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 Treaty establishing the European Community,
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,
Having regard to the opinion of the Advisory Committee on Concentrations (3),
Whereas:
(1) On 1 December 1997 the Commission received notification pursuant to Article 4 of Council Regulation (EEC) No 4064/89 (the Merger Regulation) of a proposed concentration whereby CLT-UFA SA (CLT-UFA) and Taurus 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 Gesellschaft für digitale Fernsehdienste mbH (BetaDigital) and BetaResearch Gesellschaft für Entwicklung und Vermarktung digitaler Infrastrukturen mbH (BetaResearch). The proposed concentration was to be effected through the purchase of shares.
(2) On 15 December 1997 the Commission decided to suspend implementation of the proposed concentration pursuant to Articles 7(2) and 18(2) 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 to Article 6(1)(c) of the Merger Regulation and Article 57 of the EEA Agreement to initiate proceedings in this case.
(5) The Advisory Committee discussed the draft of the present Decision on 6 May and 25 May 1998.
I. THE PARTIES
(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 feature films and entertainment programmes for television and is also active in commercial television. The group operates mainly in Germany.
II. THE PROPOSED CONCENTRATION
(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, 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.
(9) 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 50 % stake. BetaResearch is active in 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 separate 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.
III. THE CONCENTRATION
(12) Premiere is currently controlled jointly by CLT-UFA, Kirch and Canal+, since all three partners have veto rights with regard to 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 control it jointly, having henceforth to take 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.
(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 and the market for pay-TV 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 withdrawal of Canal+ together with the simultaneous development of Premiere into a digital programme and marketing platform, therefore constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.
(14) CLT-UFA and Kirch will each have a 50 % interest in BetaDigital and will control it 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 television is more widespread in Germany, 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 services for digital 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.
(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 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 the 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, it can therefore be assumed 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 behaviour between CLT-UFA and Kirch. CLT-UFA's participation in 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.
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 therefore has a Community dimension and does not constitute a case of cooperation under the EEA Agreement.
V. ASSESSMENT UNDER ARTICLE 2 OF THE MERGER REGULATION
(17) The proposed concentration affects mainly the markets for:
- pay-TV,
- technical services for pay-TV.
A. RELEVANT PRODUCT MARKETS
1. Pay-TV
(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 the case of 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 subscriptions. According to a 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 indicates that the latter 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 convergence between pay-TV and free TV, 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 pay-TV market cannot be subdivided into 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.
2. Technical services for pay-TV
(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.
(20) In addition to a decoder base, pay-TV requires a system of conditional access. This 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.
(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 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 sub-markets does not seem imperative. Both satellite and cable transmission require the same technical services for 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.
B. RELEVANT GEOGRAPHIC MARKETS
(22) The relevant geographic market for the product markets described above is confined to Germany, or at all events to the German-speaking region consisting of Germany, Austria and the German-speaking parts of Belgium and Switzerland. Given the viewing habits of the population, Luxembourg too can be included in the German-speaking region.
1. Pay-TV
(23) Despite the fact that, in certain niche markets, channels such as the sports channel Eurosport are broadcast throughout Europe, television 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.
(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 pay-TV (7). The Commission's investigation in the present proceeding brought to light a number of grounds for considering that the 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 area. This question 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.
2. Technical services for pay-TV
(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 also acquired subscribers in other 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 deemed to encompass the entire German-speaking area.
C. EFFECTS OF THE CONCENTRATION
1. Organisation of pay-TV in Germany after the concentration
(a) Programme platform
(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 technical platform). It will assemble in-house and/or commissioned TV programmes 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.
(b) Technical platform
(27) The technical platform in the narrower sense, i.e. the controlling of conditional access and the provision of the 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 the cable distribution and satellite broadcasting of programmes. In order to ensure the use of Beta access technology by Premiere and Telekom from a structural point of view, CLT-UFA and Telekom will acquire a stake in BetaResearch, which owns the rights to the encryption and decoder systems.
2. Market for pay-TV
(a) Market domination
(29) The proposed concentration will lead to the creation or strengthening of a dominant position for Premiere on the pay-TV market in Germany.
(i) Premiere will have a near-monopoly as pay-TV supplier
(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 'Multithématiques` programme bouquet consisting of three pay-TV special-interest channels, the bouquet is currently broadcast using DF 1's platform. Premiere has approximately 1,5 million subscribers (November 1997 position), including some 100 000 Premiere Digital subscribers (December 1997 position). DF 1 has approximately [ TABLE POSITION>
Where CLT-UFA has a minority holding it can be presumed that it exercises joint control.
(79) Kirch has the following holdings in free TV channels in Germany:
>TABLE>
(A plan to acquire a further 16 % in SAT 1 has been notified to the Bundeskartellamt).
Here too it can be presumed that Kirch currently enjoys at least joint control of SAT 1.
(80) In addition, Mr Thomas Kirch, the son of the owner of Kirch, has the following holdings:
>TABLE>
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.
(ii) Audience shares
(81) The German free TV broadcasters had the following audience ratings in 1996:
Public channels:
>TABLE>
Channels linked to CLT-UFA:
>TABLE>
Channels linked to Kirch:
>TABLE>
(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) Shares of the television advertising market
(83) According to the information supplied by the parties, the separate channels have the following market shares in terms of gross advertising turnover:
Public channels:
>TABLE>
Channels linked to CLT-UFA:
>TABLE>
Channels linked to Kirch:
>TABLE>
(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 their daily broadcasting time with 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.
(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 %.
(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 to the more varied programmes on offer in Germany from free TV.
(88) The attractiveness of a channel is largely dependent on the programme rights available to it. When a television operator has a leading position 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.
(i) CLT-UFA and Kirch can both be expected to try to purchase pay-TV and free TV rights in combination
(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.
(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 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).
(91) From a business 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 in 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.
(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.
(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 access to a family of channels and to the only pay-TV platform in Germany, once the concentration has made it a joint owner of Premiere. It can therefore be anticipated that Kirch too will seek to purchase pay-TV and free TV rights in combination.
(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 for the 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, [. . .].
(ii) CLT-UFA and Kirch will be able to implement programme strategies for free TV channels aimed at securing pay-TV subscribers for Premiere Digital
(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 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 involves first of all 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 prices. This shows that viewer figures and 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.
(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 it must be anticipated on the basis of the information 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 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 resources to create a programme platform, and Bertelsmann and Kirch control the decoder infrastructure.
3. The market in technical services for pay-TV
(a) BetaDigital and Telekom's monopoly position
(102) The concentration will give BetaDigital a monopoly on a lasting basis in technical services for satellites. As a result of the parallel concentration of Telekom and BetaResearch, Telekom will secure a monopoly in the operation of conditional access for cable.
(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 supplier of technical services for the digital transmission of signals on the cable network. CLT-UFA, Kirch and Telekom have stipulated in the agreement on the restructuring of BetaResearch that in providing technical services for 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.
(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 supplier of technical services for the 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.
(i) Following the concentration, d-box technology will in practice become the digital standard in the German-speaking area
(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 to acquire 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 great majority of the networks belong to Telekom. This makes it impossible for private cable operators to develop alternative facilities for the transmission of pay-TV without involving Telekom.
(107) After the concentration, Premiere will distribute digital television through d-box technology and 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.
(ii) The monopoly position of Premiere's programme platform forms a long-term obstacle to the introduction of other technology
(108) The 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 if 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, alternative access and 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 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 the 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).
(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 established in Germany. Any other potential supplier of conditional access services will have to use the d-box decoder. The d-box uses a proprietary coding system developed by BetaResearch. Potential suppliers of technical services for pay-TV would therefore have to seek a licence for Beta access technology from BetaResearch. This is the case with both satellite and cable transmission. In managing conditional access for satellite and cable, however, BetaResearch would have no interest in exposing BetaDigital or its joint parent Telekom to competition on the market in technical services for pay-TV. BetaResearch might therefore use its licensing policy to hamper other service suppliers' access to the market.
(iv) Control of the decoder infrastructure gives Bertelsmann/Kirch control of possible applications based on the d-box
(113) An application programme interface (API) allows third parties wishing to produce an independent application to have access to the decoder operating system. A typical example of 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 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 present impossible to 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 the API will probably have only a limited 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.
(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 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 then be able to start production development, which will probably take about another six to nine months.
(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 that the development work 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 to focus on 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.
(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 through another service provider. In this way d-box API licensees are 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
(118) On the foregoing grounds, and in accordance with the information currently available to 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
(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 technology. Lastly, allowance should be made for programme investments, which would amount to several DEM billion over the next few years. However, after the parties have made 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.
(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.
(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 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.
(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 if it contributes to the general acceptance of digital television and thus promotes technical 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
1. Undertakings
(123) By letters dated 28 April and 4 May 1998 the parties suggested a series of undertakings intended to remove the doubts about the proposed concentration. These consist basically of the following points.
(a) Programme rights
(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 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 includes marketing information and support. Customer relations will still be Premiere's responsibility, however. Cable operators will receive appropriate financial compensation for their efforts.
(d) Pay-TV and free TV rights
(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.
(e) BetaResearch
(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, 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 occupancy, is again emphasised by the parties.
(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 is reached on the conditions, in particular the licence fees, an arbitration body will take a final decision as to their appropriateness.
(130) BetaResearch undertakes to disclose the API interface of the d-box network ('native API`) by the end of 1998 and to defer to an arbitration body in the event of 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.
(131) BetaResearch will grant manufacturing licences to any interested manufacturer on standardised 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
(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 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 for establishing a second programme platform.
(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 to the emergence of such an alternative programme platform, since this could be generated only on the basis of premium channels (anchor channels).
(c) Cable operators
(135) The parties have offered cooperation with the cable operators only in the area of sales. The cable operators are thus prevented from marketing Premiere on their own and thereby from 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.
(e) BetaResearch
(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 experts is able to discuss issues relating to technological development but cannot require operators to comply with its recommendations.
(138) The possibility for third parties to participate in BetaResearch, as proposed by the parties, might give rise to some transparency in respect of decisions concerning future technological 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 level of licence fees, may indeed go some way to ensuring that third parties are not subject to discrimination where licensing 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, Kirch and Telekom. 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 the parties had 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.
(f) BetaDigital
(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 parties do indeed guarantee a degree of 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.
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.
(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 their own services together with the 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 cable operator alongside the Premiere package 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).
(145) Cable operators must not abuse the freedom they have been offered in order to limit their marketing operations in capacity terms with regard to Premiere programmes, i. e. they must agree to market the Premiere package in toto. Otherwise Premiere will not be obliged to make 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 (Landesmedienanstalten) or reach agreement on another objective capacity-allocation procedure.
(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 individual shareholders no longer apply.
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.
(149) As indicated in recital 63, private cable operators are predominantly active at level 4 (home link-ups, cable islands). The level-3 networks (cable 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.
(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 Telekom and interested operators (programme 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 combining the services of level-3 and level-4 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 enabling level-4 operators to establish a 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 on it. Overcoming the separation of 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 subscriber base that it will be difficult for 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. However, given the lack of exclusivity on pay-per-view rights, allowing them to offer 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.
(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 for use by potential third-party 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 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 that all shareholders 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. However, it should be borne in mind that BetaResearch will only have four shareholders since third parties will be granted a share solely via an intermediate holding 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 its 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 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 that the possibilities for 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.
(d) Overall assessment
(155) It follows from the above that the proposed undertakings, even in their expanded version, are inadequate to solve 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 CLT-UFA SA and Taurus Beteiligungs-GmbH & Co. KG of Premiere Medien GmbH & Co. KG, BetaDigital Gesellschaft für digitale Fernsehdienste mbH and BetaResearch Gesellschaft für Entwicklung und Vermarktung digtaler Infrastrukturen mbH, is hereby declared incompatible with the common market and the functioning of the EEA Agreement.
Article 2
This Decision is addressed to:
CLT-UFA SA
Boulevard Pierre Frieden 45
L-2850 Luxembourg
Taurus Beteiligungs-GmbH & Co. KG (KirchGruppe)
Robert-Bürkle-Strasse 2
D-85737 Ismaning.
Done at Brussels, 27 May 1998.