Case Number

CA 2082/09

Date Decided

8-20-2009

Decision Type

Appellate

Document Type

Full Opinion

Abstract

Facts: Bezeq, the Israel Telecommunications Corporation Ltd., held 49.78% of the shares of “Yes” D.B.S. Satellite Services (1998) Ltd. Another 32.6% of the Yes shares are held by Eurocom D.B.S Ltd. Yes is one of only two providers in the multi-channel television broadcast infrastructure market and in the multi-channel television broadcasting market. The other multi-channel television provider in the market is “Hot”. Bezeq is a public company licensed to provide internal fixed line services, including fixed line telephony and Internet infrastructure. Bezeq also provides the public with a wide variety of communications services through its subsidiary and affiliated companies, including international telecommunications services and Internet service provision, cellular telephony, and endpoint equipment for telephony. On 27 June 1995, Bezeq was declared to be a monopoly in a number of communications markets, and on 10 November 2004, it was declared to be a monopoly in high-speed Internet service provision. On 2 August 2006, Bezeq and Yes submitted a notice of merger pursuant to the Restrictive Trade Practices Law, 1988, declaring Bezeq’s intention to exercise options that it held and that would give Bezeq 58.36% of the shares of Yes, making it the controlling shareholder of Yes. The General Director of the Israel Antitrust Authority objected to the merger as presenting a reasonable risk of significant harm to competition from both a horizontal and vertical perspective. Bezeq filed an appeal with the Antitrust Tribunal. Eurocom joined the proceedings in support of the General Director’s decision. The Tribunal overturned the decision of the General Director, ruling that the merger would be permitted subject to certain conditions. The General Director and Eurocom filed the current appeal against the decision of the tribunal. Bezeq filed a counter- appeal in regard to the amount of the bank guarantee that the tribunal required of it as one of the conditions for the merger.

Held: Justice E. Hayut (Deputy President E. Rivlin and Justice E. Rubinstein concurring) delivered the opinion of the Court. Companies may not merge without the consent of the General Director of the Antitrust Authority. The test for exercising the General Director’s authority under s. 21 of the Restrictive Trade Practices Law is the existence of a “reasonable risk” – i.e., estimation that there will be a significant damage to competition due to the proposed merger, or damage to the public with respect to one of the matters listed in the section. The basic assumption of the Law is that mergers are desirable, in that they increase business efficiency and benefit consumers. However, because mergers can harm competition due the increase in the power or market share of the merging companies, the legislature saw fit to review them, and in certain cases, even to limit them in order to protect the public against economic distortions resulting from excessive concentration of certain markets. Protection of competition in the communications industry is of special importance, as the media carries out an essential function for our existence as a democratic society, and serves to realize fundamental rights such as freedom of expression and the public’s right to know.

Historically, the Israeli multi-channel television industry has been characterized by a lack of direct, effective competition. In 2000, a satellite television company entered the market. The technological innovation changed the market from a monopoly to a duopoly. The current reality in the Israeli multi-channel TV broadcast industry is that there are only two players– Hot and Yes – in the infrastructure market and in the content market, and each of them maintains full vertical integration between the infrastructure and broadcasting levels. The merger under discussion is not a horizontal one because Bezeq itself is not currently a competitor in any of the markets that are relevant to this case (i.e., the infrastructure market or multi-channel TV broadcast the content market). Additionally, this is not a vertical merger between companies operating at different stages of production or marketing in the same industry, since Bezeq’s activity in the multi-channel TV broadcast industry consists only of holding of the Yes shares that it currently holds. This merger, which is neither vertical nor horizontal, can be referred to as a conglomerate merger. Conglomerate mergers are not infrequently considered to be mergers whose effect on competition is neutral, and occasionally, even beneficial, but there are a number of dangers to competition involved in a conglomerate merger. The doctrine that is relevant to this case is that of actual potential competition. This doctrine refers to future harm that will be caused to the market because a potential competitor will be removed from it as a result of the merger. In our case, the General Director based her objection to the merger on this actual potential merger doctrine, and the essence of her argument in this context is that without a merger, Bezeq can be expected to enter into the infrastructure market and the content market for multi-channel TV broadcasts as an independent competitor. Therefore, according to the General Director, the merger’s approval will lead to the loss of Bezeq as a potential competitor in these markets or in one of them, and will fix them as duopolistic markets. The Court found that two of the key conditions for establishing the potential competitor doctrine are present here – there is a reasonable likelihood that Bezeq, as a potential competitor, will enter into the multi-channel television infrastructure market and will provide IPTV services, and it has been proven that it has the technological ability and the economic incentive to do so in the short term. Additionally, it appears that Bezeq’s entry into the multi-channel television infrastructure market presents considerable advantages over the situation that would develop in the market if the merger were approved.

The Tribunal, when adjudicating an appeal of a General Director’s decision, does not have absolute discretion to order as it wishes and it cannot stipulate conditions of a merger’s approval which, according to its own determination, does not give rise to reasonable risk of significant damage to competition in the relevant industry. The Tribunal therefore erred in subjecting merger to conditions after it found that the merger between Bezeq and Yes would not cause significant damage to competition. The Tribunal also erred in finding that the merger would not significantly damage competition. Such a risk does exist in this case. The main purpose achieved in preventing the merger is the addition of a competitor in the infrastructure market. This is a contribution to competition from a horizontal perspective through the weakening of the concentration in the existing duopolistic market, and it is hard to think of a structural condition in this case that would achieve this purpose. The behavioral conditions stipulated by the Tribunal cannot resolve the competition risk, because of the structural difficulty in ensuring such an arrangement where a single party (Bezeq) controls two out of three infrastructures in the market. The Court, therefore, cancelled the Tribunal’s decision and restored the General Director’s original determination opposing the merger.

Keywords

Administrative Law -- Discretion, Antitrust, Communications

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