work and that Optus is not currently involved in the provision of local telephone services to any significant extent.

In fact, the Optus system is working and local telephone services are being sold at the rate of one to two thousand a week. Technical problems have been overcome. Just yesterday it was reported that Optus may extend its cable network in South Australia and Queensland and possibly the ACT.

The second criticism is that Optus will proceed with its local telephony investment anyway, irrespective of the merger, because it has already sunk a large amount of money into the cable roll-out. However, this does not make the merger deal legal.

More importantly, the situation is that Optus needs to spend a further one billion dollars to make its current network complete and fully operational. The ACCC has reached the view that the Australian shareholders of Optus would not regard this investment as justifiable if the merger occurred. In reaching this view, the ACCC had access to Optus Board papers and financial data and will produce powerful evidence on this point in Court. Optus witnesses will be available for cross-examination under oath.

Is the ACCC trying to `engineer' an outcome in the pay TV market?

Some recent criticism of the Foxtel/Australis decision is contradictory on this issue: there is criticism on the one hand for opposing an anticompetitive merger in Court but on the other hand for engineering an outcome when the ACCC has not put up a plan to deal with the future structure of the pay TV industry and has no such plan.

The ACCC decided to oppose the merger because it was considered to be in clear breach of the Trade Practices Act. In so doing, it did not make a judgement that opposing the merger would lead to a better restructuring of the industry. It opposed it because it was anticompetitive.

Did the ACCC bring the Court action knowing that the delay would scuttle the merger so that its case would never be tested?

The ACCC opposed the anticompetitive merger in Court for the reasons outlined above. On this point it had firm unequivocal legal advice from Senior Counsel. The ACCC is fully prepared to have its case tested and is confident of the outcome.

Comments by some parties to the merger that they have not opposed the ACCC in Court for commercial reasons rather than because they have breached the law should not be taken at face value.

Was the ACCC unanimous?

Whilst it is not usual for the ACCC to discuss this type of issue, some of our opponents have spread incorrect suggestions on this topic. It so happens that the ACCC commissioners and staff were unanimous in their decision and there was no dissent, formal or informal, about the decision.

The ACCC approached the merger with a very open mind and this was reflected in early ACCC work, but as the investigations proceeded its staff unanimously reached the conclusion that the merger was anticompetitive and at that stage came to the Commission with a recommendation to oppose the merger. On 10 October 1997, four Commissioners unanimously decided to accept the recommendation and seek an injunction to block the merger.

As mentioned, our senior legal counsel were, from an early stage, firmly of the view that the merger was very likely to be a clearcut breach of s.50 of the Trade Practices Act and they have strengthened their views on this as the investigation proceeded.

20 November 1997

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