Part II: Implications of the BSkyB/Manchester United case
6. The attempted takeover of Manchester United by BSkyB
The Monopolies and Mergers Commission’s decision1 to recommend an outright prohibition of the acquisition of Manchester United by BSkyB surprised many commentators. Speculation had been rife that the transaction would be allowed to proceed, but that BSkyB would have to give certain undertakings, in particular in relation to its future dealings with the Premier League. Among competition lawyers, the decision was also greeted largely with surprise. There too it seemed that many had thought the transaction would go ahead.
Shareholders United Against Murdoch, a group of Manchester United fans and shareholders mounted a large campaign to block the transaction, and Rosenblatt Solicitors agreed to assist them at the stage of the MMC inquiry. The initial advice given to SUAM was that, to block the transaction, SUAM should see the transaction primarily as a ‘broadcasting’ merger rather than a ‘football’ merger. As a result, SUAM’s submissions were focused principally on the implications of the transaction for competition in broadcasting.
This chapter discusses the arguments submitted by SUAM,2 when the transaction was referred to the MMC as well as the MMC’s findings; in less detail, the chapter also considers the lessons which may be learned. Many submissions were made by other third parties in relation to the impact upon football generally, but these are not considered here. In any event, the MMC report itself placed by far the most weight on the competition aspects.3
Section 1 discusses the approach taken towards defining the relevant markets. Section 2 examines the arguments which were submitted as to how the transaction would hinder competition. Section 3 considers the points made in relation to undertakings which BSkyB might have offered, to remedy any potential anti-competitive effects. Finally, section 4 summarises the implications of the MMC’s decision for the future relationship between broadcasters and football clubs.
1. Market Definition
Defining the market is the starting point for any competition investigation. The task is – in a nutshell – to identify a framework for investigating the competition implications of a particular transaction. The market in which the two parties are active is defined, and then the assessment moves on to how the competitive position would be affected by the merger. Not surprisingly, competition authorities are usually concerned where two parties are active in the same product or service market (for example, the broadcasting market), since such a transaction would increase the market share of the competitors, possibly to the point where they can act independently of customers and competitors.
Having said that, even where the parties are active in separate (but usually related) markets, competition concerns can arise. However, such concerns do not arise unless at least one party is dominant in a particular market. Consequently, it was important to establish that at least one of the parties had a sufficiently high share of a particular market to give a preliminary indication that it was dominant.
BSkyB The MMC identified four markets in the broadcasting value chain:
(a) the supply of rights for broadcasting purposes
(b) supply of programmes
(c) supply of channels at wholesale levels
(d) distribution and retailing of channels to subscribers
BSkyB is active in all of these markets in the UK. SUAM argued that there was significant evidence that BSkyB should be treated as dominant for the purposes of the merger, in particular in the light of the European Commission’s findings in its investigation into British Interactive Broadcasting, as well as the 1996 Review of BSkyB’s position in the wholesale pay TV market. In particular, SUAM submitted that BSkyB was dominant in:
- the retail pay TV market;
- the wholesale pay TV market generally; and
- the wholesale supply of sports channels for retail pay TV.
The MMC considered whether free-to-air broadcasting and pay TV should be treated as part of the same market. This was significant since if the free-to-air ‘market’ was included, BSkyB’s position in the market would be considerably diluted. SUAM submitted that the MMC should follow the approach taken by the OFT in its 1996 Review of BSkyB’s position in wholesale pay TV. The MMC agreed with the conclusion arrived at by the OFT, but disagreed as to the reasons. The MMC decided that free-to-air broadcasting had to be purchased before pay TV could be considered by a potential subscriber. Hence the subscriber would regard pay TV as a complement to rather than substitute for free-to-air content.
In the event, the MMC concluded that it was more appropriate to treat pay TV as a separate market, and, further, that ‘based on conditions of substitutability, we concluded that the relevant market for our purposes was for sports premium TV channels’. The ability to enter and compete with BSkyB depends upon ownership of live rights, which are themselves a limited resource. The MMC decided that there were not enough such rights to sustain many sports premium channels. This, together with the fact that BSkyB currently provides three sports premium channels, led the MMC to conclude that BSkyB is dominant in this market.
United The MMC found that United enjoyed strength in three particular respects: its financial performance, the size of its supporter base and its sporting success. SUAM argued that, at the very least, Manchester United was part of the market for the supply of Premier League football (as opposed to football generally). SUAM also submitted in the oral hearing that it may be appropriate to identify a narrower market, including:
(a) a market for the supply of top-quality Premier League games; and/or
(b) a market for watching Manchester United games.
In relation to the former, SUAM argued that the consistent quality associated with the top four or five Premier League teams meant that viewers would choose – when not watching their own team – to watch matches involving these teams. On the basis of Manchester United’s recent performances, it was clear that Manchester United was an important player in that market. One possible way to gauge the accuracy of this would be to examine the gate receipts at clubs placed low down in the Premier League, when visited by those clubs at the top part of the league.
SUAM also submitted that it was possible to identify an even narrower market, that for watching Manchester United games. There were two dimensions to this: the market for watching the games at the stadium, and the market for watching the games live on TV. Clearly, to the extent that these were actual or potential substitutes, competition would be completely eliminated. The MMC did not have to decide on the matter, but did state ‘there is at least an arguable case for treating the live matches of Manchester United, whether watched at the ground or on TV, as a separate market.’
SUAM did not seek to argue that the appropriate market should be that for Manchester United live football games, but stressed that this was a possibility. SUAM provided evidence from independent surveys which appeared to support this conclusion – in particular evidence demonstrating the massive amount of support for Manchester United from younger members of society.
The MMC concluded that: ‘The market in which Manchester United operates is no wider than the matches of Premier League clubs.’
Comment: It is submitted that the MMC took the correct approach since the circumstances did not require the MMC to define a narrower market than the market for Premier League football.
An important question for the future is where this ‘narrowing’ process should naturally terminate. There is an intuitive argument that each football club is supported by a certain number of individuals for whom watching another club is no substitute (so-called ‘infra-marginal customers’). While this may be strictly true, in practice a line must be drawn, beyond which a market cannot be considered sufficiently important for the purposes of competition policy; it is of course a different question whether, from a perspective other than that of competition policy, there should be restrictions on which entities should be permitted to control football clubs.
While this is, at the time of writing, a theoretical issue, it may in the future assume practical importance. As the law currently appears to stand, broadcasters may acquire up to 25% of Premier League clubs, as long as the gross worldwide assets of each club is below £70 million, before a significant risk arises that a further acquisition would qualify for investigation by the OFT. This is because an acquisition would have to result in at least 25% of ‘services of a particular description’ coming under common control (or a lesser degree of control), before the OFT would have jurisdiction to investigate. On current views, the services of a particular description would probably be ‘Premier League games’, but the OFT could in theory take a narrower view, e.g. ‘top-class Premier League football clubs’ or even football clubs in a particular area.
More immediately worrying from the point of view of consistency in the application of competition law and economics principles is the fact that the Restrictive Practices Court came to a very different conclusion on the appropriate way to define the market. This is dealt with separately in this book by Professor Martin Cave (Chapter 22).
2. Impact on competition
In common with many other third-party submissions, SUAM argued that if BSkyB acquired United, BSkyB, irrespective of any undertakings given, would acquire a competitive advantage in negotiations on the future sale of football rights. In particular, SUAM developed what it referred to as the ‘Marks & Spencers’ analogy – in which other ‘shops’ (football clubs) want to locate closely to Marks & Spencer on the high street. Extending this analogy, the link-up of United with BSkyB would encourage other football clubs to sell their rights in future to BSkyB, since it is the dominant broadcaster in pay TV and thus would have access to the largest sources of revenue. (Of course, SUAM submitted this argument before Marks & Spencers’ most recent trading figures had been released!)
Moreover, BSkyB would simply have to acquire the rights to a further two or three top clubs (whose assets would be below the £70 million threshold), and it would have an almost unassailable position in relation to subscribers (see Chapter 8). Even just acquiring the rights to broadcast the matches of the next two or three football clubs placed after Manchester United would be made easier due to the fact that Manchester United commands the largest amount of support from the football-watching population. This process would affect the following possible relevant markets:
- the market for watching Manchester United football;
- the market for watching top-quality Premier League football;
- the market for watching Premier League football.
Although SUAM did not have the resources to have a full survey carried out, SUAM submitted that owning the rights to just three top clubs which attracted a large amount of subscribers would result in those middle- and lower-ranking clubs being attracted to BSkyB due to the possibility of increased revenue through a broader retail football-following subscriber base. This is logical in the sense that unless the pay-per-view or subscription channel was excessively priced (unlikely since BSkyB would have an incentive to increase the number of subscribers and could not price discriminate between those supporters of a particular football club who, all things being equal, may pay a higher price than the marginal football viewer), a process of ‘tipping’ would occur after critical mass had been achieved.
SUAM also argued that competition between Premier League clubs themselves would also be affected, due to the increased buying power of the club, backed by immense financial resources. However, the main detriment identified by SUAM would be the development of pay TV in the UK, in particular in relation to premium sports channels.
Undertakings When assessing a merger, the MMC is obliged to consider whether the parties can give any appropriate undertakings to remedy anti-competitive effects that have been identified. The outright prohibition of a merger must be a proportionate response to the seriousness of the anti-competitive concerns identified, and the MMC generally tends to let mergers through wherever possible. SUAM’s line on this was clear. No undertakings would be appropriate, for a number of reasons:
- the nature of the industry was changing and therefore undertakings would become at best irrelevant and at worst inappropriate;
- price regulation may be necessary, the consequence of which would be the permanent introduction of regulation into an industry which was hitherto unregulated; and
- even if the MMC could identify undertakings which could in principle be suitable, Rupert Murdoch’s own history suggested that there was a significant risk that any undertakings may be breached.
With regard to the last argument, SUAM submitted a paper containing all instances in which Rupert Murdoch had previously given assurances which had not been honoured. These included assurances given to the Department of Trade and Industry.
The MMC considered an undertaking that Manchester United should be prohibited from taking part in future discussions about the sale of live Premier League football rights. BSkyB had objected to this on the grounds that this would unnecessarily adversely affect BSkyB’s share price, and would unfairly discriminate against Manchester United. In the event, the MMC found that such an undertaking would not be appropriate:
- it would not prevent informal information flows between United and BSkyB;
- United could influence other clubs in the run-up to the allocation of future rights, without necessarily taking direct part in the final decision-making process;
- the undertaking would not be credible to other broadcasters when preparing bids for the broadcasting rights;
- this would be unfair to United since Premier League rights represented a significant element of United’s income, and it should therefore play a part in the Premier League’s decisions;
- if collective selling were to break down, this undertaking would no longer be appropriate.
The Report reveals that the parties increasingly offered more stringent undertakings. From the contents of the Report, it appears that the parties initially denied that the merger would give the parties any advantage in bidding for future rights. After the MMC objected, BSkyB offered two assurances, which were weaker than the hypothetical remedy considered by the MMC above:
- United would bar itself from receiving any information in advance of final bids being prepared;
- United would abstain from voting on the future collective sale of rights, where BSkyB had submitted a bid.
In the circumstances, it was not difficult for the MMC to conclude that these assurances would not be satisfactory: the MMC had already rejected a stricter undertaking as insufficient.
3. Broader implications
As adviser to SUAM during the MMC process, this author may not be particularly well placed to comment independently on whether the decision was the right one. However, my own view is that this was not just another ‘vertical’ merger, in contrast to the views expressed by many commentators both before and after the decision. There are instances where a vertical merger can generate horizontal effects (in this case an impact on competition in the broadcasting market), and it is submitted that the merger fell into this slightly uncommon category.
The decision has been severely criticised by some competition lawyers. However, the Report is carefully reasoned, and the MMC was simply not convinced by what the parties offered by way of undertakings. With the obvious benefit of hindsight, it is interesting to speculate whether the MMC might have allowed the transaction through if a different approach on the issue of undertakings had been taken by the parties. It is, however, immensely difficult to ‘second guess’ how the MMC will react in any given case, and to devise a strategy on hypothetical remedies accordingly. In the final analysis, of course, if the parties were not prepared to offer undertakings at least as strict as those which it might be foreseen would be required by the MMC, the transaction should not have been allowed to proceed (assuming that the MMC’s reasoning itself stands up, which I submit it does).
In my view, the Report is not a ‘setback’ for the even-handed application of competition policy. Moreover, it was not a ‘political’ decision as has been reported. The Secretary of State had no choice but to accept the MMC’s carefully reasoned recommendations. On the contrary, it would have been a political decision to reject the recommendations.
From a purely personal point of view, this was a very exciting merger to be involved in, especially because many did not take SUAM seriously, and those who did thought we were pushing a very large boulder up a very steep hill. The outcome of this particular MMC inquiry, it is submitted, turned on the inadequacy of undertakings offered by the parties. Of course, it may be that the commercial cost of undertakings which might have been suitable was too high, hence the parties’ apparent cautious approach on this issue. Moreover, even though SUAM’s focus was on the broadcasting market – to create the reasons to block the merger – sitting time after time in a room full of ardent Manchester United fans did not allow one easily to lose sight of the real aim: to keep Manchester United!