Overview of the CMA
The Competition and Markets Authority (CMA) is a department of non-ministerial government, situated in the United Kingdom. This authority takes responsibility to strengthen competition among businesses within this country. Through doing so, the country chiefly focuses to prevent and reduce various anti-competitive activities within the business sector. Hence, the authority follows some specific responsibilities. When unfair competition occurs in business practices or consumers’ choices are destroyed, the CMA takes these responsibilities.
The authority investigates mergers, conducts studies related to market and brings different criminal proceedings. These criminal proceedings occur against firms, which practice cartel system in market. In addition to this, the CMA investigates possible violation to prohibit further with the help of anti-competitive agreements through using the Competition Act 1998. The authority further implements consumer protection legislation, such as the Unfair Terms in Consumer Contract Directive along with Regulations. Moreover, the authority encourages regulators to utilise various competing powers through considering regulatory appeals and references.
The report focuses on anti-competitiveness practice of the CMA through selecting a particular case study. For this, the report selects 21st Century Fox/Sky merger inquiry. The CMA has conducted an investment when the anticipated acquisition has been done between Sky Plc and 21st Century Fox. These two companies are based on the media sector. Each company has a genuine commitment to maintain standard broadcasting. For understanding the situation, chiefly focuses on types of merger along with its positive and negative sides.
The merger between 21st century Fox, Inc. and Sky Plc would have be an example of a horizontal merger, this is a form of merger between firms that operate in the same industry. The merger would’ve provided the merging firms with an increase in the share of the market, this could then lead to the benefit of the new business having price controlling powers and reducing competition. An additional benefit of this merger would’ve been the fact that both firms are excelling in the mass media corporation in the same services (news and sport) as well as others (Fox providing a film industry and Sky providing telecommunications), it would’ve been a smart investment to merge instead of having to put a lot of time and resources into diversifying into the respected fields the other one doesn’t do and as a result, increasing revenue with minimal sunk costs.
However, the Competition and Markets Authority (CMA) began an investigation into the anticipated procurement of Sky Plc by 21st Century Fox, Inc. due to a referral made to them by the Secretary of State for Digital, Culture, Media and Sport. The provisional findings were that the merger wouldn’t be in the public’s best interest because of media plurality, which is the idea of having multiple and diverse types of media and media support. Due to the fact that the Murdoch family trust already “owns both Fox and News Corporation, as well as owning 39% of Sky Inc. and the UK newspaper titles;
The Times, The Sun and the Sunday Times” (Sky News, 2018), the issue that was brought up was that if 21st Century Fox were to acquire Sky Plc, they may have too much power of the UK’s media outlet, even possibly having the ability to sway public opinion through the news outlet. Comcast ended up outbidding Fox and purchasing Sky for $39 billion (CNBC, 2018).
Case study: 21st Century Fox/Sky merger inquiry
The Murdoch Family trusts’ news outlets currently reach a third of the UK’s population and so if the merger were to have gone through, it would’ve only increased this, meaning a reduction in competition that can end up giving 21st Century Fox monopoly power, with a greater market share within the UK’s media and news world. With greater market share and less competition, media plurality would not have been the only concern, 21st Century Fox could then have decided to increase the prices for consumers on the services they provide. In addition this would increase the barriers to entry as the contestability of the market would then be affected on the grounds that new firms wanting to join said market could be potentially deterred on the basis of Fox owning too much market share, resulting in them not wanting to attempt to join as they believe they won’t make sufficient profits to survive the industry.
Another economic basis for the referral, was on the grounds of commitment issues to broadcasting standards. However, the CMA provisionally found that the merger would not cause a lack in the commitment to broadcasting standards due to evidence that Fox has operated in the UK for two decades without committing any broadcasting standards violations. Sky Plc has a similar history of always following the broadcasting standards.In the 21st Century Fox and Sky merger inquiry, it is seen that the practices of the two firms limit or prevent competition for a number of reasons.
Firstly, the transaction is expected to operate against the public interest due to a lack of media plurality (Lambert, A. 2018). It is essential that there is some degree of market concentration in the media industry so that there is variety and consumer choice. When two large firms merge, there is a dramatic increase in market concentration. In essence, abuse of market dominance of the newly merged firm is a cause for concern in the media industry for political and economic reasons. Studies state that merger activity considerably increases concentration ratios (Jacquemin, A et al, 1991). When a firm’s market share is relatively large compared to other incumbent firms, they can reap cost benefits from economies of scale. Low costs can lead to long run profitability (Jacquemin, A et al, 1991).
This can allow them to undercut firms or partake in predatory pricing. Predatory pricing can deter new entrants into the market and force existing firms to sink their costs and leave as they cannot compete with artificial prices. This prevents competition as it provides a barrier to entry. Although economies of scale can provide organic growth, as cost decreases can be hypothecated into research and development, this dominance continues to affect consumer’s interests through a lack of diversity. Another way in which this merger may operate against the public interest is due to the way in which dominant firm’s price setting can exploit the consumer and generate an unequal distribution of income as the merged firm reaps all profit at the expense of normal households (Bennett, P. 1991).
Evaluation of the merger
Figure 1 shows that under a lack of media plurality due to a dominant/monopolistic firm in the market can be detrimental to consumer’s interests. As the newly merged firm abuse monopoly power and set their price above average and marginal cost (Bennett, P. 1991), a deadweight welfare loss is created. Therefore, the market is no longer producing at the socially allocative optimum due to a distortion in the operation of the economy (Bennett, P. 1991). The newly dominant firm’s highly set prices reduce consumer surplus dramatically as their willingness to pay falls.
that in comparison to the deadweight loss to social welfare arising from the merger, a perfectly competitive firm provides maximum social welfare. In perfect competition, the firm produces where price is equal to marginal cost. Increases in social welfare are due to maximum media plurality, competitive pricing and efficiency gains. These efficiency gains may not occur in a monopolistic market due to X-inefficiency. This means that the merged firm may not perform at their maximum ability due to a lack of competitive pressure.
The size of the welfare loss from dominantly merged firms can be measured through the difference between monopoly prices and prices from competitive markets. This has been averaged at roughly 4-7% of GDP (Bennett, P. 1991).
To add to the issue of monopolistic market dominance, mergers can be a transfer of resources to more efficient managers (Davies, H. 2001). During a merger, firms experience synergy, in which the uniting of the two companies reaps greater benefits. If the manager of one firm is more efficient than the other, a merger can mean that greater supernormal profits can be achieved. This is because the resources from the inefficient firm are now under the control of a more efficient manager wherein the benefits of the efficient manager mean that smaller inputs create greater outputs. These efficiency gains can, again, lead to cost reductions leading to either a lower price, or greater research and development. This can in turn expand the monopolistic dominance of the new firm.
The approach and methodology that the CMA took of studying both objectives seems primarily clear and precise as both public interest concerns about media plurality; and a genuine commitment to broadcasting standards were exhaustively researched independently and in-depth due to consistent specificity throughout the report.
Firstly, within the approach, the “context for whether plurality will remain sufficient” was outlined this shows further initial clarity in the aim of the report as when the importance of media plurality remaining sufficient is outlined, this provides an explicit basis for what needs to actually be researched which should in the end produce efficient results. A deductive research approach was used to clearly & further specify the level concentration (in terms of population within the UK) that the MFT (Murdoch family trust) could possibly have within media. Furthermore, this specificity element within this approach was extended as the level of potential concentration of the MFT against the other main media networks within these four different types of media outlets; which are TV, radio, print newspapers, and online was identified in the initial framework.
Anti-competitive practices and policies
The methodology used by OFCOM is going to be analysed in this case; as the Ofcom measurement framework was the only practical measurement used within this CMA report. The Ofcom measurement framework consists of three categories of “quantitative metrics” and “qualitative contextual factors”.
However, this study was open to “extensive public consultation” before its actual publication, the main issue regarding this is that the two mergers themselves who inevitably hold their own fixed view were able to offer their views which according to Fox was that “quantitative measures” are not sufficient in measuring plurality, and as such, contextual factors also need to be considered. Similarly, “Sky submitted that measures of availability are most relevant to an assessment of plurality”. This suggests immediate bias to the report, which makes this particular methodology used seem disreputable, unreliable and therefore unrepeatable.
On the contrary, there is reason to deny that the CMA could have been working on bias grounds because it could have easily manipulated the findings to show that Fox or/and sky did not have a genuine commitment to broadcasting standards, since this objective is arguably easier to prove than the concern of public interest about media plurality because the data used for the former objective is heavily more quantitative than the data used for the latter objective.
To contrast this, the limitation observed by these mergers were also observed by unnamed third parties within media, they also concluded that there are imperative quantitative aspects that cannot be measured; interestingly, this implies that the two mergers may have been critical in their criticisms; if they identify the same possible limitations of this study with third party media networks that would inevitably be bias in their oppose to the merge. Which possibly suggests that Fox and Sky could possibly be rational and critical corporations that are not bias in their release of media. As well as limitations in the study being observed by all parties.
There were Restrictions to the study observed by Ofcom themselves for instance; that there are aspects of the market that cannot be measured in a quantitative manner which was an integral and imperative part of the measurement of media plurality, which limits the reliability of this study, however the fact that this problem is known can make the study repeatable just with the constant notion that the quantitative aspect cannot be measured.
Secondly, the analysation of how the CMA came to the conclusion that the merger would not lack a genuine commitment to broadcasting standards will now be considered. The quality of broadcasting standards were compared and to the Broadcasting standards in the US and elsewhere. It was further dissected to analyse the broadcasting standards within Sky and Fox. The analysation here was restricted as only quantitative data could be used to prove this. Since, data was hindered, it can be argued that in this case the “large number of submissions from third parties addressing the commitment of both Sky and Fox to the broadcasting standards objectives” were helpful to provide more insight. However, the issue of disreputability could have risen again as opinions are inevitably subjective.
Conclusion
The main primary data used in this CMA report was derived from Ofcom, however Ofcom is the regulator for the communications services that we use and rely on each day. Therefore, if Ofcom is regulatory itself, to what quantitative and even possible unethical bias qualitative extent can it decide that the merger would not be in the public’s interest due to media plurality concerns and would not lack a genuine commitment to broadcasting standards.
The Competition and Markets Authority (CMA) has provided a report, divided into two phases. In 20th June 2017, the CMA has provided its report to the Secretary of State regarding jurisdictional matters. In this jurisdictional matter, the CMA will report that whether the arrangements are going on or experiencing contemplation. This contemplation could be seen into effect and this will influence a relevant merger situation in Europe. The role of Ofcom is described in phase 1 in the Guidance note due to interest public.
This public interest test was conducted based on the proposed acquisition between Sky plc and 21st Century Fox inc. during 16th March, 2017. In phase 2, the final report was published. In 5th June 2018, CMA has published its final report and sent it to the Secretary of State for Digital, Culture, Media and Sport. The Secretary has accepted the recommendations provided by the CMA. This recommendation has stated that this anticipated acquisition was not done based on public interest under the consideration of media plurality. In addition to this, the recommendation of CMA is accepted by DCMS because of its most proportionate and effective remedy. This remedy is for Sky News for depriving it to an appropriate third party. Based on this decision the report of CMA has been published.
In 23rd January of 2018, the CMA has observed provisionally that this anticipated acquisition of Fox with Sky’s share does not possess any public interest. This provisional finding has been done concerning the media plurality. This acquisition has not been done absence of a genuine commitment. This process can further meet broadcasting standards of the United Kingdom.
The publication containing evidence based on any party. This publication can be observed in the WebPages. In these WebPages, CMA does not indicate any endorsement through expressing the acceptance or evidence related to this evidence. The entire publication is formed in such a way that it could help public understanding regarding the issues. On 10th October 2017, the provided issues statement by CMA has established chance of investigation. It draws outlines based on initial theories through stating that this could influence two considerations related to public interest adversely. These two considerations are media plurality along with a genuine commitment in the UK based on broadcasting standards. However, the entire recommendations do not provide any conclusions or any findings.
https://news.sky.com/story/sky-warns-over-future-of-sky-news-as-fox-takeover-investigated-11118529
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https://www.cnbc.com/2018/09/22/sky-comcast-fox-36-billion-takeover-auction.html
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