COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case No: 72/LM/Sep04
In the large merger between:
Multichoice Subscriber Management (Pty) Ltd
and
Tiscali (Pty) Ltd
NonConfidential Reasons for Decision
______________________________________________________________
APPROVAL
On 12 January 2005 the Competition Tribunal issued a Merger Clearance
Certificate conditionally approving the merger between Multichoice
Subscriber Management (Pty) Ltd (Pty) Ltd and Tiscali (Pty) Ltd (Tiscali)
in terms of section 16(2)(b). The reasons for the approval of the merger
appear below.
Transaction description
i.The acquiring firm, Multichoice Subscriber
Management Services (‘MWeb”), is a subsidiary of
MWeb Holdings, whose ultimate owner is Naspers
Limited. 1
2. MWeb is acquiring the entire issued share capital of Tiscali from
Tiscali International BV. The internet access business of Tiscali will,
postmerger, be incorporated into the internet access business of M
Web. The Tiscali Cellular Mobile Telecommunications business is
excluded from this transaction. 2
1 Although MWeb is the name of Multichoice’s holding company, it is the brand and business
unit that is relevant for the purpose of this transaction, so we will for convenience refer to the
acquiring firm as MWeb
2 In a separate transaction we have approved of the sale of Tiscali’s cell phone business to
Vodacom. See case number 87/LM/Oct04.
1
Hearing
3. The hearing was held on 12 January 2005. We heard testimony from
Anthony Brooks, General Manager of the Internet Service Providers’
Association (“ISPA”), who was called as an expert witness by the
Commission, Chiwashira from G Soft who had noted objections to the
merger, Kim Reid, CEO of MWeb, and Diego Massidda, CEO of
Tiscali, who testified on behalf of the merging parties.
Rationale
4. Tiscali’s Italian based parent decided in 2004 to sell its South African
subsidiary. The reasons for this decision, we were told, had nothing to
do with conditions in the South African market the business was
considered to be doing well but were rather rooted in changes in the
regulatory environment in Europe. As a result of these changes the
group had decided to invest more heavily in its primary market and
needed to generate cash to fund this. It decided to sell its South African
investment and called for offers.
5. After a bidding process it decided to sell the internet business to M
Web and the cellular business to Vodacom.
6. MWeb saw an opportunity to increase its subscriber base in a market,
where growth appears to be driven more by acquisition than organic
growth. Both parties consider that the market is stagnating presently.
Merging parties
MWeb
7. MWeb was launched in October 1996 by the acquisition of an ISP
from the CSIR. It focussed initially on selling technology as a consumer
product with an emphasis on handholding, support and reliability. In
1998 it bought the IAfrica ISP business from UUNet, comprising
approximately 60 000 subscribers. In 1999 it acquired another ISP,
Netactive, with a consumer base of approximately 31 000 subscribers.
By 2000 its subscriber base had reached approximately 250 000. Since
By 2000 its subscriber base had reached approximately 250 000. Since
then, MWeb maintains that it has lost subscribers due to keen
competition, especially from ABSA and Telkom.
8. Early in 2004 it launched a product called “Polka”, a lower priced
internet access brand, in order to increase its subscriber base.
Tiscali
2
9. In 1998 Vodacom and World Online, a Dutch company, started an ISP
in which each had a 50% stake. The joint venture grew by acquiring
many subscriber bases. Historically Tiscali had always been number
two in terms of size after MWeb.
10. In 2000 Tiscali, an Italian company, bought a 60% interest in the
company, buying out the Dutch based parent and part of Vodacom’s
stake. Nevertheless it retained the rights to the brand and continued to
trade as WorldOnline. In 2001 Tiscali bought the remaining 40% from
Vodacom and became the sole shareholder. In 2002 the company
acquired a relatively small ISP called Netactive, focussed on the
corporate market. That allowed the company to increase its presence
in the corporate market, especially in leased lines dedicated
connections. The rebranding of WorldOnline to Tiscali only started in
2003, being completed in January 2004. 3
Identifying the markets
11. The parties provide the following services:
MWeb Tiscali
Internet access including
leased line
Internet access
including leased line
Local access Cellular mobile
telephony
Ecommerce
Subscriber management
Market analysis
12. Both merging firms as we have seen from the table provide a service
that enables consumers to access the internet. The merging parties
would have it that this is where the boundaries of the relevant market
are to be found, and that it would be wrong to segment it further on
some more narrow definition. Indeed they go as far as suggesting that
even defining a market as one for internet service provision is a
concession to narrowing rather than broadening the market. Thus in
their filing they state:
“ A narrower definition of the market (that is narrower than
telecommunications services) is the provision of access to the Internet
3 Record page 1155
3
(or Internet connectivity) generally.” 4
13. They go on to assert that further segmentation on the basis of the
licence required or the technology used to provide access is
unwarranted as these are “ technical details not integral to the service
being provided.” 5
14. The Commission has distinguished between a corporate access and a
dialup access market. This segmentation is not specifically motivated,
but appears to arise from the parties own business practice in
regarding these as distinct services with distinct customers. What this
amounts to, despite the labelling offered by the Commission, is a
segmentation premised on customer needs and profiles. Large
customers, who the Commission locates in the leased line market, are
corporations with high numbers of users willing to incur the costs of this
kind of service. Dialup customers on the other hand are largely
consumers who operate from homes and comprise both families and
small businesses.
15. We will now consider if the Commission’s delineation of the market is
appropriate or whether we should segment it in some other fashion, if
at all.
16. Internet service provision is about getting the user access to the
internet via a range of technology and intermediaries to the networks
that carry the data from one consumer of services to another.
17. A consumer wanting to access the internet has a range of technical
options to choose from which are disparately priced. What influences
the choice finally made is not only the consumer’s propensity to pay,
but also the quality and quantity of access required.
18. The simplest form of access and the most pervasive at the moment is
called ‘dialup’ access. The consumer accesses the internet via a
telephone through a modem. The consumer gets access by having a
telephone through a modem. The consumer gets access by having a
contract, prepaid or subscription with an internet service provider,
such as one of the merging firms. Note that dialup access is defined
not by the purpose for which it is used i.e. for private or office use, but
the means of access. 6 The disadvantage is that access is not constant
and the consumer must dialup to access the service and then
terminate it each time it wants to connect to the Internet.
4 Record page 43.
5 Record page 43.
6 See for instance “Internet Access in South Africa, 2004, An annual study of the Internet
access market in South Africa”, by World Wide Worx (Pty) Ltd, ( Research led by Arthur
Goldstuck.), page 37, where the authors say that for the purpose of their research that “No
distinction is made between dial up accounts at homes and offices.”
4
19. The service is limited to one user at a time and is considered slow. Its
advantages are price and technical simplicity.
20. The next stage up is the ISDN line which is also used mainly by
households and small businesses. ISDN stands for Integrated Services
Digital Network. This is a digital service between a customer’s home
and the dialup telephone network. 7 Both Tiscali and MWeb again
provide this service. Tiscali’s pricing at present is more competitive but
the services are not directly comparable and vary in relation to the size
of the mailboxes for email and the number of email addresses per
subscription. 8
21. ISDN is more expensive but faster than analogue dialup, according to
BMI.9 Subscriber figures indicate that this service is much less
pervasive than analogue. Tiscali’s figures indicate that it has about one
tenth the number of ISDN subscribers than analogue dialup.
22. The next mode of access is ADSL (Asymmetric Digital Subscriber
Line). This technology allows the user to send faxes, talk on the
telephone and surf the internet simultaneously. The advantage of the
service is that it is always on with no dialup necessary. The service is
charged at a fixed monthly fee. Fees for ADSL vary according to the
size of the gigabytes offered. However pricing even for the lowest is at
a premium to that of the most expensive analogue service.
23. At the next level is the leased line. Here the customer is given a
dedicated line to an internet service provider. This again is on all the
time but allows for use by a large number of users and thus is the
preferred method of access for large organisations with a need for
many users. Not surprisingly this is the most expensive service and is
not used by households or small businesses.
not used by households or small businesses.
24. Other more ambitious forms of internet access exist as well, albeit that
they are very much in their infancy at the time of this decision. We are
told that Sentech offers wireless broadband service which users will be
able to access by carrying a modem in their pockets and connecting
from anywhere that has reception. 10 But at the same time it is
suggested that there have been significant delays in the roll out of this
technology.11 Mr Brooks, the Commission’ s expert, made much of the
fact that from 1 February 2005 there would be significant deregulation
in the industry following an earlier announcement to this effect by the
7 BMI report record page 801
8 See record page 1168.
9 BMI report page 801
10 See World Wide Worx op cit record page 1031
11 See World Wide Worx op cit record page 1031
5
Minister. He predicted that this would lead to an expansion of business
for existing private sector providers who would no longer be dependant
on having to use Telkom’ s infrastructure, as they were obliged to do by
law up till now. We were also informed that the mobile cell companies
had targeted internet access as basis for business expansion, and that
access could come from a cellphone.
25. What all these methods have in common is that they provide a means
of access to the internet, but this does not mean that they constitute
substitutes for one another for the purpose of competition analysis.
26. Now it must be noted that firms that provide access to the internet
typically offer more than one of these modes and that the merging firms
are no exception in this respect.
27. We have up till now examined the demand side of the market. But
delineating the correct antitrust market also requires an examination of
the supply side. Here again the task is no easier. In the first place the
market consists of various tiers.
28. At the bottom of the structure is Telkom who to date have enjoyed a
monopoly over the supply of infrastructure a situation that may change
with deregulation. Telkom sells bandwidth to a range of firms who
operate largely as wholesalers of this bandwidth. These firms are
sometimes referred to as first tier firms. First tier firms then wholesale
this bandwidth to other firms who in turn act as retailers in the sense
that they sell internet access to the ultimate consumer. The merging
parties fall into this latter category of retailer, also known as second tier
firms. There is also a category of firm who are considered by the
market to be third tier firms or virtual ISP’s who, in the sense that we
understand this distinction at all, sell bandwidth to customers but are
little more than marketers who depend entirely on the first tier supplier
little more than marketers who depend entirely on the first tier supplier
for all the backup including that of a call centre. For our purposes this
distinction is academic as firms in the socalled third tier are still
competitors of the merging firms and other firms in the second tier. We
have reflected this structure of the industry in the drawing below.
6
Diagram 1: Structure of industry
29. But this model is far from rigid. Although Telkom is presently a sole
supplier to the wholesalers, it is also a competitor itself in the retail
market and thus of the merging parties.
30. Although the wholesalers are not in the retail market for dialup access,
they do sell directly to customers who want leased lines.
31. The industry is thus characterised by vertical relationships where
suppliers either compete with their customers or at least have the
potential to do so.
32. What distinguishes the merging firms as retailers is their access to a
mass customer base. This means that they have to concentrate for
their competitive advantage on customer service and marketing. This
at present distinguishes the merging firms from their suppliers in the
first tier, as the latter, whilst geared up to service a niche corporate
market, are not at present competitive in the mass market.
Conclusion on defining the relevant market
33. Both MWeb and Tiscali offer analogue and digital dialup, ISDN, ADSL
and leased line. MWeb currently provides a limited internet access
service via leased lines. Tiscali too, although the parties state that a fair
TELKOM
Sell
bandwidth
FIRST TIER
ISP’S
UUNET, Internet Solutions, SAIX
and MTN Network Solutions
SECOND TIER
ISP’S
MWEB, Tiscali, Storm, Xsinet,
@lantic
THIRD TIER
ISP’S
ABSA
=
=
Sell
bandwidth
7
proportion of its customers use leased lines. 12
34. The merging parties, as we observed earlier, commenced with an
opening observation that the market was one for telecommunication
services. That this observation was barely credible seems to have
been tacitly acknowledged by them, as they proceeded almost
immediately with a concession that the market could be characterised
as one for internet access.
35. What we have to evaluate is whether this is an adequate description or
whether the market may be further delineated. As the discussion above
has indicated, user requirements differ vastly depending on the
sophistication of the service required and this is reflected not only in
the choice of different technologies, but also in their prices. This is
further reflected in the way both merging firms have marketed their
products at consumers. We have had access to the business plans
and marketing materials of both the merging firms. The homebased
consumer, whether a private household or a small business, is
identified as a distinct segment of the broader access market. These
consumers are overwhelmingly in dialup access, to a lesser extent in
ADSL and even less ISDN. This is not surprising given that the more
sophisticated the service, the greater the price to the consumer. But it
is not possible to delineate the relevant market on the basis of choice
of technology alone. Rather it is the nature of the consumer and the
type of service they require. 13
36. For this reason we suggest, as a point of departure, that there is a
distinction between a homebased market and a corporate market.
37. Although the Commission has not followed this approach, instead, as
we noted above, using the technology utilised to segment markets into
a leased line and dialup access market, these segments roughly
a leased line and dialup access market, these segments roughly
correspond to the division between a corporate and homebased
consumer market that we have preferred.
38. Leased lines are far more expensive to operate than other forms of
access particularly dialup access, and are typically only used by
corporates or large institutions. On the supply side this market looks
different as well.
39. Support for this distinction also comes from industry commentators.
12 Record page 46
13 Figures show that as at 2004 at least 88% of Tiscali customers utilise dial–up access. See
Annexure E Subscribers Warranted. MWeb did not provide figures but stated too that a large
proportion of their customers utilised dialup access.
8
According to World Wide Worx;
“The corporate market split off almost entirely form the dial –up
services arena with the two major ISP’s., Internet Solutions and
UUNET, focussing entirely on the former. They remain the market
leaders.”14
40. This highlights an important distinction between the corporate and the
homebased market. The leading firms in this former market are not the
merging parties, but their suppliers. Indeed, according to the parties
they would post merger only have a [less than 10%] per cent share of
this market. For this reason if we assume that the corporate market, or
in the Commission’s estimation the leased line market, is a separate
relevant market the merged entity is not post merger likely to be able to
behave anticompetitively given its low market share. We need not then
consider this market further.
41. It remains for us to consider the homebased segment of the industry.
Let us assume that in the homebased segment at present, dialup
access is predominantly the technology of choice. Does this exhaust
all the possible ways to delineate this segment for competition
purposes? There is some suggestion that there may be a further
relevant market distinction in the homebased segment between a
premium and nonpremium service. This is one of the issues that we
explored during the hearing, because if there is a distinct premium
market, the merged firms would be its only significant players and
hence the merger would lead to a near monopoly.
42. The emergence in the market of a distinction between premium and
nonpremium offerings was a response to new entry into the market by
Absa and Telkom as low cost providers.
43. Absa caught the market by surprise when it entered in 2001 by offering
free internet access. The response of consumers was overwhelmingly
free internet access. The response of consumers was overwhelmingly
favourable. However the free offer did not last long and soon Absa
began charging its customers for access, discriminating in price
between those who were its banking customers and those who were
not. Absa’s strategy was to use its internet offering not as a means to
get into the internet business, but to get customers for its banking
business. The Absa offering was a nofrills one that was cheaper even
for the nonAbsa customer than the services offered by the traditional
incumbents, MWeb and Tiscali.
44. Telkom’s entry into the internet access homebased market should not
have come as a surprise. Indeed the surprise is that it had taken so
14 See World Wide Worx op cit record page 1040.
9
long for it to do so. Given Telkom’s dominance of every tier of the
access edifice it is baffling that it realised so late in the day of the value
of being in the second tier. The Telkom offering, marketed through its
access to fixed line consumers, was also priced significantly below that
of the merging firms.
45. Thus faced with a twinprong attack on their traditional market by two
firms with deep pockets, and access, through their related businesses,
to a large customer base, MWeb and Tiscali were forced to respond.
Interestingly, both responded in the same way. They first introduced a
low priced service to be competitive with Telkom and Absa. MWeb’s
offering is separately branded with no apparent link in the name and
marketing to the MWeb business. Polka, as the product is known, has
only recently been introduced and at this stage it is too early to
evaluate its success.
46. Tiscali’s also other, simpler products with less “bells and whistles” at a
price of R79.00 R 90.00 per month, but this was not offered to the
public at large, but only to select corporate client’s customers who
could only have access to the cheaper option, by virtue of being that
corporate’s client. 15
47. Of course in developing a lower cost service the firms risked having
their clients on the more expensive packages migrate downwards. To
avoid this scenario their second strategy was to differentiate their
offerings between premium and nonpremium. The premium offering
contains more features than the nonpremium product and these range
from access to free content such as educational material news sites
and dating services, to additional email addresses, larger data storage
capacity and greater safety features. Whether this distinctiveness is
sufficient to justify the price premium is not something we are called
sufficient to justify the price premium is not something we are called
upon to decide. What is of interest to us is whether the product
differentiation has been successful enough to justify segmenting the
relevant market between premium and nonpremium.
48. According to World Wide Worx;
“The number of dialup subscribers in South Africa reached 782 000 by
the end of December 2000, and the dial up user base consolidated
behind MWeb and WorldOnline, [now Tiscali] which both began to
raise their fees, partly in order to position themselves as highquality
ISP’s with extensive valueadd, and partly because it had become
apparent that subscribers were not willing to pay separate additional
amounts for additional services.” 16
15 Transcript page 83
16 Word Wide Worx op cit , record page 1039.
10
49. The table below compares the rates of these particular services.
Current Monthly Charge of the Various ISPs
ISP Rate Per Month
Telkom Internet R79
XSINET R90
MWeb’s Polka R75
Tiscali Lite R79
ABSA R39 (ABSA clients), R65 for Non
ABSA clients
@lantic R65
50. The cost of the premium services offered by Multichoice and Tiscali is
R145 per month.
51. Note that the cost to the consumer comprises the monthly charge to its
ISP and the per minute call rate charge to Telkom.
52. The parties argue strenuously in their competition filings, and thus
contrary to the thrust of their marketing materials, that this market
segmentation is not justified. They argue that there is still a single
market for internet access and that if the consumer is paying too much
for a premium service she will migrate to a cheaper one. With both
Absa and Telkom, inter alia, waiting in the wings to take on the
dissatisfied consumer the premium customer is not to be taken for
granted by them and has choices if the premium does not justify its
value.
53. But the evidence would suggest that the act of changing service
providers is less ubiquitous than the merging parties would have us
accept. One of the major reasons it appears that consumers are
reluctant to lightly change their existing service is that like telephone
numbers, email addresses are not portable. The price conscious
consumer wanting to change to a cheaper supplier must factor in the
inconvenience of a changed email address.
54. Whilst Mr Reid of MWeb did not consider this an insurmountable
obstacle to changing one’s provider, his company’s own practices
suggest otherwise. When MWeb has acquired other businesses it has
allowed consumers to retain existing email addresses. In the sale
allowed consumers to retain existing email addresses. In the sale
agreement with Tiscali it has provided for the right to use the Tiscali
name for [confidential ] years before it will have to migrate customers
11
on to another name. Prior to the conclusion of the sale MWeb’s
anxiety to secure this right is manifest in its written offer to Tiscali
where Mr Reid states:
“For this reason it is imperative that MWeb retains the Tiscali.co.za
and wol.co.za domain names on the terms set out in the Sale
Agreement in order to minimise the risk of losing subscribers. It is our
experience that email domain related cut over comes with significant
churn risk and that in the event that we are not able to manage such a
risk in the manner proposed, this will have a material effect on the
retention of subscribers and therefore the consideration offered.” 17
55. The MWeb strategy document indicates that Polka consumers will be
allowed to migrate upward and get the premium service, whilst still
retaining their Polka email address, but that the opposite will not be
allowed – if MWeb customers want to migrate to Polka they forfeit their
email address. This strategy appears to be an acknowledgment of the
‘sticky’ quality of the email address. MWeb lets you keep your
address if you migrate upwards towards the more expensive service,
but it is less accommodating if you want to migrate downwards.
56. The Commission’s expert, Mr Brooks, also suggested that there is
inertia amongst consumers to change service providers, although he
attributed this more to a reluctance to change stoporders, than a
reluctance to lose an address.
57. Yet this churn inertia, whatever its provenance, is not one which is
exacerbated by the merger. Even if the merging parties were to raise
the price of the premium service, it is likely that consumers, once they
have come to the realisation that they may have to forfeit their address,
would as easily opt for a nonpremium service as a premium one. Thus
would as easily opt for a nonpremium service as a premium one. Thus
the existence of an independent Tiscali is not decisive in constraining
an exercise of market power by the merged entity, as once a consumer
has decided to churn it is as likely, given the questionable value of the
premium product, that they would churn ‘downwards’ rather than
‘sideways’. For this reason, we believe that the merger itself would not
contribute to the lack of portability already in the market, because each
provider has some relational dominance in relation to its customer and
that dominance is a function of the value of the inconvenience in
changing email addresses, not market power .
58. This feature would suggest that at the time of this merger, a premium
segment has not yet been carved out as a standalone relevant market
for competition law purposes and that the market is one for internet
access by a homebased consumer.
17 Letter from Mr Reid to Evert den Hollander of Tiscali dated 21 June 2004.
12
59. That being said there is no doubt from all the materials that:
i.MWeb and Tiscali are the two largest firms in the market.
ii.Both have grown more by acquisition than organically and that this
suggests that the scope for smaller rivals to grow organically is slight.
iii.Pricing behaviour suggests that they behave as a duopoly and a
pricing move by one is followed by a response by the other. At present
their prices are identical for both premium and nonpremium dialup
access. According to Mr Massidda from Tiscali when on one occasion
they priced above MWeb they suffered the consequences and decided
to keep pricing in line in future. It would appear that MWeb was the
price leader in this relationship.
iv.Each regarded the other as its primary rival and that the merger leads
to the elimination of MWeb’s most effective competitor.
v.If the market is a homebased market the merged parties combined
share would be 34.4 % made up as follows:–
Firm Market Share
MWeb 24.3 %
Tiscali 10.1 %
Telkom Internet 15.8 %
ABSA 14%
Atlantic Internet 3 %
XSInet 1.2 %
Internet Solutions 16 %
Other 15.4 %
Source: Parties’ figures given at hearing
60. Precise data for this share is nevertheless not available and the
merging parties do not claim that their knowledge on this point is
definitive. Nevertheless, even accepting a broader homebased
market, one not segmented into a premium and nonpremium market,
the merging parties have a large enough share in a concentrated
market for it to raise some concerns.
Barriers to entry
61. It is trite that even if concentration levels are high in a market as long
as entry barriers are low, a merger is unlikely to be anticompetitive as
any attempt by the merged firm to exercise market power will be
countered by new entry, provided that entry is timely, likely and
13
sufficient. 18
62. The merging parties argue that entry barriers in the internet access
market are low for three reasons:
62.1 Firstly, new entrants may come from firms with access to a large
client base of their own who see the provision of internet
services as an addon to attract clients to an unrelated core
service. In this regard we have seen already the successful
entry of a firm like Absa. At the time of this decision we are
informed that Discovery, a medical aid scheme and
administrator, is offering internet services at a very low cost to
its members.
62.2 Secondly, is the fact that this is an innovation market. The Act
requires us in section 12A(2)(e) to recognise:
“ the dynamic characteristics of a market including growth,
innovation, and product differentiation.”
These are all features inherent in this market. We are advised
that wireless internet access for the home consumer is around
the corner, that the new incumbent in the fixed line market is
likely to target this market as an area for growth and that the
three mobile phone operators have plans up their sleeves to
provide an internet access service as well. Whilst we must be
cautious about the optimistic hype that surrounds the plethora of
wouldbe but not yet proven entrants, the history of the market
to date has shown that entry has come from unexpected
quarters (e.g. Absa) and that new technology is developing
continually and with it, the potential for new entry and newly
priced offerings. This has been the decisive factor in our
allowing the merger. Were this not a dynamic innovation market
we might have found against the merging parties.
62.3 The third reason given to justify likely entry is its low cost. Both
62.3 The third reason given to justify likely entry is its low cost. Both
the merging parties and Mr Brooks indicate that a firm can enter
the market at the access provider level without great capital
outlay. Even if we accept that is the case, it does not mean that
entry will be effective. GSoft, the intervenor, indicated that this
was precisely the problem and hence their interest in acquiring
Tiscali. The history of both parties indicates that they have
grown more by acquisition than organically, and that post
merger, most of the jewels in the market will have been
18 See United States Department of Justice and Federal Trade Commission’s “Horizontal
merger Guidelines, 1997.”
14
acquired. Of course some new entrants such as financial
institutions have a builtin marketing advantage by their ability to
mine their existing or potential customer basis.
63. The brand new entrant without a client base may have to rely on new
signups and this requires access to the retail market where people
purchase their new computers and software.
64. For this reason, both Tiscali and MWeb have successfully tied up the
major computer retail outlets with exclusive agreements. Tiscali has
exclusive relationships with Game and Dions. MWeb has an exclusive
relationship with Internet Connection, which clearly has a large
presence in the retail market, operating chains in the major centres
around the country and described by the merging parties as one of the
largest computer retailers in the country. 19 Kim Reid, the MD of M
Web, admitted that Incredible Connection was their most important and
had been their most effective channel to market. 20The Commission
has recently received a complaint from a small computer retailer
complaining about the fact that the exclusivity impacts on his ability to
compete in the sale of computers. As he cannot sell computers that
come with free internet software of one of the merging parties as part
of the deal, his offering, he alleges, is less attractive.
65. The analogue of this complaint would be the difficulty of small internet
companies to enter the market for sale of their product if they are
precluded from the major retail outlets. For this reason we have
proposed a condition that seeks to address this problem by requiring
the merged firm to terminate its exclusive distribution arrangements
with its retail customers. The merging parties were consulted on this
condition and had no objection.
condition and had no objection.
66. The other potential problem the merger raises concerns the buying
power of the merged firm. UUNet, which along with Internet Solutions
is one of the first tier firms in the internet market, has raised this
concern with us in a submission dated 4 January 2005. Its concern was
that the merged entity could enjoy “ extremely high buying power” . The
submission was far from clear, but we understand UUNET to be
concerned that the balance of power in the industry could shift from the
first to the second tier. However UUNET ended its objection by stating
that it has not raised an “ official objection to the merger going ahead
but, that “ it is of the opinion that if it does go ahead the current balance
of power in the market will be significantly disturbed.” 21
19 Transcript page 3637
20 Transcript page 39
21 See Record page 70 –71.
15
67. It is difficult to pursue this concern further when the protagonist has
raised it in such a fainthearted manner. Granted that MWeb in its
internal documents does put forward the ability to negotiate better
terms with suppliers as one of the advantages of the merger. Since the
input costs of its provider constitutes most of its input costs there is no
doubt where the squeeze on suppliers will be exercised. However, it
seems unlikely that, given the structure of the foundations of this
industry that first tier firms such a UUNET will be effectively squeezed
in a manner that may raise competition concerns. If the merged firm
overreaches UUNET, so that it is no longer profitable for it to supply it
at post merger prices, then it can enter the market itself at the second
tier and compete with the merged firm. This threat is likely to restrain
the merged firm’s exercise of market power as a purchaser of inputs.
Recall that UUNET was once in this market with Iafrica.com before it
sold that business to MWeb in return for the latter staying out of the
first tier market.
68. We do not see that the merger will lead to the merged firm having
monopsony power in respect of first tier firms .At present there are at
least four firms in the first tier market. 22
Vertical issues
69. As outlined above, Naspers is the ultimate shareholder of MWeb.
There is therefore a vertical relationship between a primary internet
service provider and a firm which is a significant content contributor to
its portal. According to GSoft, content provision is crucial to the
success of any ISP. GSoft raised the concern that the merger would
give MWeb a big advantage over other incumbents in the industry,
insofar as Naspers is a multinational media group with operations in,
insofar as Naspers is a multinational media group with operations in,
inter alia, payTV, print media and publishing. Naspers for instance,
controls Net, MultiChoice, News 24, and prints and publishes Beeld,
Volksblad, City Press and Daily Sun. It thus is an owner of a
considerable amount of content, which, if considered a ‘must have’ by
consumers, would give the merged entity a considerable competitive
advantage.
70. MWeb has explained that Naspers offers it two types of content
product. The first, of which news on Nasper’s Media 24 site is one
example, is what it terms ‘open content’. Although available on dialup
to its subscribers, the content can be accessed freely by anyone with
internet access.
71. The second type it terms ‘closed content’. This content is only available
22 See World Wide Worx op cit record page 1041.
16
to subscribers and is not open to view on the internet. An example of
this closed content is Naspers’ AtoZ of Diseases . Although this
product is available to MWeb, Naspers does not sell it exclusively to
MWeb and it gives examples of other firms, unrelated to Naspers, who
have purchased this content for their subscribers. According to figures
given by Naspers, MWeb has had to pay for this content. The figures
also show that it is paying more than at least two other customers for
the content.
72. Although Tiscali also offers content none of this is acquired exclusively
by it and rivals are free to purchase similar content. 23
73. The commission argued that any vertical concerns that arose out of the
relationship between Naspers and MWeb, existed prior to the merger
and are not mergerspecific. However, there is a possibility that if there
were foreclosure problems before, this merger could exacerbate these,
since the merged entity would command a greater share of the market,
therefore the foreclosure effects would be more pronounced.
74. Nevertheless even if foreclosure may be attractive to Naspers post
merger, we must consider if it is likely. The Commission’s
investigations revealed that of the 22 content products MWeb provides
to its customers, only 6 are sourced from Naspers. Of those 6, not all
are offered exclusively to MWeb.
75. Our conclusion is that the content:
i.is not of the ‘must have’ variety. Indeed with all due respect to the
merging parties, it seems particularly lacking in that respect;
ii.is not exclusive to the merged firms presently ;
iii.is not unique. There is a vast amount of similar content available to
new entrants;
iv.does not play a decisive role in consumers preference for providers.
76. For all these reasons we concluded that the merger raises no serious
vertical concerns.
Better buyer issue
77. An objector to the merger, GSoft, raised certain concerns about the
Better buyer issue
77. An objector to the merger, GSoft, raised certain concerns about the
merger. GSoft is a new BEE entrant, which was one of the bidders for
the Tiscali business, and indeed at one stage was considered the
preferred bidder. It was ultimately rejected as the buyer in favour of M
Web, it appears for funding reasons, although this remains a subject of
dispute between GSoft and Tiscali.
23 Record page 909
17
78. GSoft’s objections were to the effect that the merger with MWeb
raised both vertical and horizontal concerns and that if it were the
purchaser of Tiscali, as a new entrant, none of these concerns would
arise.
79. We have already dealt with the horizontal and vertical issues and found
that the merger would, if accompanied by the condition we require, not
have an anticompetitive effect.
80. Although GSoft, had it been successful as a purchaser, may have
presaged a more competitive market than MWeb, this is not the test
we have to apply. Our task is not to indicate which firm might be a
preferred buyer, but only if the merger as proposed would be in
violation of the Act. If the answer to the latter question is in the negative
then the merger as proposed must be approved regardless of whether
a better bride waits in the wings.
81. Although sympathetic to GSoft’s obvious disappointment at not being
able to conclude the deal, we cannot interfere with the merger on this
basis.
Public interest –employment condition
82. We have imposed a condition in relation to the retrenchment of
employees. This condition arose not out of the hearings but an
agreement reached between the merged entity and their employees as
part of their collective bargaining. For this reason we do not have to
explain it any further.
83. In imposing this condition, we have followed the approach adopted in a
previous merger, in terms of respecting the agreement reached
between employees and employer. 24
Conclusion
We approve the merger subject to the conditions, which are set out in the
annexure to this decision.
_____________ 20 April 2005
N. Manoim
24 Cherry Creek Trading 14 (Pty) Ltd and NorthWest Star (Pty) Ltd 52/LM/Jul04
18
Date
Concurring: D. H. Lewis, M. Madlanga
For the merging parties: J. Meijer, Cliffe Dekker Attorneys
For the Commission: . Mabusa, K. Moodliar, M. Langa, Competition
Commission
19