We told you so – UPC Ziggo merger was big Commission mistake

The merger of Liberty Global’s UPC and Ziggo in the Netherlands three years ago, is one of the only times that Faultline Online Reporter made a prediction which turned out to be wrong. It was the habit of the European Commission acting consistently over a period of two decades prior that fooled us. It now turns out that in principle Faultline was right, and the deal should never have been allowed to go ahead.

An appeal by rival KPN, under intense competitive pressure from the merged entity, has convinced the European Court of Justice to overturn the European Commission’s approval of the merger. So what now?

There are two schools of thought – one that it is just a matter of moving around the deckchairs to make the Titanic safe – and post-deal adjustments such as selling off sports channels, or sharing key sports rights, will mean that the deal goes ahead. Or we could disentangle the two companies, and in the process kill off the subsequent merger of Ziggo with Vodafone Netherlands.

First things first, the deal with Vodafone must also come under subsequent scrutiny, but for now let’s look purely at the UPC Ziggo merger. This merger took the two largest pay TV businesses in the Netherlands, and merged them, in the process creating the market leader in fixed line broadband, and in the process creating a fixed line footprint that was right for Vodafone to merge with and create a quad play market leader that could potentially kill competition in the country. KPN is another quad play, but other MNOs have no fixed line or TV businesses.

That process, taking any market skewing influence out of the market, is history’s usual approach.

Back in 2012 Vivendi was faced with a similar situation in France, when the Autorit’ de la Concurrence (French competition regulator), found that five years earlier in 2007, Vivendi’s CanalSat was in breach of agreements which allowed it to merge DTH services across France. It had told Canal Plus that it could not tie certain unique video channels to the CanalSat service and must let other have them at a reasonable rate.

But Canal Plus went and launched CanalSat before making the unbundled channels available to rivals, gaining a head start over them, defying the small print of the proposals. It would almost certainly have got away with this alone, but the second complaint, that Canal Plus had since deliberately failed to maintain the quality of the unbundled channels in order to weaken its competitors, persuaded the regulator to act and it brought a case in 2011 Initially it simply fined Canal Plus €30 million and required it to resubmit the merger almost six years after it had originally been approved.

This was done, and the outcome could have been worse for Canal Plus, in that the competition watchdog decided not to enforce separation of Canal Plus’ content and distribution arms as a condition for re-authorizing the merger, which was considered. The reason, following lobbying by Canal Plus, was that such separation could destabilize the French model of financial support for the country’s cinema production activities, at a time of austerity when other sources of funding were at risk.

In the end the regulator forced the opening up of key unique content to third party ISPs such as Orange, SFR, Bouygues Telecom and Free at a price set by the authority. There was an appeal, which was lost in front of the supreme court Conseil d’Etat.

The trouble that Canal Plus identifies to this very day, which has reduced its Canal Plus business substantially, was this opening up of movie channels and sports rights. And history will tell the European Commission to insist on the same, because in France consumers got a good deal and it is one of the most competitive markets in Europe.

The European Court of Justice said over the Ziggo UPC merger that the European Commission did not sufficiently look at competition in the market for premium TV content. It is possible that the European Commission could appeal this ruling, but in our view it would lose and so is unlikely to do so.

We have to ask why the European Commission allowed this deal in the first place. It created a monopoly where previously there was none, and changed dominance in broadband overnight. There are no amount of legal arguments which could have persuaded the Commission, and it was a bizarre decision, setting an ugly precedent for the rest of Europe. Since that merger approval, many other mergers, such as the cellular consolidations in the UK and Denmark, have both been refused. And yet neither of these would have made a de facto monopoly in either pay TV or broadband or cellular.

The European Commission decision was at best incompetent and at worst corrupt, and the Commissioners responsible for it should be asked immediately to stand down or be given different roles, and they should also be investigated. The Commission even decided that the deal did not require a full analysis of the Dutch market for TV services, despite the local regulator offering to take the entire investigation on.

The only defense of this decision is that these were changing markets. The consolidation of 65% market share in pay TV in the Netherlands, was perhaps mitigated by the growth in OTT video services and the arrival of Netflix in the country. But there was no such mitigation for creating a 50% plus market share holder in broadband.

The key to gaining approval was to agree not to block the licensing of content to OTT services through Ziggo contracts, something that was commonplace before that time, and the sale of one out of two movie channels. KPN objected because the merged entity still had control of key sporting rights, and that also needs to be sorted out, by externally priced wholesale of those channels.

Canal Plus all those years ago estimated that it would lose 400,000 subscribers by agreeing to wider distribution of the channels and in an OTT marketplace that number is likely to go higher, to something like 1 million customers that Liberty Global might lose over the coming few years. The shares in VodafoneZiggo are held by both Liberty Global and Vodafone equally, and so far this has not had an adverse effect on either of their share prices, but then again Liberty Global is at a pretty low ebb anyway and Vodafone is so large that this is small fry.

VodafoneZiggo’s latest quarterly figures show video subscribers down by 78,000 and broadband up by 79,000 – hardly great numbers anyway.

KPN has been described by us on numerous occasions as one of the “basket cases” of European Telcos, and this will give it some much needed breathing space to rally its TV and broadband efforts, not to mention cellular, against VodafoneZiggo.