Bagging bundle benefits in broadband and media mergers: Lessons from Sky/Vodafone for antitrust analysis

The historic precedents in telecommunications antitrust findings have tended towards finding harm to competition when network operators integrate downstream and bundle the provision of applications and services. The reason for this is that market power in network provision is thought to be extended into the applications market(s). More recently however, proposed mergers have been between telecommunications and media distribution firms, both of whom have some degree of market power, already sell their own services in bundles, and who may or may not have been offering combined bundles already via contractual agreements. Examples include Sky/Vodafone in New Zealand, and Time Warner/AT&T in the United States as well as Vodafone/Unitymedia in Germany and Media Capital/Altice in Portugal. These complex proposed arrangements pose challenges to competition authorities, whose legal and procedural rules and precedents, especially those defining the relevant markets affected by the merger or vertical integration activity, have been developed from the analysis of simpler cases. These precedents may not be sufficient to analyse current cases, characterized by multiple products catering to heterogeneous consumer preferences, and consumers are not constrained to buying only one variant of the products in each of the upstream and downstream markets.We illustrate the challenges by way of a case study of the proposed merger between Sky and Vodafone, declined by the New Zealand Commerce Commission in February 2017. Limitations in existing market definition processes and the evaluation of market power where bundling already occurs risk overlooking complex demand-side interactions that influence the profitability and efficiency of various structural and contractual strategic choices. We propose that classic merger and antitrust analysis based on econometric cost-benefit analysis can be augmented by using simulation and numerical analysis of a range of bundle offers expected to be relevant in decision-making. We develop a simple model and use it to illustrate how it may be used to inform broadband and content mergers, and other complex antitrust cases, such the assessment of the effects of two-sided markets and firm pricing decisions.