The Italian Competition Authority opens an in-depth investigation into a merger between two major publishing houses

The Italian Competition Authority (ICA) has recently opened a II-phase investigation into a merger between two major publishing houses, the proposed acquisition of RCS by Mondadori (Case C12003, Mondadori-RCS Libri). The ICA believed that the entity resulting from the notified merger would have a dominant position in several markets, where the transaction would have horizontal and vertical anti-competitive effects.

According to the ICA, the Italian publishing market is a mature highly concentrated and declining market where the market shares of the major operators have been stable over the past years and the successful entry of new operators is unlikely. In addition, RCS and Mondadori are the closest competitors and in many of the markets affected by the planned merger the merging parties are the largest players. Moreover, the merging parties belong to vertically integrated groups that are also active in other media markets.

First, the ICA looked at the feared horizontal effects of the merger. It believed that such negative anti-competitive effects would occur in the following markets: i) the market for the acquisition of copyright licences; ii) the market for the publishing of fiction works; iii) the market for the publishing of non-fiction works; iv) the market for the publishing of e-books; v) the market for the publishing of children books; vi) the market for the publishing of comics; and vii) the market for the distribution of e-books. The ICA concern that the notified merger would conduce to the creation of a dominant position in the above markets was first based on the high market shares the merging parties would jointly enjoy and also the results of the HHI test indicating quite a high level of market concentration post-merger.

Interestingly, the ICA took the view that the merging parties’ market shares in this case were not a correct proxy for the post-merger market power of the parties. Indeed, the market power of the merged entity may be higher than that reflected in the market shares due to the presence of some factors that may further strengthen the post-merger dominance of the entity resulting from the merger. First, as multimedia companies, Mondadori and RCS publishes many papers and magazines and own radio and TV chains through which they may promote their books to the detriment of those published by rivals. As a result, authors may prefer license the rights on their works to the parties and consumers may prefer buy books from the parties. Second, Mondadori owns the largest chain of bookshops in Italy. The books published by Mondadori thus enjoy a greater visibility on the shelves of the in-house bookshops and bookshops which are part of the Mondadori franchising network than those published by rivals. It is predictable that such greater visibility may be extended post-merger also to the books traded under the RCS’s brands. In practice, the ICA feared that the consummation of the merger would result in the vertical integration of the activities of the parties and strong synergies between them conferring on the merged entity competitive advantages that the smaller competitors cannot match, thereby running the risk of having to exit the market.

A further factor that may magnify the post-merger market power of the parties points to the wide range of their products. Relying on the ‘must stock items’ argument, the ICA pointed out that Mondadori and RCS would combine a large number of best seller works that, obviously, booksellers must have in stock. It is then believed that the merging parties may apply tough commercial conditions to independent retailers for the supply of such items. Alike, providers of platforms for the sale of e-books may be exposed to the market power of the merged entity.

Moreover, the ICA feared that the notified merger may also negatively affect the competition in some downstream markets. Vertical anti-competitive effects are expected in the market for the retail of books. As hinted above, Mondadori is a vertically integrated publisher running several bookshops. Limited spaces on the shelves of its bookshops may be then allocated to the rivals’ books. Additionally, due to its post-merger dominant position in many upward markets for publishing services, Mondadori would have a competitive advantage over rivals in the retail markets, since a substantial part of the books sought by consumers may be in the Mondadori catalogue. For the same reasons, the merged entity may have a dominant position in the market for the distribution of books to supermarket chains. In other words, the ICA was concerned about the risk of customers’ foreclosure, the risk being that Mondadori shops would not distribute the books published by competitors. Instead, the ICA ruled out that the merged entity would enjoy no dominant position in the online retail market for books where there exist strong competitors such as Amazon.

It remains to be seen now whether the preliminary findings of the ICA will be confirmed and, if it is so, which remedies will be agreed to resolve the competition problems arising out of the integration of the activities of the parties.