The Concept of “Irreversible” Transactions and the Application of Ex-post Remedies: the Sky Italia / R2 Decision

By Gabriele Accardo and Sabina Pacifico

On 20 May 2019, the Italian Competition Authority (“ICA” or “Authority“) issued its decision regarding the acquisition by Sky Italian Holding S.p.A. (“Sky“) of certain assets of the digital terrestrial Pay-TV owned by Mediaset Premium S.p.A. (“Mediaset Premium“). The ICA decision imposed significant behavioral remedies to clear the transaction, which the parties decided to close prior to clearance. Sky is the dominant player in the market for Pay-TV services in Italy, and Mediaset Premium was the only significant competitor in the market.

 

Background

Between March and November 2018, Sky and Mediaset Premium entered into a number of preliminary interrelated agreements in view of the sale of R2 S.r.l. (“R2“) to Sky. R2 is a company established in May 2018, through the transfer of a business branch of Mediaset Premium, that carries out technical and administrative activities necessary for companies offering Pay-TV services (such as the management of signal encryption, commercial services, administrative management of customers, activation and deactivation of services, call centers and assistance) and runs the terrestrial digital broadcasting technical platform of Mediaset Premium.

On 28 November 2018, Sky and Mediaset Premium submitted the merger filing to the ICA and two days later the transaction was closed without waiting for the clearance decision of the Authority (there is no stand-still obligation under Italian merger control rules), therefore facing the risk of significant remedies being imposed.

On 28 March 2019 the ICA sent a Statement of Objections (“SO“) to the two companies, wherein it raised serious doubts as to the compatibility of the transaction with the competition rules.

 

The preliminary conclusions in the SO

In the SO, the Authority made clear its competition concerns and highlighted its intention to block the merger or to authorize it with remedies, chiefly due to the following issues:

  • The transaction would have strengthened Sky’s already dominant position in the (i) retail market for Pay-TV services – since Mediaset Premium was its sole direct significant competitor – and in the (ii) market for wholesale access to the technical platform used to offer paid digital terrestrial services.
  • As a result of the transaction, Sky would be the sole provider of access services to the technical platform necessary for Pay-TV services by triggering the exit of Mediaset Premium from the market. According to the ICA, the mere acquisition of R2 would have the same (anticompetitive) effects as Sky acquiring the entire Mediaset Premium.

In essence, buying R2 allowed Sky to instantly reach almost five million additional customers who already have an R2 smartcard or set-top box.

 

The Decision and the behavioural remedies

Following the concerns set out in the SO, and the clear intention of the Authority to, at best, clear the transaction only with significant remedies, Sky dropped the plan to acquire R2 and withdrew the merger filing.

However, on 5 April the ICA approved the merger by imposing behavioural measures, having concluded that the transaction had already produced irreversible anticompetitive effects in the market.

In fact, as a result of the transaction, Mediaset Premium’s clients migrated to Sky. According to the ICA, once the clients have moved to a different competitor, the effects of the acquisition are irreversible.

Thus, the ICA could not help but imposing remedies aimed at restoring the competitive level that had been reduced by the exit of the main – and sole – significant competitor from the Pay-TV market.

Under the conditions imposed by the ICA, Sky:

  • will be prohibited from entering into exclusive rights for audiovisual content and linear channels for internet platforms in Italy for three years in order to restore the level playing field in the market for Pay-TV services and allowing other operators that provide their services through internet;
  • shall grant access to competitors to any new platform it may develop that is compatible with the R2’s assets, under fair, reasonable and non-discriminatory conditions.

 

Conclusive remarks

The case shows that the peculiar features of digital markets, such as the Pay-TV market, necessitate close scrutiny of the effects of a transaction in the market, prior to the transaction’s completion. In cases like the one at issue, once a transaction has been completed, it may be difficult – if not impossible – to restore the status quo ante. Therefore, extensive remedies may be expected, since even the “de-merge” would not be enough.

In the case at issue, the returning of R2 to Mediaset Premium could not, according to the ICA, eliminate the anticompetitive effects caused by the transaction – as these occurred before the filing and, most importantly, prior to the clearance decision.

The conclusion reached by the Authority is quite innovative insofar as it approved a transaction and imposed ex post remedies. This decision may further fuel the international debate regarding the approaches that competition authorities may adopt in the face of the challenges posed by the digital economy.