Summary of Judgment

Introduction

This matter concerned merger proceedings before the Competition Tribunal of South Africa, in which the Tribunal was required to decide whether to approve an international transaction in terms of which Microsoft Corporation would acquire the Devices and Services Business of Nokia Corporation.

The primary acquiring firm was Microsoft Corporation (“Microsoft”), a public company incorporated under the laws of the United States of America. The Tribunal recorded that no single shareholder controls Microsoft, whether directly or indirectly. The primary target firm was the Devices and Services Business (“D&S Business”) of Nokia Corporation (“Nokia”), a public company incorporated under the laws of Finland, and likewise not controlled by any single shareholder.

The matter was heard on 19 February 2014, and the Tribunal issued an order approving the transaction on 19 February 2014. The Tribunal’s reasons were subsequently issued on 14 March 2014. The reasons reflect an assessment conducted on the basis that there was no horizontal overlap in South Africa, and that the analysis therefore focused on potential vertical effects and public interest considerations.

The dispute concerned whether the proposed acquisition—together with associated arrangements including patent licensing and access to the HERE platform—was likely to substantially prevent or lessen competition in any relevant South African markets, and whether it raised public interest concerns.

Material Facts

Microsoft was described as primarily involved in the design, development, and supply of computer software and hardware devices and related services. Nokia was described as active in the development and supply of mobile handsets (smartphones and feature/basic phones), mobile and fixed telecom networks and associated services, and location-based services.

The transaction was characterised as an international transaction in terms of which Microsoft would acquire Nokia’s Devices and Services Business, including the mobile phones and smart devices business units and a design team. The assets and operations included devices and services production facilities, devices-and-services-related sales and marketing activities, related support functions, and design rights used on devices produced by the D&S Business.

In addition to the acquisition of the D&S Business, the Tribunal recorded associated arrangements. Nokia would grant Microsoft a non-exclusive licence to certain patents, with an option to extend the licence in perpetuity. Microsoft would also become a strategic licensee of Nokia’s HERE platform, and would separately pay Nokia under a HERE data services supply agreement.

The Tribunal treated it as material that, in South Africa, Microsoft did not sell smartphones or tablets, while Nokia produced smartphones and feature phones. On that basis, the Tribunal accepted that the transaction did not create a horizontal overlap in South Africa. The competitive assessment therefore concentrated on vertical relationships potentially arising from Microsoft’s activities in operating systems for smart mobile devices, mobile apps, and mail server communication protocols enabling interoperability, in relation to Nokia’s smartphone and smart device activities.

The Tribunal further noted that, prior to the transaction, Microsoft and Nokia were already in a partnership agreement under which Nokia delivered certain location-based services to the Windows Phone ecosystem, contributed to the Windows Phone platform and device design-related expertise, and Microsoft provided Bing search services and contributed resources to various services; the parties also engaged in joint developer outreach. The Tribunal recorded that this partnership agreement would not continue after the transaction.

For purposes of competitive effects, the Tribunal recorded market share information for smartphones and operating systems in South Africa. Nokia’s share of the supply of smartphones was approximately 10%, and Microsoft’s smartphone operating system share was approximately 11% of the total smartphones market, with Android at 72% and iOS at 6%.

Regarding intellectual property, the Tribunal recorded that Microsoft would acquire over 8500 design patents from Nokia (described as protecting the “look and feel” of Nokia devices), but that these were not technology or utility patents. Nokia would also transfer 60 patent licences or benefits under those licences to Microsoft. Microsoft would obtain a non-exclusive perpetual licence to Nokia patents and certain non-patent intellectual property used in the transferred business. The Tribunal recorded that competitors would not be prevented from licensing such patents.

On public interest, the Tribunal recorded the merging parties’ confirmation that they had not assessed staffing needs, but that they were able to confirm that no retrenchments were planned as a consequence of the transaction.

Legal Issues

The central questions were whether the proposed transaction was likely to result in a substantial lessening or prevention of competition in any relevant market in South Africa and, if not, whether it nevertheless raised any public interest issues.

The competition dispute was predominantly concerned with the application of competition principles to the facts of a merger involving vertical relationships, rather than a dispute of primary fact. The Tribunal’s task was evaluative: it had to assess, on the record before it, whether the merged entity would have the ability and incentive to engage in foreclosure strategies in relation to relevant upstream and downstream markets, and whether the patent and related licensing arrangements could create competitive harm.

In particular, the Tribunal was required to consider whether the acquisition could lead to input foreclosure or customer foreclosure in relation to (i) operating systems for smartphones and tablets and the downstream supply of smartphones and tablets, and (ii) apps, consumer communication services, and email software services used on smartphones and tablets. A further issue was whether the transaction created a new ability or incentive to foreclose rivals through patent licensing.

Court’s Reasoning

The Tribunal approached the competition analysis on the basis that there was no horizontal overlap in South Africa, and that the relevant inquiry therefore lay in the vertical effects potentially arising from Microsoft’s upstream offerings and Nokia’s downstream activities in smartphones and related devices.

In relation to operating systems and smartphones/tablets, the Tribunal noted that Microsoft’s smartphone operating system (Windows Phone) was currently used by Nokia Lumia smartphones, and that Windows RT was used in Nokia’s recently launched tablets. The Tribunal placed weight on Nokia’s relatively modest position in South Africa’s smartphone market (approximately 10%), alongside the presence of strong competitors and ecosystem competition, particularly Android and iOS, and the fact that major device suppliers such as Apple and Samsung have their own operating systems.

The Tribunal accepted Microsoft’s position that, to expand and compete with other ecosystems, it had an incentive to increase the number of users of Windows Phone devices and app developers, and therefore had an incentive to continue to offer its operating systems to original equipment manufacturers (OEMs). It also treated the market as one where product development and innovation are crucial to competitiveness. On these considerations, the Tribunal concluded that the transaction was unlikely to result in input foreclosure or customer foreclosure in respect of the upstream operating systems market and the downstream smartphones and tablets market.

With respect to apps, consumer communication services, and email services, the Tribunal accepted the merging parties’ contention that the supply of apps and email services did not drive device choice in a manner that would make foreclosure likely, because such functionalities are available across multiple operating systems, including those of Microsoft’s competitors. On that basis, it reasoned that Microsoft had a strong incentive to continue making its email services and apps available to users of devices running other operating systems, and also to users of Windows Phone devices produced by third-party OEMs.

The Tribunal further reasoned that Microsoft did not offer “must have” mobile apps, and that there existed a large range of competing apps and communication services. It also considered conditions of entry and expansion, noting that barriers to entry for developers of communications apps are extremely low, with frequent new entry by both large companies and independent developers. On this reasoning, the Tribunal found that the merged entity was unlikely to have both the ability and incentive to engage in foreclosure strategies in these upstream markets or in the downstream smartphone and tablet market.

In relation to the patent licence arrangements, the Tribunal distinguished between design patents and technology/utility patents. It recorded that Microsoft would obtain numerous design patents protecting device “look and feel,” but not technology or utility patents, and that Microsoft would receive a non-exclusive perpetual licence to Nokia patents and certain non-patent intellectual property, while Nokia would continue to offer licences to third parties. The Tribunal accepted the merging parties’ explanation that Microsoft was licensing rather than acquiring the patents, and that none of the patents were considered essential, with competitors not prevented from licensing them. The Tribunal also evaluated the transaction in light of the parties’ prior 2011 partnership and concluded that the transaction did not create a new incentive to foreclose rivals from using patent licences.

On public interest, the Tribunal recorded the parties’ indication that there were no retrenchments planned as a consequence of the transaction, and it identified no other public interest concerns arising on the facts placed before it.

Drawing these strands together, the Tribunal concluded that the transaction was unlikely to substantially lessen or prevent competition in the relevant markets, and that it raised no public interest issues.

Outcome and Relief

The Tribunal approved the acquisition of the Devices and Services Business of Nokia Corporation by Microsoft Corporation.

The order was issued on 19 February 2014, and the Tribunal’s reasons for approval were provided on 14 March 2014. The reasons, as provided, did not record any costs order.

Cases Cited

No reported cases were cited in the reasons provided.

Legislation Cited

No legislation was expressly cited in the reasons provided.

Rules of Court Cited

No rules of court were cited in the reasons provided.

Held

The Tribunal held that, given the absence of a horizontal overlap in South Africa and on the facts presented, the transaction was unlikely to lead to input foreclosure or customer foreclosure in relation to the upstream market for operating systems for smartphones and tablets and the downstream market for smartphones and tablets.

It further held that the merged entity was unlikely to have the ability or incentive to foreclose competitors in the upstream markets for mobile productivity apps, consumer communication services, and email software services, particularly in light of multi-platform availability, the absence of “must have” Microsoft mobile apps, and low barriers to entry for communications app developers.

It also held that the patent and intellectual property arrangements—being non-exclusive licensing and involving design patents rather than essential technology patents—did not create a new incentive to foreclose rivals from patent licensing, especially in the context of the parties’ pre-existing relationship.

Finally, it held that the transaction raised no public interest concerns, including no planned retrenchments as a consequence of the transaction, and it therefore approved the merger.

LEGAL PRINCIPLES

The Tribunal applied the principle that where a merger presents no horizontal overlap, the competitive assessment may focus on vertical effects, including whether the merged entity would have both the ability and the incentive to engage in foreclosure strategies (including input foreclosure and customer foreclosure).

In assessing foreclosure risks, the Tribunal treated market structure and competitive constraints as relevant, including the presence of strong competitors, the importance of innovation, and incentives to expand an ecosystem by distributing products and services broadly (including to third-party OEMs).

The Tribunal applied the principle that foreclosure concerns are less likely to arise where products and services are available across multiple platforms, where the merging party does not control “must have” inputs, and where barriers to entry are low and entry is frequent.

In evaluating intellectual property-related aspects of a merger, the Tribunal treated as material whether rights are acquired or merely licensed, whether licences are non-exclusive, and whether competitors remain able to license the relevant patents, particularly where the patents are not characterised as essential.