7. The MMC’s inquiry into BSkyB’s merger with Manchester United plc
When the merger between BSkyB and Manchester United plc was referred to the Monopolies and Mergers Commission (now the Competition Commission) for consideration, the panel assembled to undertake this task needed to be highly experienced, something which was demonstrated by the decision for the case to be chaired by the chairman of the Commission itself, Dr Derek Morris. From the outset it was clear that this was going to be a difficult case to examine, since the merger not only brought together two substantial enterprises with different operational and trading objectives, but also involved a very substantial degree of third-party representatives (over 300 individuals and 57 organisations). Closer examination of the third-party evidence, as handed over to the panel by the Office of Fair Trading (OFT), revealed them to be universally hostile to the merger apart from six Premier League clubs who had submitted letters in which they raised no objections.
In determining how the panel should conduct the inquiry, care was taken to ensure that both parties were given adequate facilities for oral representations, and that in addition, third parties were also afforded an opportunity to give oral evidence. As a consequence, the panel held an above-average number of hearings including three hearings in Manchester. In total, five hearings were held with the main parties: three with BSkyB (including a remedies hearing) and two with Manchester United. Despite objections from the main parties: the panel decided that it would be helpful if the issues letter, which laid down the main issues it wished to raise with both parties, should be formally published in the form of a press notice. This was the first merger inquiry to apply this procedure and one which, in the event, did not have the effects feared by the main parties. Indeed, the stock exchange reported that it had no discernible effect on the share prices of either BSkyB or Manchester United. Ironically, subsequent alleged leaks and comments by third parties actually led to an increase in share prices.
The reference itself
On 29 October 1998, the Secretary of State for Trade and Industry, Peter Mandelson MP, referred to the MMC the proposed acquisition by British Sky Broadcasting Group plc (BSkyB) of Manchester United plc (Manchester United). The references were made under the powers granted the Secretary of State under sections 64, 69(2) or 75(1) of the Fair Trading Act 1973. The MMC was required to investigate and report on certain matters regarding the merger, including whether the situation may be expected to operate against the public interest.
The panel’s analysis of the evidence during the inquiry
The panel decided that it was going to be crucial for it to establish an agreed market definition. Given the outstandingly successful profiles of the two merger parties, although in different fields, it was going to be important to distinguish ‘broadcasting markets’ from ‘football markets’.
One additional complication that faced the MMC was the earlier referral by the OFT of the collective selling of broadcasting rights used by the Premier League to the Restrictive Practices Court (RPC). This case was running concurrently with the MMC’s own inquiry. (It is interesting to note that this issue is now being looked at by the Competition Secretariat in DGIV of the European Commission.)
Marked definition issues
The panel looked for what could be considered as a formal link between the activities of the two merger parties. It found that it was, in fact, the sale of TV rights by sporting organisations to broadcasters which provided the main connection between the market for football and the broadcasting markets (para 2.9). The panel also noted that for the first time in the UK, the proposed merger would involve the vertical integration of a major supplier of sports rights and a broadcaster. Obviously, the panel then had to go on to consider the potential impact of the merger on the sale of Premier League TV rights (itself a subject being considered by the RPC).
BSkyB BSkyB operates in all four markets of the broadcasting supply chain: it buys TV rights, makes some of its own programmes, packages programmes into various channels, and retails these channels to both ‘direct-to-home’ subscribers and as a wholesaler to other platforms. The panel took note of the previous definitions of broadcasting markets (1996 Directorate General IV – EC Competition Policy Newsletter 1998) and compared them to those proposed by the parties to the inquiry. It focused on the market for channels at the wholesale level because this was a key determinant in ascertaining the competitive framework both upstream for rights and programme-making, and downstream for channel distribution and retailing.
In the end, it came down to the panel taking a view on whether ‘free-to-air’ TV was in the same market as all forms of pay TV. BSkyB argued strongly that they were all part of the same market, but the panel disagreed. It found that sports programmes on free-to-air TV were not ready substitutes for those on pay TV. The latter involved the purchase of attractive and exclusive live rights for which free-to-air could not compete, partly on revenue restriction grounds, but also because of programme scheduling difficulties particularly in relation to fitting in 60 live Premier League matches. Important evidence to support this conclusion came from the fact that in the 1996 sale of Premier League rights, all three bidders were planning to broadcast on a pay TV channel (or pay-per-view). No free-to-air channel was a contender.
Manchester United The club’s outstanding financial performance, strong international support base and on-field achievements make it the most successful English football club. Manchester United’s activities clearly had to be studied carefully in order to determine the relevant market. The panel noted Manchester United’s revenue sources included advertising and sponsorship, the retailing of merchandise and services such as catering and hospitality associated with Old Trafford. It focused particularly on the supply of football matches and looked at whether a wider market might be appropriate, such as leisure services, or a narrower market, such as Premier League football or Manchester United’s own matches.
One of the tests used to assess monopoly supply influences on a given market is whether or not the supplier can charge prices 5% to 10% above competitive levels. The panel applied this test to Manchester United’s products and doubted that BSkyB’s proposed ‘leisure activities’ market was realistic, particularly since a 5% or 10% price rise would not cause Manchester United supporters to switch to other leisure activities. After careful consideration of the various potential football markets, it decided that the evidence of consumer performance suggested the Premier League might be the relevant football market for the purposes of considering the effects of the merger.
Broadcasting Markets DGIV had earlier concluded that free-to-air TV was unlikely to provide sustained and effective competition to pay TV in relation to sports programming for the following reasons:
(a) free-to-air TV was capacity constrained so it was unable to provide adequate line viewing opportunities;
(b) the ability to charge subscription charges (and ultimately ‘pay-as-you-view’ charges) meant that many sports events could be purchased for more than could be reasonably afforded by free-to-air broadcasters.
BSkyB put forward various arguments to refute DGIV’s conclusions, none of which managed to persuade the panel otherwise. In need of examination were the relative values paid for executive rights for live sporting events, particularly football. Clearly Premier League football was a primary product attracting high values, and this situation was likely to be exacerbated in 2000–01 when those collective rights, if permitted, were to be auctioned again.
The panel, however, did not find the DGIV’s conclusions convincing and instead looked carefully at demand side considerations to assess substitutability. The conclusion reached was that there was a separate market for pay TV whilst recognising that the existence of free-to-air broadcasters would place some upper limit on the prices of pay TV broadcasters (para 2.39).
The panel then considered carefully whether a narrower market was appropriate. Again, substitutability was a key consideration. It agreed that sports programmes (particularly those offering exclusive live coverage of an event) could not readily be substituted for non-sports programmes. The availability of this particular product was largely confined to sports channels. Market evidence tended to suggest that because of demand side considerations there was a ‘sports premium channel market’ (para 2.44).
It also approached the question of new market entry and concluded that creating a new premium sports channel is a step that cannot be easily and rapidly taken. Given BSkyB’s virtual monopoly of sports channels, the panel looked at the case for defining the market even more narrowly in terms of football, or some sub-set of football on pay TV (paras 2.45/2/46). There was evidence suggesting that football, and Premier League football in particular, played an important part in persuading consumers to purchase sports channels, and to an extent a recent NOP survey lent weight to this conclusion (para 2.46). The possibility that the development of the pay-per-view market could start to blur the distinction between different types of sports channels was accepted by the panel. However, it found that this market for football was, as yet, undeveloped and that, on balance, the relevant broadcasting market was the market for pay TV sports premium channels (para 2.51).
Market access to premium sports channels
The potential for new competitive sports premium channels was analysed by the panel, who concluded that there were unlikely to be enough rights to sustain many sports premium channels. In addition, BSkyB’s very high market share, together with entry difficulties, gave BSkyB market power in the sports premium channel market (para 1.5).
Benefits of the merger to the main parties
Before going on to examine public-interest issues, the panel took evidence from the main parties on the merger itself, in particular to ascertain the benefits to each of the parties.
At oral hearings, BSkyB had emphasised the importance of ‘owning content’ as a means of securing their future role as ‘programme-makers’. The panel was shown the internal documents that had been prepared to support the offer for Manchester United. The BSkyB executive confirmed that:
- sport was an accepted part of BSkyB’s brand-building strategies;
- football was the leading sport in European TV market;
- sport could be used to build the value of TV networks and/or distribution;
- Manchester United would provide a solid UK football product base;
- acquisition of Manchester United would buy a ‘seat at the table’;
- through Manchester United, BSkyB might be in a better position to deal with developments such as a European super league.
It became evident that BSkyB’s case detailed only positive consequences which the merger would bring about, but these were ones which would, ultimately, extend their already dominant market influence. The panel did not feel that without the merger BSkyB would be commercially threatened in any way (para 2.75/76).
Manchester United, on the other hand, felt the merger would offer the club an opportunity to be part of a new group, one with greater financial means and additional resources. Thus, merging with a media business that could offer both of these would merely be a logical venture for Manchester United’s business interests.
Public interest raised by the merger fell into two broad groups:
- competition amongst broadcasters; and
- possible effects on consumers and football generally.
Competition for TV rights
The panel took care to examine whether the proposed merger would give BSkyB further significant advantages in the competition for rights. The problems that it encountered in the course of this examination concerned, first, the uncertainty over future selling arrangements for Premier League rights and, second, the extent to which the merger might precipitate other mergers between broadcasters and Premier League clubs. These uncertainties led the panel to scrutinise the merger using four main scenarios:
(1) Existing collective selling arrangements/single merger
Third-party submissions focused on the importance and influence of Manchester United within the Premier League – indeed, many parties felt that it would be objectionable if BSkyB, or any other broadcaster, bought any Premier League club, since it would give them a ‘seat on both sides of the table’ when rights sales were negotiated. It was seen as particularly detrimental for BSkyB, the incumbent broadcaster of Premier League football, to acquire the most influential club. Both BSkyB and Manchester United argued against this conclusion, claiming that Manchester United, with one vote in 20, was no more influential than the bottom club. Manchester United argued strongly that the way in which the collective rights were negotiated and sold made it impossible for Manchester United or any other club to exercise any influence. Finally, BSkyB said that it did not need to own Manchester United to ensure support for its bid for collective rights.
On balance, the panel was not convinced that these arguments held water. It believed that the ‘seat at the table’ arguments had value and that this might give an organisation the facility for inside influence by legitimate means (para 2.87). The ultimate threat of withdrawal from the Premier League by Manchester United seemed unlikely, but not inconceivable in certain circumstances. The difference if the club were to be owned by BSkyB would be that broadcast considerations, rather than football club considerations, might dominate.
The panel considered all the information advantages, toehold effects and BSkyB fall-back options (paras 2.99 to 2.135) with the parties, but in the light of third-party submissions it concluded that, despite arguments to the contrary from the parties, certain information advantages would be likely to accrue to the merged entity. In relation to toehold effects, the panel was inclined to agree that the effects which would arise as a result of the merger would not give BSkyB the major advantage over its competitors that some third parties claimed it would. However, it did think that some benefit would accrue from the overall rights-selling process, in the form of its financial stake in the revenues received by Premier League clubs.
BSkyB’s assertions that it was not its intention, or desire, to end the Premier League’s collective selling arrangements or to damage the League in any way was accepted. However, the panel felt that BSkyB’s fall-back options, which included splintering the collective selling arrangements, whilst unattractive, could be used as a spoiling tactic, and other potential bidders could be expected to see such options as credible. Consequentially, the panel felt it likely that the bidding behaviour of BSkyB’s competitors would be inhibited to some extent (para 2.135).
The panel also looked to the ownership of football clubs by broadcasters in other countries as a useful comparison, but found that their experiences did not really provide a helpful basis for reaching conclusions about what was likely to happen in the UK were the merger to proceed (para 2.139).
Whilst the matters analysed by the panel would not individually give BSkyB a decisive advantage over competing broadcasters, taken together they could be expected to improve significantly BSkyB’s chances of securing the Premier League’s rights. This advantage was felt to be a real one, indeed one which might be expected to improve BSkyB’s chances of winning – whatever the response of its competitors (para 2.140).
It was because of the OFT’s challenge to the collective selling of rights by the Premier League (which was referred to the Restrictive Practices Court prior to the BSkyB/Manchester United reference to the Commission) that the panel felt it necessary also to examine the remaining three of the original four scenarios which it thought might arise should the OFT win the case.
These were (2) new selling arrangements/single merger, (3) existing selling arrangements/multiple mergers and (4) new selling arrangements/multiple mergers.
Whilst accepting that conclusions were bound to be speculative, the panel nevertheless felt it appropriate to see what the effect of these developments might be on competition for Premier League rights.
The removal of collective selling rights from the Premier League would not prevent individual clubs from putting together agreed collective packages. BSkyB’s ownership of Manchester United, however, was felt to give it a strong hand in any such negotiations. The panel felt that no other broadcaster could put together such a package (because no one else owned Manchester United’s rights), so BSkyB would be able to outbid their competitors (para 2.150). The panel looked at the likelihood of exclusive rights being abandoned, and sales of rights being distributed widely amongst different broadcasters. It concluded that this was highly unlikely in the short to medium term because the economic value of exclusivity would be of significant financial advantage to most clubs.
The panel then looked at the likely consequences if BSkyB’s bid for Manchester United precipitated a range of bids for other clubs by broadcasters. In reality, broadcasters that owned clubs might then seek to share the rights of Premier League clubs. Such an agreement to not compete with each other would have at least as damaging an impact on competition for these rights, and in any event might all be investigated under the Competition Act 1998 (para 2.165). In circumstances where only individual selling rights were permitted and the BSkyB/Manchester United merger had precipitated other mergers between broadcasters and Premier League clubs, the panel decided that this might be expected to reduce competition, compared with the possibility of no such mergers (para 2.170).
In conclusion, the panel found that in any of the four scenarios they looked at, a reduction of competition, less innovation and reduced choice would be the result.
Effects on Football
A strong concern of the panel was to ensure that its inquiry adequately covered the many concerns expressed by third parties about the consequences of the merger on football. Although the concerns expressed often went further than the competition and consumer concerns that normally arose in a merger inquiry, the panel felt obliged to ensure that such concerns were examined, if relevant in terms of the public interest. It decided to look at three issues: effects on consumers; effects on competition between football clubs; and the effects on the organisation of football.
Consumers The panel categorised consumers in two ways: those who were committed fans of a particular club, and those who regularly attended matches. Clearly, there was a considerable degree of overlap between the two groups. Third-party submissions claimed that the merger would have an adverse effect on ticket prices because local community pressures would no longer be effective once BSkyB owned Manchester United. The panel disagreed, believing that Manchester United already had sufficient commercial incentives to exploit local monopoly opportunities. It then examined the implications of the introduction of pay-per-view, but concluded that since no widespread application of pay-per-view was imminent it could not reasonably form an expectation of an adverse effect (para 2.192).
The panel went on to examine another widely expressed concern of Manchester United fans, namely that following the merger, starting times of matches would be fixed to suit broadcast considerations. The evidence was not, however, felt to substantiate these allegations and whilst there was little doubt that broadcast considerations now played a part in determining starting times, this was occasionally occurring already at the request of some clubs with specific security concerns. The panel felt that some trade-off was inevitable given the very large sums of money paid by broadcasters to football clubs for the rights, and that if clashes between fans’ interests and broadcasters occurred, the football authorities were the right people to intervene.
Competition amongst football clubs Fans, and organisations representing them, were deeply concerned about the effect of the merger on competition between football clubs. However, the panel found that there were two opposing views:
- Manchester United could be held back or artificially weakened;
- the merger would make Manchester United so strong that it might be virtually unbeatable.
At the heart of these concerns was the feeling that once a broadcaster owned a club, commercial broadcast considerations could require strategies to be adopted which distort the purity of competition.
The panel thought it unlikely that it was in BSkyB’s interest to weaken the club, thereby reducing its attraction. However, it did believe that under certain circumstances, the strengthening of the club could cause adverse public-interest effects. In particular, the panel stated the concern of many parties that if the merger led to Manchester United becoming too strong, this would worsen an already marked trend towards greater inequality of wealth between football clubs (para 2.205). The panel had taken quite a lot of evidence on the distribution of the very considerable sums of TV money that had flowed into the industry over recent years. Even within the Premier League, there were wide disparities between the most successful and least successful clubs. But outside the Premier League, great worries had been exposed about the impact of increasing inequalities of wealth on the whole structure and quality of British football.
Somewhat surprisingly, the panel accepted that major structural changes to British football were matters within its terms of reference, but only in so far as they were affected by the merger. It concluded that the merger would tend to increase the inequality of wealth between clubs and that, as a consequence, the ability of many clubs to compete would be hampered and the demise of some smaller clubs could well follow (para 2.206).
The organisation of football It was put to the panel that the merger would strengthen the hand of BSkyB in its dealings with football authorities, and that the interests of broadcasters would lead to changes in the game and its presentation that might be against the public interest.
BSkyB continued to make a heartfelt plea which focused on how the importance of football to its viewing profile would mean that it would never do anything which might be regarded as detrimental to the game. However, once again, the panel concluded that by increasing BSkyB’s influence over the Premier League’s decisions, the merger could lead to a situation whereby some decisions taken would not be in the long-term interests of football, giving rise to the adverse effect that the quality of British football would be damaged.
These public-interest findings on the adverse effect of the merger on certain aspects or football were somewhat controversial. In practice, whether or not the panel had so found, the merger would have been recommended for prohibition on broadcasting competition issues alone.
At the same time as the issues letter was publicly distributed, the panel had also sent a letter solely to the main parties, setting out hypothetical remedies. The panel had indicated some areas where undertakings might be explored, but the parties were unable to develop these and the panel ‘went cold’ on the potential effectiveness of any undertakings. This was for two primary reasons. Firstly, the only undertaking that might get close to alleviating the principal public-interest offences would be one that effectively removed Manchester United from the entire rights-selling process. This proposal was clearly flawed since it was both demonstrably unfair to Manchester United and it would not prevent other bidders from recognising the informal influence still available to the new group.
The second reason was a belief on the panel’s part that developments in broadcast technology (such as digital television) and, consequently new product availability (such as pay-per-view), were so rapid that any undertakings might quickly be overrun and rendered obsolete.
During the later stages of the inquiry, both BSkyB and Manchester United did offer a number of concessionary assurances, but none that the panel felt could combat these two important realities.
In the end, the panel felt that ‘the only remedy which would deal with the full range of the adverse effects it had identified would be prohibition of the merger’.