1999/153/EC: Commission Decision of 27 May 1998 relating to a proceeding pursuant to Council Regulation (EEC) No 4064/89 (Case No IV/M.993 - Bertelsmann/Kirch/Premiere (notified under document number C(1998) 1439) (Only the German text is authentic) (Text with EEA relevance)
27. 2. 1999 EN Official Journal of the European Communities L 53/1 II (Acts whose publication is not obligatory) COMMISSION COMMISSION DECISION of 27 May 1998 relating to a proceeding pursuant to Council Regulation (EEC) No 4064/89 (Case No IV/M. 993 — Bertelsmann/Kirch/Premiere (notified under document number C(1998) 1439) (Only the German text is authentic) (Text with EEA relevance) (1999/153/EC) THE COMMISSION OF THE EUROPEAN COMMUNITIES, Having regard to the opinion of the Advisory Committee on Concentrations (3), Having regard to the Treaty establishing the European Community, Whereas: Having regard to the Agreement on the European Economic Area, and in particular Article 57(2)(a) thereof, Having regard to Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings (1), as amended by Regulation (EC) No 1310/97 (2), and in particular Article 8(3) thereof, Having regard to the Commission Decision of 22 January 1998 to initiate proceedings in this case, Having given the firms concerned the opportunity to make known their views on the objections raised by the Commission, SA and (CLT-UFA) (1) On 1 December 1997 the Commission received notification pursuant to Article 4 of Council Regulation (the Merger (EEC) No 4064/89 Regulation) of a proposed concentration whereby Taurus CLT-UFA Beteiligungs-GmbH & Co. KG (Taurus) would acquire joint control, within the meaning of Article 3(1) of the Merger Regulation, of Premiere Medien GmbH & Co. KG (Premiere), BetaDigital für digitale Fernsehdienste mbH Gesellschaft (BetaDigital) and BetaResearch Gesellschaft für digitaler Entwicklung Infrastrukturen mbH The proposed concentration was to be effected through the purchase of shares. (BetaResearch). Vermarktung und (2) On 15 December 1997 the Commission decided to proposed suspend concentration pursuant to Articles 7(2) and 18(2) implementation the of (1) OJ L 395, 30. 12. 1989, p. 1; corrigendum: OJ L 257, 21. 9. 1990, p. 13. (2) OJ L 180, 9. 7. 1997, p. 1. (3) OJ C 57, 27. 2. 1999. L 53/2 EN Official Journal of the European Communities 27. 2. 1999 of the Merger Regulation, pending adoption of a final decision. (3) By letter dated 22 December 1997 the German Government informed the Commission pursuant to Article 9(2) of the Merger Regulation that the concentration threatened to create or strengthen a dominant position, as a result of which effective competition would be significantly impeded on six markets in Germany, each constituting a separate geographic market within the meaning of Article 9(7) of the Merger Regulation. (4) On 22 January 1998 the Commission decided pursuant the Merger Regulation and Article 57 of the EEA Agreement to initiate proceedings in this case. to Article 6(1)(c) of (5) The Advisory Committee discussed the draft of the present Decision on 6 May and 25 May 1998. I. THE PARTIES (9) (6) Bertelsmann AG (Bertelsmann) is the common parent company of the leading German media group. The Bertelsmann group has activities primarily in book and magazine publishing, book clubs, printing, music publishing and sound recording, and has holdings in commercial television. CLT-UFA is a joint venture between Bertelsmann and Audiofina SA, in which the parent companies have merged their European television interests. These include the shareholding in Premiere. (7) Taurus is a holding company belonging to the Kirch group (Kirch). Kirch is the leading German supplier of films and entertainment programmes for television and is also active in commercial television. The group operates mainly in Germany. feature II. THE PROPOSED CONCENTRATION which has 25 %. It is proposed that Canal+ should divest itself of its shareholding and that CLT-UFA and Kirch should increase their shares in Premiere to 50 % each. At the same time Kirch will close down its own digital pay-TV channel DF 1 and transfer DF 1’s assets to Premiere. It will also bring its sports channel DSF into Premiere and place its pay-TV and pay-per-view rights at Premiere’s disposal by sublicensing them [. ] (4). Premiere will become a digital pay-TV programme and marketing platform using the d-box technology made available to it by Kirch, which operates with a proprietary encryption system. To this end Premiere will assemble in-house or bought-in TV programmes into programme packages and market them. In addition, it will provide subscriber management services (SMS) both to Premiere Digital and to other programme companies. It will build up the decoder infrastructure (in the form of set-top boxes) needed to receive digital television. For digital television transmitted by satellite, it will also administer a system of conditional access. At the same time, CLT-UFA will acquire a 50 % interest in BetaDigital, currently a wholly owned subsidiary of Kirch. BetaDigital operates a playout centre for satellite-transmitted digital television and will in future provide to Premiere, and to any interested third parties, the services connected with processing and broadcasting, such as encryption, video compression, multiplexing and satellite uplink. BetaDigital currently provides satellite uplink for DSF, PRO 7 and [. ]. (10) CLT-UFA will also acquire a 50 % interest in BetaResearch, currently likewise a wholly owned Kirch subsidiary. BetaResearch is the holder of exclusive, open-ended licences — granted for Germany, Austria and the German-speaking part of Switzerland — for Beta encryption technology for scrambling programmes, based on the d-box decoder. The licenser of the access technology is DigCo BV, in which Kirch and Irdeto BV, owned by the South African group MIH, each have a (8) The German pay-TV supplier Premiere is currently owned by CLT-UFA and Canal+ SA (Canal+), which have a 37,5 % share each, and by Kirch, (4) Deleted for publication. In what follows, all particulars of inter alia, market shares and turnover have, for reasons of confidentiality, been replaced by magnitudes given in square brackets. Likewise, text of a confidential nature has been replaced by suspension marks in square brackets. 27. 2. 1999 EN Official Journal of the European Communities L 53/3 in is active stake. BetaResearch 50 % the development of decoder software and will continue to develop the encryption and operating software for the d-box technology. It will license this technology to Premiere, Deutsche Telekom AG (Telekom), other programme suppliers and decoder manufacturers. In addition, BetaResearch will itself manufacture conditional access modules (CA modules) and smart cards for supply to d-box manufacturers, and will carry out contract and project work for third parties; it has already received orders for such work from [. ]. (11) In the Agreement on a cable platform for digital television which is neutral as far as programme suppliers are concerned, Telekom has become party to the arrangement between Kirch and Bertelsmann regarding Beta access technology based on the d-box decoder, thereby obtaining a technical platform for the digital distribution of pay-TV programmes via its cable network. It intends to acquire a stake in BetaResearch in order to ensure that it has the necessary rights in the d-box decoder based Beta access technology. This operation forms the subject-matter of proceeding IV/M. 1027 — Deutsche Telekom/BetaResearch. Although, technically speaking, the two projects constitute concentrations and have therefore also been notified separately, in fact they are closely linked. Taken together, they will provide the framework for the introduction of digital television in Germany. separate III. THE CONCENTRATION (12) Premiere is regard currently controlled rights with jointly by CLT-UFA, Kirch and Canal+, since all three to partners have veto market-related decisions. The operation will lead to a change in the nature of the control. Once Canal+ has withdrawn, CLT-UFA and Kirch will each have a 50 % interest in Premiere and will jointly, having henceforth to take control strategic business decisions affecting it by mutual agreement. At the same time, Kirch will contribute to Premiere substantial market-relevant assets both in the form of DF 1 and the sports channel DSF and through the transfer of its pay-TV and pay-per-view rights. The transfer to Premiere of Kirch’s digital interests will result in a sizeable extension of Premiere’s business activities. it (13) Premiere will perform on a permanent basis all the functions of an autonomous economic entity, and should not lead to coordination of the competitive behaviour of CLT-UFA and Kirch. It will continue to operate pay-TV in Germany and will develop, alongside the previously predominant analogue pay-TV programmes, digital pay-TV both as a programme supplier and at the level of the programme and marketing platform. Although at present it still obtains pay-TV broadcasting rights from Taurus, once the agreements concluded by Taurus with the licensers have expired Premiere will itself acquire those rights [. ]. Once the proposed merger has been completed, Kirch and CLT-UFA/Bertelsmann will be active on the market for pay-TV for pay-TV and broadcasting rights only through their participation in Premiere. The increase in the size of the stakes held by CLT-UFA and Kirch in Premiere after the the withdrawal of Canal+ into a simultaneous development of Premiere digital programme and marketing platform, therefore constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation. together with the market it (14) CLT-UFA and Kirch will each have a 50 % interest in BetaDigital and will control jointly. BetaDigital will perform on a permanent basis all the functions of an autonomous economic entity, and should not lead to coordination of the competitive behaviour of CLT-UFA and Kirch. Although at the present time the purchasers of BetaDigital’s technical services are predominantly firms associated with CLT-UFA and Kirch, the provision of such services to third parties is not only planned but to some extent already a reality. It may be assumed from this that, once digital in Germany, television kBetaDigital will act increasingly on behalf of third parties. BetaDigital is accordingly to be regarded as a full-function enterprise. Since in the field of technical television only CLT-UFA is active to any extent (through Cologne Broadcasting Centre GmbH), there will be no coordination here either of the competitive behaviour of CLT-UFA and Kirch. CLT-UFA’s participation in BetaDigital therefore constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation in the form of a concentrative joint venture. is more widespread for digital services (15) To begin with, CLT-UFA and BetaTechnik, which is owned by the Kirch group, will each have a 50 % interest in BetaResearch. Once Telekom has acquired a stake in BetaResearch, Telekom, CLT-UFA and Kirch will control BetaResearch L 53/4 EN Official Journal of the European Communities 27. 2. 1999 the jointly. In the Agreement on the restructuring of BetaResearch (the restructuring agreement), it is stipulated that important business decisions [. ] are to be taken by the proprietors’meeting, acting unanimously. BetaResearch will perform on a permanent basis all functions of an autonomous economic entity; this should not lead to coordination of the competitive behaviour of CLT-UFA and Kirch. BetaResearch will not only license d-box technology to firms — such as Telekom and BetaDigital — which seek to offer technical services for digital television, but it will also grant licences to programme suppliers who wish to provide the necessary technical services themselves. It will grant licences to interested decoder manufacturers and supply them with CA modules, and develop decoder software for third parties. Besides its business dealings with its parent companies and with companies associated with them, that BetaResearch will also transact licensing business to a not inconsiderable extent with third parties and will hence have its own access to the market. BetaResearch is accordingly to be regarded as a full-function enterprise. Since only CLT-UFA is active in the field of digital encryption technology for pay-TV, through Bertelsmann’s stake in Seca SA, there is no risk of coordination of competitive and Kirch. behaviour CLT-UFA’s BetaResearch accordingly constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation in the form of a concentrative joint venture. between CLT-UFA in therefore be assumed participation can it IV. COMMUNITY DIMENSION (16) Bertelsmann and Kirch together have an aggregate worldwide turnover of more than ECU 5 billion. Each of them has an aggregate Community-wide turnover of more than ECU 250 million. Kirch is alone in realising more than two thirds of its aggregate Community-wide turnover within one and the same Member State, namely Germany. The concentration a Community therefore has dimension and does not constitute a case of cooperation under the EEA Agreement. V. ASSESSMENT UNDER ARTICLE 2 OF THE MERGER REGULATION — pay-TV, — technical services for pay-TV. A. RELEVANT PRODUCT MARKETS 1. Pay-TV the case of (18) Pay-TV constitutes a relevant product market separate from that for free-access television (free TV), i. e. advertising-financed private television and public television financed through fees and partly through advertising (5). While, in the case of fee- and advertising-financed television, there is a trade relationship only between the programme supplier and the advertising industry, in the case of pay-TV there is a trade relationship only between the programme supplier and the viewer as subscriber. The conditions of competition are accordingly different for the two types of television. Whereas in fee- and advertising-financed television the audience share and the advertising rates are the key parameters, in the case of pay-TV the key factors are the shaping of programmes to meet the interests of the target groups and the level of study by GfK-Fernsehforschung (GfK TV Research), pay-TV subscribers devote on average 90 % of their daily viewing time to free TV and 10 % to pay-TV. The fact that subscribers, despite comparatively little use, are prepared to pay considerable sums for pay-TV is a clearly distinguishable product with specific extra utility. As digitalisation continues to spread, there could admittedly, with the passage of time, be a certain free TV, convergence between pay-TV and particularly if, at some future stage, free-TV channels too should largely be supplied in digital bouquets by pay-TV operators. However, this possible future development is not enough now to justify the acceptance of a common market for pay-TV and free TV. The market for pay-TV also includes pay-per-channel and pay-per-view. The into pay-TV market cannot be subscriptions. According indicates that the subdivided to a latter (17) The proposed concentration affects mainly the markets for: (5) See Commission Decision 94/922/EC, MSG Media Service (OJ L 364, 31. 12. 1994, p. 1, paragraphs 32 and 33). 27. 2. 1999 EN Official Journal of the European Communities L 53/5 analogue and digital pay-TV. Digital pay-TV is only a further development of analogue pay-TV and therefore does not constitute a separate relevant product market. Moreover, account should be taken of the fact that in the next few years analogue broadcast pay-TV will be completely superseded by digital broadcast pay-TV. Under Premiere’s business plan, analogue subscriptions will be continually transformed into digital ones, so that by [. ] the only subscribers will be digital ones. distribution, on the other hand, the processed television signals are first beamed down from the satellite transponder to a cable head-end, where they are converted for cable transmission and then fed into the cable network. Despite the separate transmission technology for satellite and cable transmission, a corresponding subdivision of the market for technical services for pay-TV into two independent seem imperative. Both satellite and cable transmission require the operation of pay-TV. Ultimately the question can be left open, however, as it does not affect the outcome of the assessment under the Merger Regulation. technical services sub-markets the same does not for 2. Technical services for pay-TV B. RELEVANT GEOGRAPHIC MARKETS (19) The operation of pay-TV requires a special technical infrastructure in order to encrypt the television signals and to decrypt them for the authorised viewer. This is done by a decoder which is installed in the home of every pay-TV subscriber. Decoders for receiving digital pay-TV do not only decrypt the signals encrypted in the access system, but they also convert them to enable digital television signals to be received on analogue TV sets. Different decoders are used for cable and satellite TV. (22) The relevant geographic market for the product markets described above is confined to Germany, or at all events to the German-speaking region the consisting of Germany, Austria German-speaking and Switzerland. Given the viewing habits of the population, Luxembourg too can be included in the German-speaking region. Belgium parts and of 1. Pay-TV (20) conditional access. This In addition to a decoder base, pay-TV requires a system of system comprises the transmission of encrypted data, which contain information on the programmes or packages of programmes subscribed to and on the entitlement of the pay-TV subscribers to receive the programmes, together with the television signal, and possibly smart cards which are made available to the viewer and are able to decipher the encrypted authorisation data and transfer them to the decoder. (23) Despite the fact that, in certain niche markets, channels such as the sports channel Eurosport are throughout broadcast television Europe, broadcasting is still generally organised on a national basis. As the Commission has already stated in a number of decisions (6), owing primarily to different regulatory regimes, language barriers, cultural factors and other different conditions of competition prevailing in the individual Member States (e. g. the structure of the market for cable TV), the markets for the organisation of television are national in nature. (21) The infrastructure described above forms the basis for the services relating to the operation of pay-TV. These involve primarily the handling of conditional access and the marketing of decoders and smart cards. Technical services for pay-TV require specific technology for the transmission of digital television signals via satellite and via cable. In the case of satellite transmission, the television signal is processed by the playout centre and sent to the respective satellite transponder, from where it can be beamed down and received directly by each satellite TV subscriber using a decoder designed for satellite reception. In the case of cable (24) Germany is accordingly the relevant geographic market for pay-TV. The Commission came to the same conclusion in the MSG Media Service case, although it indicated in that Decision that, bearing in mind the lack of any language barrier, a market might in future be assumed to exist for German language Commission’s investigation in the present proceeding brought to light a number of grounds for considering that the pay-TV (7). The (6) See MSG Media Service footnote 5, paragraph 46; Commission Decision 96/346/EC, RTL/Veronica/Endemol, (OJ L 134, 5. 6. 1996, p. 32, paragraph 25). (7) See footnote 5, paragraph 51. L 53/6 EN Official Journal of the European Communities 27. 2. 1999 relevant geographic market for pay-TV here extends beyond Germany and, in view of the lack of any language barrier, comprises the entire German-speaking can, however, be left open in the last analysis, as the competition assessment of the concentration would be the same even on the assumption of a market encompassing the whole of that region. area. This question 2. Technical services for pay-TV acquired (25) Technical services for pay-TV are closely bound up with the supply of pay-TV. In its decision in MSG Media Service (8) the Commission assumed that the relevant geographic market was confined to Germany, but at the same time it stated that, to the extent that German providers of digital pay-TV other also German-speaking regions, MSG’s service market would probably also spread to such areas. In the present case, the market for technical services for pay-TV may, whether there is assumed to be a separate market for satellite transmission or an overall market for satellite and cable transmission, be entire deemed German-speaking area. subscribers encompass the to in (b) Technical platform the (27) The technical platform in the narrower sense, i. e. the controlling of conditional access and the provision of technical services connected therewith, will be organised differently in the case of satellite transmission and in that of cable transmission. The technical platform encrypts the signals of the programme to be broadcast that are sent by the programme supplier and transmits them to subscribers. In the case of satellite transmission, access control and the related technical services will be handled by BetaDigital, while in the case of cable distribution access control will be handled by Telekom, which will provide an electronic programming guide in the form of a base navigator. (28) The decoder technology is part of the technical platform. CLT-UFA, Kirch and Telekom have agreed to use d-box technology and Beta access control technology — the latter co-developed by Kirch — for encryption purposes in connection with satellite broadcasting of programmes. In order to ensure the use of Beta access technology by Premiere and Telekom structural point of view, CLT-UFA and Telekom will acquire a stake in BetaResearch, which owns the rights to the encryption and decoder systems. distribution from a cable and the C. EFFECTS OF THE CONCENTRATION 2. Market for pay-TV 1. Organisation of pay-TV in Germany after the concentration (a) Market domination (a) Programme platform (29) The proposed concentration will lead to the creation or strengthening of a dominant position for Premiere on the pay-TV market in Germany. commissioned TV programmes (26) Premiere will build up a programme and marketing platform and distribute its programmes both through the cable networks (using Telekom’s technical platform) and via satellite (using its own in-house technical platform). It will assemble and/or into programme packages, which it will market either by way of direct marketing or through the trade and it will provide subscriber management services not only for Premiere Digital but also for other programme suppliers. As a matter of priority, it will build up the decoder infrastructure (set-top boxes) needed to receive digital TV. (8) See footnote 5, paragraphs 52, 53 and 54. (i) Premiere will have a near-monopoly as pay-TV supplier ‘Multithe´matiques’ (30) At the present time, Premiere and DF 1 are basically the only pay-TV suppliers in Germany. Although Canal+ is active in Germany, providing the bouquet consisiting of special-interest three pay-TV channels, the bouquet is currently broadcast using DF 1’s platform. Premiere has approximately 1,5 million subscribers (November 1997 position), including Premiere Digital 100 000 subscribers (December 1997 position). DF 1 has programme some 27. 2. 1999 EN Official Journal of the European Communities L 53/7 figures indicate approximately [ 100 000] subscribers to its digital programme package (November 1997 position). These that Premiere already occupies a dominant position on the pay-TV market. This position is not as yet unassailable though, since Kirch has extensive and important films and sports rights and Premiere is especially dependent on the former’s pay-TV broadcasting rights. Even if Kirch, as explained in recital 2, was able to exercise joint control over Premiere, there has hitherto been an intensive competitive relationship between Premiere and DF 1. Despite its position as a partner in Premiere, in 1996 Kirch began, with DF 1, to set up a digital pay-TV platform in competition with Premiere. This behaviour triggered intense competition between Premiere and DF 1 and resulted in numerous court proceedings. One of the consequences of this competition was that, prior to the agreement reached in June 1997 on the proposed merger, Kirch and Premiere were each running separate decoder projects. Once the proposed concentration has taken place, this competition will cease and for all practical purposes there will be only one pay-TV-supplier, which will the programme resources of both CLT-UFA and Kirch. combine (ii) Premiere will be the only programme platform for digital pay-TV supply (31) At present Premiere provides an analogue pay-TV channel which broadcasts mainly premium films (first transmission of currently showing feature films and sports events. Premiere Digital provides a further two channels which broadcast the analogue programme with staggered showing times. The digital films on a pay-per-view basis. DF 1 offers a basic bouquet consisting of 20 channels (including a few foreign free-TV Planet and pay-channel). three additional packages (films, sport and science fiction), four special-interest channels, which can be subscribed to separately (including two belonging to Canal+), and feature films on a pay-per-view basis. It also offers Canal+’s channels includes feature (32) The conversion of Premiere into a 50/50 joint venture between CLT-UFA and Kirch and the cessation of the activity of DF 1 as an independent pay-TV supplier mean that in the near future Premiere will be the only pay-TV programme and marketing platform the concentration has taken place, Premiere will have in Germany. Once taken over substantial assets [. ]. DF 1’s broadcasting and other activities will thereupon cease. Taurus Film will, moreover, transfer [. ] to Premiere in return for the assumption by the latter of its responsibilities as employer. Premiere will acquire the sports broadcaster DSF, which will in future supply sports channels for Premiere’s programme bouquet and operate an additional free TV sports channel. It is also taking over the operation of [ 20] of DF 1’s transponders and [ 10] of CLT-UFA’s, together with responsibility for the contract between Kirch and Nokia for an order of over 1 million d-box decoders. (33) [. ]. (iii) Premiere will have access to the most attractive and most comprehensive programme resources (34) Access to programme resources is vital to the successful provision of pay-TV. Particularly important is access to premium films and major sporting events; bradcasting these on the premium channels known as ‘anchor channels’ awakens interest in a pay-TV bouquet among potential subscribers. Access to a stock of films that have already been shown on television and to television productions suitable for repeat broadcasting is also important. ‘Library’ programmes of this kind can be used especially in order to run special-interest channels, such as feature film channels or science fiction, comedy and documentary channels. (35) Premiere will have access to programme resources unparalleled its parent in Germany companies CLT-UFA and Kirch on account of their positions on the upstream markets for programme rights. For reasons of confidentiality no detailed figures can be given here. through (36) Kirch is the leading German supplier of feature films and entertainment programmes for television. In its Decision in MSG Media Service (9), the Commission noted that Kirch had at its disposal a stock of about 15 000 films of all types and 50 000 hours of television programmes, and also had extensive production activities in the area of films and television. Since that Decision, in the years [. ], Kirch has concluded exclusive output deals for pay-TV rights with numerous film the Hollywood studios, including almost all (9) See footnote 5, paragraph 76. L 53/8 EN Official Journal of the European Communities 27. 2. 1999 majors, and has thereby acquired a commanding position in the area of programming. Furthermore, the proportion of pay-TV rights which is not now in the hands either of Kirch or of CLT-UFA or Premiere is [. ]. As a result of the output deals concluded by Kirch for pay-TV rights in particular, the [. ] monopoly in premium films for pay-TV which Premiere will enjoy as a result of the transaction will continue foreseeable future. the for (37) Kirch and CLT-UFA also hold [. ] sports rights, which in many cases are complementary. For example, CLT-UFA has the pay-TV rights to German Bundesliga football matches, while Kirch has [. ]. In tennis, Kirch has the rights to [. ], while CLT-UFA has the rights to [. ]. Both have rights to a large number of other sports. Kirch, for example, has the rights to [. ]. (43) (38) [. ]. (39) [. ]. (40) [. ]. (41) [. ]. a list of particularly important sporting events to be transmitted by free TV, it should be emphasised that these involve only the Olympic games and a few football matches of outstanding importance. (iv) Premiere’s scope for competitive action will not be controlled to any considerable extent by public television suppliers that its examination In their reply to the Commission’s objections, the parties contend the in Commission did not pay enough attention (a) to the strong competitive interrelation between public and commercial free TV on the one hand and pay-TV on the other hand and (b) to the resulting controlling influences of free TV on pay-TV. In particular, the Commission took absolutely no the massive competitive pressure account of exerted by public television in Germany on pay-TV. (42) [. ]. When the parties contend that some of the said rights are granted to them for only a relatively short time with the result that they would soon have to try and get them renewed, this is of course quite true. In this respect, the list given here reflects only the current situation. When, however, the parties already hold a quite considerable number of these important sports rights, which are usually granted only for a relatively short period, then it is to be expected, after their resources have been bundled in Premiere, that they will also be awarded such rights in future, at least on the same scale but probably to a greater extent. The parties have not contended otherwise. As regards the parties’contention that the Prime Ministers of the Länder had, on the basis of European Parliament and Council Directive 97/36/EC of 30 June 1997 amending Directive the coordination of certain provisions laid down by law, regulation or administrative action in Member television States broadcasting activities (10), provisionally agreed on the pursuit of 89/552/EEC concerning on (10) OJ L 202, 30. 7. 1997, p. 60. It to pay-TV. in addition (44) The Commission does not deny that, although pay-TV and free TV constitute two different markets, there is an interrelation between them. As explained more fully in section (c), the more varied and attractive the programmes supplied by free TV, the less incentive there is for viewers to subscribe is not convincing to say, however, that on account of this interrelation Premiere’s scope for action on the pay-TV market is already considerably restricted, especially by the public broadcasters. There is no direct competitive relation between free TV and pay-TV. When the parties object, on the contrary, that such competition does exist, particularly in regard to audience share, this is immediately contradicted by their further statements. The parties cite a study by GfK-Fernsehforschung (GfK TV Research), according to which pay-TV subscribers devote on average 90 % of their daily viewing time to free TV and 10 % to pay-TV. If, however, pay-TV subscribers are prepared, in addition to the existing broadcasting fees of about DEM 30, to pay an extra DEM 50 for a pay-TV subscription, although they use this for only 10 % of their viewing consumption, this shows that the economic success of pay-TV is not exactly dependent on the audience share. What is decisive is the subscriber base, which exists independently 27. 2. 1999 EN Official Journal of the European Communities L 53/9 fact time. The of the actual extent to which pay-TV is used at any one that subscribers, despite comparatively little use, are prepared to pay a considerable price for pay-TV shows, moreover, that pay-TV is a clearly distinguishable product with specific extra utility. (i) No other firm will have the programme resources necessary to establish a programme platform (45) When the parties further contend that an increase in broadcasting fees affects the demand for pay-TV and that, hence, the elasticity of demand for pay-TV depends in the long term on the amount of the fees charged by public broadcasters, this is not evidence, either, of a competitive relation between pay-TV and the public broadcasters. To begin with, a fee increase and hence a charge on the ‘cultural budget’ would have to be fairly drastic to affect the existing willingness to pay DEM 50 a month for a pay-TV subscription. Furthermore, it is fair to speak of a competitive relation with regard to the amount of the fees, and possibly the price of a pay-TV subscription, only if the public broadcasters could set the fees autonomously. But this is precisely what they cannot do. (b) Duration of dominance (46) The parties concede that Premiere will have a very strong position on the market in pay-TV over the next five years. But they argue that this position will be limited in time. As soon as Premiere has succeeded in establishing a broad decoder base, other pay-TV suppliers will be able to use it to offer their own pay-TV marketing and programme platforms and to provide and distribute their own programmes competition with Premiere. Telekom in particular will be able to set up an alternative programme and marketing platform for cable, and to market programmes and to service and manage subscribers for other programme suppliers. in (47) This argument cannot be accepted. It must be assumed that Premiere’s dominant position will be established on a lasting basis. As a result of the transaction, Premiere will continue to be the only programme and marketing platform for the cable and satellite sector on the pay-TV market in Germany for a long time to come. (48) Access rights to programme is even more important in the case of pay-TV than it is in the case of free TV, since, in order to entice the consumer to subscribe, or to take particular productions on a pay-per-view basis, certain specific types of content are required. Experience with pay-TV in Europe so far shows that in order to be sufficiently attractive a pay-TV bouquet must include a combination of premium rights for the first broadcasts of films produced at the major Hollywood studios and for popular sporting events. This is especially true in Germany, where every household with television can already receive more than 30 free-access channels. The importance of premium films and sporting events for the organisation of pay-TV is borne out by the programme costs estimated in Premiere’s business plan. [60 % to 80 %] of all licensing costs in 1998 are accounted for by premium films ([30 % to 50 %]) and sports rights ([20 % to 40 %]). An alternative programme platform can therefore be built up only by somebody who has access to premium content so that he can offer a promising pay-TV bouquet. (49) But programme resources are in short supply, since, as a general rule, the broadcasting rights for premium content of this kind are given on the basis of longer-term exclusive contracts. In the German-speaking area CLT-UFA and Kirch hold [. ] pay-TV broadcasting rights for premium films, as a result of output deals with the Hollywood majors, and [. ] sports rights too. As CLT-UFA and Kirch are to transfer their pay-TV broadcasting rights to Premiere, the transaction will initially make Premiere the only operator to dispose of the programme content for a premium channel. For the duration of the existing contracts no other supplier will have access to Premiere’s programme resources. Thus potential competitors will not be in a position to create an alternative programme platform for the German-speaking area. They might be able to show particular programmes in specific pay-TV niches, but to do so they would be dependent on Premiere’s programme and marketing platform. L 53/10 EN Official Journal of the European Communities 27. 2. 1999 (50) Nor is it likely that the situation will change in any way once the current contracts for pay-TV rights have expired. In theory, pay-TV services could be supplied in Germany and the German-speaking area by other European and non-European television operators, such as BskyB Ltd or Canal+, or even the major Hollywood studios. But in order to establish an alternative programme platform it is not enough to conclude just a few individual output deals. The output deals concluded by Kirch and CLT-UFA run for different terms. Four of the ten output deals of Kirch, whose rights will be sub-licensed to Premiere, have a term of [ 20] years. These are at least [. ]. Most of the output deals with the Hollywood majors run till [ 2005] or longer. Potential competitors would have to succeed in acquiring rights under several output deals over a number of years before they could offer an attractive pay-TV bouquet. (51) Given the market position Premiere will have established by then, competitors’ prospects of securing any substantial volume of attractive pay-TV broadcasting rights will be small. To have any hope of acquiring broadcasting rights, it is vital to have access to an established subscriber base, since rightholders usually want to see their product distributed widely. This is true of premium films, and even more so of sports events. The holders of sports rights are especially interested in having their events broadcast as widely as possible, as this attracts further sponsors and increases advertising revenue. Premiere will already have an established subscriber base, which will enable it to guarantee more extensive distribution than a bidder who has still to build up a subscriber base. In addition, the prices of pay-TV rights are usually the number of determined by reference subscribers, subject to a stated minimum. This is certainly what in output deals. As Premiere’s subscriber base can be expected to be large in the next few years, it follows that a sale of rights to Premiere should secure a considerably higher price than sale to a newcomer. Moreover, a newcomer would run a considerable financial risk by concluding output deals, since it would have to guarantee a minimum subscriber base, without is done to knowing whether it could achieve the guaranteed figure. In view of the advantages which Premiere will consequently enjoy over any potential competitor in the negotiation of contracts for premium content, it is unlikely that outsiders will be able to secure adequate access to content of that kind. (52) It is also unlikely that Telekom will establish an alternative programme and marketing platform. Telekom would in any event be able to establish a platform only for cable. But Telekom does not hold film and sports rights. To build up a competing bouquet it would have to have premium content and only an operator with access to premium content can successfully market other programmes that are suitable for bundling. These are programmes which are not so attractive in themselves that they might induce viewers to subscribe. Thus Telekom would be able to build up an alternative platform open to potential competitors with Premiere only if it had access to premium content or to a premium channel. In its agreements with CLT-UFA and Kirch, however, Telekom has expressly undertaken not to market Premiere itself. it is difficult to see, therefore, how Telekom could build up an attractive, marketable pay-TV bouquet. (ii) The transaction enables Premiere to combine the advantages of its subscriber base with the enormous programme resources of Kirch (53) Premiere is already the biggest pay-TV supplier, and as such already has a subscriber list that it can use for the future digital pay-TV. As can be seen from Premiere’s marketing of the d-box, which was suspended last December, an existing body of analogue TV subscribers is an important factor in the successful marketing of a digital pay-TV bouquet. Premiere offered its subscribers the digital programme, including the hire of the d-box, at the small extra charge of DEM 10 over that analogue subscription. Between the beginning of November and the middle of December, when the marketing of the d-box came to an end, Premiere secured [50 000 to Premiere Digital, and placed a corresponding number of to 100 000] subscribers 27. 2. 1999 EN Official Journal of the European Communities L 53/11 d-boxes on the market. There were [ 20 000] d-boxes exchanged for [. ], [50 000 to 70 000] d-boxes exchanged for analogue decoders being used by Premiere subscribers, and only [10 000 to 30 000] new subscribers for Premiere Digital. Anyone wishing to compete with Premiere on the market in pay-TV would have to acquire a similar subscriber base first, or in other words, as compared with Premiere, to start from scratch. new decoder infrastructure. In practice, however, a new programme supplier entering the market will have to use the services and infrastructure of the pay-TV operator already established on the market. This follows in particular from the fact that the economic risk is too great to justify installing a new for a new programme. Households will not normally be prepared to procure another decoder in order to receive another pay-TV bouquet. This is true whether the new decoder is for sale or for hire. infrastructure (54) In addition, it should be borne in mind that the CLT-UFA programme resources at Premiere’s disposal would allow it to develop different programme packages tailored to the needs of particular target groups which could be offered to those groups at advantageous subscriber prices. Experience in countries in which the pay-TV business has already developed further shows that the assembly of into packages is an important component in success in the pay-TV business. Premiere will be the only operator with premium content available, and will be able to its premium content still further by bundling it with other programme rights. increase the attractiveness of individual programmes (57) (55) CLT-UFA and Kirch also conduct extensive free-access commercial TV operations. Together with Bertelsmann they have over 50 % of the free TV audience and 90 % of the advertising market, through programme suppliers linked to CLT-UFA, namely RTL, RTL 2, Super RTL and VOX, and those in Kirch’s sphere of influence, namely SAT 1, DSF, PRO 7 and Kabel 1. CLT-UFA and Kirch can use their strong presence in free TV to promote Premiere Digital intensively. This was the strategy followed for the marketing of Premiere Digital between the beginning of November and the middle of December last year. Of course, as a general rule, potential competitors would also be able to advertise on free TV in this way. But it is questionable whether they would be able to advertise on terms comparable with those available to Premiere. (iii) Bertelsmann and Kirch control the decoder infrastructure (56) Potential competitors from Germany and abroad who propose to offer their own programmes and channels on the German market are dependent on access to the d-box. In theory, a pay-TV operator has a choice between distributing programmes via an existing decoder infrastructure or building up a some 7 000 000 In addition, an alternative decoder infrastructure could in any event be established only for satellite to transmission. There are 9 000 000 households receiving satellite broadcasts in Germany, while about 18 500 000 households are connected to broadband cable networks. In the restructuring agreement, however, CLT-UFA, that when Kirch and Telekom have agreed Telekom provides technical services for the relay of digital TV programmes via its broadband cable networks, it will use only Beta access technology on the basis of the d-box decoder. Any pay-TV operator seeking access to the 18 500 000 cable households would therefore have to use the d-box in any event. It can be concluded, decoder therefore, that future competitors Premiere in pay-TV will be dependent on access to the d-box decoder base their bouquet. the broadcasting of for (58) The d-box works with a proprietary conditional access system, so that a potential pay-TV operator will have to acquire a licence from BetaResearch for the use of the Beta access technology. But BetaResearch is two-thirds controlled by CLT-UFA and Kirch. Through their stake in BetaResearch, therefore, CLT-UFA and Kirch, would be in a position to exercise a powerful influence over any competition offered by future pay-TV operators to Premiere, and to a great extent to channel it as they saw fit. With their controlling interest in BetaResearch, they could ensure that the terms for the use of Beta access technology, and in particular the price structure applied, were advantageous to potential Premiere unfavourable inflated competitors’ programmes. Artificially and to L 53/12 EN Official Journal of the European Communities 27. 2. 1999 prices, for example, would favour CLT-UFA and Kirch, since unlike their competitors they share in BetaResearch’s profits. Moreover, as explained below (see recital 112), in view of the control of access technology it should be assumed that in the satellite field there will be hardly any other suppliers of technical services on the market apart from BetaDigital. Potential competitors of Premiere will their to programmes be controlled by BetaDigital. therefore have let access to The range guide’ programmes. (59) Control of the decoder infrastructure also enables the parties to influence the positioning of their competitors’ of programmes possible in digital television makes it necessary to provide users with an ‘electronic allows programming programming and other to be presented to the viewer in an easy-to-read form. A navigation system known as TONI is contained in the d-box which provides the basic functions of an EPG. This is a proprietary solution developed for the d-box. All programme suppliers are dependent on the performance of this EPG. At present outside programme suppliers are unable to operate their own EPG on the d-box. They have to be included in the d-box EPG. (EPG), which information simpler this kind Information of third parties. This objection obtained showing which specific group preferred which kind of programme content and to what extent. confers considerable competitive advantages by making it to develop programmes or much programme packages tailored to particular target groups. The parties object, on the contrary, that it is possible for other suppliers simply to operate their own SMS or to use corresponding services is supplied by unconvincing. As the Commission has already established in MSG Media Service (11), it is not to be expected that the average pay-TV subscriber several would wish subscriber management operators. It is in the viewer’s interest to have as far as possible a single body dealing on his behalf with all questions relating to the taking of pay-TV (e. g. extension of to additional programmes, the reduction of programmes subscribed to, settlement of the subscription). Whichever service supplier can provide the largest number of programmes and the most attractive programmes will thus occupy a favoured position against which the other service suppliers will have difficulty asserting themselves. As explained above, however, this will always be Premiere. to have dealings with subscription in (60) Programme suppliers such as ARD see the EPG as a means of differentiating themselves from the competition. Creative design of EPG content, and the possibility for interactive services such as games, is an important competitive parameter. Unlike other systems already on the market, which make it easy to create one’s own EPG, the d-box EPG currently offers only rudimentary functions. (iv) Given the present structure of the German cable network, cable operators would not be able to offer an alternative programme platform even if they had access to Premiere programmes (61) Lastly, control of the Premiere programme and marketing platform and the decoder infrastructure gives CLT-UFA and Kirch considerable advantages in terms of information. As Premiere is to carry out subscriber management and servicing not only for Premiere Digital but for other programme suppliers too, information on it would have competitors’ programme plans and customer structure, and more generally on the behaviour of competitors’ their subscriber management system (SMS). Premiere would not need access to individual customer data. Access to anonymous data, which might for example give information on the age structure of the audience for different programmes, would suffice. With interactive pay-TV services such as pay-per-view, anonymous data could also be subscribers entrusted to (62) Without access to Premiere’s premium programmes it would in any event be impracticable for private cable operators to try to establish an alternative programme platform. Premiere has the most attractive programme rights (feature films and sports events), so that other operators, if they tried to enter the market at all, would have to market their own offering via the Premiere platform, and consequently would not be available for the programme construction if platform. Even their programme via the Premiere platform, other programme suppliers would not be able to achieve they did not offer alternative an of (11) See footnote 5, paragraph 71. 27. 2. 1999 EN Official Journal of the European Communities L 53/13 the critical mass of attractive programmes needed to build up an alternative platform, because of the concentration of premium programmes in the hands of Premiere. (63) But because of the historical development of the structure of cable distribution in Germany, it would not in fact be possible for private cable operators to establish an alternative programme platform even if they did have access to the premium programmes in Premiere’s platform. In Germany there are 18,5 million households connected to cable, that is to say over half of all households with TV. At network level 4, the level supply of household distribution and networks, about one third of connected German households are serviced by Telekom. The other households with cable are connected to a large number of sometimes very small private cable operators. These private operators normally handle small level 4 ‘cable islands’, which are frequently not connected between themselves, and are supplied by a ‘backbone’ level 3 network belonging to Telekom. Private cable operators also operate to a limited extent at level 3. local (66) (64) This means that private cable operators are usually dependent on upstream level 3 services supplied by Telekom. Before the private cable operators set up an alternative programme platform, they would certainly have to integrate their cable islands by means of level 3 supply networks. As a result of the planned transaction, however, the level 3 networks operated by Telekom would not be available the creation of an alternative platform, so that the cable operators would have to establish their own level 3. But the private cable operators would not have the financial capacity to carry out the investment necessary over the whole territory. for (65) Even if the private operators did set up their own level 3, the creation of an alternative programme platform would still be at best a technical possibility. The marketing of such a platform would still pose problems which would be extremely difficult to resolve in practice, owing to the more or less random geographic distribution of the private cable networks. The fragmentation of the German cable television business and the position of Telekom as practically the only level 3 supply networks mean operator of that regardless of the question of access to premium content the private cable operators are not at present in a position to offer an alternative programme competition with Premiere. platform in (v) As the sole programme platform, Premiere can dictate the conditions of market entry for other suppliers In principle a pay-TV operator has a choice between building up his own infrastructure or offering his programmes as part of an existing bouquet. As has been exhaustively explained here, however, the construction of a new infrastructure is at best a theoretical alternative, certainly for operators who do not possess sufficient programme resources to be able to offer a premium channel. Canal+, for example, has a programme bouquet known as ‘Multithe´matiques’, consisting of three digital pay-TV programmes, ‘Planet’, ‘Seasons’ and ‘Cine Classics I + II’; it has decided to offer it via DF 1, with ‘Planet’ forming part of the DF 1 basic package, and ‘Seasons’ and ‘Cine Classics I + II’ being broadcast via DF 1’s platform but also available on a subscription separate from the DF 1 basic package. ‘Seasons’ has just under [1 000 to 5 000] subscriptions, and ‘Cine Classics’ to 5 000]. Hollywood studios likewise prefer to have their own pay-TV channels in existing bouquets. Kirch has concluded [. ] on behalf of DF 1. Kirch also concluded [. ]. just under [1 000 included (67) An outsider will usually be able to gain access to an existing programme bouquet more easily if he has a choice between several competing bouquets; such a choice existed in Germany before the planned concentration. In the absence of an alternative programme and marketing platform in Germany, however, potential competitors from at home and abroad who want to offer their own programmes and channels on the German market will in future be dependent on access to Premiere’s platform. This means that every pay-TV operator is obliged to have his programmes included in a bouquet to be made up by Premiere. Premiere thereby gains control of these competitors’ activities, and would be in a position to determine the conditions under which other operators compete with it. L 53/14 EN Official Journal of the European Communities 27. 2. 1999 (68) Premiere could refuse outright to allow a pay-TV provider access to the Premiere platform, or could impose its own conditions. There has already been one case which makes it clear how Premiere might proceed with outsiders wishing to offer their own pay-TV programmes the concentration. The [. ] between Kirch and [. ]. in Germany after (vi) The fact that DF 1 has had only limited success so far does not mean that the conditions of competition will be the same with or without the concentration (71) (69) (70) to responded the they It was not until Commission’s objections that the parties asserted that the concentration would not result in the establishment or strengthening of a dominant position for Premiere on the pay-TV market. [. ]. Premiere already has a subscriber base, so that the acquisition of DF 1’s subscribers forms an increase in subscribers and not, as would be the case with a different acquirer, a new start-up in pay-TV. In its decision, in Kali and Salz/MdK/Treuhand (12), in the mean time upheld by the Court of Justice, the Commission recognised that a merger which should normally be considered to lead to the creation of reinforcement of a dominant position on the part of the acquiring firm can be regarded as not causing such a position on the market if, even in the event of the merger’s being prohibited, the acquirer would inevitably achieve or reinforce a dominant position. Accordingly, a merger generally is not the cause of the deterioration of the competitive structure if it is clear that: — the acquired firm would in the near future be forced out of the market if not taken over by another firm, — the acquiring firm would take over the market share of the acquired firm if it were forced out of the market, (12) Commission Decision 94/449/EC, OJ L 186, 21. 7. 1994, p. 38, paragraphs 70 et seq. ; Judgment of the Court of Justice in Joined Cases C-68/94 and C-30/95 France and others v. Commission [1998] ECR I-1375. — there is no less anti-competitive alternative purchase. Moreover, the Commission made it clear in the Kali and Saltz Decision that this is an exceptional situation; normally, there would be a presumption that a concentration which results in the creation or strengthening of a dominant position is the cause of this deterioration in the competitive structure. Consequently, the burden of proof of a missing link of causality lies with the merging firms. In this It should be made clear from the outset that the present case, unlike Kali and Saltz, does not involve a whole company apparently being forced out of the market; in fact, DF 1 GmbH & Co. KG, as will be shown below, forms only part of Kirch’s pay-TV business. Even if Kirch completely abandoned its pay-TV business the position would not be comparable with that in the Kali and Saltz case since Kirch as a whole would not be dissolved. It would merely relinquish a part of its extensive business. instance Kirch’s abandonment of the pay-TV market is simply a management decision to give up an area of its to business which has not the management’s expectations. Where the ‘failing division defence’ and not the ‘failing company defence’ is invoked, particularly high standards must be set for establishing that the conditions for a defence on the grounds of lack of a causal link have been met. this were not so, any concentration involving the disposal of an allegedly unprofitable area of a business could be justified for merger-control purposes by a declaration on the part of the seller that, without the merger, it would be necessary to close down the seller’s business in that area. lived up If (72) The parties’ arguments do not suffice to establish the defence of lack of a causal link. Apart from the general considerations set out above, they have failed to adduce any evidence that DF 1 is liable to be forced out of the market, in the short term at least. A mere reference to initial losses of DEM [500 million to 2 billion], without any details, is insufficient to establish why DF 1 would have to cease trading. Moreover, regarding the initial losses arising from the contract between Kirch [. ] and from the [. ] by Kirch [. ], these were incurred by Kirch, forming investments made with a view to 27. 2. 1999 EN Official Journal of the European Communities L 53/15 entering the digital pay-TV market. Kirch’s expectations on entering the market have not been met, particularly as to the number of subscribers. It should, however, be noted at this point that a crucial element in DF 1’s lack of success has been made good in the mean time, since, through agreements concluded with Telekom, DF 1, which for long was accessible only by satellite, is now available on cable, so that it has a potential subscriber-base of 18,5 million households with television. After gaining access the cable network, DF 1 has been able to increase its subscribers from [30 000 to 100 000] in [. ] 1998 to [50 000 to 200 000], i. e. more than [. ]. to (73) Even if Kirch were now to decide to close down DF 1 in view of the high initial losses and failure to live up to expected growth rates for subscribers, its withdrawal from the pay-TV market would not automatically follow, since DF 1 is merely the marketing platform for Kirch’s digital bouquet. The programme rights for Kirch’s pay-TV business are held by Taurus, which also produces at least part of the digital channels for DF 1. The technical services for DF 1’s digital bouquet are provided by BetaDigital. BetaResearch holds the rights to the Beta encryption technology. Moreover, even if Kirch decided in the near future to dissolve DF 1, DF 1’s broadcasting activities would not be terminated immediately. Instead DF 1 would have to terminate its contracts with subscribers and contracts with the other channels transmitted in the DF 1 bouquet and to continue until the end of the contractual period of notice. According to the parties, DF 1 would continue for about a year. Even if DF 1 were dissolved immediately, Kirch would therefore remain in a position, particularly in view of its extensive programme resources in premium films and sport, to review its decision and, either alone or with other proprietors, to establish a new marketing platform and operate in pay-TV. (74) In the Commission’s view, the parties’ arguments that pay-TV viewers’ only option would be to change to Premiere, so that the market shares relinquished by DF 1 would in any case fall to Premiere, are inconclusive. If Kirch in fact closed down DF 1’s operations, potential pay-TV operators would have an opportunity, by using Kirch’s pay-TV broadcasting rights, to enter the pay-TV market as competitors Premiere. The competitive situation which would arise, with or without the proposed concentration, is by no means the same. that is no lack of success the negotiations were unsuccessful. (75) The parties have [. ] that Premiere is the only possible acquirer for DF 1, [. ]. In particular, a in mere reference to Kirch’s identifying a partner is insufficient to prove that there less anti-competitive alternative available. The Commission’s statements in the Kali and Salz/MdK/Treuhand Decision show clearly that it sets stringent requirements for establishing that there is no possible alternative purchaser to the acquiring undertaking and this view has in fact been upheld by the Court of Justice (13). The parties’ arguments are undoubtedly insufficient to establish these requirements have been fulfilled. They have indicated neither the parties with whom Kirch has negotiated nor the reasons why In particular, they have not in fact proved that the negotiations failed because of DF 1’s inadequate subscriber base and because the prospects of profits were too poor in view of the losses which would arise on the acquisition of a holding. It is consequently that negotiations between Kirch and interested third parties foundered because Kirch was previously not prepared to relinquish a majority holding in DF 1. Since, as the proposed concentration which has been notified shows, Kirch would now accept joint control, it is entirely possible that negotiations could be successfully concluded with third parties on the basis of a 50/50 holding. In those circumstances, the Commission considers that sufficient evidence has not been adduced that the acquisition of DF 1, in its entirety or of significant parts, by businesses other than Premiere can be excluded. impossible rule out to (76) Accordingly the parties have fulfilled none of the three conditions laid down by the Commission in the Kali and Salz Decision as necessary to establish a defence on the ground of lack of a causal link. In fact the proposed concentration therefore gives Premiere a monopoly position on the market in pay-TV consequent deterioration in the competitive structure. Even if brings about and a (13) Cited in footnote 12. L 53/16 EN Official Journal of the European Communities 27. 2. 1999 Kirch terminated DF 1’s operations the negative effects on competition would be less severe than if the concentration were carried through, since DF 1’s assets and all of its pay-TV distribution rights would not be transferred to Premiere. This would enable competing pay-TV organisations to acquire Kirch’s pay-TV distribution rights and enter the pay-TV market in competition with Premiere. (c) Interrelation between pay-TV and free TV (80) In addition, Mr Thomas Kirch, the son of the owner of Kirch, has the following holdings: PRO 7 Kabel 1 60 % 60 % Between PRO 7 and Kirch there are links other than the family relationship between the owner of the one and the majority shareholder in the other. There are also long-term business relations, as PRO 7 is estimated to take something approaching [40 % to 60 %] of its programme requirements from Kirch. (1) Free TV — market structure (ii) A u d i e n c e s h a r e s (81) The German free TV broadcasters had the following audience ratings in 1996: (77) The market for free TV in Germany is shared between the public broadcasters ARD and ZDF on the one hand and a large number of private broadcasters on the other. The private channels are ‘clusters’ of essentially concentrated broadcasters. One of is made up of broadcasters in which CLT-UFA has holdings. The other consists of broadcasters in which Kirch has holdings, or which belong to Kirch’s sphere of influence for other reasons. in these two (i) T h e p a r t i e s ’ h o l d i n g s Public channels: ARD (first programme) ARD (third programme) ZDF Total Channels linked to CLT-UFA: RTL RTL 2 VOX Super RTL Total (78) CLT-UFA has the following holdings in free TV channels in Germany: Channels linked to Kirch: RTL RTL 2 VOX Super RTL 89 % 34,4 % 24,9 % 50 % Where CLT-UFA has a minority holding it can be presumed that it exercises joint control. SAT 1 PRO 7 Kabel 1 DSF Total Other channels (79) Kirch has the following holdings in free TV channels in Germany: SAT 1 DFS 43 % 100 % (A plan to acquire a further 16 % in SAT 1 has been notified to the Bundeskartellamt). (82) Thus the public channels have about 40 % of audiences, and private channels have about 60 %. Private broadcasting is almost entirely in the hands of the two clusters CLT-UFA and Kirch, whose positions are equally strong. (iii) S h a r e s o f t h e t e l e v i s i o n a d v e r t i s i n g m a r k e t Here too it can be presumed that Kirch currently enjoys at least joint control of SAT 1. (83) According to the information supplied by the parties, the separate channels have the following market shares terms of gross advertising turnover: in 14,8 % 10,1 % 14,4 % 39,3 % 17,0 % 4,5 % 3,6 % 2,1 % 27,2 % 13,2 % 9,5 % 3,6 % 1,3 % 27,6 % 5,9 % 27. 2. 1999 EN Official Journal of the European Communities L 53/17 Public channels: ARD (total) ZDF Total Channels linked to CLT-UFA: RTL RTL 2 VOX Super RTL Total Channels linked to Kirch: SAT 1 PRO 7 Kabel 1 DSF Total Other broadcasters 4,4 % 4,4 % 8,8 % 29,9 % 5,5 % 2,8 % 1,0 % 39,3 % 24,1 % 21,8 % 3,8 % 1,8 % 50,7 % 1,3 % (Market shares on the basis of net advertising revenue are much the same, with a few minor differences). (84) The public channels’ shares of this market are quite different from their audience shares. Their audience share is about 40 %, while their share of the advertising market is less than 10 %. The main reason for this is doubtless the fact that media legislation limits the public channels to 20 minutes’ advertising a day, which must be shown before 8p. m Private broadcasters are entitled to fill up to 15 % of time with their daily broadcasting advertising. They may broadcast advertising in prime time after 8pm. (85) The public broadcasters are consequently financed mainly by licence fees, which amount to about DEM 7 billion a year. This sum is roughly equal to the net advertising revenue of all television operators on the German television advertising market in 1996. (2) Further strengthening of Premiere’s dominant position in pay-TV (87) Pay-TV and free TV are separate markets, as has already been explained. There is some interaction between them, however. The more varied and attractive the programmes offered by the free broadcasters, the less incentive there is for viewers to subscribe to pay-TV as well. The existence of this interaction is borne out by the slow pace of development of pay-TV in Germany in comparison to France or the United Kingdom, which is doubtless due primarily the more varied programmes on offer in Germany from free TV. to (88) The attractiveness of a channel is largely dependent on the programme rights available to it. When a television operator has a in pay-TV and free TV, and also holds the main programme rights for free TV and pay-TV, he is in a position to control the interaction between free TV and pay-TV. After the planned concentration CLT-UFA and Kirch will be in this position. leading position (i) C L T - U F A a n d K i r c h c a n b o t h b e e x p e c t e d t o t r y t o p u r c h a s e p a y - T V a n d f r e e T V r i g h t s i n c o m b i n a t i o n (89) During the proceeding the parties declared that purchases of pay-TV and free TV rights were in principle to be made separately. Premiere would be responsible for the purchase of pay-TV rights, and CLT-UFA and Kirch would buy free TV. Only in exceptional cases would one of the parties acquire pay-TV and free TV rights together. (86) The CLT-UFA and Kirch clusters together take about 90 % of all advertising revenue in German television; Kirch’s position, at about 50 %, is somewhat ahead of CLT-UFA’s approximately 40 %. Advertising revenue is concentrated on the market leader RTL and on SAT 1 and PRO 7. These three together have a market share of 76 %. (90) After a press report appeared which claimed, citing internal Bertelsmann documents, that pay-TV and free TV were to be coordinated, Bertelsmann modified its earlier statements. It publicly conceded that cooperation between the free TV channels linked to CLT-UFA and Premiere was being pursued as a logical business goal. The purchase of L 53/18 EN Official Journal of the European Communities 27. 2. 1999 rights was included. Shortly afterwards, Dr Dornemann, the Bertelsmann director responsible for television, detailed the advantages of combined purchasing of free TV and pay-TV rights in an interview (14). platform access to a family of channels and to the only once pay-TV the concentration has made joint owner of Premiere. It can therefore be anticipated that Kirch too will seek to purchase pay-TV and free TV rights in combination. in Germany, it a (91) From a business in standpoint, a coordinated approach to the purchasing of programme rights by CLT-UFA and Premiere does indeed seem the most probable strategy. Through Premiere and the free TV channels its broadcasting group, CLT-UFA carries on all forms of exploitation of programme rights, i. e. pay-per-view, pay-TV, free TV (first viewing) and free TV (second viewing). It is therefore an obvious step to acquire the rights for the entire sequence. This would enable CLT-UFA to use the rights to their strategic maximum. For example, rights to sport can be exploited in such a way that the most significant events are broadcast on pay-TV (e. g. football finals) while smaller events are shown on free TV. In the case of film rights the period between transmission on pay-TV and the windows for first and second showings on free TV can be fixed as part of an overall strategy. for the (94) The price charged for pay-TV rights is normally determined by the number of subscribers, subject to a specified minimum. With Premiere’s increasing numbers of subscribers, pay-TV rights are growing in importance as compared with free TV rights. Their strategic significance television business of CLT-UFA and Kirch as a whole is likewise rising. Since Premiere is operated jointly by CLT-UFA and Kirch, however, it would scarcely make sense if the two companies were invariably to make separate purchases of pay-TV and free TV rights at a time when pay-TV business was growing steadily more significant in relation to free TV. But pay-TV business will indeed be growing in importance, at least according to the business plan for Premiere stipulated in the consortium agreement: it is planned that Premiere’s net turnover, [. ]. (92) At present it is only in some cases that the rights to the Hollywood majors’ films in particular are sold as a package covering all stages of exploitation; but this could change if purchasers appear who are able to handle the entire sequence. In addition, the demand-side power created by the combination of the intense programme requirements of a Premiere digital bouquet and CLT-UFA’s free TV channels might well induce rights suppliers to sell the rights for pay-TV and free TV together. (ii) C L T - U F A a n d K i r c h w i l l b e a b l e t o i m p l e m e n t p r o g r a m m e s t r a t e g i e s f o r f r e e T V c h a n n e l s a i m e d a t s e c u r i n g p a y - T V s u b s c r i b e r s f o r P r e m i e r e D i g i t a l (93) Bertelsmann’s statements concerning combined purchasing of rights for pay-TV and free TV therefore seem convincing and there appears to be no reason why Kirch should not pursue a similar strategy. Like CLT-UFA, Kirch will also have (95) The parties have repeatedly stated that Premiere’s development as a platform for digital pay-TV will require a major investment. In the abovementioned Süddeutsche Zeitung interview (15), Dr Dornemann spoke of investments amounting to DEM 13,5 billion up to the year 2007 and start-up losses amounting to DEM 2,5 billion. It is clear that CLT-UFA and Kirch therefore have a basic interest in securing as many subscribers as possible for Premiere. In view of the interrelation described above between pay-TV and free TV, harmonisation (14) Süddeutsche Zeitung, 25 February 1998, p. 2. (15) See footnote 14. 27. 2. 1999 EN Official Journal of the European Communities L 53/19 of the programming of Premiere and of CLT-UFA’s and Kirch’s free TV channels might well be a significant step towards attainment of this aim. (96) This all involves first of arranging the programming of Premiere and the free TV channels so that they complement each other. As has been explained above, in the case of sporting events, for example, minor fixtures such as the initial rounds in football competitions can be used to arouse the interest of spectators on free TV, and then the big attraction, the final, can be broadcast on pay-TV or pay-per-view. So far as Bertelsmann’s television business is concerned, this sort of complementary programming has been facilitated by the 1997 merger between CLT and UFA, in that all its television activities are now grouped together in the hands of CLT-UFA, which has a majority holding in the biggest free TV broadcaster, RTL. (97) In the medium term at least, with the increasing significance of pay-TV, CLT-UFA and Kirch have an interest in limiting the attractiveness of free TV channels so as to induce as many viewers as possible to subscribe to pay-TV. Of course a strategy of this kind would normally carry the risk that an increase in subscribers would be gained at the expense of a fall in advertising income. But in the present case this danger is a limited one. As has been explained above, private free TV channels almost all belong to one of the two groups associated with CLT-UFA and Kirch, which together have about 95 % of viewers of private television. A definite strategy on the part of CLT-UFA and Kirch to make free TV less attractive could only displace advertising business to public broadcasters. However, since the latter, with their compulsory restriction of advertising, cannot extend their advertising times, and are not allowed to broadcast any advertising in prime time, it is most unlikely that advertising business will be displaced to them. (98) If CLT-UFA and Kirch’s free TV channels are together made less attractive, a major loss of advertising income can be anticipated only if advertisers, confronted with falling ratings, move a large proportion of their advertising budgets from television to other media, primarily printed media. However, this is probable only if there is a dramatic fall in viewer figures. The daily viewing rates for private channels in Germany rose by about 15 % from 1993 to 1996. In the same period, advertising turnover rose by 35 % at 1993 figures and prices. This shows advertising intensity are not necessarily evenly related. In addition, any loss of advertising income to CLT-UFA and Kirch would have to be set against the profit from lucrative pay-TV. that viewer (3) Conclusion (99) The combined acquisition of pay-TV and free TV rights and the complementary programming which are foreseeable will lead to a further strengthening of Premiere’s dominant position on the market in pay-TV. (d) Conclusion (100) For the reasons described above the it must be information the basis of anticipated on currently available that the intended concentration will give Premiere a dominant position on a lasting basis on the market in pay-TV in Germany. The combined acquisition of pay-TV and free TV rights and the complementary programming which are foreseeable will lead to a further strengthening of Premiere’s dominant position on the market in pay-TV. (101) If the market for the provision of pay-TV is taken to be the entire German-speaking area, Premiere can likewise be expected to enjoy a dominant position on a lasting basis. Basically the same considerations apply to this area as for the German market. However, in Austria for instance, unlike Germany, the cable networks are exclusively in the hands of private operators. In Germany, ownership of the cable TV network is fragmented, and Telekom is virtually the sole operator of level 3 supply networks, with the result that private cable operators, even supposing they had access to premium content, are unable to offer any alternative programme platform to compete with Premiere; in Austria, on the other hand, the major private cable operators would, theoretically at L 53/20 EN Official Journal of the European Communities 27. 2. 1999 least, be able to put together an alternative programme platform limited to their region. But since in its dealings with Telekom in Germany Premiere has succeeded in having the transport model adopted for cable, it must be expected that it would refuse to have its programmes marketed by cable operators in the other parts of the German-speaking area too. This has been its previous strategy for its analogue programme; for example, in Austria it has hitherto refused to have its programme marketed directly by cable operators. In the autumn of 1997 it did retreat from its requirement that marketing be carried out by Premiere alone, and expressed a willingness to sell its analogue programme to a major Austrian cable network operator. Nevertheless, shortly before the contract was due to be concluded, Premiere withdrew its offer. It must be expected after all that Premiere, after the concentration, will become and remain the only programme and marketing platform in the German-speaking area as a whole, since no other enterprise holds the necessary programme to create a programme platform, and Bertelsmann and Kirch control the decoder infrastructure. resources in providing transmission of signals on the cable network. CLT-UFA, Kirch and Telekom have stipulated in the agreement on the restructuring of BetaResearch that the transmission of digital TV programmes on its broadband cable networks Telekom will use only Beta access technology on the basis of the d-box decoder. technical services for (b) Lasting nature of the dominant position (105) In the market in technical services for the digital transmission of data, at any rate by satellite, BetaDigital will secure a monopoly position in the German-speaking area on a lasting basis. It must also be anticipated that Telekom will remain the sole the technical transmission of pay-TV over the cable network in Germany, and in this area too will secure a monopoly position on a lasting basis. This assessment is based on the considerations set out below. supplier of services for 3. The market in technical services for pay-TV (a) BetaDigital and Telekom’s monopoly position (i) Following the concentration, d-box technology will in practice become the digital standard in the German-speaking area (102) The satellites. As a concentration will give BetaDigital a monopoly on a lasting basis in technical services for the parallel concentration of Telekom and BetaResearch, Telekom will secure a monopoly in the operation of conditional access for cable. result of (103) BetaDigital is already the only supplier of technical services for the digital transmission of signals by satellite. According to the statements of the parties, Bertelsmann also provides small-scale, technical services for pay-TV through Cologne Broadcasting Centre GmbH, but further details of these activities have not been provided. (104) In the near future Telekom will also be the sole the digital technical services supplier of for to acquire (106) Pay-TV requires special technical infrastructure. This can be provided either by pay-TV operators or by other parties, mainly cable operators. Because of the structure of the cable networks in Germany, private cable operators are by themselves unable to provide the technical infrastructure for the transmission of pay-TV. This is because their ‘cable islands’ are mostly too small to justify the investment necessary their own conditional access and alternative decoder system for pay-TV. Moreover, private cable operators control only parts of the level 3 and 4 networks involved in the distribution of cable television. At network level 3, i. e. from the cable head-end, where the digital programme signal is received and fed into the cable network, to the boundary of the individual house, the it networks belong to Telekom. This makes impossible for private cable operators to develop alternative facilities for the transmission of pay-TV without involving Telekom. the great majority of (107) After the concentration, Premiere will distribute digital television through d-box technology and 27. 2. 1999 EN Official Journal of the European Communities L 53/21 d-box decoders. Telekom will supply services for pay-TV by cable on the basis of Beta access technology and d-box decoders. Thus those companies which would have been qualified to set up an infrastructure for digital television and to provide the corresponding services have committed themselves to Beta access technology based on the d-box decoder. It must therefore be accepted that, in the German-speaking area, there will be no alternative technical platform for digital television in the foreseeable future. have stated that a proprietary conditional access system was developed for security reasons. Other pay-TV operators, such as Canal+ and BSkyB, who already have experience in the pay-TV market, also prefer to rely on a proprietary conditional access system as it appears to afford better protection against breaches of security of data transmission. Under the DVB standard, there are two processes available to avoid a viewer of subscriber pay-TV with different conditional access systems having to use a number of decoders, i. e. simulcrypt and common interface (CI). the (ii) The monopoly programme platform obstacle to technology the position of Premiere’s long-term introduction of other forms a (108) The if installation of an alternative technical infrastructure for the transmission of pay-TV would require a major investment. However, other potential suppliers would be prepared to make that investment only there were corresponding opportunities for market penetration. That would be so only if it were possible for a second pay-TV operator to set up in Germany. Such an operator could either create his own technical platform, on the basis of alternative access technology, or offer another party an opportunity of developing a technical infrastructure. But as has already been said, it is improbable that a second pay-TV operator will enter the market, given Premiere’s established position, with its subscriber base and, especially, its programme resources. (109) Moreover, and access alternative decoder technology could be developed only for satellite transmission, since CLT-UFA, Kirch and Telekom have stipulated in the restructuring agreement that Telekom, in providing technical services for digital transmission of TV programmes on its broadband cable network, will rely exclusively on Beta access technology on the basis of the d-box decoder. This means that potential pay-TV suppliers and other potential suppliers of conditional access services would in any case be obliged to use Beta access technology and the d-box decoder as far as the Telekom cable network is concerned. (iii) All potential conditional access operators will be dependent on BetaResearch’s licensing policy (110) BetaResearch is the licenser of the conditional access system applied in the d-box. The parties (111) With CI, widely varying conditional access systems can be used in the same decoder, enabling all other pay-TV operators and service providers to operate access controls using the existing decoder base. It is not necessary with CI, as it is with simulcrypt, to conclude an agreement with the person who installed the decoder base on the linking of one’s own access-validation system with the proprietary access system of the decoder. If a proprietary conditional access is to be used, there must be discrimination-free access to the system. In the Commission’s view, this requires that the licenser of the decoder technology be able to conduct his business without being influenced by a programme supplier. In the present case the licenser is not independent, since BetaResearch is controlled mainly by enterprises which have their own interests as programme suppliers. (112) If all actual and potential suppliers of digital pay-TV, and Telekom as supplier of technical services for cable, have committed themselves to Beta access technology and the d-box decoder, it is impossible for an alternative decoder base to be in Germany. Any other potential established supplier of conditional access services will have to the d-box decoder. The d-box uses a use by proprietary system technical BetaResearch. Potential suppliers of services for pay-TV would therefore have to seek a licence from access BetaResearch. This is the case with both satellite and cable transmission. In managing conditional technology for Beta developed coding L 53/22 EN Official Journal of the European Communities 27. 2. 1999 for and cable, satellite access however, BetaResearch would have no interest in exposing BetaDigital or to competition on the market in technical services for its pay-TV. BetaResearch might therefore use licensing policy to hamper other service suppliers’ access to the market. joint parent Telekom its (iv) Control of the decoder infrastructure gives Bertelsmann/Kirch control of possible applications based on the d-box typical example of (113) An application programme interface (API) allows third parties wishing to produce an independent application to have access to the decoder operating system. A this kind of independent application is the EPG, which shows the choice of programmes available in an on-screen menu form. At present d-boxes do not have a publicly available version of the d-box operating system interface. This means that other persons wishing to use their own independent applications through the d-box would have to have it inserted into the operating system’s source code by BetaResearch. (114) According to the parties, BetaResearch to present impossible is to develop an API for the d-box and present the interface by the end of 1998 at the latest. However, details of licensing policy, particularly the level of royalties, is not available. It is therefore at assess whether BetaResearch’s API, compared to the APIs of other suppliers such as OpenTV or MediaHighway, will be made available on market conditions. But it is safe to say, since the introduction of the d-box to the market is to take place in the near future, that limited the API will probably have only a operational scope. This appraisal is corroborated by the fact that other suppliers have continuously improved their APIs over the years after their introduction on the market in order to provide a full use of the operational scope of decoder technology and in this way to promote the development of advanced applications. functions which are independent of the API. This makes possible the development and operation of an application independent of the API. The parties contended that the DVB specification work on a standardised API which works like a VM will probably be concluded by mid-1998. BetaResearch would start production development, which will probably take about another six to nine months. then be able to (116) As long as a standardised API is not yet available, the d-box API will allow only proprietary applications, so that a licence for the API will be necessary to produce an application. The parties also state that the functions of the future API can be extended at the request of the licensee of the API. However, the licensee would then be obliged to provide detailed information on why and how a particular function should be made available. BetaResearch would decide whether this should be done. It can be assumed that only those functions would be adopted which are in the interest of BetaResearch, i. e. of its controlling enterprises. If the function is to be introduced, the development costs will be borne, wholly or in part, by the licensee. The licensee has no choice in the matter, since BetaResearch is the only licenser of the d-box API. Moreover, the licensee has no means of ensuring at BetaResearch is carried out rapidly. In this respect, it is already doubtful whether BetaResearch will have enough development capacity at all to take on development work from licensees. It will above all have the respective acceptance deadlines for new API versions and use its capacity accordingly and not for the rapid execution of additional development work for licensees who are competing with Premiere. development work focus on that the to (115) According to the parties, the d-box API will have two facilities for running applications. In the first, the application is operated using the functions of the API; these are known as ‘native applications’. These applications can operate only on the d-box. In the second, a ‘virtual machine’ (VM) is built on the API, transforming specific API functions to (117) Moreover, the d-box API, compared to other existing systems already on the market, will not at first have comprehensive programming assistance and tools to allow advanced applications to be introduced quickly and cheaply, either by the licensee himself or service provider. In this way d-box API licensees are through another 27. 2. 1999 EN Official Journal of the European Communities L 53/23 compelled to leave all work on the development of applications to BetaResearch, since it is the only firm able to carry out advanced developments. The alternative, i. e. that a licensee should produce the application itself, is excluded from the outset, because of cost and especially the licensee’s lack of detailed knowledge of the d-box API. (c) Conclusion the parties have made technology. Lastly, allowance should be made for programme investments, which would amount to several DEM billion over the next few years. However, after the investments to establish a digital infrastructure, other persons would be able to provide a vast range of supplementary services at relatively low cost, particularly as viewers’ psychological barriers to additional payments are progressively lowered with the penetration of digital pay-TV. to information currently available (118) On the foregoing grounds, and in accordance with the the Commission, it is to be expected that the proposed concentration will give BetaDigital a dominant position on a lasting basis on the market in technical services for satellite pay-TV, and that given the fact that Bertelsmann and Kirch will control the decoder infrastructure, it will also further strengthen Premiere’s dominant position on the pay-TV market. In addition, Premiere’s dominant position on the pay-TV market will further strengthen BetaDigital’s dominant position on the market in technical services for satellite pay-TV in the German-speaking area. If it is considered that there is one market in technical services for both satellite and cable TV, the concentration, taken together with the parallel concentration between Deutsche Telekom and BetaResearch, will produce a dominant duopoly on this broader market in the German-speaking area. Neither BetaDigital nor Telekom will encounter serious competition on this market. In view of their common technology and of their legal links with BetaResearch, there are no grounds to expect that there will be competition between BetaDigital and Telekom. VI. PROMOTING TECHNICAL AND ECONOMIC PROGRESS (120) The parties’ claims give rise to considerable doubt in practical terms. It may well be the case that, in the first years of digital television, the necessary decoders will be leased by viewers and not bought, which means that they will have to be financed in advance. However, the financing costs cannot possibly be on the scale indicated by the parties. A d-box is currently leased at about DEM [10 to 30]. In Annex 2(c) to the agreement between CLT-UFA and Taurus, Nokia’s average purchase price for a d-box for the period August 1995 to December 1999 is estimated at around DEM [400 to 1 000]. Given a monthly leasing charge of DEM [10 to 30] (DEM [100 to 400] per year), the purchase price to be financed in advance would be written off after [1 to 5] years. It is only over this period that the corresponding interest would be payable and this would in any event be offset by the increasing leasing instalments. After [1 to 5] years the leasing of a decoder would show a profit. Premiere’s business plan dated 7 November 1997 [. ] tallies with this view. In the plan, the heading for decoder coverage for 1998 gives costs at DEM [100 to 200] million, which steadily fall to DEM [10 to 30] million up to 2002. For the total five-year period, costs thus amount to DEM [200 to 500] million, assuming [2 to 5] million subscribers. The parties have obviously omitted to include the leasing rates in their calculation of the costs of the decoder bases. In any event these costs are not on the scale represented by the parties. (119) The parties claim that it is only by pooling the resources of Bertelsmann and Kirch that the infrastructure necessary for the breakthrough of digital television can be established. Building up a decoder base would require about DEM [500 to 1 000] per household connected so that, with an estimated [3 to 10] million subscribers over 10 years, the cost would be around DEM [1,5 to 10] billion. There would be a further investment of DEM [50 to 300] million for setting up the digital transmission centre and for conditional access (121) The parties claim that only Bertelsmann and Kirch together are capable of supplying the attractive programmes necessary for the breakthrough of digital television, but no further substantiation for this claim is provided. The claim may well be correct if Kirch, on the one hand, completely withheld its programme resources, particularly its premium rights, from Premiere and, on the other hand, got into financial difficulties as a result of L 53/24 EN Official Journal of the European Communities 27. 2. 1999 such a blockade policy based on its wide-ranging financing commitments arising from the output deals concluded by it. However, such a situation, which was looming before the conclusion of the agreement between Bertelsmann and Kirch, will not necessarily occur. if (122) Lastly, if the parties, by establishing a digital infrastructure and jointly offering an attractive programme, are successful in securing the general acceptance of digital television, as has been indicated above, they will in fact wall off the future market in digital pay-TV and bring it under their control on a lasting basis. The concentration therefore makes it impossible for this market to develop on a competitive basis. Even it contributes to the general acceptance of digital technical and thus promotes television and economic progress, that contribution is irrelevant under the Merger Regulation. In this connection it should be stressed that the criterion of technical and economic progress contained in Article 2(1)(b) is subject to the proviso that it does not form an obstacle to competition. Moreover, it is extremely doubtful whether the concentration in fact makes a positive contribution to technical and economic progress. Since the parties will wall off and control the market, other potential providers of digital pay-TV and multimedia services will be unable to develop freely and without restriction. There is reason to fear that technical and economic aspects of the development of digital television and other digital services will be adversely affected by this. VII. UNDERTAKINGS PROPOSED BY THE PARTIES each case, 25 % of the pay-TV rights to the [. ] categories. The price for the pay-TV rights is proportionate to the contracts concluded with the Hollywood studios, i. e. to the largest pay-TV supplier in each case on the relevant market in each case. The Hollywood studios themselves are excluded from the procedure in their capacity as customers. The tender for the selection and award of 25 % of the output contracts for pay-TV rights is valid only as long as Premiere has access to five of seven output deals for pay-TV rights, and until 1 January 2003 at the latest. (b) Bouquet structure (125) Premiere will open up its scheduling by no longer making the subscription to its own basic package a condition for subscription to the film and sports channels. This undertaking will apply as long as no second platform with a premium package has established itself on the market, and until 1 January 2003 at the latest. (c) Cable operators (126) The parties to the merger are prepared to cooperate with the cable operators as regards sales. As well as advertising for new customers, this information and support. includes marketing Customer still be Premiere’s responsibility, however. Cable operators will receive appropriate financial compensation for their efforts. relations will 1. Undertakings (d) Pay-TV and free TV rights (123) By letters dated 28 April and 4 May 1998 the parties suggested a series of undertakings intended the proposed to remove concentration. These consist basically of the following points. the doubts about (127) Premiere will itself buy the pay-TV rights it needs and will not acquire any free TV rights, so that there is no bundling through Premiere of the purchase of pay-TV and free TV rights. (a) Programme rights (e) BetaResearch (124) For a certain period, 25 % of the pay-TV rights from Kirch’s and CLT-UFA’s output deals with the Hollywood studios [. ] will be held open for third parties. In each case, the selection procedure for the next year but one takes place every year. The 25 % of the output of each studio comprises, in (128) Telekom will set a technical council of experts, which will be accessible to all firms involved in digital television. The council’s recommendations will be implemented in accordance with the already existing agreement between Bertelsmann, Kirch, 27. 2. 1999 EN Official Journal of the European Communities L 53/25 Telekom, ARD and ZDF. The shareholders of BetaResearch are, moreover, prepared to allocate 25 % of the company’s capital to third firms via an intermediate holding company. No veto rights will be associated with this, however. The present veto rights of Bertelsmann, Kirch and Telekom will continue. The leading role of Kirch, in particular as regards management again emphasised by the parties. occupancy, is (129) BetaResearch will on request immediately grant every customer who intends to perform encryption services for itself or for third parties a conditional access licence (compulsory licence) on the basis of a generally accessible standard contract. If no agreement in particular the licence fees, an arbitration body will take a final decision as to their appropriateness. the conditions, is reached on (130) BetaResearch undertakes in the to disclose the API interface of the d-box network (‘native API’) by the end of 1998 and to defer to an arbitration body licensing disputes. BetaResearch also undertakes to supplement the native API with the interface to be standardised by the DVB, as soon as the DVB has approved such a standard. BetaResearch, moreover, will adopt all future DVB standards. event of as Premiere. Since this is based on the number of Premiere subscribers (with a minimum guarantee for a certain number of subscribers), a newcomer would run a considerable risk, which would continually increase with the expected rapid rise in the number of Premiere subscribers. According to the parties’ submissions, an interested third party has to decide within a certain period every year the scale on which it wishes to acquire rights in the next year but one. Thus the first time a third party could acquire rights would be for the year 2000. But, in the year 2000, Premiere, according to its business plan, will have about [. ] million subscribers, on the basis of which figure the price would be calculated. A third party would therefore have to pay about USD 2,3 million per film. In this respect it should be stressed that, as customers (repurchasers), the Hollywood studios themselves have been left out of the undertaking. Thus the parties have in advance excluded the only potential customers who could probably bear the risk associated with acquiring the rights. Moreover, the undertaking is subject to a time limit (end of the year 2002), so the rights would be granted anyway for a period of three years only. Equally, the undertaking covers only the output deals with the Hollywood majors. Sports rights, which with premium films are crucial programme content for premium channels, are not included. All things considered, the undertaking is not likely to provide an opportunity second programme platform. establishing for a (131) BetaResearch will grant manufacturing licences to any standardised interested manufacturer on conditions and defer in the event of disputes about those conditions to an arbitration body. A ‘technical verification test’ by BetaResearch is the condition on which the decoders may be supplied on the market. Manufacturers may be certified after two to three years by independent third parties. (f) BetaDigital (132) Where third parties wish to use the services of BetaDigital and agreement about the conditions is not reached, BetaDigital will likewise submit to an arbitration body, which will take a final decision. 2. Assessment (a) Programme rights (b) Bouquet structure (134) The parties contend that the market entry of potential suppliers of basic packages and sports programmes will be facilitated if subscribers are not forced, as a condition for subscribing to Premiere’s premium film and sports channels, to subscribe first to the Premiere basic package. This undertaking may indeed make it easier for an alternative programme platform to win subscribers for a basic package in competition with Premiere. It can, however, hardly contribute the emergence of such an alternative programme platform, since this could be generated only on the basis of premium channels (anchor channels). to (133) It is unlikely that a potential pay-TV provider would enter the market on the basis of the offer of 25 % of the pay-TV rights from the output deals. Any third party would have to pay the same price (135) The parties have offered cooperation with the cable operators only in the area of sales. The cable (c) Cable operators L 53/26 EN Official Journal of the European Communities 27. 2. 1999 thereby operators are thus prevented from marketing Premiere on from their own and developing customer relations and unbundling and repackaging programmes. For the cable operators to develop an alternative programme platform, other than by cooperating with Telekom given the existing network structure, they would require at least to be able to obtain the individual programme packages offered by Premiere, in particular the premium film and sports channels, bundle them with third-party channels and offer them to their cable customers. (d) Pay-TV and free TV rights (136) The wording of the undertaking allows Premiere to purchase the required rights not just from other suppliers but also from Kirch and CLT-UFA. However, CLT-UFA and Kirch would then be able to purchase pay-TV and free TV rights combined. This undertaking is therefore meaningless. and Kirch licensing Telekom. level of licence fees, may indeed go some way to ensuring that third parties are not subject to discrimination where is concerned. However, this undertaking again does not alter the fact that the technological development for which licences are granted will be controlled by Bertelsmann, The undertakings that BetaResearch will disclose the API interface of the d-box network by the end of 1998, that, in the event of licensing disputes, it will defer to an arbitration tribunal, and that it will supplement the native API with the interface to be standardised by the DVB as soon as the latter is available are essentially confirmation of intentions which in any case stated. Furthermore, although BetaResearch’s undertaking that it will grant manufacturing licences to any interested decoder manufacturer on standard conditions and defer to an arbitration body in the event of disputes concerning these conditions might well contribute to creating competition with regard to the manufacture of decoders, it likewise does not alter the fact that Bertelsmann and Kirch, as dominant pay-TV suppliers, and Telekom, as dominant cable operator, control the development of decoder technology. the parties had (e) BetaResearch (f) BetaDigital (137) Telekom’s offer of setting up a technical council of experts is simply a question of opening up the existing council of experts with ARD and ZDF to third parties. It should be noted that under the agreement with ARD and ZDF, this council of issues relating to experts technological development but cannot require operators to comply with its recommendations. is able to discuss (138) The possibility for third parties to participate in BetaResearch, as proposed by the parties, might in respect of give rise to some transparency technological future concerning decisions development. However, since this participation is to be limited to 25 % and the intermediate holding company is not to be granted any veto rights, Bertelsmann and Kirch, as the dominant pay-TV suppliers, and Telekom, as the dominant cable operator, retain joint control of BetaResearch and, consequently, of technological development. (139) The introduction of a compulsory conditional access licence and an arbitration body for settling disputes concerning conditions, in particular the (140) Although BetaDigital will, in the event of disputes concerning terms, also defer to an arbitration tribunal with final say, this undertaking does not in any way alter the fact that BetaDigital will have a long-term monopoly on the market for technical satellite pay-TV services. (g) Overall assessment (141) On the basis of the proposed undertakings, the indeed guarantee a degree of parties do technological transparency and access to d-box technology. However, the parties are not willing to surrender their absolute control of this technology, and in particular of its further development. As far as pay-TV is concerned, the proposed undertakings will not give any alternative programme and marketing platform a realistic chance. Premiere will continue to be able to dictate the terms on which third parties may enter the market. At the same time, the undertakings are rendered even more meaningless by the fact that, without a second programme platform, no alternative technological platform can be expected to be developed. 27. 2. 1999 EN Official Journal of the European Communities L 53/27 3. Further undertakings (142) On 13 and 19 May 1998, the parties supplemented and widened the proposals they had made, as follows. (a) Cable operators (143) In addition to the cooperation on sales already offered, Premiere will, on certain conditions, also allow cable operators to market its programmes and thus develop their own customer relations. Free TV, pay-TV and pay-per-view programme suppliers are in principle excluded from marketing. Marketing will not be exclusive, i. e. Premiere and the cable operators will market Premiere in competition with each other. Generally speaking, each party will pursue customer relations with those subscribers acquired by it. The data of customers acquired by the cable operators would, however, have to be made available to Premiere’s subscriber management system so that Premiere could provide the customers in question with additional services (such as pay-per-view) and general customer information. Cable operators will not be allowed to market Premiere’s pay-per-view services. their own together with (144) The cable operators will have to offer the same combination of packages as Premiere. They will not be allowed to unbundle programmes within individual packages or Premiere’s package structure. However, cable operators will be able to offer the services programme package and market the packages and individual programmes of third-party suppliers. Because Premiere no longer insists on linking its basic package with its premium package (see recital 125), the cable operators’ customers will have the opportunity of subscribing to a basic package offered by the Premiere combination. However, subscribing to such a basic package must not be made a condition for subscribing to Premiere programmes. The price payable by cable operators for the Premiere package will be calculated on the basis of the transfer price of Premiere on the cable market minus the costs which Premiere will have saved on marketing. Cable operators will, like Premiere, have to offer the d-box decoder for rental and, while supplies last, make use of decoders from the Nokia quota (1 million units). the cable operator alongside package Premiere programmes, i. e. they must agree to market the Premiere package in toto. Otherwise Premiere will not be obliged its programmes available for marketing. In the event of capacity shortages, Premiere and the cable operators will either be bound by the instructions of the Land Media Institutes (Landesmedienanstal- ten) or reach agreement on another objective capacity-allocation procedure. to make (b) Cable networks (146) Telekom also stated on 20 May 1998 that it will keep, until 31 December 1999 at the latest, two digital channels on the cable TV band open for use by a potential third-party programme supplier. Telekom is also willing, together with level-4 operators, to expand cable capacities on band IV, but only where refinancing is possible for cable operators (levels 3 and 4). (c) BetaResearch (147) As far as the offer to allow third-party firms to acquire a holding in BetaResearch via an intermediate holding company (see recital 128), all shareholders, i. e. Bertelsmann, Kirch, Telekom and the holding company, will have the same rights. For the purposes of obtaining a majority in the event of voting, the statutory rules will apply (no specific quorum). The special rights previously granted to longer apply. individual shareholders no 4. Assessment (a) Cable operators (148) The new undertakings proposed by the parties do not create the conditions for the development of an alternative programme and marketing platform for cable operations. The parties themselves point out in their accompanying letter that ‘the partners for the establishment of these marketing forms on an economically plausible basis do not at present exist on the German market or at least have not in the past shown any readiness to carry out the necessary investments to develop the corresponding infrastructures’. With the cable-network structure in its present form, it is indeed not possible for private cable operators to set up a programme and marketing platform of their own. (145) Cable operators must not abuse the freedom they have been offered in order to limit their marketing in capacity terms with regard to operations (149) As indicated in recital 63, private cable operators are predominantly active at level 4 (home link-ups, (cable cable level-3 networks islands). The L 53/28 EN Official Journal of the European Communities 27. 2. 1999 head-end to the boundary of a plot of land) are almost entirely owned by Telekom. Private operators are thus generally dependent on obtaining upstream level-3 services from Telekom. Without operating at level 3, however, it is not possible for private cable operators to create an alternative programme platform. Given the fragmentation of the German cable-TV market and Telekom’s position as virtually the sole operator of level-3 networks, the private cable operators are not at present able to offer an alternative programme platform which would compete with Premiere. levels 3 and 4 would, in all probability, only be possible after a restructuring and privatisation of Telekom’s cable networks, whereby they would be operated by regional companies in which private cable operators would have a stake. Telekom has not, however, made any binding statements about when and how such restructuring might take place. It will therefore probably not occur until such time as Premiere is so ahead of the field in terms of its it will be difficult for subscriber base that alternative platforms to gain a foothold. (151) In addition, cable operators will not, on the basis of the proposed undertakings, be in a position to offer pay-TV programmes on the same competitive terms as Premiere. This is because they will not be allowed to supply programmes for pay-TV and, for example, offer regional programmes produced by themselves. Rather, they will be limited, in their ability to offer additional services, to marketing third-party channels. Moreover, they will not be allowed to market Premiere’s pay-per-view services nor offer any pay-per-view services of their own. lack of exclusivity on However, given pay-per-view to offer them pay-per-view services would be the easiest way of giving them access to the pay-TV market. Cable operators must also offer the Premiere package in the same combination as Premiere itself. This means that they will be completely dependent on Premiere as far as the essential parameter of bundling is concerned. rights, allowing the (152) Cable operators are further required to make their customer data available to Premiere without any corresponding obligations on Premiere’s part. However, the supply of such data would be an entirely uncommon practice in this sector, and would provide Premiere with a considerable competitive advantage. Pricing on the basis of the Premiere transfer price minus the costs saved on marketing gives rise to the risk that cable operators will not be able to market Premiere programmes economically. It remains entirely unclear who will determine these cost savings and what criteria will be used in so doing. (b) Cable networks (153) The reservation of two digital channels in the cable TV band third-party for use by potential programme suppliers might theoretically help make it possible for competing programmes to be supplied given the additional capacity thus made available, but it is not in itself likely to open up an opportunity for the emergence of an alternative programme platform for cable. This is true solely level-3 and (150) In the course of this proceeding, Telekom has not shown any willingness to cooperate with private cable operators in creating an alternative cable platform or at least allow them access to level-3 services. It is true that, when asked on 22 May 1998 how the separation between levels 3 and 4 could be overcome, Telekom stated that, for the purposes of making available its services relating to the digital cable platform and digital marketing platform, contracts would be concluded between interested operators (programme Telekom and suppliers, level-3 operators). If level-4 operators so wished, the technical and operational separation of levels 3 and 4 could also be overcome by level-4 combining the services of operators. However, these statements are so vague and general that they do not provide adequate reason to expect that the separation between levels 3 and 4 can be overcome for the purposes of a enabling programme and marketing platform. In particular, as far as combining the services of level-3 and level-4 operators is concerned, it is not explained which services could be provided by Telekom and which by the level-4 operators, nor how indeed they could be combined in technical and economic terms. It is still completely unclear whether level-4 operators will have their own access to level 3 and whether, in particular, they could also operate conditional access to level 3 and whether, in particular, they could also operate conditional access and how this could be made technically possible. On the basis of Telekom’s statements, it must therefore continue to be assumed that Telekom ultimately wants to be the sole provider of the necessary technical services, and that, consequently, level-4 operators will be dependent of on level-4 operators it. Overcoming separation establish the to 27. 2. 1999 EN Official Journal of the European Communities L 53/29 by dint of the fact that the reservation is limited in time. It would be extremely difficult in only one and a half years to set up an alternative programme platform. Since, moreover, private cable operators are not, if they wish to market Premiere, allowed to supply pay-TV themselves, they will be restricted to offering third-party channels and thus be considerably handicapped in their ability to set up a programme platform which could use the two channels. On the other side of the coin, a programme supplier who wished to set up a programme platform on the basis of the 25 % of pay-TV rights could not make use of those rights until 2000. Moreover, in order to use the two channels, a programme supplier would have to sign a contract for 10 years even though he has access to the 25 % of pay-TV rights from the output deals, as offered by the parties, only until the end of 2002. The creation, as proposed by Telekom, of additional capacities by extending band IV has not been described in any more concrete terms and should therefore be considered merely a general statement of intent. (c) BetaResearch (154) The undertaking all that shareholders it should be borne intermediate holding in BetaResearch, including the intermediate holding company for third parties, will be granted the same rights might in principle solve the problem of the control of technology by programme suppliers. If CLT-UFA and Kirch no longer have the right of veto and all shareholders have the same rights, shifting majorities are, from a formal point of view, possible within the bodies of the company. in mind that However, BetaResearch will only have four shareholders since third parties will be granted a share solely via an company. Majority decision could therefore be taken only with the approval of at least three of the four shareholders. This means that CLT-UFA and Kirch, acting together, would always be able to block decisions and thus continue to ensure that their interests win the day by preventing any decision which goes against those interests from being adopted. The intermediate holding company would, by contrast, only be able to enforce interest against CLT-UFA and Kirch in conjunction with Telekom if both of them voted against CLT-UFA and Kirch and thereby prevented a majority from being reached. It is obvious, however, that Telekom, given that it will supply technical services for pay-TV on the basis of the d-box technology, is its more likely to have interests which converge with those of CLT-UFA and Kirch than with those of the intermediate holding company for third-party firms. This means for that CLT-UFA and Kirch, as dominant pay-TV suppliers, and Telekom, as dominant cable operator, of jointly controlling the technology and its further development may be limited from a formal point of view but might nevertheless remain in practice. the possibilities (d) Overall assessment to solve (155) It follows from the above that the proposed undertakings, even in their expanded version, are inadequate the existing competition problems. They are unlikely, in particular as far as the pay-TV domain is concerned, to give private operators a realistic chance of establishing an alternative programme and marketing platform. Premiere will thus continue to be in a position to dictate the conditions for market entry by third parties. It is true that opening up the possibility for third parties to take a holding in BetaResearch and the simultaneous abandonment of the veto and special rights of the existing shareholders is an important concession since it will enable the structurally safeguarded control of the technology and its further development to be lifted. However, since no alternative technical platform will emerge without the chance of an alternative programme platform, the undertaking regarding BetaResearch is inadequate, even in connection with the further undertakings proposed by the parties concerning the CA licence, the API and the manufacturing licence, to prevent Premiere and BetaDigital from, in the long term, dominating the market. VIII. CONCLUSION (156) For the above reasons it is considered that the proposed concentration would create or strengthen a dominant position as a result of which effective competition would be impeded in a substantial part of the Community. It must consequently be declared incompatible with the common market under Article 8(3) of the Merger Regulation, HAS ADOPTED THIS DECISION: Article 1 The concentration notified to the Commission, which would take the form of the acquisition of joint control by L 53/30 EN Official Journal of the European Communities 27. 2. 1999 CLT-UFA SA and Taurus Beteiligungs-GmbH & Co. KG of Premiere Medien GmbH & Co. KG, BetaDigital für digitale Fernsehdienste mbH and Gesellschaft BetaResearch Gesellschaft und Vermarktung digtaler Infrastrukturen mbH, is hereby declared incompatible with the common market and the functioning of the EEA Agreement. für Entwicklung CLT-UFA SA Boulevard Pierre Frieden 45 L-2850 Luxembourg Taurus Beteiligungs-GmbH & Co. KG (KirchGruppe) Robert-Bürkle-Strasse 2 D-85737 Ismaning. Article 2 This Decision is addressed to: Done at Brussels, 27 May 1998. For the Commission Karel VAN MIERT Member of the Commission