CMA Report: Anti-Competitiveness Analysis of Fox/Sky Merger Inquiry

This report examines the Competition and Markets Authority (CMA) investigation into the proposed merger between 21st Century Fox and Sky Plc. The report focuses on the anti-competitive aspects of the merger, particularly concerning media plurality and market concentration within the UK. It analyzes the potential for reduced competition, the impact on consumer prices, and the barriers to entry created by such a merger. The report explores the CMA's approach, methodology, and findings, including the investigation into broadcasting standards. It highlights the economic implications of the merger, discussing horizontal mergers, economies of scale, market dominance, and welfare losses. The analysis includes figures illustrating the impact on consumer surplus and social welfare. The report also assesses the CMA's use of quantitative and qualitative metrics, limitations observed, and the influence of various stakeholders. Ultimately, the report provides a comprehensive overview of the merger inquiry and its implications for competition and consumer interests in the UK media market.

The Competition and Markets Authority (CMA) is a department of non-
ministerial government, situated in the United Kingdom. This authority
takes responsibility to strengthen competition among businesses within
this country. Through doing so, the country chiefly focuses to prevent and
reduce various anti-competitive activities within the business sector.
Hence, the authority follows some specific responsibilities. When unfair
competition occurs in business practices or consumers’ choices are
destroyed, the CMA takes these responsibilities. The authority investigates
mergers, conducts studies related to market and brings different criminal
proceedings. These criminal proceedings occur against firms, which
practice cartel system in market. In addition to this, the CMA investigates
possible violation to prohibit further with the help of anti-competitive
agreements through using the Competition Act 1998. The authority
further implements consumer protection legislation, such as the Unfair
Terms in Consumer Contract Directive along with Regulations. Moreover,
the authority encourages regulators to utilise various competing powers
through considering regulatory appeals and references. The report
focuses on anti-competitiveness practice of the CMA through selecting a
particular case study. For this, the report selects 21st Century Fox/Sky
merger inquiry. The CMA has conducted an investment when the
anticipated acquisition has been done between Sky Plc and 21st Century
Fox. These two companies are based on the media sector. Each company
has a genuine commitment to maintain standard broadcasting. For
understanding the situation, chiefly focuses on types of merger along with
its positive and negative sides.
The merger between 21st century Fox, Inc. and Sky Plc would have be an
example of a horizontal merger, this is a form of merger between firms
that operate in the same industry. The merger would’ve provided the
merging firms with an increase in the share of the market, this could then
lead to the benefit of the new business having price controlling powers
and reducing competition. An additional benefit of this merger would’ve
been the fact that both firms are excelling in the mass media corporation
in the same services (news and sport) as well as others (Fox providing a
film industry and Sky providing telecommunications), it would’ve been a
smart investment to merge instead of having to put a lot of time and
resources into diversifying into the respected fields the other one doesn’t
do and as a result, increasing revenue with minimal sunk costs.
However, the Competition and Markets Authority (CMA) began an
investigation into the anticipated procurement of Sky Plc by 21st Century
Fox, Inc. due to a referral made to them by the Secretary of State for

Digital, Culture, Media and Sport. The provisional findings were that the
merger wouldn’t be in the public’s best interest because of media
plurality, which is the idea of having multiple and diverse types of media
and media support. Due to the fact that the Murdoch family trust already
“owns both Fox and News Corporation, as well as owning 39% of Sky Inc.
and the UK newspaper titles; The Times, The Sun and the Sunday Times”
(Sky News, 2018), the issue that was brought up was that if 21st Century
Fox were to acquire Sky Plc, they may have too much power of the UK’s
media outlet, even possibly having the ability to sway public opinion
through the news outlet. Comcast ended up outbidding Fox and
purchasing Sky for $39 billion (CNBC, 2018).
The Murdoch Family trusts’ news outlets currently reach a third of the
UK’s population and so if the merger were to have gone through, it
would’ve only increased this, meaning a reduction in competition that can
end up giving 21st Century Fox monopoly power, with a greater market
share within the UK’s media and news world. With greater market share
and less competition, media plurality would not have been the only
concern, 21st Century Fox could then have decided to increase the prices
for consumers on the services they provide. In addition this would
increase the barriers to entry as the contestability of the market would
then be affected on the grounds that new firms wanting to join said
market could be potentially deterred on the basis of Fox owning too much
market share, resulting in them not wanting to attempt to join as they
believe they won’t make sufficient profits to survive the industry.
Another economic basis for the referral, was on the grounds of
commitment issues to broadcasting standards. However, the CMA
provisionally found that the merger would not cause a lack in the
commitment to broadcasting standards due to evidence that Fox has
operated in the UK for two decades without committing any broadcasting
standards violations. Sky Plc has a similar history of always following the
broadcasting standards.
In the 21st Century Fox and Sky merger inquiry, it is seen that the
practices of the two firms limit or prevent competition for a number of
reasons.
Firstly, the transaction is expected to operate against the public interest
due to a lack of media plurality (Lambert, A. 2018). It is essential that
there is some degree of market concentration in the media industry so
that there is variety and consumer choice. When two large firms merge,

there is a dramatic increase in market concentration. In essence, abuse of
market dominance of the newly merged firm is a cause for concern in the
media industry for political and economic reasons. Studies state that
merger activity considerably increases concentration ratios (Jacquemin, A
et al, 1991). When a firm’s market share is relatively large compared to
other incumbent firms, they can reap cost benefits from economies of
scale. Low costs can lead to long run profitability (Jacquemin, A et al,
1991). This can allow them to undercut firms or partake in predatory
pricing. Predatory pricing can deter new entrants into the market and
force existing firms to sink their costs and leave as they cannot compete
with artificial prices. This prevents competition as it provides a barrier to
entry. Although economies of scale can provide organic growth, as cost
decreases can be hypothecated into research and development, this
dominance continues to affect consumer’s interests through a lack of
diversity. Another way in which this merger may operate against the
public interest is due to the way in which dominant firm’s price setting can
exploit the consumer and generate an unequal distribution of income as
the merged firm reaps all profit at the expense of normal households
(Bennett, P. 1991).
Figure 1 shows that under a lack of media plurality due to a
dominant/monopolistic firm in the market can be detrimental to
consumer’s interests. As the newly merged firm abuse monopoly power
and set their price above average and marginal cost (Bennett, P. 1991), a
deadweight welfare loss is created. Therefore, the market is no longer
producing at the socially allocative optimum due to a distortion in the
operation of the economy (Bennett, P. 1991). The newly dominant firm’s
highly set prices reduce
consumer surplus dramatically
as their willingness to pay falls.

Figure 2 shows that in comparison
to the deadweight loss to social
welfare arising from the merger, a
perfectly competitive firm provides
maximum social welfare. In perfect
competition, the firm produces
where price is equal to marginal
cost. Increases in social welfare are
due to maximum media plurality,
competitive pricing and efficiency
gains. These efficiency gains may
not occur in a monopolistic market
due to X-inefficiency. This means
that the merged firm may not
perform at their maximum ability due to a lack of competitive pressure.
The size of the welfare loss from dominantly merged firms can be
measured through the difference between monopoly prices and prices
from competitive markets. This has been averaged at roughly 4-7% of
GDP (Bennett, P. 1991).
To add to the issue of monopolistic market dominance, mergers can be a
transfer of resources to more efficient managers (Davies, H. 2001). During
a merger, firms experience synergy, in which the uniting of the two
companies reaps greater benefits. If the manager of one firm is more
efficient than the other, a merger can mean that greater supernormal
profits can be achieved. This is because the resources from the inefficient
firm are now under the control of a more efficient manager wherein the
benefits of the efficient manager mean that smaller inputs create greater
outputs. These efficiency gains can, again, lead to cost reductions leading
to either a lower price, or greater research and development. This can in
turn expand the monopolistic dominance of the new firm.
The approach and methodology that the CMA took of studying both
objectives seems primarily clear and precise as both public interest
concerns about media plurality; and a genuine commitment to
broadcasting standards were exhaustively researched independently and
in-depth due to consistent specificity throughout the report.
Firstly, within the approach, the “context for whether plurality will remain
sufficient” was outlined this shows further initial clarity in the aim of the
report as when the importance of media plurality remaining sufficient is
outlined, this provides an explicit basis for what needs to actually be

researched which should in the end produce efficient results. A deductive
research approach was used to clearly & further specify the level
concentration (in terms of population within the UK) that the MFT
(Murdoch family trust) could possibly have within media. Furthermore, this
specificity element within this approach was extended as the level of
potential concentration of the MFT against the other main media networks
within these four different types of media outlets; which are TV, radio,
print newspapers, and online was identified in the initial framework.
The methodology used by OFCOM is going to be analysed in this case; as
the Ofcom measurement framework was the only practical measurement
used within this CMA report. The Ofcom measurement framework consists
of three categories of “quantitative metrics” and “qualitative contextual
factors”. However, this study was open to “extensive public consultation”
before its actual publication, the main issue regarding this is that the two
mergers themselves who inevitably hold their own fixed view were able to
offer their views which according to Fox was that “quantitative measures”
are not sufficient in measuring plurality, and as such, contextual factors
also need to be considered. Similarly, “Sky submitted that measures of
availability are most relevant to an assessment of plurality”. This suggests
immediate bias to the report, which makes this particular methodology
used seem disreputable, unreliable and therefore unrepeatable. On the
contrary, there is reason to deny that the CMA could have been working
on bias grounds because it could have easily manipulated the findings to
show that Fox or/and sky did not have a genuine commitment to
broadcasting standards, since this objective is arguably easier to prove
than the concern of public interest about media plurality because the data
used for the former objective is heavily more quantitative than the data
used for the latter objective.
To contrast this, the limitation observed by these mergers were also
observed by unnamed third parties within media, they also concluded that
there are imperative quantitative aspects that cannot be measured;
interestingly, this implies that the two mergers may have been critical in
their criticisms; if they identify the same possible limitations of this study
with third party media networks that would inevitably be bias in their
oppose to the merge. Which possibly suggests that Fox and Sky could
possibly be rational and critical corporations that are not bias in their
release of media. As well as limitations in the study being observed by all
parties. There were Restrictions to the study observed by Ofcom
themselves for instance; that there are aspects of the market that cannot
be measured in a quantitative manner which was an integral and
imperative part of the measurement of media plurality, which limits the
reliability of this study, however the fact that this problem is known can
make the study repeatable just with the constant notion that the
quantitative aspect cannot be measured.

Secondly, the analysation of how the CMA came to the conclusion that the
merger would not lack a genuine commitment to broadcasting standards
will now be considered. The quality of broadcasting standards were
compared and to the Broadcasting standards in the US and elsewhere. It
was further dissected to analyse the broadcasting standards within Sky
and Fox. The analysation here was restricted as only quantitative data
could be used to prove this. Since, data was hindered, it can be argued
that in this case the “large number of submissions from third parties
addressing the commitment of both Sky and Fox to the broadcasting
standards objectives” were helpful to provide more insight. However, the
issue of disreputability could have risen again as opinions are inevitably
subjective.
The main primary data used in this CMA report was derived from Ofcom,
however Ofcom is the regulator for the communications services that we
use and rely on each day. Therefore, if Ofcom is regulatory itself, to what
quantitative and even possible unethical bias qualitative extent can it
decide that the merger would not be in the public’s interest due to media
plurality concerns and would not lack a genuine commitment to
broadcasting standards.
The Competition and Markets Authority (CMA) has provided a report,
divided into two phases. In 20th June 2017, the CMA has provided its report
to the Secretary of State regarding jurisdictional matters. In this
jurisdictional matter, the CMA will report that whether the arrangements
are going on or experiencing contemplation. This contemplation could be
seen into effect and this will influence a relevant merger situation in
Europe. The role of Ofcom is described in phase 1 in the Guidance note
due to interest public. This public interest test was conducted based on
the proposed acquisition between Sky plc and 21st Century Fox inc. during
16th March, 2017. In phase 2, the final report was published. In 5th June
2018, CMA has published its final report and sent it to the Secretary of
State for Digital, Culture, Media and Sport. The Secretary has accepted
the recommendations provided by the CMA. This recommendation has
stated that this anticipated acquisition was not done based on public
interest under the consideration of media plurality. In addition to this, the
recommendation of CMA is accepted by DCMS because of its most
proportionate and effective remedy. This remedy is for Sky News for
depriving it to an appropriate third party. Based on this decision the report
of CMA has been published.
In 23rd January of 2018, the CMA has observed provisionally that this
anticipated acquisition of Fox with Sky’s share does not possess any
public interest. This provisional finding has been done concerning the
media plurality. This acquisition has not been done absence of a genuine

commitment. This process can further meet broadcasting standards of the
United Kingdom.
The publication containing evidence based on any party. This publication
can be observed in the WebPages. In these WebPages, CMA does not
indicate any endorsement through expressing the acceptance or evidence
related to this evidence. The entire publication is formed in such a way
that it could help public understanding regarding the issues. On 10th
October 2017, the provided issues statement by CMA has established
chance of investigation. It draws outlines based on initial theories through
stating that this could influence two considerations related to public
interest adversely. These two considerations are media plurality along
with a genuine commitment in the UK based on broadcasting standards.
However, the entire recommendations do not provide any conclusions or
any findings.
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