Last October, RTÉ agreed to change its approach to the sale of television advertising in order to address concerns identified by the Competition Authority. The Authority’s investigation was triggered by a complaint from TV3 Television Network Limited (“TV3”) regarding RTÉ’s scheme for the sale of TV advertising, commonly referred to as the Share Deal. TV3 argued that the Share Deal contained conditional rebates with loyalty-inducing effects thus resulting in an abuse of RTÉ’s dominant position contrary to Article 102 of the Treaty on the Functioning of the European Union (previously Article 82 of the EC Treaty) and/or Section 5 of the Competition Act 2002, as amended. The Authority’s initial legal and economic thinking regarding the competition aspects of the Share Deal are contained in its Enforcement Decision, published in January 2012.
The 2002 Act allows the Authority to keep the public informed regarding relevant competition issues. Since the entry into force of this legislation, the Authority has published fourteen enforcement decisions. The purpose of this is to increase transparency and predictability regarding the Authority’s interpretation of competition rules. Accordingly, the Authority tends to publish enforcement decisions regarding completed investigations that raise complex or novel issues. Since the 2002 Act does not allow the Authority to find that an infringement of EU/Irish competition law has occurred, enforcement decisions are published where the Authority has found that there is no such breach or where the companies under investigation have offered remedies under Irish competition law in order to settle the case. (The Authority is not able to accept a commitment under EU competition rules since that function is reserved to the Courts in the State.)
Abuse of a dominant position
Section 5 outlaws the abuse of dominant position in the State whereas Article 102 prohibits the abuse of a dominant position in the EU that may affect trade between EU Member States. In order to prove that an undertaking has infringed Section 5/Article 102, one must first establish that this company has a dominant position. A dominant position is defined as a position of economic strength that enables a company to restrict effective competition by allowing it to behave, to an appreciable extent, independently of its competitors, customers and, ultimately, consumers. In itself, dominance is not unlawful. However, dominant undertakings are under a special responsibility not to restrict effective competition. Both Section 5 and Article 102 contain a non-exhaustive list of various types of abusive behaviour. These include the imposition of unfair prices or other trading conditions.
Suppliers commonly compete by offering discounts (also referred to as rebates) to customers or prospective customers. However, the European Courts in various judgments and the European Commission in its 2009 Guidance on the Commission’s enforcement priorities in applying Article 82 of EC Treaty to abusive exclusionary conduct by dominant undertakings both state that loyalty discounts may constitute an abuse of a dominant position in certain circumstances. More particularly, conditional rebates with loyalty-inducing effects granted by a dominant undertaking may constitute an abuse of a dominant position unless objectively justified. Target rebates are probably the most common type of conditional discount. These are dependent on the customer reaching or exceeding a purchasing target during a particular reference period.
Such discounts are anti-competitive because they may require or persuade a customer on a particular market to purchase the entirety (or the vast bulk) of its relevant supplies from the dominant undertaking. In other words, if the dominant player is an unavoidable trading partner for all or most customers, conditional rebates may result in foreclosure. However, if competitors can compete on equal terms for a customer’s entire supply requirements, conditional rebates are unlikely to give rise to such concerns. The EU General Court’s 2010 decision in Tomra v Commission confirmed that it is sufficient to show that the relevant conduct is capable of foreclosure effects for it to be seen as abusive. In other words, it is not necessary to show that the abuse under consideration had an actual anti-competitive impact.
Funding models of RTÉ and TV3
RTÉ currently operates two free-to-air television channels and is financed by both TV licence fees and commercial revenue whereas TV3 is funded by advertising, sponsorship and other business revenue. This company offers two channels, TV3 and 3e. In 2009, TV3 complained that rebates granted under the Share Deal infringed Section 5/Article 102. The following year, the Authority opened a formal investigation of RTÉ’s conduct. In 2011, the Authority set out its preliminary concerns to RTÉ.
Sale of TV advertising
TV advertising is sold on the basis of ‘commercial impacts’. An impact is defined as an individual watching a particular advertisement once. Since the viewers of a particular TV programme may be drawn from a mix of different demographics, impacts are sold against these groups. The price of an impact is expressed as cost per thousand or CPT for each demographic. RTÉ sets initial CPTs for a total of 18 different audience groups. These prices are used as the starting point for RTÉ’s annual discussions with advertising agencies since the vast bulk of TV ads are sold through these agencies.
The share of its total advertising budget an customer would commit to RTÉ was a crucial factor in the relevant negotiations. Generally, the Share Deal provides that the higher the share of its TV advertising budget an advertiser committed to RTÉ, the higher the discount it received. Indeed if a company decided to be commit a small share of its TV advertising budget to RTÉ, it may not have received any discount and may even have been obliged to pay a premium.
RTÉ’s market power
Relying on the approach of enforcement bodies such as the European Commission, the Authority reached the preliminary view that the appropriate market definition was the sale of TV advertising in the State. The Authority suggested that the sale of advertising on UK TV stations available in Ireland such as UTV and Channel 4 did not materially impact the geographic market definition. Although the Authority did not reach a final view on market definition, RTÉ’s counter-argument that the relevant product market definition should be broadened to include new forms of advertising such as social media is noteworthy. (Given ongoing technological developments, this issue is likely to recur regularly over the coming years.)
In assessing whether RTÉ is dominant in the sale of TV advertising, the Authority examined a number of different factors. Firstly, it noted that RTÉ’s market share was stable and substantial i.e. it remained at 55-65% over the last decade. Moreover, the Authority argued that the Share Deal restricted the ability of other TV stations to increase their market shares. The Authority did not accept that advertising agencies were a sufficient competitive constraint on RTÉ because they were not in a position to switch quickly to competitors such as TV3 or Sky. In addition, the Authority considered that RTÉ’s status as the national broadcaster increased its prestige thus making it more appealing to advertisers. This underlines its status as an unavoidable trading partner. All told, the Authority formed the initial view that RTÉ was dominant in the market for the sale of TV advertising airtime in the State.
Anti-competitive aspects of the Share Deal
The Authority examined a number of factors in considering whether the Share Deal could have loyalty-inducing effects. These include whether this target rebate is retroactive or “all-units”; the progressive nature of the rebate/actual discount levels; the market shares of competing undertakings; and finally, an economic analysis of the potential foreclosure effect.
Since the Share Deal incentivises an advertiser to spend a particular percentage of its annual TV advertising budget with RTÉ in order to benefit from discounts on its total spend over the relevant period, the Authority argued that it is an “all-units” rebate. The loyalty-inducing effect of this rebate is strong since advertisers would be keen to reach their respective targets in order to benefit from the discount on their overall individual TV advertising budgets. In addition, other TV companies would be obliged to compensate advertisers for their possible loss of the RTÉ discounts in order to win some of the State broadcaster’s business. The necessary cuts in advertising rates may not be economically viable.
The Authority found that the level of a company’s TV advertising budget committed to RTÉ is an important factor in determining the available discount. Under the Share Deal, the achievement of significant budget commitments would result in the granting of major discounts. For example, an advertiser that spent 60-70% of its TV advertising budget with RTÉ in 2008 or 2009 received a 20-30% discount overall. The Authority viewed the Share Deal as progressive since the rate of discount increases in accordance with the placing of additional TV advertising with RTÉ. In addition, this scheme had loyalty-inducting effects since rates were prohibitively expensive unless a business spent a substantial percentage of its TV advertising budget with RTÉ.
The EU Court of Justice’s 2007 judgment in British Airways plc v Commission states that the competitive pressure exerted by a dominant company is bolstered if this undertaking has a much larger relevant market share than that of its rivals. The Authority noted that RTÉ’s share of the Irish TV advertising market was much greater than either of its two main rivals, TV3 or Sky. Accordingly, customers are likely to use these stations for limited slices of their relevant TV advertising spend only. Moreover, these stations would have to offer significantly higher discounts in order to attract customers.
In analysing the economic aspects of the Share Deal, the Authority noted that the European Commission’s “as efficient competitor” test should be used to determine this scheme’s potential exclusionary effects. The purpose of this test is to ensure that a dominant undertaking cannot foreclose a competitor which is ‘as efficient’ but, because of its inferior financial resources, is incapable of withstanding the competition waged against it. Although the Authority did not carry out a full economic analysis, it reached the preliminary view that it would be difficult for RTÉ’s rivals to offer sufficiently low TV advertising rates in order to compete effectively.
All things considered, the Authority reached the initial view that the Share Deal was a conditional rebate scheme with a loyalty-inducing effect. In order to address the Authority’s abuse of dominance concerns, RTÉ committed to revise its TV advertising sales policy by excluding the share of TV advertising budget element. Resolving the case in this manner allowed the Authority to avoid the perils of expensive, time-consuming, lengthy and unpredictable litigation. However, the settlement means the Authority did not reach a final view regarding whether RTÉ has abused its dominant position. Indeed, under Irish law, only the Courts have the power to decide that an infringement of the 2002 Act has taken place. Nevertheless, this Enforcement Decision contains useful guidance regarding the Authority’s likely approach to the discount strategies of dominant companies. Moreover, the Authority’s approach in the Enforcement Decision shows that, unsurprisingly, it will closely follow the guidance of the European Courts and the European Commission on abuse of dominance issues.
This item featured in the Law Society Gazette (May 2012)
Contributed by Cormac Little