OFT's advice on the Competition Commission report on the proposed merger of Carlton and Granada

No. ME/1645/02

A report under section 125(4) of the Fair Trading Act 1973 of the Chairman's advice dated 18 September 2003, to the Secretary of State for Trade and Industry under section 86(1) of the Act

Please note that the full text of the decision can be downloaded by using the link on the right. What follows is an extract from the advice.

In this submission the OFT advises under section 86(1) of the Fair Trading Act 1973 on the report by the Competition Commission (CC) on the proposed merger of Carlton Communications plc (Carlton) and Granada plc (Granada) (the Report).

The CC has concluded that the merger qualifies for investigation and that it may be expected to operate against the public interest.  It recommends that, in order to address the adverse effects of the merger, Carlton and Granada should agree to the set of behavioural undertakings set out at paragraphs 2.137 to 2.139 of the Report (in relation to other ITV regional licences) and paragraphs 2.154 to 2.170 of the Report (in relation to sales of advertising airtime).

BACKGROUND

Carlton and Granada are media companies active in the supply of studios and post-production facilities; programme acquisition and supply; distribution of rights for merchandising and licensing of programmes; acquisition of broadcast licences; control of ITV through the ITV network; supply of airtime for TV advertising; and broadcasting. The merger between Carlton and Granada, proposed in October 2002, raised competition concerns in the supply of TV advertising in the UK (together with possible concerns relating to the supply of studios and broadcasting licences). On my recommendation, you referred this merger situation to the CC for investigation on 11 March 2003.

THE CC's ASSESSMENT

The CC concluded that the merger could be expected to operate against the public interest in relation to (i) the position of the other ITV regional licensees and (ii) future competition for the sale of advertising airtime.

As regards the position of the other ITV regional licensees, the CC concluded that, post-merger, Carlton and Granada would control both the day-to-day and the longer-term strategic decisions of the ITV Network Centre. The other ITV licensees could be vulnerable to the ability of the merged entity to exert its power over the networking arrangements to their detriment. The CC further concluded that the merger would give rise to additional adverse effects since the other ITV licensees would lose a choice as to which sales house to use to sell their TV advertising airtime. Unless the other ITV licensees could continue to sell their airtime through the merged entity's sales house on terms similar to those that they currently enjoy, the proposed merger would have an adverse effect on those licensees.

The CC's major focus was on the effect of the proposed merger on the sale of Carlton's and Granada's advertising airtime. It concluded that the proposed merger would have an adverse effect on future competition for the sale of advertising airtime and so might be expected to operate against the public interest. More specifically, the CC thought that the adverse effects likely to arise would centre on the enhanced market position of Carlton and Granada. This might manifest itself in a number of ways including, in particular, the parties' ability post-merger to:

• insist on terms that were generally less attractive to advertisers or media buyers
• enhance the degree of price discrimination;  and/or
• change the system under which television advertising airtime was sold to the advantage of the merged entity.

The CC identified a number of benefits arising from the proposed merger in terms of broadcasting, programming and competition for viewers. The CC concluded that these benefits did not outweigh the adverse effects identified.  Accordingly, the CC found that the merger may be expected to operate against the public interest.

THE OFT's ASSESSMENT AND RECOMMENDATION

Although this merger is being considered under the Fair Trading Act, our approach, in the spirit of the Enterprise Act 2002 now in force, is to advise acceptance of CC recommendations provided that those recommendations – in particular as they affect remedies – are capable of transposition into undertakings that can be implemented and monitored effectively so as to remedy the detriment identified.

RECOMMENDATION

We recommend that you invite us under s88 of the Act to liaise with the ITC and Ofcom to seek to obtain from Carlton and Granada the CC's recommended remedies concerning regional ITV licensees. We further recommend that you carefully consider the concerns relating to the effectiveness, possible adverse competitive effects, and implementation of the CRR remedy when deciding whether to accept the CC's recommendation in relation to the sale of advertising airtime. If you decide to accept the CC's CRR remedy, we advise that you invite us to liaise with the ITC and Ofcom to seek to obtain undertakings giving effect to the CRR remedy. If you decide not to accept the CC's recommendation, you may wish to consider the alternative remedies addressed by the CC.

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