Complaint of Predatory Pricing by by a282102

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									                  Complaint of Predatory Pricing by
                 Hong Kong Cable Television Limited


Complaint against      Hong Kong Cable Television Limited (“HKCTV”)
Issue                  Alleged predatory pricing by HKCTV in relation to
                       two promotional packages, namely “Be My
                       Valentine” and “2002 World Cup” packages
Relevant Provisions    Sections 13 and 14 of the Broadcasting Ordinance
                       (“BO”) (Cap. 562)
Case Opened            March 2002
Case Closed            June 2002
Decision               No breach of sections 13 or 14 of the BO
Outcome                Unsubstantiated
Case Reference         BA1/2002


The Complaint

             The Broadcasting Authority (“BA”) received a competition
complaint concerning two promotional packages offered by HKCTV,
namely the “Be My Valentine” and “2002 World Cup” packages. The “Be
My Valentine” promotion, marketed from 21 January to 14 March 2002,
reduced the monthly subscription fee of $298 to $198 until end-December
2002. The current “2002 World Cup” promotion, marketed from 8 April to
the end of June, effectively reduces the fee to $166.80 per month for one
year. The complaint was lodged jointly by three new pay TV licensees, viz.
Yes Television (Hong Kong) Limited, Galaxy Satellite Broadcasting
Limited and Pacific Digital Media (Hong Kong) Corporation (hereafter
referred to as “the complainants”). The complainants alleged that the two
promotional packages offered by HKCTV are a form of predatory pricing
that is designed to eliminate them or weaken them as competitors or
potential competitors in the pay TV market.

2.           Specifically, the complainants claimed that it was HKCTV’s
intention to “eliminate or weaken” other Hong Kong pay TV licensees, and
the new pay TV licensees would all be “seriously affected” by the price
reductions of HKCTV’s promotional packages.
                                     - 2 -
The Law

3.          Section 13(1) of the Broadcasting Ordinance (“BO”) (Cap.
562) prohibits anti-competitive conduct in the following terms -

      “…a licensee shall not engage in conduct which, in the opinion of the
      Broadcasting Authority, has the purpose or effect of preventing,
      distorting or substantially restricting competition in a television
      programme service market.”

Section 14(1) prohibits a licensee in a dominant position in a television
programme service market from abusing its position. Section 14(4) deems
an abuse of a dominant position in the following terms -

      “A licensee who is in a dominant position is deemed to have abused
      its position if, in the opinion of the Broadcasting Authority, the
      licensee has engaged in conduct which has the purpose or effect of
      preventing, distorting or substantially restricting competition in a
      television programme service market.”

Section 14(5) provides that the Broadcasting Authority (“BA”) may consider
predatory pricing as an abuse of dominance.

4.           Central to both prohibitions is the requirement to establish that
the conduct “…has the purpose or effect of preventing, distorting or
substantially restricting competition in a television programme service
market.” Accordingly, this paper is primarily an assessment of whether the
conduct of HKCTV, specifically its offer of the two promotional packages,
has the purpose or effect of preventing, distorting or substantially restricting
competition in a relevant Hong Kong TV market.


The Inquiry

5.         In conducting the preliminary inquiry into the complaint, the
BA has sought to understand the following issues –

      (a)    the relevant market in which to assess the competitive effects of
             HKCTV’s promotional packages;
                                    - 3 -
      (b)   whether HKCTV is dominant in the relevant TV market, and if
            so, whether the promotional packages under complaint amount
            to an abuse of HKCTV’s dominance in the relevant market; and

      (c)   what impact the behaviour under complaint (i.e. HKCTV’s
            promotional packages in this case) may have on competitors
            and consumers in the relevant market.

An analysis of each of the above issues, taking into account the information
supplied by the complainants and HKCTV, is set out below.


(a) The Relevant Market

6.           The three complainants, in response to the BA’s investigation
inquiries, considered that the free-to-air (“FTA”) TV represented a different
kind of television service in terms of nature and characteristic as compared
to pay TV. For example, FTA TV is available for public reception free of
charge, but pay TV is a service which targets at viewers who are willing to
pay for their choice of programming. Unlike FTA TV, which is basically
advertising revenue driven, pay TV service largely depends on subscription
fee as a source of revenue. Besides, the more stringent programme
standards and the physical limitation in the availability of FTA TV
frequencies up to now have restricted terrestrial FTA TV service providers
from offering the same range and volume of programming that pay TV
operators provide. The services offered by these two kinds of service
providers vary substantially. Hence, the services offered by FTA TV could
not be a close substitute for the services provided by the existing or planned
service of the domestic pay TV licensees.

7.            HKCTV, in response to the BA’s investigation inquiry, argued
that FTA TV and pay TV are in the same market and there is no separate
market for pay TV. It submitted that subscribers switched to FTA TV in
response to price increases in pay TV services was evidence of
substitutability between FTA TV and pay TV.

8.          After considering the different views on the relevant market, the
BA concluded that FTA TV is not in the same market as pay TV in Hong
Kong, for the following reasons -
                                                  - 4 -
          (a)      a pay TV service generally tends to be a multi-channel service
                   offering a large range of specific-interest channels, whereas a
                   FTA TV service generally tends to offer composite
                   programming in a single channel or a few channels appealing to
                   the widest possible audience;

          (b)      a significant number of pay TV subscribers willingly pay fees
                   for pay TV services despite the availability of FTA TV services
                   suggests that pay TV is more an additional service to FTA TV
                   than a substitute for FTA TV;

          (c)      the commercial economics of a pay TV business differs
                   significantly from that of a FTA TV business in the sense that
                   pay TV operators generate income mainly from subscription
                   fees whereas FTA TV operators generate income mainly from
                   advertising;

          (d)      the commercial economics of a pay TV business and its multi-
                   channel nature provide a pay TV operator with the commercial
                   incentive and technical capacity to differentiate its pay TV
                   service from that of a commercial dual-channel FTA TV
                   broadcaster in Hong Kong; and

          (e)      the evidence of the pricing behaviour of pay TV service
                   providers in overseas countries with competitive pay TV
                   industries suggests that they are more closely constrained by the
                   market behaviour of another pay TV operator than a FTA TV
                   broadcaster.

9.           In addition, there are overseas decisions and report findings that
support the conclusion that pay TV and FTA TV are two separate markets –

          (a)      the European Commission has concluded in one case that pay
                   TV constitutes a product market separate from FTA TV since
                   pay TV is mainly financed by subscribers whereas FTA TV
                   relies on advertising, and that the conditions of competition are
                   accordingly different for the two types of commercial
                   television1;


1
    Decision of the Commission of the European Communities, published in the Official Journal, L.364/1, 31
    December 1994 (IV/M.469 – MSG Media Service).
                                                - 5 -



        (b)     the Office of Fair Trading (“OFT”) released a report concluding
                that there is a separate pay TV market in the UK2;

        (c)     the Federal Communications Commission (the “FCC”) in the
                US has concluded that the availability of single-channel FTA
                TV broadcast services is insufficient to constrain the market
                power of multi-channel pay TV service providers3;

        (d)     the Federal Trade Commission (the “FTC”) in the US has
                concluded that there is a separate pay TV market4; and

        (e)     the Australian Competition and Consumer Commission (the
                “ACCC”) has concluded on a number of occasions that FTA
                TV would not provide a sufficient constraint on the exercise of
                market power by pay TV operators, and thus is in a separate
                market5.

10.           As regards HKCTV’s argument that certain subscribers have
switched to FTA TV in response to an increase in price for pay TV, the BA
is of the view that this does not necessarily mean that FTA TV is a substitute
for pay TV. The fact that subscribers actually pay for pay TV despite the
availability of FTA TV would tend to indicate that these subscribers do not
consider FTA TV to be a close substitute. Although ex-subscribers may
choose to watch FTA TV rather than pay increased prices for pay TV, this is
more an indication that subscribers are relatively sensitive to price increases
for pay TV (in economic terms, known as having a high price elasticity),
rather than that FTA TV and pay TV are close substitutes in terms of market
definition.




2
  Review of BskyB’s Position in the Wholesale Pay TV Market, OFT, December 1996.
3
  The First Annual Report of the FCC in the matter of Annual Assessment of the Status of Competition in
   the Market for the Delivery of Video Programming, CS Docket No.94-48, 28 September 1994 at
   paragraph 101.
4
  In the matter of Time Warner Inc, Turner Broadcasting System Inc, Telecommunications Inc, Liberty
   Media Corporation, Docket No. C-3709.
5
  For example, Declaration of an analogue subscription television broadcast carriage service, ACCC,
  October 1999 and Australis Media/Foxtel Merger Statement of Claim, NG581 of 1997, Federal Court of
  Australia, 27 October 1997.
                                     - 6 -
11.          In view of the foregoing, the BA does not accept HKCTV’s
arguments for a TV market in HK that encompasses both FTA TV and pay
TV, but considers that the pay TV market in Hong Kong is the relevant
market in this case.


(b)   Market Dominance

12.          Having determined that the pay TV market in Hong Kong is the
relevant market in analysing this complaint case, the BA noted that, until
February 1998, HKCTV was the only provider of pay TV services in Hong
Kong. At present, the aggregate number of pay TV subscribers in Hong
Kong is estimated to be below 600,000. HKCTV submitted that it had over
560,000 subscribers. According to the “Guidelines to the Application of the
Competition Provisions of the BO” (paragraph 57(a) refers), there will be a
presumption of dominance, in the absence of evidence to the contrary, if a
licensee has a market share persistently above 50%. It would thus appear
that, prima facie, HKCTV is in a dominant position in the pay TV market in
Hong Kong as evidenced by its market share in terms of pay TV subscribers.

13.          However, dominance itself is not prohibited. The critical test is
whether the promotional packages offered by HKCTV, being a dominant
player in the pay TV market, constitute an abuse of its dominance; or are
anti-competitive conduct that has the purpose or effect of preventing,
distorting or substantially restricting competition in the pay TV market.


(c) Impact on Competitors in the Relevant Market

14.          The conduct in question has been characterised by the
complainants as predatory pricing. They claim that it is HKCTV’s intention
to “eliminate or weaken” them, that they will all be “seriously affected” by
the price reductions and that there is a good chance of future “recoupment”
of profit by HKCTV once they are “driven out or weakened”.

15.           The BA considers that in assessing the effect of HKCTV’s
promotional offers, it is important to establish that they are a direct cause of
competitive injury to the complainants. As part of the inquiry, each of the
complainants was asked to provide evidence for their assertions that they
would be “eliminated or weakened” such that competition is prevented,
distorted or substantially restricted.
                                    - 7 -
16.           In response to the BA’s inquiry, one complainant asserted that
HKCTV’s promotional packages would attract away 50% of its potential
subscribers, without providing any further supporting evidence. Another
complainant responded that, since it was only at the initial stage of a
commercial soft launch of its pay TV service, the impact had yet to be
determined. The third complainant did not provide any documentation, but
re-asserted that HKCTV’s promotion had materially affected its business for
the start up period.

17.         On the information provided by the complainants, the BA is of
the view that there is no prima facie evidence that the HKCTV’s
promotional packages had, or are having, any material adverse effect on the
complainants’ businesses.

18.          Having formed the view that there is no requisite effect, there
may nonetheless be the requisite purpose to prevent, distort or substantially
restrict competition. In this respect, HKCTV submitted that the 2002 “Be
My Valentine” package was the second of two similar promotions. The first
promotion was offered in 2001, well before the complainants launched their
services. The discounts then were higher – the monthly subscription fee was
$149 as compared to the normal subscription of $298, representing a 43%
discount. Under the 2002 “Be My Valentine” promotion, the monthly
subscription fee of $198 represents only a 34% discount.

19.         Given the previous promotional offer and the lack of any prima
facie evidence to the contrary, the BA came to the view that HKCTV’s
promotional offers did not have the requisite anti-competition purpose.


Conclusion

20.          On the basis of the information available, and taking into
account relevant factors in assessing the conduct in terms of the competition
provisions in the BO, the BA concluded that there is no reason to believe
that there is a breach of the prohibitions on anti-competitive conduct and
abuse of dominance. There is therefore no justification for proceeding to a
second stage full investigation.


June 2002

								
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