Opening address 2010 competition law conference

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Structural Arrangements

  1. As earlier mentioned, in Queensland Co operative Milling at p 189, the Tribunal noted that whether firms engage in the process of competition is “very much a matter of the structure of the markets in which they operate” and identified five elements of market structure warranting analysis, of which, ”no doubt, the most important is the height of barriers to entry”. It was common ground on the appeal that barriers to entry to the retail pay television market were “relatively high” due to the expense and difficulty concerning changes in the subscriber bases, known as “churn”. As to the contended wholesale sports channel market, the primary judge found the barriers to entry were low once rights to a marquee sport were obtained. Seven contended that acquiring such rights which were expensive and granted infrequently for long terms, was a significant barrier. Third party entry would have to also confront the incumbency of special relationships. Nevertheless, the Full Court accepted that it would have been open to either the AFL or the NRL to provide match coverage “as part of a sports channel” or as the primary judge found, the pay platforms could have bid for AFL or NRL rights and then produced their own sports channels. Thus, the barriers to entry into the “channel supply market” for each of the AFL, NRL and pay television platforms “might not have been as high as they were for other potential entrants”.

The Conduct Evidence and Industry Views

  1. Much of this evidence was contained in documents created between 1998 and 2001. Some actions of participants indicated a perception that C7 and Fox Sports were “in competition in supplying channels to pay television platforms”. In the absence of a SSNIP test, the evidence was said by Seven to be of “enhanced importance”. It was discounted by the primary judge. Some examples should be identified.

  2. First, a director of News, Mr Macourt (also closely involved in the affairs of Foxtel, Fox Sports and the NRL partnership) accepted that from June 1998, it was apparent that the “most likely source of competition to Fox Sports in the sports channel business was Seven”.

  3. Secondly, Optus made it plain in strong terms to News that if Optus could not strike an appropriate arrangement with Fox Sports, Optus would enter into a long term supply arrangement with C7. On 10 March 1999, Mr Macourt in a memorandum complained that Fox brands (channels) were to be included in an Austar tier “with direct competitors of News Corporation in C7 and ESPN”. The Full Court accepted that the memorandum did speak to C7’s position as a supplier of sports channels to pay television platforms. The Full Court regarded Mr Macourt’s perception that C7 was in competition at some level with Fox Sports as “unsurprising” as he must have had in mind “the possibility that C7 might attract pay television platforms by offering something which Fox Sports could not”. Sackville J discounted the evidence on the footing that Mr Macourt was asked about competition not about close competition.

  4. Thirdly, Telstra documents suggested that Telstra perceived that both News and PBL considered C7 to be a competitor of Fox Sports and that Fox Sports would be more valuable if C7 failed. Ms Lowes, a Telstra nominated director of Foxtel, prepared a draft Telstra Board Report on 19 July 1999 noting News’s consistent indication that it would block Foxtel dealing with C7. The same theme was reflected in a further email and a memorandum. The Full Court accepted that the Telstra documents suggested the perception that C7 was in competition with Fox Sports; that Telstra saw C7 as a valuable addition to Foxtel’s service; and News and PBL saw C7 as being in competition with Fox Sports. More importantly, in late 1998, News agreed to supply Fox Sports channels to Austar at a price substantially below the supply price to Foxtel which angered Telstra. In a Foxtel Board meeting, Mr Lachlan Murdoch conceded that News had supplied Fox Sports at a preferential discounted price, so as to win Austar’s business over that of C7. Mr Macourt held the same view. As to that evidence, the Full Court at [655] said this:

Whether or not Austar would have given up Fox Sports with NRL for C7 with AFL, the point is that News appears to have taken the threat seriously. News’s alleged fear that Austar might take C7 mirrors Telstra’s assertion that Foxtel should consider taking it. Both sides in the Foxtel partnership were treating C7 as being, in some way, a threat to Fox Sports. We find it difficult to accept that these major corporations were exchanging empty rhetoric, neither side expecting to be taken seriously.

  1. In addition, News by its general counsel, Mr Philip, agreed that between 1998 and 2000 C7 was the most significant competitive threat to Fox Sports. The primary judge discounted the evidence because Mr Philip viewed ESPN (without a marquee sport) in the same way and Mr Philip had not been speaking or thinking in terms of “close competition”, which the primary judge thought was a critical distinction. Mr Philip also agreed that in negotiating the supply of Fox Sports to Optus, News sought to insert a provision to exclude the possibility of Optus carrying sports programs not provided by Fox Sports so as to prevent Optus carrying Seven’s sports programming.

  2. As to the discounting of the probative value of the evidence due to the criticality of the distinction between competition and close competition, the Full Court said this at [660]:

It is unlikely that any person, not an economist or competition lawyer, would draw such a distinction. The witnesses may not have described the perceived competition as “close”, but it does not follow that it was not. In any event, “closeness” is a matter of degree. The evidence must be scrutinized in context to identify the sense in which the term “competition” was used. It should not be dismissed as ambiguous unless the ambiguity can be resolved.

  1. In reflecting on the lay evidence the Full Court said this at [661]:

News’s concern about Austar taking C7 was based, at least in part, upon the fear that Fox Sports would lose its position as principal supplier of Austar’s sporting content. The figures concerning increases in revenue, in the event that C7 disappeared, suggested a focus upon competition between it and Fox Sports as suppliers of sports channels, as did the efforts to prevent C7 from deriving any benefit from a perceived association with the Fox brand or NRL matches.

  1. As to the danger of incumbency in not revealing the contestable threat of innovators, the Full Court said this at [662]:

A major step in his Honour’s reasoning was the conclusion that C7 (with AFL match coverage) was not a constraint upon Fox Sports (with NRL match coverage) because pay television platforms carrying Fox Sports’ channels would not treat C7’s channels as substitutes. This was because subscribers to a platform or channel with NRL coverage would not consider a platform or channel with AFL coverage to be a substitute for it. We consider that this approach placed too great an emphasis upon existing circumstances and gave too little consideration to the potential for change.
[emphasis added]

  1. The Full Court accepted that News, PBL and Telstra saw benefit in acquiring both the AFL and NRL rights as, whilst C7 was supplying AFL match coverage to pay television platforms, there was a “chance” that C7 with AFL would displace Fox Sports as supplier of NRL to those platforms. The close relationship between News and the NRL partnership and News’s long term preferential position may have reduced the risk of switching. C7 thought it worthwhile to bid for the NRL rights and Fox Sports was a potential supplier of AFL matches.

  2. At [664], the Full Court said this:

We consider that this potential for replacement and displacement militates in favour of a description of the Fox Sports product which recognises the need for marquee sport coverage, but does not necessarily involve the supply of NRL coverage.
[emphasis added]

  1. At [667], the Full Court concluded:

We accept the appellant’s submission that Fox Sports and C7 should not be characterised as having been solely suppliers of NRL matches or AFL matches. They were sports channel suppliers, having established arrangements with pay television platforms. In order to be successful each needed a marquee sport. In the longer term each had the potential capacity to displace the other as supplier of the latter’s marquee sport. We consider that the relevant product consisted of general sports channels which included marquee match coverage (either NRL or AFL).

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