EN Official Journal of the European Union C 241/11

Summary of Commission Decision

of 23 November 2011

declaring a concentration compatible with the internal market and the functioning of the EEA Agreement

(Case COMP/M.6203 — Western Digital Ireland/Viviti Technologies)

(notified under document C(2011) 8664)

(Only the English version is authentic)

(Text with EEA relevance)

2013/C 241/06

On 23 November 2011, the Commission adopted a decision in a merger case under Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (1), and in particular Article 8(2) of that Regulation. A non-confidential version of the full Decision can be found in the authentic language of the case and in the working languages of the Commission on the website of the Directorate-General for Competition, at the following address:

http://ec.europa.eu/comm/competition/index_en.html

I. THE PARTIES

(1) Western Digital Corporation (‘WD’ or ‘Notifying Party’, United States) designs, develops, manufactures and sells hard disk drives (HDDs), solid state drives (SSDs), external hard disk drives (XHDDs) and media players. Its operations are vertically integrated upstream in the manufacturing of key components, such as read/write heads and media.

(2) Hitachi Global Storage Technologies (HGST, Singapore), recently renamed Viviti Technologies, is a wholly-owned subsidiary of Hitachi, Ltd. It develops and manufactures digital storage devices, such as HDDs and SSDs, together with some branded XHDDs. It is also vertically integrated upstream.

(3) WD and HGST are hereafter referred to as ‘the Parties’; the entity resulting from the proposed concentration is hereafter referred to as ‘the Merged Entity’.

II. THE OPERATION

(4) On 20 April 2011, the Commission received a notification of a proposed concentration pursuant to Article 4 of the Merger Regulation by which WD acquires, by means of the purchase of shares, control within the meaning of Article 3(1)(b) of the Merger Regulation of the whole of HGST (hereafter referred to as ‘the proposed transaction’).

(5) As a result of the proposed transaction, HGST will be solely controlled by WD. The operation therefore constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.

(6) The transaction has an EU dimension pursuant to Article 1(2) of the Merger Regulation.

III. SUMMARY

A. Analytical framework

(7) Another concentration affecting the same markets, namely the acquisition by Seagate (Seagate) of sole control over the HDD Business of Samsung Electronics Co., Ltd (Samsung HDD, South Korea) (2), was notified to the Commission on 19 April 2011, one day before the present transaction.

(8) Consistent with its recent practice, the Commission has decided to assess these parallel transactions affecting the same markets according to a priority rule (first come, first served) based on the date of notification.

(9) The Commission takes the view that it is inherent in the general system of the Merger Regulation that a party that is the first to notify a concentration which, assessed on its own merits, would not significantly impede effective competition in the internal market or in a substantial part thereof, is entitled to have its operation declared compatible with the internal market within the applicable time limits. It is neither necessary nor appropriate to take into account future changes to the market conditions resulting from concentrations subsequently notified.

(10) The ‘first come, first served’ approach is the only one that ensures sufficient legal certainty and objectivity. The Commission recalls that ensuring legal certainty is one of the primary aims of the Merger Regulation.

(11) Furthermore, under the scheme of the Merger Regulation, the date of notification is the most appropriate basis for applying the priority rule. It is a clear and objective criterion, determined in all cases in accordance with the rules of Article 5 of Regulation (EC) No 802/2004, which fits into a notification-based system of merger control. Other criteria, such as the date that a binding agreement is signed or the moment that a proposed concentration is made public, are more difficult to apply and may lead to uncertainty.

(12) Therefore, in view of the dates of notification, the proposed transaction is assessed taking into account the Seagate/Samsung transaction which was notified one day earlier and approved by the Commission on 19 October 2011. The starting point of the Commission's assessment is a market structure with the following HDD suppliers: HGST, the merged entity Seagate/Samsung, Toshiba and WD.

B. The relevant markets

1. Introduction

(13) HDDs are devices that use one or more rotating disks with magnetic surfaces (media) to store and allow access to data. HDDs provide non-volatile data storage, which means that the data remains present when power is no longer applied to the device.

(14) The main components of a hard drive are the Head-Disk-Assembly (HDA) and the Printed Circuit Board Assembly (PCBA). Toshiba and Samsung HDD purchase major components such as heads and media from third party manufacturers, such as TDK for heads and Showa Denko for media. Other suppliers, namely Seagate, WD and HGST, self-supply the large majority of these key components.

(15) Differentiation of HDDs is possible according to their technical characteristics, such as size (3,5″, 2,5″, 1,8″ form factors), rotational speed (seek time), storage capacity and the type of interface.

(16) Further, HDDs are customarily categorised by reference to their end use, in particular the following.

(a) Enterprise HDDs

(17) Enterprise HDDs are used mainly in servers and enterprise storage systems. Enterprise HDDs can be further segmented in: (i) Mission Critical HDDs (employed in high performance servers or storage arrays which require 99,999 % reliability); and (ii) Business Critical HHDs (used in the large storage facilities or server farms of internet companies which run 24/7).

(b) Desktop HDDs

(18) Desktop HDDs are incorporated in personal computers intended for regular use at a single location (homes, businesses and multi-user networks). Nearly all HDDs for Desktop applications are based on the 3,5″ form factor, which offers the highest storage capacity with the lowest price per GB.

(c) Mobile HDDs

(19) Mobile HDDs are incorporated primarily in notebook computers and other mobile devices. Individuals use mobile computers both in and away from homes and businesses. Most Mobile HDDs are based on the 2,5″ form factor. They are generally more expensive and have less capacity than 3,5″ Desktop HDDs.

(d) Consumer Electronics (CE) HDDs

(20) CE HDDs are used in: (i) digital video recorders (DVRs) and satellite and cable set-top boxes (STBs); and (ii) game consoles. HDDs supplied for CE applications include both 3,5″ and 2,5″ form factor drives as well as a small volume of 1,8″ drives (3). As opposed to HDDs used in PC applications (whether Desktop or Mobile), 2,5″ and 3,5″ HDDs used in CE products are provided with specific firmware codes customized according to the specific application purpose.

2. Different HDDs markets according to form factor and end-use

(21) The Commission's investigation revealed that there is no demand-side substitutability across all HDDs since the various end-use applications where HDDs are incorporated largely determine the technical requirements of HDDs (capacity, interface, rpm and form factor). In addition, within the same end-use application HDDs with different form factors (namely 3,5″ and 2,5″) are not substitutable from a customer standpoint.

(22) HDDs employed in different end-use applications are also subject to different industry dynamics and different supply chain models. The Commission's investigation also indicated that there is no sufficient supply-side substitutability across all types of HDDs in terms of effectiveness and immediacy. In the absence of such supply-side substitution, the market cannot be defined in a broader manner.

(23) The Commission defined the following relevant product markets: (i) Enterprise Mission Critical HDDs (4); (ii) 3,5″ Enterprise Business Critical HDDs; (iii) 3,5″ Desktop HDDs; (iv) 3,5″ CE HDDs; (v) 2,5″ Mobile HDDs; and (vi) 2,5″ CE HDDs.

(24) The Commission's investigation and previous decisions indicated that all the HDD markets are worldwide in scope.

3. XHDDs

(25) External hard disk drives (XHDDs) allow PC users to supplement the storage space of their PC systems, their home and small office networks, or their CE devices. They provide stand-alone storage solutions. XHDDs use HDDs as inputs. Unlike internal HDDs, XHDDs are sold as finished products on the merchant market and substantially target different customers, mainly end users of PC and CE devices as opposed to original equipment manufacturers (OEMs). XHDDs are predominantly a branded business.

(26) The Commission considers that XHDDs constitute a separate product market that is downstream of HDDs. The Commission further considers that the XHDD market is currently regional and therefore must be assessed at the EEA-wide level as the customers as well as the customer mix differs significantly between the different regions in the world. Also the identity and number of XHDD suppliers vary across the different regions in the world.

C. Competitive assessment

Non-coordinated effects

(27) WD is currently the largest HDD supplier in terms of volume, and a close second to Seagate in terms of revenues. It is the largest supplier on the significant markets for 3,5″ Desktop HDDs ([40-50]* % market share in revenues) and 2,5″ Mobile HDDs ([30-40]* % market share in revenues), it is the largest supplier on the market for 3,5″ CE HDDs ([40-50]* % market share in revenues), and the second largest on the market for 3,5″ Business Critical HDDs ([30-40]* % market share in revenues).

(28) With the proposed transaction, WD would reinforce its leading position to become by far the largest HDD supplier on all HDD markets except on the market for Mission Critical Enterprise HDDs where WD only recently entered. The activities of WD and HGST overlap in all the HDD markets, and the proposed transaction would generally result in significant increments to WD's current market shares.

(29) The Commission assessed the competitive effects of the proposed transaction on each of the relevant markets.

(30) In line with the priority rule mentioned above, the relevant counterfactual is that pre-merger, Seagate/Samsung, WD, HGST and Toshiba remain as HDD competitors on the various 2,5″ markets and the 3,5″ Business Critical market, and WD, Seagate/Samsung and HGST remain as competitors on the 3,5″ Desktop and 3,5″ CE markets.

(31) Market structure and competitive dynamics vary for each of the relevant HDDs markets. A number of common factors are nonetheless relevant for the Commission's competitive assessment for each of these markets, as explained below.

(32) The Commission finds that products on the HDD markets have features of differentiated products rather than pure commodity products. The Commission's investigation indeed confirmed that technology and innovation are important, and that factors such as performance (rotation, seek speed), product quality and reliability, noise and energy consumption of HDDs are important factors in the purchasing decisions of OEM customers. Key factors driving competition between HDD suppliers are also the ability of HDD suppliers to execute their product roadmaps well and to bring high quality products to the market in a timely and cost-effective manner.

(33) The Commission's investigation indicated that multi-sourcing is very important for HDD customers for reasons of security of supply as well as to receive competitively priced supply. The Commission's investigation further revealed that at least three qualified and reliable suppliers are required for an effective multi-sourcing policy. It follows that the ability of HDD customers to switch suppliers and reallocate purchase shares would be significantly limited in a two-supplier scenario.

(34) The competitors have different strengths and strategies. For the purpose of analysing the closeness of competition between WD and HGST, and the competitive force of HGST, the Commission assessed the competitive strengths of each of the HDD competitors on the basis of the various benchmarks identified by the Notifying Party's key executives, as well as HDD customers, namely, product breadth, product availability and execution of product roadmaps, product quality, technology and cost effectiveness/price.

(35) The Commission's investigation indicated that there are significant barriers to entry and that there is no likely, timely and sufficient entry in any of the relevant HDD markets, either by a new entrant in the HDD industry or by an HDD supplier that is not present in a specific HDD market (such as a possible entry by Toshiba in the 3,5″ Desktop or 3,5″ CE markets as further explained below).

1. The worldwide market for 3,5″ Desktop HDD

(36) WD is already one of the leading suppliers on the 3,5″ Desktop market, with a [40-50]* % market share. HGST's market share is [10-20]* % and therefore significant. The proposed transaction would reduce the number of HHD competitors on the 3,5″ Desktop market from three to two. Post-merger, the Merged Entity would have the highest market share in value ([50-60]* %). The other half of the market would be controlled by Seagate/Samsung, with a [40-50]* % market share. Since Toshiba is not present on this market, there would be not alternative supplier for customers other than the Merged Entity and Seagate/Samsung.

(37) Although the Notifying Party asserts that OEMs would re-allocate purchase shares between HDD suppliers once the proposed transaction is implemented, the Commission found that the proposed transaction differs from the previous concentrations in the HDD industry. In those previous cases, the Commission accepted that the ‘Conner effect’ could mitigate the effects of concentrations between two HDD competitors, since customers were able to shift purchase shares and ultimately keep their total number of HDD suppliers constant (5).

(38) Various sources of evidence confirm that multi-sourcing of HDD supplies is prevalent on the 3,5″ Desktop market. Contrary to the Notifying Party's claim, even in a two-supplier scenario, most OEMs confirm that they would be unwilling to allocate very high purchase shares to a single HDD supplier. This means that in a two-supplier scenario, by construction, the share allocated to the most competitive bidder cannot be dramatically larger than the share allocated to the least competitive bidder.

(39) Despite the Notifying Party's claim that WD/HGST and Seagate would continue to compete intensively for the highest purchase share of any HDD customer despite the impact of the removal of HGST the Commission's investigation showed that the proposed transaction might have given rise to an adverse price effect. The Commission considers that evidence on the ‘best responses’ of HDD suppliers when faced between the choice of competing aggressively for the higher purchase share or less intensely for the lower share, do not provide any indications on the effect that the removal of the third competitor has on competition between the remaining two competitors. The same applies to the argument that post-merger, WD/HGST and Seagate/Samsung would always have the incentive to decrease prices and increase output.

(40) On a 3,5″ Desktop HDD market with only two suppliers, because customers need to multi-source, the runner-up bidder would not get zero demand, but on the contrary, a very significant one. In this perspective, the presence of the third competitor is likely to pose a significant competitive constraint on WD. This finding is all the more valid given that HGST has been an important competitive constraint on the 3,5″ Desktop HDD market as evidenced by: (i) the bidding data; (ii) HGST's presence at large OEMs; and (iii) internal documents and public statements of WD, HGST and Seagate. The views that customers on the 3,5″ Desktop market expressed during the course of the Commission's investigation confirm that the proposed transaction is likely to remove an important competitive constraint from the 3,5″ Desktop market and to have an adverse price effect.

(41) It is not likely that Seagate would have the ability and incentive to increase its supplies so as to countervail any price increase by the Merged Entity.

(42) The Commission finds that the proposed transaction would seriously increase the constraints that large OEMs face in switching their HDD suppliers. Thus, the bargaining strength of OEMs will be negatively impacted by the proposed transaction and customers would not possess sufficient countervailing power to counter the increase in market power brought about by the proposed transaction. The evidence from the Parties confirms that the significant impediment to effective competition that is likely in relation to large OEMs, applies with equal or even more force to distributors and smaller OEMs, which largely buy HDDs from the distribution channel, as well as XHDD suppliers which source their HDD input from the 3,5" Desktop market.

(43) The Commission cannot conclude that entry by Toshiba on the 3,5″ Desktop market would be likely and sufficient. Furthermore, the Commission concludes that while entry by Toshiba might occur within the 2 years normally contemplated by the Horizontal Merger Guidelines, it is uncertain whether such entry would be timely given the short product life cycles in the 3,5″ Desktop market. The Commission concludes that there is no likely, timely and sufficient entry by a new HDD competitor to defeat the likely anticompetitive effects of the proposed transaction.

(44) In light of the above, the Commission concludes that the proposed transaction is likely to result in a significant impediment to effective competition in the worldwide market for 3,5″ Desktop HDDs.

2. The worldwide market for 3,5″ CE HDDs

(45) WD is currently the second largest market player with a [40-50]* % market share. The combined WD/HGST entity would be the market leader holding a market share of [50-60]* %. The market share increment brought about by the proposed transaction would be [10-20]* % and hence significant. Post-merger, the Merged Entity will only face one remaining competitor, Seagate/Samsung, with a similar market share ([40-50]* %).

(46) The fact that some 3,5″ CE customers solicit bids from two sources of supply only for certain HDD products does not undermine the great importance associated with the number of available suppliers on the market for negotiations purposes as this can impact OEMs' ability to secure sufficient volumes of supply at competitive prices. Virtually all CE OEMs confirm that they use the market presence of alternative supply sources to obtain better prices from those HDD suppliers that were invited to bid.

(47) WD and HGST belong to the same tier 1 group of HDD suppliers, and HGST is therefore a close competitor to WD and generally an important competitive force on the 3,5″ CE market.

(48) There would be no sufficient post-merger countervailing buyer power since customers are not in a position to counteract the likely anticompetitive effects of the proposed transaction.

(49) The Commission cannot conclude that entry by Toshiba on the 3,5″ CE HDDs market would be likely and sufficient.

(50) In light of the above, the Commission concludes that the proposed transaction is likely to result in a significant impediment to effective competition in the worldwide market for 3,5″ CE HDDs.

3. The worldwide market for 3,5″ Business Critical Enterprise HDDs

(51) There are currently four suppliers on the market for 3,5″ Business Critical Enterprise HDDs: Seagate/Samsung, WD, HGST and Toshiba. WD is currently the second largest market player with a [30-40]* % market share. HGST is the third largest market player. The combined WD/HGST entity would be the market leader holding a market share in excess of [50-60]* % with a significant increment of [20-30]* %.

(52) The competitive strengths of WD and HGST overlap on a number of important parameters of competition, such as product portfolio and supply flexibility.

(53) The Commission's investigation indicated that the removal of HGST as an important supply source on the 3,5″ Business Critical market is likely to have a detrimental effect on the ability of customers on that market to secure competitive prices when multi-sourcing their supplies. Contrary to the Notifying Party's view, the mere fact that some customers use only two sources of supply for certain products does not undermine the great importance associated to the number of available suppliers on the market for negotiations purposes as this can impact OEMs' ability to secure sufficient volumes of supply at competitive prices.

(54) The Commission's investigation showed that the proposed transaction removes the competitive constraint currently exercised by HGST as the third strongest player on the market and an important player in terms of quality and innovation.

(55) The Commission's investigation indicated that Toshiba does not currently exercise a sufficiently constraining influence in the 3,5″ Business Critical market to deter or defeat the increased market power of the Merged Entity post transaction. Furthermore, there is no clear indication that Toshiba is likely to develop into a sufficient competitive constraint in a sufficiently swift and sustained manner.

(56) In light of the above, the Commission concludes that the proposed transaction is likely to result in a significant impediment to effective competition in the worldwide market for 3,5″ Business Critical Enterprise HDDs.

4. The worldwide market for 2,5″ Mobile HDDs

(57) The proposed transaction would reduce the number of suppliers of 2,5″ Mobile HDDs from four to three. Post-merger, WD/HGST would hold a [40-50]* % market share (WD [30-40]* %; HGST [10-20]* %) and it would face a close runner-up Seagate/Samsung ([30-40]* %), as well as one other competitor Toshiba ([10-20]* %).

(58) The proposed transaction will not impact customers' ability to multi-source and switch suppliers in the 2,5″ Mobile market where not only customers will also be able to source HDDs from Seagate/Samsung but also from Toshiba. It can be expected that Toshiba will gain shares in 2,5″ Mobile HDD market as a majority of OEMs sourcing 2,5″ Mobile HDDs stated that they will ‘re-allocate’ HDD purchase shares post-transaction.

(59) In light of the above, the Commission concludes that the proposed transaction is not likely to result in a significant impediment to effective competition in the worldwide market for 2,5″ Mobile HDDs.

5. The worldwide market for 2,5″ CE HDDs

(60) The proposed transaction would reduce the number of suppliers of 2,5″ CE HDDs from four to three. Currently HGST is the number 2 supplier, behind Toshiba, in the 2,5″ CE market with a [30-40]* % market share in value. The proposed transaction will only result in a small increment of [0-5]* % in market share, given WD's limited market presence. Moreover, post-merger, the Merged Entity will continue to face competition from Toshiba and Seagate/Samsung, two strong suppliers which will hold market shares of [40-50]* % and [10-20]* % respectively.

(61) The proposed transaction will not impact customers' ability to multi-source and switch suppliers in the 2,5″ CE market where customers will also be able to source HDDs from Toshiba and Seagate/Samsung.

(62) In light of the above, the Commission concludes that the proposed transaction is not likely to result in a significant impediment to effective competition in the worldwide market for 2,5″ CE HDDs.

6. The worldwide market for Mission Critical Enterprise HDDs

(63) The proposed transaction will only result in a negligible increment ([0-5]* %) to the market share of the current second player on the market, HGST ([20-30]* %). WD and HGST are not close competitors since the latter is the second well-established player after Seagate/Samsung ([60-70]* %) whilst WD is a small player which entered this market a few years ago but has struggled to gain a meaningful market share. Therefore, the proposed transaction will not have any material impact on the competitive structure of the worldwide market for Mission Critical Enterprise HDDs.

(64) In light of the above, the Commission concludes that the proposed transaction is not likely to result in a significant impediment to effective competition in the worldwide market for Mission Critical Enterprise HDDs.

7. The EEA-wide market for XHDDs

(65) The XHDD market is growing faster than the markets for internal HDDs. On the supply side, the XHDD market seems to be less concentrated than the HDDs markets. In addition to the HDD producers, there are alternative XHDD suppliers which are not vertically integrated upstream in the manufacturing of HDDs.

(66) The Commission's investigation indicated that WD is the largest player in the market ([30-40]* %) and after the acquisition of HGST ([0-5]* %), the only other integrated XHDD competitors would be Seagate/Samsung ([10-20]* %) and Toshiba (only about [0-5]* %). The non-integrated competitors are Iomega ([10-20]* %), LaCie ([5-10]* %), Verbatim/Freecom ([5-10]* %), Trekstor ([5-10]* %) and Buffalo ([0-5]* %).

(67) The Commission's investigation revealed that, firstly, WD is already the leading XHDD player in the EEA XHDD market and the acquisition of HGST would further consolidate its current leading position. Secondly, the market shares and increment may underestimate the market power of the Merged Entity and the competitive constraint exerted by HGST on WD. The XHDD market has to be assessed in a dynamic perspective as the entry of HDD manufacturers in the XHDD market is currently rapidly changing the competitive landscape, mirroring in a closer fashion the upstream HDD markets. Thirdly, HGST is a close competitor to WD. Fourth, the Commission's investigation also indicated that the proposed transaction may increase the ability and incentive of WD to raise the costs of its non-integrated rivals in the downstream EEA XHDD market. Finally, there are no countervailing factors like low barriers to entry or buyer power which would sufficiently mitigate the significant competitive constraint removed by the proposed transaction.

8. Conclusion

(68) The Commission notes that the commitments that the Notifying Party has offered to remove the unilateral concerns in the upstream 3,5″ HDD markets would preclude a significant impediment to effective competition from arising on the downstream EEA XHDD market. In particular, these commitments would allow for the emergence of a new, viable and effective competitor on those upstream 3,5″ HDD markets.

(69) In light of the above, the Commission concludes that the proposed transaction, as amended by the commitments offered by the Notifying Party, is unlikely to give rise to a significant impediment to effective competition stemming from non-coordinated effects on the EEA-wide market for XHDDs.

(70) In light of the above assessment, the Commission concludes that the proposed transaction is likely to result in a significant impediment to effective competition in the following markets: (i) the worldwide 3,5″ Desktop HDD market; (ii) the worldwide 3,5″ CE HDD market; (iii) the worldwide 3,5″ Business Critical Enterprise HDD market; and (iv) the EEA-wide XHDD market.

Coordinated effects

(71) In the worldwide markets for 3,5″ Desktop HDDs and 3,5″ CE HDDs, only two competitors would remain post transaction. Given Toshiba's recent entry, there is a potential third competitor in the 3,5″ Business Critical Enterprise although it has yet to gain market share. Firms may find it easier to reach a common understanding on the terms of coordination if they are relatively symmetric, including in terms of market shares. However, a number of elements appear to complicate agreeing on the terms of coordination in a sustainable way in these markets. As far as tacit collusion on price is concerned, the Commission's investigation indicated that the market is characterised by non-transparent bidding contests.

(72) With regard to potential tacit collusion on output (e.g. on each HDD supplier's share of quarterly Total Available Market (TAM)), it appears that coordination at the aggregate level (such as at the level of each product market), could potentially be destabilised because of product mix effects. Each company would wish to achieve their share with high margin products within the allocated share of TAM. Effective and sustainable coordination would therefore require collusion at product level and at least on a quarterly basis (given that price negotiations with customers generally take place on at least a quarterly basis). The multitude of products within a given market as well as the frequency of price negotiations with customers would therefore make it more unlikely to put in place a process of tacitly reaching the terms of coordination.

(73) In any case, following the remedies offered by the Notifying Party, the future purchaser would enter all markets in which only two HDD suppliers would be left. It is likely that the purchaser — with comparatively low market shares in these markets — would have strong incentives not to participate in any coordination that seeks to preserve the status quo, or to deviate from the terms of coordination.

(74) The Commission concludes that the proposed transaction is unlikely to result in a significant impediment to effective competition stemming from coordinated effects in the relevant markets.

Vertical relationships

(75) The proposed transaction brings together two companies which are already vertically integrated upstream in the production of heads and media used in the manufacture of HDDs. Both Parties also source a portion of their head and media requirements externally, from independent head and media manufacturers present on the merchant market. The extent of this external sourcing of heads and media differs for WD and HGST.

(76) The Commission assessed whether the proposed transaction would lead to a risk of customer foreclosure to the detriment of head and media suppliers and the resulting possible impact on Toshiba's ability to source competitive components and ultimately its ability to compete on the HDD markets.

(77) The data provided by the parties in combination with the results of the Commission's investigation showed that while the Merged Entity may have a certain ability to foreclose independent components suppliers it will not have the incentive to do so and in any case, any attempt of foreclosure would have no effect on independent component suppliers and by consequence on the downstream HDD markets.

(78) In light of the above, the Commission concludes that the proposed transaction is not likely to result in a significant impediment to effective competition stemming from customer foreclosure.

Efficiencies

(79) On the basis of the evidence submitted by the Notifying Party, the Commission is not in the position to conclude that the efficiencies generated by the proposed transaction are likely to enhance the ability and incentive of the Merged Entity to act pro-competitively for the benefit of consumers, thereby counteracting the adverse effects on competition that the proposed transaction is likely to have. Accordingly, the Commission is not in the position to conclude that the proposed transaction is compatible with the internal market as a result of the efficiencies that it would bring about.

D. Remedies

(80) The Notifying Party offered commitments on 3 October 2011. The proposed remedies consisted essentially in a ‘carve-out’ of production lines used by HGST to produce some 3,5″ Desktop, CE and Business Critical products, along with some personnel and a license to IP rights. The Notifying Party submitted revised commitments on 10 October 2011.

(81) The commitments offered by the Notifying Party on 10 October 2011 consisted in the divestment of an HDD business of HGST, including the following main tangible and intangible assets: (i) a plant of HGST in […]* which includes [20-30]* fully configured production lines capable of manufacturing 3,5″ Desktop, CE and Business Critical HDDs, including XHDDs; (ii) product designs for 3,5″ HDDs in production and pipeline products in development by HGST; (iii) distribution offices in America, Asia and Europe; (iv) transfer of the IP rights used by the Divestment Business solely in the manufacture of 3,5″ HDDs; (v) a non-exclusive, perpetual, royalty-free, fully paid-up license for the IP rights used by the Divestment Business for the manufacture of 3,5″ HDDs and by HGST for the manufacture of HDDs; (vi) transfer of personnel of the plant, as well as some other R&D and marketing personnel; (vii) one or more supply agreements, under which the Merged Entity would supply HDD components (heads and aluminium media components) to the Divestment Business at then prevailing market prices for a period up to 3 years.

(82) The market test of the remedies carried out by the Commission indicated that a number of improvements to the remedies were needed and, most importantly, that an upfront buyer clause and more stringent suitable purchaser criteria were necessary in order to ensure the effectiveness of the proposed divestiture remedy.

(83) Following the market test, on 24 and 27 October, the Notifying Party submitted improved commitments addressing all the aspects of the commitments that had been identified as requiring improvements, in particular: (i) the inclusion of an upfront buyer clause and stricter purchaser criteria; (ii) the inclusion of additional assets related to 4- and 5-platter HDDs in the scope of the Divestment Business; (iii) the transfer of patents to the Purchaser and generally stronger IP rights to be at the disposal of the Divestment Business; and (iv) the provision for specific contractual terms related to the supply of components and the setting up of firewalls within WD in order to avoid that it gains access to competitively sensitive information of the Divestment Business.

(84) Under the upfront buyer clause, the Notifying Party commits that it will not close the proposed acquisition of HGST before it has concluded a binding agreement for the sale of the Divestment Business to a suitable Purchaser that is approved by the Commission. Moreover, the Notifying Party has included stricter purchaser criteria according to which the purchaser will need to: (i) be committed to maintain the competitiveness of the Divestment Business including the development of 3,5″ HDD technology in each of the markets of concern; and (ii) have proven expertise and an ongoing track record as an R&D innovator within the HDD industry, and preferably proven expertise in a market neighbouring a market of concern. This provision together with the improvements to the assets transferred and the stronger commitment regarding the supply of components ensure the long term viability and competitiveness of Divestment Business.

(85) The final commitments also provide for a reinforced role for the Monitoring Trustee for the monitoring of the implementation of the commitments.

(86) The commitments will allow for the maintenance of a third competitive and viable alternative supplier on the worldwide markets for 3,5″ Desktop HDDs, 3,5″ CE HDDs and 3,5″ Business Critical HDDs, provided the Divestment Business is purchased by a suitable purchaser. Post transaction the Merged Entity will continue to face competition from Seagate/Samsung and the Divestment Business (the successor to HGST in the markets of concern). Customers on these markets, including non-integrated XHDD suppliers, will continue to face a sufficient number of alternative suppliers.

(87) The Commission concludes that the final commitments submitted by the Notifying Party are sufficient to eliminate its concerns as to the compatibility of the proposed transaction with the internal market.

IV. CONCLUSION

(88) For the reasons mentioned above, the decision concludes that the proposed concentration will not significantly impede effective competition in the internal market or in a substantial part of it.

(89) Consequently the concentration should be declared compatible with the internal market and the functioning of the EEA Agreement, in accordance with Article 2(2) and Article 8(2) of the Merger Regulation and Article 57 of the EEA Agreement.

(1) OJ L 24, 29.1.2004, p. 1 (hereinafter referred to as the ‘Merger Regulation’).

(2) Case COMP/M.6214 — Seagate/HDD Business of Samsung.

(3) The 1,8″ drive will not be discussed as neither WD nor HGST manufacture this type of HDDs.

(4) For the purpose of the decision, there is no need to differentiate Enterprise Mission Critical HDDs according to form factor as no competition concerns arise in this market under any alternative product market definition.

(5) See, for example, Case COMP/M.5483 — Toshiba/Fujitsu HDD business.