Opening address 2010 competition law conference

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The Asserted Markets

  1. At trial, Seven asserted that there were four separate markets relevant to the case. They were, first, a retail pay television market being a market for the supply of pay television services to retail subscribers. Secondly, a wholesale sports channel market being a market for the wholesale acquisition and supply of channels containing sports programming, for supply to pay television platforms. Thirdly, an AFL pay television rights market being a market for the acquisition and supply of the rights to broadcast AFL matches on pay television. Fourthly, an NRL pay television rights market being a market for the acquisition and supply of the rights to broadcast NRL matches on pay television.

The Approach and Findings of the Primary Judge

  1. The primary judge found that the first of those markets, a retail pay television market, was made out but that no wholesale sports channel market nor an AFL pay rights market nor an NRL pay rights market were made out. On appeal, Seven did not press a claim of an AFL pay rights market or an NRL pay rights market. Seven contended only that the trial judge erred in finding that there was no wholesale sports channel market. Although News contended at trial that there was no retail pay television market nor a wholesale sports channel market, it did not contend on appeal that the primary judge erred in finding that there was a retail pay television market.

  2. Accordingly, the question to be determined on appeal, so far as market definition was concerned, was whether the primary judge was correct in concluding that there was no “wholesale sports channel market”. For the purposes of this discussion, I propose to examine the approaches adopted in the analysis of that question.

The Pleaded Wholesale Sports Channel Market

  1. The primary judge observed at [1857] that at trial, Seven contended that there is and has been since November 1998 a wholesale sports channel market being a market for the wholesale acquisition and supply of channels consisting of sporting content for the providers of pay television services and that according to the Statement of Claim:

  1. the channels are supplied by channel providers to the operators of pay television services in the retail pay television market who incorporate sports channels into the package of channels constituting the pay television services provided to subscribers (para 145(a), Statement of Claim);

  1. the suppliers in this market have been Foxtel (which until recently produced the Fox Footy Channel), Fox Sports, ESPN, TAB Ltd (“TAB”) and C7 (para 145(b)); and

  1. the acquirers of the channels are the pay television service providers, chiefly Foxtel, Optus and Austar.

  1. It can be seen that Seven contended for a market described at para 145 of its pleading as “the wholesale acquisition and supply of channels consisting of sports programming” which suggests a market for the acquisition of sports programming channels and the supply of those channels. The primary judge observed that at various points in its argument Seven contended that C7 acted as a constraint in relation to the acquisition of sports rights, particularly AFL and NRL pay television rights. However, the market for the acquisition of sports rights including AFL and NRL pay television rights was a different market to the acquisition and supply of “channels consisting of sports programming for the providers of pay television services”, as pleaded.

Close Constraints

  1. The trial judge observed that the focus of his examination needed to be on the close constraints on Fox Sports as a supplier of sports channels to pay television platforms during the period 1998 to 2000 leading up to the meeting on 13 December 2000 and the respondents entering into the Master Agreement and the offending provision.

The Hypothetical Monopolist

  1. The primary judge said the correct question was whether a hypothetical monopolist of the supply of sporting channels could sustain a price to pay television platforms above the competitive level for a non transitory period. Seven contended that sports channels are distinct from and not substitutable for channels with other program content because only sports channels are true “subscription drivers” and secondly a wholesale sports channel must have as part of its content a marquee sport which in Australia means either AFL or NRL.

  2. Seven contended that prior to Foxtel obtaining the pay television rights to the AFL, those rights had been held by C7 and the purpose and effect of the acquisition of those rights by Foxtel was to lessen competition in the wholesale sports market.

Seven’s Dilemma

  1. However, the primary judge considered that these positions gave rise to a lacuna for Seven which he described in these terms at [1878] and [1879]:

1878. The dilemma is that the more Seven stresses the unique character of each of exclusive AFL and NRL content as subscription drivers, the more difficult it is to see a channel containing exclusive AFL live content as a close substitute for a channel containing exclusive NRL content. No doubt it is in theory possible to have two forms of subscription driving content that appeal largely to the same audiences … but if each channel containing separate subscription driving content appeals to a largely discrete audience or potential audience, it may be very difficult to conclude that one channel supplier can closely constrain the other if it attempts to impose a SSNIP.
1879. Early in its Closing Submissions, Seven reiterates its pleading that a pay television operator must have access to material that includes a marquee sport and that the only marquee sports in Australia are the AFL and NRL. The primary forensic reason for Seven’s emphasis on the unique attractions of AFL and NRL content is clear enough. Its case is that once C7 was locked out of the AFL and NRL pay television rights in 2000, the channel was doomed.
[emphasis of Sackville J]

  1. The primary judge assumed, for the sake of the argument, that AFL and NRL content represents the most important subscription drivers for pay television in Australia and found it difficult to understand how a wholesale sports channel market would also include ESPN (a general international sports channel), TAB (a racing channel) neither of which have a marquee sport. Sackville J concluded that neither of those channels represented any constraint upon Fox Sports as a wholesale channel supplier.

The Principles Applied

  1. In determining market questions, the primary judge accepted that markets are not defined in the abstract but must be defined for the purposes of analysing the process of competition in the context of the particular allegations made in the case noting Australian Competition and Consumer Commission v Liquorland (Australia) Pty Ltd [2006] ATPR 42 123 at [429] per Allsop J; services that are substitutable for or otherwise competitive with the relevant services must be taken into account; the orthodoxy of market concepts best expounded in Re Queensland Co operative Milling Association Ltd (1976) 25 FLR 169 are to be applied; although these notions expounded in Queensland Co operative Milling predate s 4E of the TPA they remain good and have been expressly approved in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co. Ltd (1989) 167 CLR 177 and Boral Besser Masonry Ltd v ACCC (2003) 215 CLR 374; Seven would need to demonstrate strong substitution at least in the long run: Re Tooth & Co. Ltd [1979] ATPR 18, 174; a distinction has historically been made between contestability or “competition per se” and “close competition” and in defining the boundaries of a market having regard to the features of a market identified in Queensland Co operative Milling, this distinction is “crucial”; the hypothetical monopolist test is the standard analytical tool applied by economists in examining cross elasticities of demand and supply; the question of a small but significant non transitory increase in price must be applied to a demonstrated competitive price so as to avoid the cellophane fallacy of applying a SSNIP to a monopoly price: United States v E I Du Pont de Nemours & Co. 351 US 377 (1956); and consideration should be given to whether there is a buyer in the market who might enjoy the power to reduce price below the competitive level or exclude other buyers from the market as a monopsonist.

The Expert Evidence

  1. As to the question of the evidence going to these issues the primary judge noted that expert evidence had been called by Seven from Professor R. Noll and Dr R. Smith. News called Professor F. Fisher and Professor P. Williams. PPBL called Professor G. Hay. The primary judge observed that all the experts agreed that it was difficult to identify a competitive price for the purpose of applying a SSNIP and in the absence of quantitative data the experts were called upon to make “qualitative assessments” which Dr Smith had described as involving “a thought experiment”. Sackville J at [1784] and [1787] to [1789] said this about the use of qualitative assessments in the absence of quantitative data:

1784. The reliable application of the SSNIP test requires sufficient quantitative data to permit the calculation or assessment, in particular, of the competitive price for the product in question. As has been seen, it is the competitive price that provides the starting point for determining whether a hypothetical monopolist could profitably impose a SSNIP. Whether or not it is ever possible to apply the test on the basis of purely quantitative data, the experts agree that such an approach is not available in the present case.

1787. One consequence of the limitations of the SSNIP test (in the absence of quantitative data) is that in certain respects the economic evidence may not be as helpful as its volume (and the time spent on it in cross examination) might suggest. This is not to deny the value of economic evidence for certain purposes. Plainly, it can be very helpful in identifying and explaining the economic concepts embodied in the TP Act. It can also be very helpful in explaining how economists go about the task of applying the economic concepts to particular situations. The evidence is, however, apt to be less cogent when the experts are asked to apply economic principles to the particular circumstances of a case. There are at least two reasons for this.
1788. The first is that a “qualitative assessment” necessarily involves the exercise of judgement upon which reasonable minds can differ. The sharp differences of opinion in this case among well qualified experts demonstrate that this is so. Moreover, the exercise of judgement, if the present case is any guide, requires economists who may not have specialist expertise or experience in a particular industry to express their opinions about the application of economic principles to that industry. Even if the witness has expertise or experience in the industry, the lack of quantitative data may require what comes very close to speculation about the likely behaviour of industry participants, although it may perhaps be described as informed speculation.
1789. The second reason is that the qualitative assessments by the expert economists must proceed on the basis of assumed facts since, in the ordinary course, the facts have not yet been established by the Court. Like many competition cases, the present case is extremely complex. In order to deal with the complexities, the parties deemed it appropriate to provide their respective experts with extraordinarily elaborate sets of assumptions upon which to base their evidence.

  1. At [1792], Sackville J said this of the utility of the economic evidence:

1792. In the end, however, [the experts] were required to express opinions concerning the application of economic principles to an Australian industry with which none of them had detailed practical knowledge or experience. As Dr Smith said in her evidence, this process required them not only to take into account different assumptions, but to interpret the common assumptions. In addition, the experts had to analyse and construe documents such as board papers, emails and formal agreements, some of which were the subject of extensive oral evidence. It is therefore perhaps not entirely surprising that they came to such divergent conclusions on market definition and other issues.

  1. As to the role of the judge, Sackville J said this at [1794]:

1794. Conclusions on market definition cannot simply be reached by choosing between the expert opinions. The task requires the application of the statutory criteria, informed (as the authorities require) by economic principles. Ultimately, the conclusions must rest on an assessment of the evidence as a whole including, where they are helpful, the opinions and reasoning of the experts. But the fact that ss 45 and 46 of the TP Act incorporate economic principles and concepts does not mean that the application of those principles to the facts is, in effect, to be delegated to the economists who are called to give their expert opinions.

The Best Evidence

  1. It seemed to be common ground that in the absence of a quantitative SSNIP test, the “best evidence” of the dimensions of a market will often be from those who work in the relevant industries rather than from economic theory. Not surprisingly, the parties disputed the inferences that should be drawn from decisions, steps taken or opinions expressed by industry participants as reflected in emails, letters and documents. The primary judge noted at [1796] the observations of Justice Heydon writing extra judicially (J D Heydon, Trade Practices Law (Lawbook Co., Subscription Service) at [3.245]:

[3.245] The dimensions of a market are real, not theoretical. To define those dimensions the best evidence will come from the people who work in the market: the marketing managers and salesmen, the market analysts and researchers, the advertising account executives, the buyers or purchasing officers, the product designers and evaluators. Their records will establish the dimensions of the market; they will show the figures being kept of competitors’ and customers’ behaviour and the particular products being followed. They will show the potential customers whom salesmen are visiting, the suppliers whom purchasing officers regularly contact, products against which advertising is directed, the price movements of other suppliers which give rise to intra corporate memoranda, the process by which products are bought, what buyers might seek in terms of quantities, delivery schedules, price flexibility, why accounts are won and lost.

  1. The primary judge then had regard to particular evidence which was said by Seven to show that industry participants including representatives of News regarded C7 as a competitor of Fox Sports and that from June 1998 it was apparent that the most likely source of competition to Fox Sports in the “sports channel business” was Seven or part of the Seven group. The primary judge also observed that contemporaneous conduct or expressions of opinion by market participants can often be ambiguous on questions of market definition as the sense in which terms might be used can be anecdotal and references to markets might be made in the most general of senses.

Audience Differentiation

  1. Although Sackville J cast doubts upon the utility of the evidence of the experts, he also noted that Professor Noll had failed to explain why on the assumptions underlying its case as to marquee sports, C7 would constrain Fox Sports from imposing a SSNIP or could otherwise be regarded as a close competitor of Fox Sports. Professor Noll emphasised that the audiences for these games are substantially non overlapping and therefore at [1903], Sackville J observed:

1903. If the AFL and NRL are separately subscription drivers and have accumulative effect on the revenue of pay television broadcasters because they appeal to different audiences (the position Seven itself adopts) it would seem to follow that an AFL sports channel supplier would be unlikely to constrain a SSNIP by an NRL sports channel supplier.

Switching by a Pay Platform

  1. As to the question of whether a pay TV platform faced with a hypothetical increase in the price by, say, Fox Sports in relation to an NRL channel might be met with a platform threatening to substitute C7 with an AFL channel for Fox Sports to constrain the increase, Dr Smith said that if the price was more than a SSNIP, the platform might be persuaded to do that but given that the NRL appeals to one particular group of subscribers and AFL appeals to a different group of subscribers, a very small change in price would not be likely to result in a switch.

No Close Constraint

  1. Thus it followed for the primary judge that C7 would not represent a close constraint upon Fox Sports imposing a SSNIP and thus there was no wholesale sports channel market. In other words, there was no separate market for wholesale sports channel suppliers in which C7 and Fox Sports competed. The primary judge concluded that the expert evidence called by the appellants provided “scant support” for its case. The primary judge accepted PPBL’s submission that Fox Sports, built around NRL pay television rights and C7 built around AFL pay television rights were not substitutes in demand or supply and thus Fox Sports and C7 products, that is, sports channels, were not substitutable or otherwise competitive with each other.

Functional Dimension

  1. As to the functional dimension of the market, the primary judge accepted the evidence of Professor Hay that a pay TV platform could integrate backwards, acquire the rights directly from the leagues and thus impose constraints upon Fox Sports or C7. The primary judge noted and accepted as persuasive at [1967] Professor Hay’s articulation of his thesis in these terms:

1967. … to the extent [the] applicants are claiming the exercise of a separate relevant market for the production of wholesale premium sports channels, where a premium sports channel is defined as one that includes one of the marquee sports in Australia (at a minimum, NRL and AFL) I do not believe that the economic analysis that underlies issues of market definition supports the claim. If a hypothetical single producer of wholesale premium sports channels set out to acquire the NRL and/or AFL rights with the notion of attempting to impose supra competitive prices on the customers for those channels (the suppliers of pay TV services), there would be nothing to prevent one or more of the providers of pay TV services from integrating backwards, acquiring the rights directly from the leagues, and either including the matches on existing channels or creating specialty channels. Nor would a hypothetical single producer of premium sports channels be able to depress the price paid for the rights to the marquee sports below competitive levels, given the ability of the leagues to integrate forward into the production of sports channels or to sell the rights directly to the providers of pay TV services.

[emphasis added]

  1. The primary judge identified six different examples where there had been either actual or contemplated vertical integration by pay television platforms between 1997 and 2001 and the findings in relation to those matters were not challenged on appeal.


  1. As to barriers as to entry into the wholesale sports channel market which in itself assumed the existence of such a market, the primary judge had regard to the evidence of Mr Stokes who said that establishing a new pay television channel would be “pretty easy” and that a free to air television station such as Ten could take over the production and supply of sporting channels to a pay television operator such as Optus.

  2. As to strategic barriers, the primary judge also relied upon the evidence of Mr Stokes that when Seven put its bid in for the AFL television rights and, in particular, the pay television rights, Foxtel had signalled that it might not take the pay television rights from C7. Thus Seven did not see Foxtel’s commercial position as a strategic barrier and moreover Mr Stokes gave evidence that in December 2000 the Seven Board expected that if C7 acquired the NRL pay television rights Foxtel would take that channel. Further, the primary judge thought that Seven’s 2005 bid for the AFL pay television rights proceeded on the footing that it expected Foxtel would negotiate on commercial terms for a sublicence because Foxtel needed the AFL channel content in order to increase its subscriptions in AFL States.

  3. It followed from all of these considerations that even assuming that C7 and Foxtel were in competition with each other as to the products offered, there could be no separate functional wholesale sports channel market. Rather, the market in which competition occurred was the retail pay television market.

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