Opening address 2010 competition law conference

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Use of the SSNIP Test

  1. News contended that notwithstanding the limitations upon the applicability of the SSNIP test, an inference was open that a small but significant non transient increase in price, variation in quality or other changes in the terms of supply, would not have caused a platform to switch from Fox Sports to C7 because subscribers to the platform carrying NRL were loyal to the NRL. Further, such an inference “should be treated as utterly conclusive evidence that the two entities were not in close competition”.

  2. The argument, put another way, seems to be that a platform would not switch under such an economic incentive because the dead weight of subscribers to one platform loyal to one marquee sport (NRL) would not stay with the platform (that is, maintain or renew subscriptions) if it offered those subscribers the other marquee sport (AFL). At one level, presumably, the cohort of subscribers to Platform 1 (P1) (loyal to NRL) would follow the sport to Platform 2 (P2), the new supplier of NRL games, as P1 switched to C7 and offered subscribers the other marquee sport. Presumably, subscribers loyal to AFL would, out of embedded loyalty to the code as contended, follow that sport to P1.

  3. Seven contended that to the extent that the inferences upon which it relied were inconsistent with the evidence or views of industry participants, the evidence of the industry participants should be discounted.

  4. As to the correct method of approach, the Full Court at [668] said this:

We doubt whether it is permissible to draw such a largely intuitive inference [as contended], or to accord such significance to it. The exercise should rather involve an examination of all the evidence to determine whether C7 (carrying AFL matches and wanting to carry NRL matches) in fact imposed a close constraint upon Fox Sports’ conduct as a supplier of sports channels (carrying NRL matches and wanting to carry AFL matches).

  1. The Full Court accepted that C7 may have responded to a price rise by Fox Sports by seeking more actively to acquire the NRL rights apart from any competition manifested by innovation in the sports product.

The Utility of the SSNIP Test in a Qualitative Setting

  1. At [670], the utility and role of the SSNIP test was expressed in these terms:

… a qualitative application of the test [in market definition] requires identification of its purpose. As we understand it, the test looks to the actual or likely effect of competitive conduct, or potential competitive conduct, upon price and other conditions of supply, including quality of the product. However the competitive conduct may not have an immediate and obvious effect upon those matters. Particularly in a relatively new industry, competitors may be looking for longer term, rather than shorter term, advantages. The “richness” of the concept of competition referred to in Re Queensland Co operative Milling Association Ltd … means that competition may take many forms. Its effects may be immediate or delayed. The SSNIP test addresses the effects of competition, but it does not define the way in which it occurs.

  1. As to the question of competition between Fox Sports and C7, the Full Court observed that industry perceptions as to such competition must be examined in the light of conditions in the industry and the way the industry operates. The Court noted that pay television platforms derive most of their income from subscriptions and that channels containing marquee sports were subscription drivers. The evidence demonstrated that pay television platforms would seek to broadcast both AFL and NRL matches. Optus and Austar had done so. Foxtel broadcast only NRL. The Court noted that if a pay television platform were broadcasting a channel with AFL matches and a channel with NRL matches, each channel being supplied by a different supplier, the suppliers would inevitably be in competition. Although Foxtel had not enjoyed the AFL rights, the evidence demonstrated that News, PBL and Telstra decided that they should acquire the AFL pay television rights if at all possible. The Full Court noted that:

It is impossible to avoid the conclusion that in seeking to obtain the AFL pay television rights, the respondents were seeking to attract subscribers to Optus and Austar away from C7, thus reducing its attractiveness for those platforms. C7’s desire to obtain the NRL rights was no doubt motivated by a similar motive concerning Fox Sports, at least with respect to Foxtel and Austar.

  1. As to the potential for change on the part of subscribers, the Full Court said this at [680] and [684]:

680. We accept that for many subscribers and potential subscribers … there was a virtually indissoluble union with one or other of the Marquee Sports. They subscribe, or would have subscribed, to a platform because or primary because, it carried their Marquee Sport of choice. However, it cannot be assumed that no supporter of one Marquee Sport would ever have changed to the other. It may be accepted that apostasy is not common. The respondents submit that such code loyalty meant that C7 was not in competition with Fox Sports. We find that proposition difficult to accept. Firstly, it fails to take account of the possibility that either Fox Sports or C7 might have sought to supply both Marquee Sports … Secondly, it assumes that a supplier would have had no interest in attracting more subscribers to the pay television platform or platforms carrying its channels at the expense of the other supplier’s channels. All of that seems quite unlikely.

684. … we do not accept that such loyalty necessarily justified the assumption that Fox Sports and C7 would not have sought to “convert” existing subscribers who had such loyalties, attract existing subscribers who had no current loyalties or attract new subscribers. These are areas in which one would expect fierce competition.

Constraints Exerted by C7 upon Fox Sports

  1. The Court found that there could be little doubt that C7’s activities as a supplier of sports channels carrying a marquee sport had an actual and potential effect upon Fox Sports’ behaviour as a supplier of similar channels and that there were “significant areas of competition” between Fox Sports and C7 each having “established relationships” with pay television platforms. It followed for the Court that C7 “imposed a constraint upon Fox Sports” and its marquee sport product “was a substitute for that of Fox Sports as a supplier of NRL matches to Optus; as a general supplier of NRL matches (if it obtained the rights); as a supplier of AFL matches (unless it lost the rights); as an alternative supplier of sports channels with a Marquee Sport to attract subscribers who had no allegiance to either NRL or AFL; as an attraction to non subscribers to become subscribers; and as an alternative for subscribers who were inclined to change their code preferences”.

Were those Constraints “Close Constraints”?

  1. The Court observed that the pre eminent importance to pay television platforms of NRL and AFL matches suggested that any potential challenge to the capacity of a supplier to obtain or retain either set of rights could have been a significant constraint upon its business and although those rights may have been traded in markets separate from that in which sports channels were supplied and acquired, the acquisition or loss of such rights would have significantly affected competition in the latter market. The Court inferred that “each supplier would have been anxious to supplant the other in this way”. By either supplier acquiring both sets of rights, each could have improved its attractiveness to the platforms and acquired access to greater subscriber revenue.

Established Relationships

  1. The Court noted that the platforms however sought to avoid churn which might well have conditioned a platform’s reaction to a change in supply conditions imposed by Fox Sports. Foxtel’s conduct was constrained by the capacity of News and PBL to maintain the status quo. Austar considered NRL programming to be a necessary aspect of its own offering. From 1998 until 2000, Optus had televised its own NRL matches using its sub licence from News and C7’s production facilities. After the 2000 season, Optus continued to be entitled to a sub licence from News, if it held the NRL rights or a licence from the NRL partnership on similar terms. When Fox Sports acquired the rights in 2001, Optus preferred to take up coverage from Fox Sports rather than the NRL partnership. As a general proposition, it was unlikely that Foxtel would have considered substituting C7 (with AFL matches) for Fox Sports (with NRL matches). However, the Court noted that Foxtel’s need to attract subscribers outside Queensland and New South Wales meant that for as long as C7 had the AFL rights, C7’s attractiveness, from Foxtel’s point of view “was obvious”.

  2. Having regard to the evidence of the industry participants and their views, the Court concluded that C7 and Optus imposed or had the potential to impose a significant constraint upon Fox Sports in connection with the supply of NRL matches and in any event C7 was a potential general supplier of NRL matches if it could acquire the rights. Similarly, if Fox Sports wished to be the supplier of AFL matches, it necessarily had to “attack C7’s position as supplier of AFL match coverage”. In the end, both Fox Sports and C7 were seeking to maximise their respective shares of pay television subscriptions through product offerings to platforms and, as the Court observed, “they could only do that at each other’s expense” and the “primary measure of their respective capacities was the ability to supply either or both of the two Marquee Sports”. At [703], the Court said:

They competed for carriage on the platforms, but the prize was access to subscriptions. On balance, we conclude that C7 constrained Fox Sports in this way.

A Wholesale Market

  1. Seven contended that “the existence of Fox Sports and C7 as wholesale suppliers demonstrates the existence of such a market”. In dealing with that proposition, the Court examined the findings of the primary judge in relation to the evidence of, particularly, Professor Hay, but also that of Professor Fisher, concerning the capacity of the platforms to integrate backwards and the leagues to migrate forwards. The Court had previously discussed the barriers to entry to any market for sports channels with marquee sport content by reason of the special relationships between Fox Sports and the NRL partnership on the one hand and C7 and the AFL on the other. Also, arrangements existed between Fox Sports and C7 on the one hand and retail television platforms on the other as further barriers. The Court noted that the NRL partnership and the AFL would have been well placed to surmount the former barrier whilst the platforms would have been well placed to surmount the latter. The Court was satisfied that the primary judge’s conclusions reached in reliance upon Professor Hay’s thesis of integration backwards by the platforms and migration forward by the leagues was supported by the evidence.

  2. Seven also placed, as earlier mentioned, particular emphasis upon the observations of Professor Brunt concerning market dynamics and the notion that once a network of actual and potential transactions between buyers and sellers of goods and services which are, or could be, close substitutes is demonstrated at a particular functional level, then a market will be taken to exist at that functional level unless there are demonstrated efficiencies of vertical integration such that market co ordination between buyers and sellers is superseded by in house co ordination, there being, in that case, no functional differentiation to create transactions between particular stages of production. Those views of Professor Brunt were adopted by the Tribunal in Application by Services Sydney Pty Ltd (2006) ATPR 42 099 at [107] to [112].

  3. As to this question of vertical integration, the Court noted that in the Services Sydney decision, the Tribunal was dealing with questions arising under the access regime established under Part IIIA of the TPA (rather than Part IV) which requires, firstly, the identification of the market in which the natural monopoly service provider operates and, secondly, the separate market, upstream or downstream of the infrastructure services, in which access to the natural monopoly services would promote competition. The Court noted that the Tribunal appeared to have accepted, in the Sydney Services decision, that there “was a difference in emphasis in identifying a market for the purposes of Part IIIA as opposed to doing so for the purposes of Part IV” (emphasis added) and said, by way of conclusion, at [719]:

We see no justification, either in the legislation or in the decision, for laying down firm evidentiary rules as to the way in which cases under either part should be approached or for fragmenting the process of market identification. Such identification must depend upon evidence of the circumstances in which the relevant entity was carrying on its business at the relevant time.

  1. The Court seems to be suggesting that market delineation is first and foremost a function of the evidence of the way in which the relevant entity conducts its business which might be measured by direct evidence from market participants of conduct, steps taken, views expressed and quantitative data enlivening the application of orthodox economic tools which might aid findings of fact concerning the circumstances in which the relevant entity is carrying on its business at the relevant time.

The Ultimate Question

  1. In the present case the question was ultimately whether the evidence established that in late 2000, Fox Sports was supplying its channels, in a market, in which supply was actually and potentially undertaken, by wholesalers. The Court concluded that aspects of the arrangements between Fox Sports and Foxtel and between Optus and C7 suggested that the market was not simply a wholesale market. News saw Fox Sports’ primary role as supplying sports channels to Foxtel. The Court noted that it supplied NRL match coverage to Foxtel under a sub licence which had the characteristics of a “supply pursuant to a contract for services, a partnership agreement or a joint venture agreement than wholesale supply” [720]. Fox Sports’ arrangements with Austar seemed to have been struck “for strategic reasons rather than as part of a wholesaling business” [720]. It was, “at least arguable that [Fox Sports’] dealings with Optus in 2000 were similarly motivated” and thus the Court concluded:

In those circumstances we doubt whether one can infer that its existence demonstrated that market conditions dictated the existence of a wholesale market.

  1. Similarly, the Court concluded that C7’s participation in the industry had only begun in the second half of 1998 and had ended in early 2002 and, like Fox Sports’ supply of NRL match coverage to Foxtel, C7’s supply of NRL coverage using Optus’s sub licence “was not really wholesale supply” and even assuming that C7 was otherwise a wholesale supplier of sports channels with AFL match coverage, “the existence of one wholesale supplier may not have been an adequate basis for inferring that market conditions dictated wholesale supply”: [712]. The Court further noted that although Seven and Ten jointly obtained the free to air and pay television AFL rights for the 2007 to 2011 seasons, “they were acquired with the intention of sub licensing the pay television rights to Foxtel or some other party, and not for use in the wholesale supply of sports channels”: [712].

  2. In addition, the Court accepted that proposals for non wholesale supply relied upon by the primary judge, provided a basis for inferring that persons experienced in the industry believed that such supply would be commercially “viable” and were thus suggestive of no wholesale functional market [723] and [724]. In brief, those examples were Seven’s willingness to enter into a joint venture with the AFL to exploit the AFL rights; Foxtel’s willingness to do so; from 1998 until 2000 Foxtel and Optus held non exclusive rights to broadcast NRL matches and used Fox Sports and C7 respectively to produce their coverage; Telstra had suggested that special sporting events be acquired by one off joint venture arrangements rather than by Fox Sports; and late in 2000, Austar proposed a joint venture with C7 should Seven obtain the NRL rights: [724].

  3. The Court concluded that all of this evidence supported the views expressed by the respondents’ expert witnesses that the AFL, the NRL partnership and the pay television platforms were potential suppliers of general sports channels with marquee sport content and, in addition, free to air broadcasters may also have been potential suppliers and Seven and Nine were already involved in C7 and Fox Sports/Foxtel respectively, in any event. Moreover, the Court concluded that there was “ample evidence” that industry participants had contemplated “non wholesale supply with optimism” and “to the extent that [Seven] relies on the existence of C7 and Fox Sports as proving the existence of a wholesale market, the argument is undermined by the ambiguous nature of at least some of their supply arrangements”: [731]. Thus, it followed that there was “a real potential for entry by non wholesale suppliers particularly the AFL, the NRL partnership and, perhaps, pay television platforms which, by definition, excluded the existence of a wholesale market”: [737].


Federal Court of Australia

29 May 2010
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