Bundeskartellamt intends to prohibit takeover of ish, KBW and iesy by KDG

According to the Bundeskartellamt’s current evaluation the proposed takeover by Kabelnetzgesellschaft Kabel Deutschland GmbH (KDG), Unterföhring, of the three regional cable network companies Kabelnetz NRW HoldCo GmbH (ish), Cologne, Kabel BW Holdings GmbH (KBW), Heidelberg, and iesy Repository GmbH (iesy), Frankfurt, will lead to a strengthening of KDG’s dominant position. Particularly affected by this project is the market for feeding in television programmes including the provision of technical services for free TV and pay TV. On 23 August 2004 the Bundeskartellamt therefore issued a warning letter regarding the planned takeover. The companies involved in the proceedings have until 8 September 2004 to comment on this warning. After an evaluation of these comments the Bundeskartellamt will reach final decisions in all the three cases before 7 October 2004.

KDG operates Deutsche Telekom’s former broadband cable network in the six regions of Hamburg / Schleswig-Holstein / Mecklenburg-Western Pommerania, Lower Saxony / Bremen, Berlin / Brandenburg, Saxony / Saxony-Anhalt / Thuringia, Rhineland-Palatinate / Saarland and Bavaria. In all of these regions KDG offers analogue and digital transmission of broadcasting signals and related services. KDG supplies approx. 10 million households with TV signals on the so-called network level 3. The broadband cable networks in the remaining German regions are operated by the three other cable network companies. ish supplies approx. 4 million households in North-Rhine/Westphalia, KBW approx. 2 million households in Baden-Württemberg and iesy approx. 1 million households in Hesse.

As compared to the suppliers of TV programmes KDG already holds a dominant position with its broadband cable network. After extensive investigations the Bundeskartellamt assumes that, from the point of view of the programme providers, the different transmission paths for TV signals, i.e. cable, satellite, terrestrial or Digital Video Broadcasting-Terrestrial (DVB-T), are not interchangeable, but complementary. Both in free TV and pay TV, it is important for providers of TV programmes that their contents reach as large a service area as possible. As about 56 per cent of all households are currently cable customers the programme providers cannot operate without feeding in programmes via this transmission path. Switching over to another transmission path (provided that households should wish to do this), is partly impossible for factual or legal reasons, but would at least involve a considerable delay.

Moreover KDG also operates its own so-called digital platform for coding and decoding digital TV programmes. This digital platform includes a coding system, a set-top box (decoder) for decoding programmes and a “SmartCard” to activate the set-top box. The set-top box is subject to extensive KDG provisions regarding the coding system used, further software and other features. Whereas currently only pay TV programmes are coded, KDG plans, according to its own statements, to introduce a basic coding in future also for free TV programmes. If free TV could only be received via the “boxes” licensed by KDG, end customers would be forced to purchase such a box in any case. Furthermore KDG operates its own pay TV bouquet which distributes paid contents to end customers. KDG can use the control of the set-top boxes to the advantage of its own pay TV bouquet. In addition this strategy could seal off the market against other pay TV suppliers.

The President of the Bundeskartellamt, Dr Böge, stated: “The largely uncontrolled scope of action which KDG already enjoys as the owner of cable networks in six regions would be strengthened even further by the proposed merger with the three other cable network companies. This is firstly due to the expansion of the KDG network’s service area which would allow KDG to increase its existing scope of action in such a way as to cover the whole of Germany. Additionally, KDG could transfer its current control of the digital platform to the other regions which either do not operate any digital platform at all or only to a limited extent. And finally these mergers would massively restrict potential competition from regional cable network companies which, in view of KDG’s monopoly position, must be considered as particularly worth protecting. Currently, potential competition mainly arises from the possibility of transmission via KDG’s cable network, but also from the possibility of establishing parallel cable islands or so-called cable head stations.”

Dr Böge continued by saying: „On the basis of the information currently available, the Bundeskartellamt does not assume that the mergers would lead to an improvement of the competitive conditions in other markets (balancing clause).”

According to Dr Böge effective competition in the pay TV market could also be achieved by means of feeding in, i.e. without acquiring cable networks. As regards the market for broadband Internet access the authority’s investigations showed that the smaller regional companies are far ahead of the large network operator KDG, both in terms of upgrading the network and with regard to the number of Internet customers, and generally plan to expand their Internet and telephony services offered. Very little indication of such an approach could be perceived in KDG’s strategy. According to Dr Böge this refutes the widespread misconception that only a national network could bring about progress in the use of the network for the media: „The competition of different business models pursued by several cable network operators promotes technical progress whereas a monopoly rather slows this process down. In any case it is not evident that upgrading one’s own Internet business should only be possible by taking over the three cable network companies, as argued by KDG.”