Microsoft/Skype: Do mergers to monopoly in dynamic markets have negative effects on competition?
In the recent judgment in the case T-79/12, Cisco Systems and Messagenet v Commission, the EU General Court (GC) dealt with the issue of the relevance of the market shares to ascertain the competition effects of merger operations in dynamic markets. Under the EU merger control regime, the market shares enjoyed by the merging parties are generally among the most important factors to be considered when assessing the competition impact of a notified transaction. According to the decisional practice of the European Commission, when the combined market shares of the parties are more than 50% the merged entity is presumed to have a dominant position in the relevant markets. If it is the case, concerns arise about whether the merger may restrain competition.
Yet market shares are not always a correct proxy for the market power of the merged entity as reflected by the decisions of the Commission by which in some cases it cleared the notified merger in spite of the high market shares of the parties. In Alcatel/Telettra (Case M.42) the parties were found to have a 83% and a 81% in the markets for microwave equipment and for line transmission equipment, respectively. Notwithstanding that, the Commission approved the merger since customers could switch to alternative suppliers which could easily enter the market due to the low entry barriers. Such mitigating structural factors were also considered by the Commission in Mercedes-Benz/Kässbohrer (Case M.477). The Commission did not believe that the merged entity would have a dominant position due to its 74% share of the German market for intercity buses. Indeed, both actual and potential competitors were thought to be able to exert a reliable competition pressure on the merged entity and the buyer power of important customers.
Equally, market shares in dynamic markets may not be taken as reliable basis to ascertain whether the parties enjoy a dominant position. Fast evolving technologies and past volatility of market shares are all factors mitigating the possible competition concerns arising from the high post-merger market shares of the merged entity. The Commission consistently relied on this line of reasoning in vetting mergers affecting dynamic markets with the above reported characteristics.
In HP/Compaq (Case M.2609) the Commission found the parties to have relatively high market shares in the market for the entry-level servers. However, the merger entity was found to be unlikely to enjoy a post-merger dominance. That was due to the dynamic and growing nature of the market with a rapidly evolving technology, combined with the volatility of market shares, absence of entry barriers and the presence of several strong competitors as well a series of fringe suppliers. The Commission followed a similar approach in Philips/Agilent (Case M.2256). When assessing the effects of the merger on competition on the cardiac ultrasound market, the Commission noted that this was a dynamic, innovation-driven market. Manufacturers’ market positions repeatedly changed due to new product developments. And since ongoing technological innovation, particularly new dynamic imaging techniques in the cardiac segment, were expected to continue, no single company would dominate the market. In Microsoft/Skype (Case M.6281) the Commission unconditionally cleared the Microsoft acquisition of Skype, though the merged entity would have a quasi-monopoly position in the market for video communication services. The Commission believed that the notified merger would not restrain competition because, among other things, this was a fast-growing market where the market shares were not particularly indicative of competitive strength.
Some competitors of the merging parties, Cisco Systems and Messagenet, appealed the Commission decision before the GC. In particular, they pleaded that the very high market shared the parties enjoyed, had to be considered as a indicia of competition concerns. The GC dismissed these pleadings and substantially uphold all the findings of the Commission. The GC found that the high market shares of the parties in the market for consumer video communications, around 80-90%, were not necessarily indicative of their market power. In regard the GC pointed out that the relevant market was a recent and fast-growing sector with short innovation cycles. Under such s market conditions, the GC went on, even large market shares may be ephemeral.and indeed, a growing demand for video communication services was generated from users of platforms, such as smartphones and tablets, which at that time the parties did not commercialized.
In conclusion, in Cisco Systems and Messagenet v Commission, the GC sanctioned the approach of the Commission in assessing the competition impact of merger in dynamic markets to not attach much relevance to the market shares as they are easily contestable in growing high-tech sectors. This appears to be a welcome development for firms having large market shares in such sectors and planning to extend it further through acquisitions of competitors.
Yet market shares are not always a correct proxy for the market power of the merged entity as reflected by the decisions of the Commission by which in some cases it cleared the notified merger in spite of the high market shares of the parties. In Alcatel/Telettra (Case M.42) the parties were found to have a 83% and a 81% in the markets for microwave equipment and for line transmission equipment, respectively. Notwithstanding that, the Commission approved the merger since customers could switch to alternative suppliers which could easily enter the market due to the low entry barriers. Such mitigating structural factors were also considered by the Commission in Mercedes-Benz/Kässbohrer (Case M.477). The Commission did not believe that the merged entity would have a dominant position due to its 74% share of the German market for intercity buses. Indeed, both actual and potential competitors were thought to be able to exert a reliable competition pressure on the merged entity and the buyer power of important customers.
Equally, market shares in dynamic markets may not be taken as reliable basis to ascertain whether the parties enjoy a dominant position. Fast evolving technologies and past volatility of market shares are all factors mitigating the possible competition concerns arising from the high post-merger market shares of the merged entity. The Commission consistently relied on this line of reasoning in vetting mergers affecting dynamic markets with the above reported characteristics.
In HP/Compaq (Case M.2609) the Commission found the parties to have relatively high market shares in the market for the entry-level servers. However, the merger entity was found to be unlikely to enjoy a post-merger dominance. That was due to the dynamic and growing nature of the market with a rapidly evolving technology, combined with the volatility of market shares, absence of entry barriers and the presence of several strong competitors as well a series of fringe suppliers. The Commission followed a similar approach in Philips/Agilent (Case M.2256). When assessing the effects of the merger on competition on the cardiac ultrasound market, the Commission noted that this was a dynamic, innovation-driven market. Manufacturers’ market positions repeatedly changed due to new product developments. And since ongoing technological innovation, particularly new dynamic imaging techniques in the cardiac segment, were expected to continue, no single company would dominate the market. In Microsoft/Skype (Case M.6281) the Commission unconditionally cleared the Microsoft acquisition of Skype, though the merged entity would have a quasi-monopoly position in the market for video communication services. The Commission believed that the notified merger would not restrain competition because, among other things, this was a fast-growing market where the market shares were not particularly indicative of competitive strength.
Some competitors of the merging parties, Cisco Systems and Messagenet, appealed the Commission decision before the GC. In particular, they pleaded that the very high market shared the parties enjoyed, had to be considered as a indicia of competition concerns. The GC dismissed these pleadings and substantially uphold all the findings of the Commission. The GC found that the high market shares of the parties in the market for consumer video communications, around 80-90%, were not necessarily indicative of their market power. In regard the GC pointed out that the relevant market was a recent and fast-growing sector with short innovation cycles. Under such s market conditions, the GC went on, even large market shares may be ephemeral.and indeed, a growing demand for video communication services was generated from users of platforms, such as smartphones and tablets, which at that time the parties did not commercialized.
In conclusion, in Cisco Systems and Messagenet v Commission, the GC sanctioned the approach of the Commission in assessing the competition impact of merger in dynamic markets to not attach much relevance to the market shares as they are easily contestable in growing high-tech sectors. This appears to be a welcome development for firms having large market shares in such sectors and planning to extend it further through acquisitions of competitors.
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