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Regulating TV markets to protect BT? Not again, Ofcom. Please

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BTOfcom

Many of you will have read the headlines about the recent auction organised by the Premier League. A couple of weeks ago, Sky and BT paid a record sum of £5.1bn (up from £3bn in 2012) for the TV rights to three seasons of the top English football championship (2016-17 to 2018-19). Sky secured the majority of the rights (126 matches per season out of a total of 168).

Victory for Sky? I am not convinced, and given the behaviour of Sky’s shares the day after the deal was announced, it would seem that I am not alone. In fact, the deal seems to have strengthened BT’s position. Unlike Sky, the incumbent telecommunications operator in the UK had nothing to lose, and everything to gain, in the process. Just consider the aftermath of the auction. BT has managed to force Sky, a major competitor, to pay an unprecedented amount for premium sports content (thereby harming its profitability), without fearing the consequences of not securing the rights in question. Why not? In 2010, Sky was required to supply its sports channels to its competitors. As a result, BT was confident that it would be able to offer top football to its subscribers irrespective of the outcome of the auction.

An analysis of the regulatory landscape indeed shows that the incumbent telecommunications operator benefits disproportionately from the multiple distortions progressively introduced by Ofcom and the European Commission on markets for the acquisition of the rights to premium sports content. Due to intervention by the latter, BT has been able to acquire part of the rights offered by the Premier League, as well as the rights to the UEFA Champions League. As a result of the regime set up by the former in 2010, it is able to offer Sky Sports channels to its subscribers (in addition to its own content). The combination of the two regimes has allowed BT to become a credible provider of pay TV services in little time.

Against this background, the immediate question that springs to mind is why Ofcom would set up regulation having the effect of strengthening the position of the incumbent telecommunications operator at the expense of two of its rivals, Sky and Virgin Media (the main cable operator in the country). In December 2014, Ofcom launched a consultation about whether the regime introduced in 2010 should be amended or removed. If this blog post is accepted as a response to the consultation, here is my reaction: ‘Please remove the compulsory licensing obligation, and the sooner, the better. It is not necessary in any way and is likely to do more harm than good’.

I guess many among you are unfamiliar with the regulation put in place by Ofcom in 2010. If you know little or nothing about it, I am sure you would find it interesting to take a look at the consultation document issued back in December by the authority. It illustrates very well the sort of issues that might arise in areas at the crossroads of competition law and sector-specific regulation. Premium TV content is in a grey area between the two. It is not part of the traditional focus of telecommunications regulation (which is primarily concerned with access to, and interconnection between, networks). At the same time, TV content is obviously relevant for broadband Internet providers offering television services as part of their triple and quadruple play bundles. The competitive advantage, in the form of exclusive rights, enjoyed by one provider is likely to influence downstream competition.

In essence, Ofcom’s seeks comments on whether it is convenient to treat premium TV content in the same way it treats the telecommunications network and thus whether it makes sense to impose compulsory supply and non-discrimination obligations on pay TV providers like Sky. Access to BT’s network ensures a level playing field between the incumbent telecommunications operator and its competitors. Imposing similar obligations in relation to Sky’s premium channels would ensure that all broadband Internet providers are able to compete on an equal footing with the leading pay TV operator in the UK.

You may have asked yourself already whether premium TV content and the telecommunications network are really comparable. If you read the consultation document you are likely to be even less convinced about the convenience of extending to content activities the regulatory regime applying to networks.

Is premium content indispensable for downstream competition? It would make sense to treat networks and premium TV content alike if the latter were an essential facility or an indispensable input to compete on the relevant downstream market. Interestingly, Ofcom’s consultation document provides extensive evidence showing that this is clearly not the case. I have in fact not found a more exhaustive and reliable source of data showing that premium TV content is a far cry from being indispensable for pay TV or triple play providers.

There is nothing anticompetitive in trying to exploit one’s competitive advantages. One should not be surprised that companies want to keep competitive advantages for themselves. Profit-maximising firms tend to be unhappy with the idea of subsidising a competitor. Authorities and courts have long understood that a refusal to supply is, absent exceptional circumstances, a manifestation of healthy rivalry. Curiously, Ofcom seems to claim that Sky’s lack of incentive to supply its premium TV channels to its rivals is anticompetitive. This is certainly the line of reasoning that a competition lawyer is more likely to find strange or surprising.

How do companies compete on the relevant downstream market(s)? It is interesting that the consultation document never seeks to define the relevant downstream market in a systematic way. The dynamics of downstream rivalry (where BT, Sky and Virgin Media compete across the whole range of convergent services) must be understood before one determines whether it is justified to take regulatory action in a particular market segment. The consultation document falls short in this regard. At times, it borders on the tautological. Here and there, Ofcom seems to suggest that obligations relating to the provision of premium sports channels are justified to promote competition on the market for premium sports content.

What are the unintended consequences of regulatory intervention? More than anything, I am concerned about the fact that Ofcom never considers the unintended consequences of regulatory intervention. By and large, pay TV and premium content are examined in isolation. The risk that intervention could strengthen the position of the incumbent telecommunications operator is never considered. Similarly, Ofcom does not question whether it makes sense to favour the commoditisation of triple and quadruple play offers. If premium TV content is far from indispensable, would it not make more sense to favour diversity, as opposed to homogeneous offers? What are the consequences of limiting operators’ scope for differentiating their products? Does regulatory intervention commoditising retail offers harm firms’ incentives to invest and innovate? These are questions to which I do not find a satisfactory answer in the consultation document.

I look forward to Ofcom’s next steps in relation to this consultation. We (read: I) will keep you updated about them. And now with the tradition: I do not have anything to disclose (funnily enough, I had to clarify this back in 2010, when I submitted this paper to a review). In fact, I do not even have a TV set at home. Although I do have a broadband subscription, which I hope to keep many years… with BT.

Written by Pablo Ibanez Colomo

26 February 2015 at 7:59 pm

Posted in Uncategorized

State aid and investment arbitration: an improbable (and fascinating) conflict

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ICSID

A very good friend tells me that the world of international arbitration is discovering the mysteries of EU State aid law, and that some of its peculiarities have not been received particularly well (to put it elegantly). Curiously enough, these developments have not gathered much attention so far in the parallel universe of EU competition law. It is a pity, as the questions raised by the interface between these disciplines are genuinely interesting. May an arbitral award amount to State aid within the meaning of Article 107(1) TFEU? May the Commission order its recovery as a result? Imagine the implications of an affirmative answer to these two questions in other areas of the law.

If you are not familiar with the ongoing debates, you may be interested to know that these issues are being discussed in the Micula case. In December 2013, Romania was ordered to pay around EUR 82 million (plus interest) as a result of an investment dispute. The arbitration tribunal found that the said Member State had breached a Bilateral Investment Treaty with Sweden. Shortly thereafter, the Commission informed the Romanian government that the implementation of the award would amount to new aid within the meaning of Article 108 TFEU and would therefore have to be notified. In addition, it issued a suspension injunction to ensure that Romania would not take any steps in this regard. From the perspective of the Commission, the implementation of the award would conflict with a previous decision declaring a tax incentive to be incompatible with EU State aid law. Romania was thus left torn between two regimes.

If you take a look at the letter submitted by the Commission in Micula, you will realise that the legal and factual scenario is fairly straightforward from the perspective of EU State aid law. I was in fact struggling to find something unusual in the case. If a measure adopted by a Member State is found to be incompatible with the internal market, it is simply natural that any subsequent measure intended to compensate the recipients of the aid for the consequences of a recovery obligation is also found to run counter to the principles set out in Articles 107 and 108 TFEU. If it were possible for a Member State to grant damages in such a context, the whole system would collapse. The ECJ understood early on that, indeed, the ex ante control for the award of State aid would otherwise become meaningless. These ideas stem clearly from cases like Van Calster or Commission v Council (2006).

It does not matter how well-established these principles may be under EU State aid law. From the perspective of international arbitration, I can understand that the intervention of the Commission in cases like Micula is received with surprise, if not shock. How can it be argued that it is unlawful for a Member State to comply with its obligations under the ICSID Convention? The same that I said in relation to EU State aid law in the preceding paragraph could be said in relation to international arbitration. The whole system for the settlement of investment disputes could be jeopardised if such arguments were to be accepted. It is in fact not unusual for States to claim that their domestic regime makes it impossible for them to comply with the award.

Underlying the Micula case there seems to be something that looks like a primacy (or, if one prefers, a kompetenz-kompetenz) issue – a debate that brings me straight out of my comfort zone. It seems to be about determining which of the two legal orders prevails. There are other issues that may be less fundamental but not necessarily less interesting, and on which I hope to work in the coming months. If you read the Commission letter, you will see that the issue of legitimate expectations is understood very differently in EU State aid law and investment arbitration, respectively. It is well-known that legitimate expectations can be validly invoked only in truly exceptional circumstances under the former. Articles 107 and 108 TFEU would not be practicable if the possibility to circumvent recovery obligations were not limited to the narrowest set of scenarios. This is a distinct feature of EU State aid law that is very unlikely to be found in other areas of the law. It should therefore come as no surprise that the principle of legitimate expectations has a broader scope of application in the context of investment arbitration, the point of which is after all to provide a framework for the protection of international investments.

Written by Pablo Ibanez Colomo

5 February 2015 at 10:33 am

Posted in Uncategorized

A view from the hill: European Competition Law Annual (and my personal favourites)

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European University Institute

Hart has been kind enough to send us (technically, to me) a review copy of the latest volume of the European Competition Law Annual series, and I thought I would devote this Friday slot to say a word about it. You do not need an introduction to the famous Florence workshops, which have proved to be enormously influential and which have anticipated some substantive and procedural developments in EU competition law. The vast majority of you do not need an introduction either to the beauty of the Tuscan landscapes surrounding the European University Institute. Even though I did my PhD there, I am amazed every time I have the chance to go back, which is less often than I would like to.

Because it would not make any sense to discuss the obvious, I thought it would say instead a few words about some of my favourite pieces published as part of the proceedings. These are articles which I use very often for research purposes or about which I find myself thinking quite often. My personal top 3 – in strict alphabetical order – is as follows:

  • Ian Forrester, Sector-specific price regulation or antitrust regulation – A plague on both your houses?: If you have followed my work a bit you will know that I am interested in telecommunications regulation (as it is now called again, it would seem). Unfortunately, there is relatively little academic research in the area. This piece discusses the interaction between competition law and sector-specific regulation and the implications of some legislative developments. In particular, it provides an excellent critical analysis of the regulation of roaming. This was the first significant departure from the logic underpinning the EU Regulatory Framework for Electronic Communications. If Ian Forrester only knew back then what would happen in subsequent years.
  • Luc Gyselen, Rebates – Competition on the Merits or Exclusionary Practice?: The first virtue of this piece is its clarity. If you want to understand DG Comp’s pre-Discussion Paper approach to exclusive dealing and rebates, this article is the best starting point. Many things make more sense after reading the piece (in particular some ECJ rulings such as British Airways). Its second virtue is its intellectual honesty. At the time of the workshop, in 2003, Luc Gyselen was Head of Unit at DG Comp. This fact did not prevent him from expressing in public his misgivings about Michelin II, which was controversial for several reasons even under the old approach.
  • Heike Schweitzer, The History, Interpretation and Underlying Principles of Section 2 Sherman Act and Article 82 EC: Article 102 TFEU case law is frequently labelled as being ‘ordoliberal’. It is not always clear what people mean when they use this expression, no less because it is often relied upon to refer to any feature of the case law that is perceived to be problematic or controversial. This article explores some common misconceptions in this sense. Heike Schweitzer discusses the drafting history of Article 102 TFEU and explains post-war ordoliberal views and debates on the appropriate legal treatment of unilateral practices. The analysis of existing case law is valuable in its own right. I often refer in my work to her understanding of the principle whereby dominant firms have a ‘special responsibility’ under Article 102 TFEU. I agree with her views and I also believe that people tend to read too much into it. I only regret that the piece does not cover more practices!

Written by Pablo Ibanez Colomo

23 January 2015 at 5:52 pm

Posted in Uncategorized

The Autorité de la concurrence and the Competition & Markets Authority on open and closed systems

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Autorite_de_la_concurrenceCMA

I have finally read the report jointly issued by the Autorité de la Concurrence and the Competition & Markets Authority on the economics of open and closed systems and published about a month ago. The topic is exciting, the timing ideal and the initiative itself most interesting for several (both substantive and institutional) reasons. It remains to be seen whether joint action of this kind will become more frequent in the years to come.

The report seems to be broadly in line with consensus positions. Both relatively open (say, Android) and relatively closed (say, iOS) systems can have pro- or anticompetitive effects depending on the circumstances. As a result, there is no reason, from a competition law standpoint, to favour one over the other, or to seek an allegedly optimal level of openness. The fact that the report restates these commonly known principles does not make it any less interesting or relevant. Well-established positions tend to be forgotten all too often, and it is reassuring that two leading authorities embrace them publicly.

My only criticism (admittedly an incredibly unfair one!) of the report is that it is too abstract and avoids the use of concrete examples. When it is said that prohibiting closed systems could lead to substantial efficiency losses, advocates of open systems tend not to take the warning very seriously. Efficiency, when dealt with as an abstract concept, seems to be inherently suspicious and as such can be disposed of very easily. ‘Who wants efficiency when you can have freedom?’ has become a fairly frequent argument, even in published work.

It is only by referring to concrete examples that a discussion about these matters becomes meaningful. Apple launched its iPhone as a relatively closed system. It was even more closed in the early days than it is now – remember that Apple preferred to offer the phone through a single mobile provider in each country. It would be difficult to deny that the iPhone and the revolution in mobile telephony to which it gave rise have been immensely beneficial for consumers and society as whole (and please note that this statement comes from a never-ever-Apple person!).

Cable television was created as a closed system (something that was deemed problematic during the 1970s in the US). We may never have witnessed the dawn of a new ‘golden age’ in television if network providers had been prevented from keeping tight control of content. HBO was not created as a stand-alone venture, but at the initiative of a cable operator that wanted to attract subscribers to its system. The phenomenal growth of satellite pay television in countries like the UK during the mid-1990s owes much to the integration between the two activities.

Now that the battle seems to have been lost forever in the context of telecommunications regulation – net neutrality without a compelling theory, I am afraid, is here to stay – we can only hope that competition authorities do not fall into the trap of making sweeping assumptions or favouring across-the-board remedies. This is a risk that I have already identified in some of my pieces. I see a worrying tendency to assume – both in abuse of dominance and in merger cases – that the creation of a ‘level playing field’ in vertical settings is by definition conducive to more competition and innovation. This is not necessarily the case, and, as I say above, the report is a fine reminder that things are far more complex in practice.

Written by Pablo Ibanez Colomo

15 January 2015 at 11:35 am

Posted in Uncategorized

Coming soon…

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– On Friday 30 January we, at the IEB course, will be holding a seminar in Madrid, coordinated by Fernando Castillo and Eric Gippini, which will feature three panels: one on judicial review in competition cases (with Manuel Campos -Spanish Supreme Court-, Santiago Soldevila -former GC judge, now at the Spanish Audiencia Nacional- and Helmut Brokelmann -MLAB-; another on the application of competition law to public conduct (with Francisco Marcos -IE Law School-, Fernando Castillo – EC’s legal service- and José Luis Buendía -Garrigues-); and a third one on Life after Cartes Bancaires (with Nicholas Khan -EC’s Legal Service-, Xavier Ruiz Calzado -Latham & Watkins- and a handsome lawyer going by the name of Alfonso Lamadrid -Garrigues-). For more info please click here or send an email to competencia@ieb.es.

– On Friday 6 February the editors of the Competition Law Journal will hold the 9th Junior Competition Conference, which will have two themes, namely Control of unilateral conduct and ‘the Goldilocks dilemma’: too much, too little or just right?” and The new frontier: competition law in the financial services sector”. The conference programme can be found here. Those interesting in attending may contact the organizers at operations@catribunal.org.uk

– On Thursday 19 February ERA will host a workshop in Brussels on “Dawn Raids in Practice: Developments in Case Law and Enforcement”. The workshop will examine the latest enforcement trends and the impact of recent case law from the CJEU and the ECtHR on the conduct of dawn raids by the European Commission and national competition authorities. More info is available here.

– On Friday 20 February we, again at the IEB in Madrid, will host a seminar on recent developments in abuse of dominance and merger control coordinated by Cecilio Madero -Deputy Director General, DG Comp-, Nicholas Banasevic -Head of Unit at DG COMP- and Milan Kristof -Référendaire at the ECJ-.

– A bit later, on 15 May, the University of Leeds will hold a (free) conference on Contemporary Challenges in Competition Law featuring, among top-notch speakers, Pablo and Nicolas. More info is available here.

– And, in a few days, Chillin’Competition will be resuming its Friday Slot section with a quite special interview. More info coming soon…

Written by Alfonso Lamadrid

14 January 2015 at 9:20 pm

Posted in Uncategorized

And the 2014 winner is…

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 (by Sam Villiers, Garrigues, Brussels, not pictured below)

GwynethPaltrowOscars1999

With the Golden Globes this weekend and the Oscars fast approaching, the 2014 awards season is officially upon us. In this light, the FT ran an interesting piece yesterday (see here) on the highlights of 2014….in the world of cartel fines. I don’t know whether one can accurately describe there being ‘winners’ and ‘losers’ in cartels, but the article – based on a report by A&O (see here) – certainly highlights some interesting general trends in global cartel fining.

The report explains that total cartel fines dished out by the world’s competition authorities in 2014 reached a new level of $5.3bn, up 31% on the previous year’s (record breaking) total. And the nominees are…..sorry, I mean…the markets handing out the most fines in 2014 are:

  • Europe leads the way, having handed out €1.7 bn ($2.3 bn), although didn’t quite make it to the giddy heights of its 2013 level of €2.5bn. The report picks out the German and French competition authorities as having enjoyed particularly vintage years.
  • Brazil’s CADE (Administrative Council for Economic Defense) had a record-breaking year, with cartel fines totaling $1.6 bn. This figure includes the imposition of the second largest fine ever given by a competition watchdog, that of $1.39 bn for a decades-long cement cartel.
  • South Korea’s KFTC also broke its fining record, doling out an impressive $1.01 bn worth of fines.
  • In the 2014 fiscal year, the US DOJ Antitrust Division imposed a modest $861m of fines, 15% down from the previous year. Plus, the lion’s share of this total came from fines handed out to the auto parts cartelists.

It is quite hard to discern too many long-term trends from these isolated 2014 numbers as cartel investigations are characterised by such long gestation periods; the time between the opening of a case file and the final decision by an authority or court can take years. It would perhaps be more indicative of general trends if one could look at the total fines given over 5 or 10 year cycles. In any case, the numbers are interesting in themselves.

One general trend that did particularly catch my eye – in the context of the debates around reform of competition enforcement in Europe – is the seemingly large number of jurisdictions allowing individual offenders to face prison sentences. It is interesting to note that in 2014 a Brazilian court imposed a 10 year prison sentence (and a $156m fine) on an executive for bid rigging. At the level of DG Comp, I would imagine that we are some time away from this.

Oh, and one final point: according to the FT, bistros (the noisy, French variety one would presume – easier not to be overheard ;-)) and hotels were shown to be the preferred cartelist meeting spots. Not surprising I guess, but zero points for imagination…  That said, if anyone reading this is in search of a cartel venue, I hear Alfonso’s parents have a special offer for cartellists at their hotel ;)

Written by Alfonso Lamadrid

8 January 2015 at 11:34 am

Posted in Uncategorized

EU competition law and choice: falling back into old habits

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Free to choose

Ideas originating in North America cross the Atlantic sooner or later. The view that competition law should be concerned with choice, rather than with a particular measure of welfare, or another objective, seems to be gaining popularity in the EU. In addition to the references to choice found in Commission decisions and other statements of policy, there is a growing strand of literature emphasising the importance of choice in the competitive process.

You have certainly guessed from the title that I am quite sceptical about this move, and that I find express reliance on choice by competition authorities to be problematic in certain instances. More than anything, I see this trend as the repetition of past mistakes. As such, it also provides a suitable topic for the first post of the year, when we all think about resolutions. Indeed, ‘don’t repeat past mistakes’ is probably the best resolution of which one can think. Before I forget, by the way: happy 2015 to all!

There is already quite a lot written on competition law (or antitrust) and choice, which means that the main arguments are already well-known. Saying that competition law should be about choice amounts in a way to stating the obvious. Preserving the sources of competitive pressure to which firms are subject can be expected to lead to increase choice for consumers, in the same way it can be expected to lead to lower prices.

It is also abundantly clear that the competitive process often leads to what look like choice restrictions. By definition, selective distribution limits choice for consumers, insofar as they may only be able buy the product in question from certain retailers. Yet such systems are known to be pro-competitive (they tend to promote competition and thus choice). They fall outside the scope of Article 101(1) TFEU altogether in certain instances. The same can be said of franchising. It would certainly enhance choice to have McDonald’s hamburgers sold alongside Pizza Hut products. However, the ECJ held very clearly in Pronuptia that franchisors may take steps to protect their know-how and their reputation without infringing Article 101(1) TFEU.

In light of the above, it is not clear why choice as such would be advocated after the experience acquired over many decades. I do not believe choice advocates claim that we should prohibit altogether selective distribution, franchising or other vertical restraints. I am certain that they accept free-riding as a concern that can justify choice restrictions in such and other instances, and I am also sure that they accept the idea that the protection of the competitive process tends to lead to increased choice. In this same vein, I do not think they have in mind an alternative, internally coherent and fully-fledged standard revolving around choice.

What are we left with, then? It is difficult to tell. My impression is that choice could be useful in practice as something akin to a ‘back-up’ quasi-standard; that is, as a contemporary abracadabra that would allow for intervention when conventional analysis would not. Remedial action is not warranted under the established framework? Well, one can always resort to the vague idea of choice to make a case for intervention. It may not be as robust as a properly articulated theory of harm, but it may sound plausible and, hey, sure nobody is heartless enough to be against consumer choice.

If this is really what is going on, there is every reason to be concerned. It shows, first and foremost, that the lessons of history are easy to forget. We have come a long way to make enforcement sensible and predictable. It would seem, however, that the temptation to rely on nebulous concepts will never fade. Expanding the boundaries of intervention will always be appealing. The good news is that EU competition law is now much better equipped to deal with insufficiently robust and/or poorly articulated claims.

Written by Pablo Ibanez Colomo

6 January 2015 at 1:35 pm

Posted in Uncategorized

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