Amidst increasing globalization of markets and industries, it is natural for custodians of free-market distortions, to scrutinize not just companies at home country, but also foreign ones. This is applicable to not only national regulators such Federal Trade Commission (FTC) or the Antitrust Division of Department of Justice (DOJ), but also to international regulators such as the European Commission. These regulators must supervise mergers and acquisitions at their home territory as well as in other jurisdictions. So, it is not unexpected when, those mergers, which, initially seems to be purely American in nature, have been subject to intensive inspection by the European Commission. In U.S, market concentration is the commencement point in a merger control inquisition, but, in Europe, Market Dominance of one competitor is the starting point. In most case, both these approaches gives the same result. But, it is possible that the same merger can be following all legal regulations in U.S, but could come under the scanner in Europe. Thus, the European Commission and the American regulators are almost on a direct collision course. It is in this background, that, this article takes the example of the merger between AOL and Time Warner, and argues why it was important for the European Commission to intervene. The article also discusses the impact the regulations on the particular merger had on American companies. It also discusses how it affects managers of foreign enterprises with substantial operations in Europe.
- Proposed Merger by AOL/Time Warner
In April 2000, the internet provider AOL and the media giant Time Warner Inc., announced the decision to merge. This announcement resulted in an instant uproar amongst competitors and regulators since and AOL/Time Warner merger, if approved, would create the largest media company in the world and dominate over all its competitors.AOL is primarily an Internet service provider, but they also provide popular softwares such as Netscape browser. More importantly, AOL was closely associated with the German media giant Bertelsmann, which, is a large media conglomerate involved in publishing, TV and radio production and distribution, and, music. Time Warner, is a media giant, which has powerful subsidiaries such as CNN, Warner Bros., etc. and several publishing companies, besides having large stakes in TV and music content providers.The European Commission was perturbed by the proposed vertical integration of both these companies. The merger would make AOL a very powerful internet service provider. At the time, AOL had tie-ups with Bertelsmann, which would make possible for the newly merged company to be the market leader in the online music market. The Commission also concluded "that the new entity would become dominant in the market for music software." The European Commission wanted to ensure that the proposed entity would not be able to control the access to Europe’s primary source of music publishing rights. (Stefan Schmitz).
- Concerns of the European Commission
2.1“Gatekeeper” IssueThe proposed vertical integration of AOL and Time Warner would have resulted in the entity being a “gatekeeper”. AOL was the only internet service provider with a presence in most European Union Member States. Moreover, Time Warner was the world’ s largest media conglomerate with interests in TV and music networks, books, and film and cable networks. The proposed merged entity would be capable of playing a “gatekeeper” role with the ability to mandate the technical standards required for online music delivery, which involves both streaming and downloading of music from the internet. This would have enabled the proposed entity to dominate the then emerging markets of online music delivery. This could have happened in two ways. Firstly, the proposed entity would be able to establish a implicit formatting technology for all the music downloads of both Time Warner and Bertelsmann. The formatting language developed by the proposed entity could become the industry standard. If so, the competitors would have to format their music according to the proposed entity’s technology. This could have given disproportionate control to the proposed entity. Secondly, the proposed entity would have the power to format its music to sync with its own software, Winamp. This could result in Winamp becoming the only music player in the world and completely kill competition .If the entity refuses to license their proprietary technology, then, they could easily charge heavy prices for its usage.
- Network effects
“Network effect” occurs when the product value increases with the number of people buying the same product or the product accessory. In the case of AOL/Time Warner, the proposed entity would have created “network effects” both for the content providers and for the customers. For content providers, AOL internet group would turn out to be the primary channel for their product distribution. As far as customers are concerned, they would not have any enticement to leave AOL. The “network effects” would cause the newcomers to join the AOL community because there are more possibilities to chat and connect through AOL.The primary factor for this is the combined content owned by Time Warner and Bertelsmann together, along with the huge subscriber base for AOL. This would force competing record companies to distribute their product via AOL’s online channel. Also, the proposed entity would have the power to provide its subscriber base with preferential access to their content, which might allow their subscribers to have access to new releases even before it was made available to the public through other distribution outlets. Thus, “network effects”, along with a powerful market position would eventually promote market impediments, resulting in market foreclosure.
2.3 Foreclosure of Input marketsVertical integration “eliminates the double marginalization problem and opportunisticbehavior”. (European E & M Consultants). But, they may also lead to foreclosure of input markets. One of the essential conditions for foreclosure is that the merging companies have the dominating market position on the upstream level. This would happen f the merged entity can increase the competitor’s cost by rising the input prices, when in fact, the downstream entity of the company would have access to the input at minimal costs, thus getting a competitive advantage. Foreclosure of input markets can also happen if the merged entity discontinues supply of its downstream entity to their competitors, thus, withholding any access to the input. An input foreclosure creates instantaneous ramifications in prices. The input foreclosure would force rival companies to raise prices. This might even lead to their exit in the market, eventually harming the consumer.
In the case of AOL/Time Warner, the proposed entity had the capability to acquire the rights to one of the biggest music libraries in the world. AOL would also have exclusive access to the Bertelsmann Music Group’s library. This would ultimately result in the proposed entity dominating the music publishing rights in Europe. It should be noted, that Time Warner was simultaneously trying to merge with EMI. So, the proposed entity would not only have music rights of Warner and Bertelsmann, but also of EMI. Thus, the proposed entity would have the power for almost half of the whole music content in Europe. Such power, could lead to foreclosure of input markets.
3. Remedies Proposed by European CommissionIn the case of AOL/Time Warner, the concerns about competition started at the sources, because the proposed entity was to have rights to almost half of the music content in Europe. Time Warner Inc., eventually aborted plans of merger with EMI, which substantially reduced concerns about competition. So, the European Commission concentrated on the fundamental link between AOL and Bertelsmann. AOL decided to restructure their joint venture with Bertelsmann, which resulted in them existing from AOL Europe. This resulted in abating some of the concerns. AOL did not take any measures that would result in Betteressmann music being accessible solely through AOL.
4. Impact on American Business The regulations by the European Commission have a considerable impact on American business practices. For U.S, European Union is the largest market and the most significant trading partner. European Commission's priorities include environmental protection, reduction of free-market aberrations such as unfair trade practices, unfair competitive advantage, and to provide consumer health and safety. These regulations are largely welcomed by the consumers, but, large American business, are negatively impacted, since it would just increase the market barriers, and the business do not have any power over it.One of the primary area in which the regulations on AOL/Time Warner impacted the American business is Market access and competition. The European Commission works to protect their free markets and regulates all forms of monopolistic tendencies within the European market. The case involving the merger of AOL and Time Warner is an apt example of this. The Commission ensured that there would be a fair access to the market.So, large American companies, who wish to engage in mergers or acquisitions, should now have to face an additional barrier. It is not possible for an American firm to ignore the regulations proposed by the European Commission, because the EU market is consequential to nearly all sectors of the economy. Even companies such as Microsoft have felt the heat, because of the competition policy of the European Commission, which related to unfair practices contributing to market domination.For managers of foreign enterprises with substantial operations in Europe, the European Commission rules have a direct impact in the way they do their job. Companies, which, face probe from the regulators and which fail to comply with the regulations, run a high risk of being subjected to fines and such negative aftermaths. Even though, the European Union competition rules does not fine individuals, their careers can be negatively affected by any wrong decision. So, the mangers have to be judicious in their choices, since it can even impact a company’s existence.
The primary concern of the European Commission, with respect to a merger, is to attest whether the potential entity would actually benefit the end customer or not. For this reason, firms should aim at not resisting the practice, but should take measures to follow regulations so as to ultimately enhance the customer experience through lower prices, better product offerings and improved shopping experiences.
As of today, the European Commission has stopped only very few mergers. But, this is because the firms either, engaged in disseminating part of their business or, appropriately took steps to overcome the concerns raised by the Commission. This was primarily the case of the AOL/Time Warner merger.
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Amie Kreppel.The EU's growing impact on American business and consumers. Niemanwatchdog.org, 19 Dec 2005. Web. 27 Nov 2012.
Schmitz, Stefan. How dare they? European Merger Control And the European Commissions Blocking of the General Electric/Honey Well Merger. Penn Law. 2002. Web. 27 Nov 2012.
Turner, James. Mega Merger, Mega Problems: A Critique of the European Community's Commission on Competition's Review of the AOL/Time Warner Merger, 2001. Web. 27 Nov 2012.