Summary of Commission Decision of 4 April 2007 declaring a concentration to be compatible with the common market and the EEA Agreement (Case COMP/M.4403 — Thales/Finmeccanica/Alcatel Alenia Space & Telespazio)
Date: 2009-02-11
Institutions: European Commission
Subjects: aerospace industry, economic concentration, exchange of information, information system, merger control, militarisation of space, satellite, technology, telecommunications industry

11.2.2009

EN

Official Journal of the European Union

C 34/5

Summary of Commission Decision

of 4 April 2007

declaring a concentration to be compatible with the common market and the EEA Agreement

(Case COMP/M.4403 — Thales/Finmeccanica/Alcatel Alenia Space & Telespazio)

(Only the English version is authentic)

(2009/C 34/05)

On 4 April 2007, 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, and in particular Article 8(1) 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

III. THE RELEVANT PRODUCT MARKETS

(1) Thales is a French company jointly-controlled by the
French State (through TSA) and Alcatel, which is active in
the development and integration of critical
information
systems for the industries of defence, aeronautics and
transport and for civil security.

(5)

In previous cases in the space sector, the Commission has
identified two main segments, the space segment and the
ground segment, which can each be further divided into
(i) launchers; (ii) space transportation and space infrastruc-
ture; and (iii) satellites.

(2)

Finmeccanica is an Italian diversified engineering group,
solely controlled by the Italian State, which is active in
aerospace, defence systems, energy, communications, trans-
portation and automation.

(3) AAS is a French company jointly-controlled by Alcatel and
Finmeccanica, which is active in the design and manufac-
ture of ground and space systems, including satellites and
satellite subsystems. Telespazio is an Italian company
jointly-controlled by Alcatel and Finmeccanica, which
provides
services and end-user applications using or
related to satellites-based solutions and products.

II. THE OPERATION

and

in AAS

shareholdings

(4) Through the proposed operation, Thales will acquire
Telespazio (1).
Alcatel's
Post-merger, Thales and Finmeccanica will jointly control
AAS and Telespazio, including the space activities contrib-
uted by Thales and Finmeccanica to these two joint
ventures, within the meaning of Article 3(1)(b) of
the
Merger Regulation. The transaction thus constitutes a
the Merger
concentration within the meaning of
Regulation.

(1) In 2005, Alcatel and Finmeccanica merged their activities related to
space systems through the setting up of two joint ventures, AAS and
Telespazio. Alcatel and Finmeccanica respectively held 67 % and 33 %
of AAS capital and 33 % and 67 % of Telespazio's capital. The creation
of
the two joint ventures was cleared by the Commission (See
Commission decision of 28 April 2005 in Case COMP/M.3680 —
Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio).

(6) The present case concerns more particularly the markets
satellites, and the
telecommunications
telecommunications
for

subsystems

satellites

of commercial
specific
satellites.

A. Commercial telecommunications satellites

(7) The Commission has previously distinguished between
satellites used for military applications,
for commercial
applications and for institutional applications. The market
investigation has confirmed that commercial, institutional
and military satellites belong to distinct relevant product
markets.

(8) Commercial satellites are used in the field of telecommuni-
cations (fixed telephony, mobile telephony,
internet, etc.)
and television broadcasting and are purchased by private
satellite operators through competitive tendering.

B. Travelling Wave Tubes (‘TWTs’)

(9) TWTs are electronic components used to amplify micro-
wave (radio-frequency) signals received by the satellite
before the signals are retransmitted to the earth. There are
several TWTs per
(generally 40-50, up to
60 TWTs). TWTs are available in different frequencies that
determine the radio frequency of the satellite (e.g. C-band,
Ka-band, Ku-band, L-band). It should be noted that TWTs
of different
frequencies are often loaded on the same
satellite.

satellite

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(10) On the demand side, the market investigation has indicated
that there is no or very low substitutability between TWTs
of different frequencies. Demand for a TWT of a specific
frequency is determined not only by the satellite's specific
mission (TWTs of different frequency bands serve different
end applications) but also by frequency coordination and
orbital allocation issues. On the supply side, the market
investigation has shown that (i) the underlying technology
(ii) manufacturing
is the same for all TWT frequencies;
equipment, production line, testing equipment and quali-
fied personnel are common to the different frequencies;
and (iii)
a
wholly-owned subsidiary of Thales, and L3) have both the
technical expertise to produce TWTs of all
frequency
bands and output power. The Commission therefore
concludes that there is a single product market for the
supply of TWTs, but with different segments based on the
frequency bands and power output of the TWTs.

two existing TWT suppliers

(TED,

the

C. Electronic Power Conditioners (‘EPCs’)

(11) EPCs provide the power supply for the TWTs. EPCs can be
single, providing the energy necessary for one TWT, or
dual, providing the energy necessary for two TWTs. On
the demand side, the choice of the EPC does not depend
on the frequency band of
the TWT but on the input
voltage and output power of the TWT, and the satellite
platform bus. On the supply side, the market investigation
has confirmed that technology is similar for all EPCs. The
Commission therefore concludes that
there is a single
market for the supply of EPCs.

D. Travelling Wave Tube Amplifiers (‘TWTAs’)

(12) TWTs and EPCs are integrated to form TWTAs. This elec-
tronic device is the main transmitter on a satellite, used to
amplify the microwave signal before it is broadcasted back
to earth. Linearisers (‘LINs’), channel amplifiers (‘CAMPs’),
and linearised channel amplifiers (‘LCAMPs’) are fitted to
the vast majority of TWTAs in order to improve the line-
arity and compression of
the microwave signal. The
Commission's investigation has confirmed that TWTAs
and further integrated TWTAs to which a lineariser and/or
a channel amplifier are added (TWTA+s) belong to a single
product market (1).

IV. THE RELEVANT GEOGRAPHIC MARKETS

(13) In line with the Commission's approach in previous cases,
the markets for commercial telecommunications satellites

(1) For the purposes of the present document, TWTAs and the further-
integrated TWT-based subsystems CTWTA, LTWTA, LCTWTA are
altogether referred to as ‘TWTAs’ for ease of reference. Where it is
necessary to distinguish TWTAs from the further integrated TWTAs
(LTWTAs, CTWTAs, LCTWTAs), the reference ‘TWTA+ subsystems’ is
used.

and satellite subsystems such as TWTs, EPCs and TWTAs
are considered to have a worldwide geographic dimension
as sourcing takes place on a worldwide basis. However, the
Commission takes into account in its competitive assess-
ment the existence of various segments where the respec-
tive subsystem suppliers and prime contractors
face
different constraints due the US Export Administration
Regulations (‘EAR’) and US International Traffic in Arms
Regulations (‘ITAR’) which exclude US suppliers from
competitions to supply satellites and satellite subsystems to
operators in some black-listed countries.

V. ASSESSMENT

(14) The proposed concentration give rise to a vertical relation-
ship between the TWTs produced by TED, a wholly-owned
subsidiary of Thales, and markets downstream of TWTs at
two levels: (i) TWTAs; and (ii) commercial telecommunica-
tions satellites. The Commission's in-depth investigation
examined whether Thales, as the new parent company of
AAS, would be likely to foreclose TED's and AAS' down-
stream rivals on these two markets (2).

(15) In Phase I, the Commission identified serious competition
concerns and took the view that the behavioural remedies
offered by the parties were not sufficiently clear-cut to
entirely remove these concerns. The Commission however
recognized that the case at hand is a complex vertical case
and already indicated in its decision to open an in-depth
investigation that it needed to thoroughly examine the
constraints on the ability and the incentive of the new
entity to foreclose its downstream rivals.

(16) It should be noted as a preliminary remark that the vertical
integration brought about by the merger is only partial (as
Thales will only have a 67 % shareholding in AAS) and
indirect (since TED and AAS will be sister companies, and
will remain separate legal entities with a different share-
holding structure and different and independent decision-
making bodies).

A. Market structure

1. Commercial telecommunications satellites

(17) There are six main suppliers on the market for commercial
Systems
telecommunications
(‘Boeing’)
([20-25 %]* market share over 2001-2005),
Lockheed Martin Commercial Space Systems (‘Lockheed
Martin’)
(‘AAS’)
([20-25 %]*), Alcatel Alenia Space
([15-20 %]*), Space Systems Loral (‘Loral’) ([10-15 %]*),

satellites: Boeing

Space

(2) There are some horizontal overlaps and vertical relationships between
the activities of Thales and AAS in the ground segment but none of
them give raise to any competition concerns.

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EADS Astrium (‘Astrium’) ([5-10 %]*), and Orbital Sciences
Corporation (‘Orbital’) ([0-5 %]*). Japanese prime manufac-
turers (Melco and Mitsubishi) are significantly smaller. New
players are emerging in India (ISRO), China (CAST), Russia
(NPO PM and Russian Satellite Communications Company
(‘RSCC’)), and Israel (IAI).

that manufacturer has internal EPC production (2) — or by
a third party TWTA integrator such as Tesat or L3. In the
latter case, the satellite prime contractor will procure the
TWT and will have it delivered at the TWTA integrator's
facility for AIT with the TWTA integrator's own EPC. In
such case, the TWTA manufacturer will sell an EPC+AIT,
and invoice its margin on these components/services. The
TWTA is then provided to the satellite prime contractor
within the schedule for integration on the satellite itself.

(18) Given the massive investments needed in R & D,

the
industry is characterised by a certain degree of specialisa-
tion and concentration. This aspect is particularly accentu-
ated in Europe, where space companies have developed
particular expertises as equipment manufacturers, payload
suppliers and solution providers.

(19) Satellite operators are the final customers for satellites.
Luxembourg-based SES GLOBAL is the largest operator.
JSAT
Intelsat (USA), Eutelsat (France), PanAmSat (USA),
(Japan), Telesat (Canada) and Hispasat follow in order of
declining importance.

(20) The markets for satellites and for satellite subsystems are
bidding markets. When ordering a new telecommunica-
tions satellite, a satellite operator will generally request bids
from several satellite prime contractors. Before submitting
their bid for the prime contracting of the satellite to the
satellite operator and in order to be able to do so, satellite
prime contractors request bids for the most important
equipment beforehand.

(21) Specifically with regard to TWT(A)s (1), satellite manufac-
turers request bids (i) either separately for TWTs, EPCs and
other components; or (ii) for a TWTA. In case the satellite
manufacturer opts for an integrated TWTA, the TWTA
integrator that is invited to bid will in turn request an offer
for a TWT from the TWT supplier (either TED or L3). The
TWTA integrator that has won the bid will then assemble
and integrate the TWT with the EPC, and test the obtained
TWTA and provide it to the satellite prime contractor
within the schedule for integration on the satellite itself. In
separately
satellite manufacturer opts
case
procuring the TWT and EPC (including services
for
assembly, integration and testing (‘AIT’)), he will issue sepa-
rate requests for TWTs and the other components. The
integration of the TWT with the EPC into a TWTA may be
carried out by the satellite manufacturer itself — in case

the

for

(22) It is important to stress that market demand has evolved
to integrated products. For around 70 % of recent satellite
orders, prime contractors now request and purchase
TWTAs or more integrated products rather than issuing
separate quotations for TWTs and EPCs. The market inves-
tigation has shown that the procurement of
integrated
TWTAs brings significant benefits to prime contractors
(notably, cost savings and simplification in the procure-
ment process, shifting of the liability for performance of
the overall TWTA+ subsystem to the TWTA subcon-
tractor). It appears that currently only AAS — and to a
much lesser extent Loral — continue to procure separately
TWTs and EPCs+AIT.

2. TWTs

company
Inc ETI

(23) There are only two suppliers of TWTs worldwide: TED and
Electron
L3
the US
Technologies,
(‘L3’). TED produced, on average
over three years, approximately [70-80 %]* of the TWTs
and L3 the remaining [20-30 %]*. However, L3's share of
TWT production has increased to more than [30-40 %]*
in 2006.

Communications

frequency bands,

(24) The Commission's investigation has shown that L3 is a
credible competitor of TED for
the most common
in particular C-band and
commercial
Ku-band, where L3's TWTs are currently more competitive
than TED's TWTs (21 % and 34 % of the market respec-
tively). L3 does not currently have qualified TWTs with
sufficient flight heritage for the commercial market for
L-band (7 % of the market), high power Ku-band (12 %),
and Ka-band (10 %). L3 has, however, the competence and
expertise
in all
to develop and manufacture TWTs
frequency bands and has already qualified a 32 GHz
Ka-band TWT for institutional applications. Despite the
fact that L3 has slightly less flight heritage than TED, most
satellite prime contractors consider L3 as a credible alter-
native for TWT frequencies where it has a product
offering.

(1) Comparable procurement processes apply in the case of the selection

of the EPC, the linearizer and channel amplifier functions.

(2) Some satellite prime contractors, such as Lockheed Martin, have
in-house production capabilities for EPCs and LCAMPs and in-house
integration capabilities.

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3. EPCs

(25) There are two main suppliers of EPCs worldwide, Tesat
(a subsidiary of EADS/Astrium), and L3. Other space
companies have the capability to manufacture EPCs for in-
house applications but have not been active on the
merchant market, such as Lockheed Martin or ETCA, a
subsidiary of AAS.

(26) Both L3 and Tesat have large production capacities, a
broad product range,
including dual EPCs, an extensive
flight heritage and an established position on the merchant
market. By contrast, ETCA has a much more limited
production capacity, only produces single EPCs and inte-
grated most of its EPCs to supply its parent company AAS.
The major satellite prime contractors (other than AAS)
only deal with Tesat and L3 for EPCs and are not familiar
with ETCA's EPC products.

(27) The Commission has investigated in-depth ETCA's EPC
capabilities as it is essential for the competitive assessment.
The Commission' investigation has shown that: (i) ETCA
has a modern and competitive medium power single EPC,
which however
flight heritage;
(ii) ETCA has an older generation high power single EPC;
(iii) ETCA could qualify a competitive dual EPC in
[2009-2012]*, which could have acquired flight-heritage
by [2012-2015]*; and (iv) ETCA could qualify a competi-
tive high power EPC in [2009-2012]*, which could have
acquired flight-heritage by [2012-2015]*.

sufficient

lacks

still

supply of TWTs to rival TWTA integrators so as to favour
its downstream activities on the TWTA market, and, if so,
whether this would have a significant detrimental effect on
effective competition on the TWTA market. The Commis-
sion's in-depth investigation has revealed that
the new
entity's ability and incentive to foreclose rival integrators
would be seriously constrained for several reasons.

(30) First, in order to foreclose Tesat on the TWTA market, the
new entity needs to have access to EPCs to integrate with
its TWTs. The Commission's in-depth investigation has
revealed that (i) AAS' subsidiary, ETCA, only has a limited
range of EPCs; and (ii) ETCA is also constrained by its
limited EPC and AIT production capacity. Secondly, prime
contractors and satellite operators purchase conservatively
and have strong preferences for the EPCs and TWTAs of
Tesat and L3. Thirdly, the market investigation has revealed
that margins are considerably lower at the TWTA level
which is characterised by more competitive pressure than
at the TWT level. Fourthly, since it will acquire a 67 %
shareholding in AAS, Thales will only have 67 % of the
additional margins it makes on TWTAs (which would be
integrated by AAS' subsidiary ETCA) whereas it benefits
from the full margins for TWTs.

4. TWTAs

(28) Due to their strong position at the level of EPCs, L3 and
Tesat are the two leading integrators of EPCs globally. They
are the only two integrators with significant assembly and
testing facilities, an installed base of TWTAs on satellites
with extensive flight heritage and a significant presence on
the merchant market. ETCA and TED have limited TWTA
integration activities, ETCA having essentially supplied its
parent company AAS for institutional satellites.

B. Impact of the merger on the TWTA market

(29) The Commission has investigated whether the new entity
would have the ability and incentive to discriminate in the

(i)

takes into account

(31) In light of these constraints, the likelihood of the new
entity engaging in input foreclosure requires a detailed
analysis that
the various input
components of TWTAs, and (ii) the prime contractor and
its potential preferences. On the basis of such an assess-
ment market segment by market segment, the Commission
has established that foreclosure would be likely only for a
limited market segment, that are ITAR-restricted and where
ETCA could meet AAS' EPC demand, and that account for
[0-5 %]* of the TWTA market. The Commission has also
concluded that foreclosure is possible, but not to a degree
such as to consider that it would be likely, in the market
segment where the new entity is active (single EPC) and
does not face currently a competitive constraint from L3's
TWTs (high power Ku-band, L-band and Ka-band). These
market segments altogether represent [10-15 %]* of the
TWTA market. The Commission has also determined that
there is no possibility for
foreclosure on the market
segments where there is (i) dual EPC demand; (ii) a compe-
titive constraint from L3's TWTs or (iii) a strong preference
of prime contractors for either L3 or Tesat. This altogether
represents
the TWTA market
(i.e. more than [80-85 %]*).

the vast majority of

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(32) Based on this assessment, it is estimated that an input fore-
closure strategy by the new entity could allow it to capture
[0-5 %]* of the TWTA market in the short term (in par-
ticular ITAR-restricted markets segments). For [10-15 %]*
of the TWTA market, a market entry of the new entity can
also be considered as possible although the new entity
would need to demonstrate that it is a reliable TWTA
supplier capable of meeting satellite manufacturers' require-
invest-
ments, which would in turn require significant
ments. By contrast, foreclosure on the bulk of the TWTA
market does not appear likely and could only start if the
new entity obtains an EPC product range that is compar-
able to Tesat and L3 (i.e. as of [2012-2015]* in the best
case scenario).

(37) Secondly, the transaction will in fact place Thales/AAS in a
similar position on the satellite prime contracting market
as that of Astrium/Tesat
(i.e. as a supplier of TWTAs
present at the prime contracting level) prior to the transac-
tion. However, there have been no allegations that Astrium
engaged in an input
foreclosure strategy for TWTAs
(through its control of Tesat) so as to gain advantages in
prime competitions. This confirms that there is no incen-
tive for such strategy, especially in a space industry charac-
terized by complex interdependences, and that this strategy
is unlikely post-merger.

(33) In any event, entry of the new entity on these segments of
the TWTA market in the near future — which was up to
now divided between Tesat and L3 — would as such
increase the number of credible competitors on the market
from 2 to 3, thereby increasing competition.

(38) The Commission has nonetheless assessed the ability and
incentive of
the new entity to foreclose rival prime
contractors post-merger, assuming that such input foreclo-
sure could be carried out through direct supply of TWTs
and thus independent of the success of an input foreclo-
sure strategy at the TWTA level.

(34) The Commission therefore concludes that the concentra-
tion does not lead to a significant impediment to competi-
tion on the TWTA market.

C. Impact of the merger on commercial telecommuni-

cations satellites market

(35) The Commission has investigated whether the new entity
would have the ability and incentive to discriminate in the
supply of TWTs to rival prime contractors in order to gain
an advantage in competitions for commercial telecommu-
nications satellites and, if so, whether this would have a
significant detrimental effect on effective competition on
the market for commercial telecommunications satellites.

(36) The Commission first notes that the ability and incentive
of the new entity to engage in input foreclosure at the
prime contracting level is necessarily linked to the market
situation at the intermediate level of TWTAs, since most
prime contractors — except AAS — are increasingly
purchasing TWTAs (in particular TWTA+s). As explained
above, foreclosure at the TWTA level is however unlikely.
This, in itself, strongly suggests that an input foreclosure
strategy relating to the supply of TWTs directly to prime
contractors could not be effective.

(39) The Commission has however identified a number of
serious constraints faced by the new entity if it were to
engage in input foreclosure. First, as regards the ability of
AAS to be independent for its EPC needs, the Commis-
sion's investigation has shown that (i) ETCA does not have
dual EPCs, which account for around half of the market,
and it is not expected to have qualified such EPCs with
sufficient flight heritage before [2012-2015]*;
(ii) ETCA
does not have competitive (in terms of performance and
costs) high power single EPCs and is not expected to have
qualified such EPCs before[2012-2015]*; (iii) ETCA is not
yet considered by prime contractors as a competitive
supplier of EPCs, and (iv) L3 does not have an incentive to
supply EPCs to AAS if it can sell integrated TWTAs. As
regards the ability of the new entity to engage in a TWT
input
investigation has
the Commission's
shown that
(i) L3 is a reliable and competitive TWT
supplier for the frequency ranges where it has a qualified
product and that (ii) an input foreclosure strategy risks
leading to loss of significant TWT sales for TED if prime
contractors turn to L3 in reaction. As regards the incen-
tives, the Commission found that TED's sales of TWTs are
profitable due to the current strong position of TED while
it
is far from certain that a TWT foreclosure strategy
would allow the new entity to be decisively more competi-
tive than all its rival prime contractors.

foreclosure,

(40) As for the TWTA level, the Commission has carried out its
assessment at the prime contracting level on the basis of
the various market segments and differences in competitive
conditions in order to consider all the different foreclosure

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scenarios. On the basis of such assessment market segment
by market segment, the Commission has concluded that
the new entity is likely to have both the ability and the
incentive to foreclose rival prime contractors only in
market segments accounting for around [10-15 %]* of the
overall market. For the remainder of the market, it is unli-
kely that the new entity would have both the ability and
the incentive to foreclose.

(41) In view of the above, even if foreclosure were to occur in
some market
foreclosure
strategy would not have a significant impact on competi-
tion for commercial satellites. In particular, that foreclosure

the new entity's

segments,

strategy is not
ability
programmes.

to

likely to affect rival prime contractors'
satellite

compete with AAS

for most

VI. CONCLUSION

(42) The Commission takes the view that, on the basis of the
evidence available, it is not likely that the merged entity
would have the ability and incentive to foreclose its
competitors at any level of the supply chain and that the
proposed transaction would, as a result,
significantly
impede effective competition. The Commission there-
fore declares that the proposed merger is compatible with
the
and the
the
EEA Agreement.

common market

functioning of