www.eui.eu/RSCAS

Market definition, dominant positions and

pluralism in Media

Prof. Pier Luigi Parcu

Director, Centre for Media Pluralism and Media Freedom

pierluigi.parcu@eui.eu @PLParcu

14 May 2013 - EUI, Fiesole

Centre for Media Pluralism and Media Freedom

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STRUCTURE OF THE PRESENTATION

1. Competition legislation and pluralism regulation

2. Competition: assessment of relevant product market and geographical market

3. Market power and dominance – Media ownership and market concentration

4. Pluralism regulation in the main EU countries

5. Conclusion

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1. Competition legislation and pluralism regulation

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“The marked trend towards concentration in the European communications and media sectors during recent years in our view entails two dangers. The first danger is the creation of significant market power of undertakings, or even monopoly, that significantly impedes competition, ultimately to the detriment of consumer welfare. This very often coincides with the second danger, which by the way, as competition authorities, we have no remit to control, namely the possibility for a limited number of media companies to curtail media pluralism, diversity and freedom of information.” (Philip Lowe , Director General for Competition, European Commission Convention 2004)

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Two levels of media legislation

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The EC exerts a market-related control toward mergers and the possible distortions of competition and dominant positions eventually resulting from them

However, the control on media pluralism rests primarily within national regulators

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Two levels of media legislation

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Two levels of media legislation

Competition regulation is provided on a European level, aside of the national applications. Example the Telepiù/Stream merger in Italy. It is used in the media field, as in any other economic sectors. Competition regulation can be used also to protect pluralism, though it is not its main purpose.

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Two levels of media legislation

Specific regulation to protect media pluralism is needed, as the competition regulation could be non sufficient to secure freedom of expression and information. Media pluralism regulation relies on national legislation, as there is not a European common legislation in this matter. Each EU country has a specific regulation, often focusing on particular aspects of media pluralism.

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2. Competition: assessment of relevant product market and geographical market:

essentially an economic definition

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Market: the place (actual or nominal) where economic agents - (potential) buyers and sellers - interact generating exchange

opportunities

Industry: the system of firms producing same or similar products in a defined productive field

Relevant market: the market in which one or more products compete

→ instrumental for the analysis of market power

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Definition of product markets

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Market forms: tassonomy

MARKET FORMS CHARACTERISTICS

Firm’s size Number of firms Product’s type

Barriers to entry/exit

Perfect competition

Small (a single firm’s production is negligible w.r.t. the overall quantity exchanged on the market)

High (tending to infinite)

Homogeneous None

Imperfect competition

Monopoly

Big (a single firm’s production is the all quantity exchanged on the market)

One firm ---- No possibility of entry

Oligopoly

Big (a single firm’s production is a large part of the quantity exchanged on the market)

Few firms Homogeneous Barriers may exist

Monopolistic competition

Small (a single firm’s production is negligible w.r.t. the overall quantity exchanged on the market)

High Differentiated None

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Official Definition

EU Commission:

• A relevant product market comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer, by reason of the products' characteristics, their prices and their intended use*

• *Commission Notice on the Definition of the Relevant Market for the Purposes of Community Competition Law, Official Journal, C372, 9/12/1997

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Notion of relevant market

To identify boundaries of competition between firms

Three types of constrains:

• Demand-side substitution: ability of consumers to switch

• Supply-side substitution: ability of suppliers to switch in the short term, cf. entry barriers

• Potential competition: ability of suppliers to switch in the long term ( but during the dominance analysis)

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Main criteria used by the Commission

• Demand-side substitution (cf. segmentation fixed/mobile)

• Price differentials between products (cf. segmentation fixed/mobile)

• Different payment structures (cf. segmentation cable/satellite television)

• Different product characteristics (cf. segmentation pay-TV and free TV)

• Existence of specific customer groups (cf. segmentation enhanced telecommunications for international corporations)

Product market: TLC and media/1

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• Two main types of markets

– Services to end users (retail)

– Services supplied to undertakings so as to provide retail services (wholesale)

• Five platforms

– Fixed narrowband

– Fixed broadband

– Fixed leased lines

– Mobile

– Broadcasting

Product market: TLC and media/2

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• Other fixed lines markets (wholesale and retail level)

• Other mobile markets (wholesale and retail level)

• Other Internet markets

• Other broadcasting markets

• Satellite markets

• Equipment markets

• Bundled Products

Product market: TLC and media/3

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Definition of geographic markets

A relevant geographic market comprises the area in which the firms concerned are involved in the supply and demand of products or services, in which the conditions of competition are sufficiently homogeneous and which can be distinguished from neighbor areas because the conditions of competition are appreciably different in those area *

*Commission Notice on the Definition of the Relevant Market for the Purposes of Community Competition Law, Official Journal, C372, 9/12/1997

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Notion of geographic markets

• Past evidence of orders to other areas

• Basic demand characteristics (i.e. national preferences, preferences for national brands, language, culture and lifestyle, need for local presence)

• Views of customers and competitors

• Current geographic pattern of purchases

• Barriers to entry and the costs associated with switching to companies located in other areas

• Movements of consumers across areas in response to (relative) price variations or changes in other relevant variables

• Characteristics of the goods (ex. soft goods) 17

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Geographic market: TLC and media

In network and media industries most of the markets remain national because:

• physical characteristics or capacity of a network (i.e. the area covered by the network)

• regulatory reasons (i.e. the area in which operators are authorised to operate or to use share facilities such as spectrum)

• national or regional restrictions on the cross-border provision of services at least as far as the control of editorial content is concerned

• characteristics of the viewers and the homogeneity of linguistic areas that cross national borders

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3. Market power and dominance - Media ownership and concentration

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Basic notion

Legal approach:

• Dominant position → Position of economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and ultimately consumers

Economic approach:

• Market power → Power on price

→ Dominant position exists if market power is high

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Market power

The power of a firm to increase the price over the marginal cost

Price is equal to marginal cost in perfect competition (very high number of competitors, homogeneous product, …)

In the real world fix costs exist, and products very unlikely are perfectly homogenous and substitute → single firms

always have market power to a certain extent

The issue is to measure how large this is 21

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• Dominance “relates to a position of economic strength

enjoyed by an undertaking, which enables it to prevent effective competition being maintained on a relevant market, by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of consumers.” (ECJ, Hoffmann-La Roche, 1979)

• Three type of constraints are important:

– by actual competitors

– by expansion of actual competitors and potential entrants

– by customers

Definition of dominance

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Media industry tends to concentration

The media industry is characterized by:

High initial costs (barriers to entry)

Low marginal costs

Relevant economies of scale (horizontal vertical and diagonal integration)

The digitalization process however is bringing profound changes:

Lowering of barriers to entry

Long tail effect

Audience fragmentation

Products customization

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Entry barriers

Entry and expansion barriers contribute to define the extent to which a firm is dominant:

• Legal and regulatory: causing State intervention

E.g.: limitation due to scarcity of resources such as spectrum

• Structural: due to market structure

E.g.: scale and scope economies when fixed costs are sunk, control of essential facility of important distribution network, network effects

• Strategic: due to firms behaviors

Long term contracts with exclusionary effect on competitors, excessive investment, predatory prices strategies

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Entry barriers

Concentration in media markets can lead to two different and opposite firms behaviors, both increasing barriers to entry:

with few contestants, prices can grow up, thus narrowing the access of new entrants (e.g. the TV sports rights)

dominant firms can keep the prices low (predatory prices), making the market not profitable for potential entrants, especially because of the high initial costs

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Tools: market share

First look at the market share (usually it is better in value rather than in volume)

However, a high market share does not imply necessarily market dominance

→ a firm could be unable to increase the price if the market is contestable (i.e. barriers to entry are absent).

Market share thresholds should be used as attention levels:

• More than 50%: rebuttable presumption of dominance

• Between 40 and 50%: may be indication of dominance, see size of competitors, evolution over time, other factors

• Between 30 and 40%: generally not considered as dominance

• Less than 25% : presumption of no-dominance

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Other criteria/1

Low marginal costs: - For press media marginal costs are low, as additional

cost is related to just a part of the product (paper, distribution…)

- For broadcasting media the marginal cost is zero, as any new viewer/listener does not have any additional cost.

But Switching to internet as the new distribution mean, through streaming videos, this paradigm is changing,

because more viewers/listeners mean more bandwidth, and more costs

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Other criteria/2

• Overall size of the undertaking • Cost and barriers to switching • Control of infrastructure not easily duplicated • Technological advantages or superiority • Easy or privileged access to capital markets/financial resources • Product/services diversification (e.g. bundled products or services)

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Other criteria/3

• Economies of scale and economies of scope • Vertical integration • Highly developed distribution and sales network • Absence of potential competition • Barriers to expansion • Ease of market entry • Absence of or low countervailing buying power

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Demand characteristics/1

Consumers concentration affect a firm’s market power:

Aggregated consumers have stronger bargaining power, because they constitute an attractive group and so stimulate tighter

competition (in particular when customer are well informed)

Moreover:

• If consumers are homogeneous and aggregated they attract possible new entrants (and this reduces the incumbent market power)

• If consumers are dispersed, fixed costs make entrance into the market unattractive (the entrant will probably deal only with a small proportion of consumers)

• Audience fragmentation in media markets could impede the access of new entrants

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Demand characteristics/2

Technological development is deeply influencing the media markets:

On the one hand it lowers entry barriers, reducing dominance, with positive effects on market plurality

On the other hand it contributes to fragment the audience, dispersing consumers and thus making the market less attractive for new entrants.

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Criteria

• High proportion of the producer’s total output bought by a certain customer

• High portion of the costs for a service in relation to their total expenditure of the customers

• Well informed customers

•Countervailing buyer power is more meaningful in wholesale markets because wholesale customers are in general more visible and powerful than retail customers

Demand characteristics/3

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4. Pluralism regulation in the main EU countries: essentially an ad hoc definition

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General principles of freedom of expression and freedom of speech are clearly stated in the article 10 of in the European Convention of Human Rights.

Specific rules about media pluralism can be considered the ones provided by the AVMS Directive (Audiovisual Media Services, following the TV Without Frontiers Directive), in the broadcasting sector, that prescribes some specific quotas:

- Broadcasters should reserve a majority of the transmission time to EU audiovisual works

- Broadcasters should reserve a 10% of the transmission time to audiovisual works provided by independent producers.

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Two stages of media ownership control at European level

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Each EU country has a specific pluralism legislation, focusing particular aspects of media pluralism.

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Overview

TV Newspapers Crossmedia

France 49% of a single TV licence owner

30% share of the national circulation

Several measures to avoid strong positions in TV, radio adn newspapers at the same time

Germany Max. 30% of TV audience share

Federal Cartel Office intervenes for big mergers

Undue influence if more than 25% of TV audience share and dominant position in related market

Italy 20% of the total TV market (TV licences and programs)

20% of the total newspapers market

20% of the total communications market revenues (SIC)

United Kingdom Secretary of State asks the advice of Ofcom and CC for main mergers

Mergers are submitted to public interest test

Several measures to avoid strong positions in TV, radio adn newspapers at the same time

USA Max. reach of 45% of TV households for local TV stations

- Cross-ownership allowed according to the number of TV stations that operate in a market

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Television Maximum holding of 49% of a national terrestrial TV service exceeding 2.5% of TV audience share

in a given year Maximum holding of 33% of a local terrestrial TV service exceeding 2.5% of TV audience share in a

given year If one holds more than 15% in a national terrestrial TV service, may not hold an interest of more

than 15% in another TV service. If one holds more than 5% in two national TV services can’t hold more than 5% of a third national TV service

Prohibition on the holding of more than seven licenses for national DTT services; Prohibition on the holding of more than two licenses for satellite services.

Print Prohibition to exceed the threshold of 30% of the national daily circulation

Cross media No person may hold more than two of the following positions at national level: holder of licences for television services with audience reach exceeding 4 million; holder of licenses for cable TV services with audience reach exceeding 6 million; holder of licences for television services with audience reach exceeding 30 million; editor or owner of daily newspapers with a national share of circulation in excess of 20%.

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France

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Television

30 per cent rule: a broadcaster can not exceed 30% of TV audience share during a given year.

25 per cent rule: if a broadcaster holds a dominant position can not exceed 25 % of TV audience share in a given year

Press

Mergers: if one of the companies involved in a merger has a turnover of more than 25 million Euros, the filling of the Federal Cartel Office is required

When printed media companies merge, a maximum share of 24.5% is permitted.

Cross media

A company is considered having an undue influence on public opinion when it holds 25% of the TV audience share and market or a 30% of the TV and media market dominant position in a related media market

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Germany

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Television

A broadcaster can not have more than 20% of the total National TV channels

Incumbent operators (= operators having more than one national TV licence) in the passage to digital multiplexes must cede 40% of their network capacity to new entrants

Press

Any owner cannot control more than 20% of the national daily newspapers

Cross media

SIC (integrated system of communications). One media company can not control more than 20% of the total communications market (advertising, pay-tv subscriptions, many other things…).

If one company has more than 40% in the telecommunications market, it can not control more than 10% of the SIC.

If a company controls more than 8% of the SIC, it can not hold shares in any newspaper. This rule was expected to expire in 2010, but it has been extended.

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Italy

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Television Any merger in the TV market, if relevant for the public interest, can be assessed by the

Secretary of State, who can ask Ofcom and the Competition Commission to investigate

Press Cross media mergers involving press companies should be submitted to a public

interest test.

Cross media In every local area at least three separate media companies for TV, radio and

newspapers

If one controls more than 20% of national newspapers circulation, cannot hold more than 20% of an ITV licence

If one controls a regional ITV licence, cannot control more than 20% of the newspaper circulation in that region

If one controls a regional ITV licence, can not control a radio station with an audience exceeding 45% of in that region

If one controls a newspaper accounting for more than 50% of the circulation in a given region, cannot control a radio station

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United Kingdom

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In 2003, the Federal Communication Commission opted for a relaxation in the media ownership rules. This decision has been strongly opposed

New rules foresee:

Television

A TV network can operate local TV station with a maximum reach of 45% of US TV households. The previous threshold was 35%.

A company can own 3 TV stations in those market with more than 18 TV stations, or 2 TV stations where there are more than 5 TV stations.

Cross media

If in one market there are 9 or more TV stations, cross-ownerships (newspapers-broadcast, and television-radio) are allowed

If in one market there are between 4 and 8 TV stations, cross-ownerships (newspapers-broadcast, and television-radio) are subject to some restrictions.

If in one market there are less than 4 TV stations, cross-ownerships (newspapers-broadcast, and television-radio) are prohibited

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USA

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Conclusion

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Conclusion

• The instruments of competition are not fit for pluralism but they can help!

• The EU Member States however have not a common line on pluralism preservation

• The world of internet presents different issues and prima facie seems less manageable and maybe less in need of traditional regulatory instruments

• However, the Google, the Apples, the Facebooks…may create new concerns both for competition and pluralism…

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