Article & Essay

MARKET DEFINITION AND VERTICAL INTEGRATION OF OTTS: POOQ-OKSUSU MERGER CASE

  • DATE WRITTEN : 2020-11-02
  • WRITER : Nam Hoon
  • VIEW : 907
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In August 2019, the Korea Fair Trade Commission (KFTC) conditionally approved the merger of POOQ and Oksusu, two major OTTs in Korea. OTTs are increasingly becoming the center of attention in the ICT and media industries in Korea, but their dynamic nature and lack of classification scheme make it difficult to analyze their competitive effects. In this article, I review and criticize the KFTCs findings regarding the relevant market and the competitive effects of vertical integration.

. Introduction
In August 2019, the KFTC conditionally approved the merger of two over-the-top (OTT) services--POOQ and Oksusu . POOQ was an OTT jointly owned and operated by the three major television broadcasters in Korea—SBS, MBC, and KBS—while Oksusu was the OTT service unit of SK Broadband, an ISP and IPTV service provider that is a subsidiary of mobile carrier SK Telecom. As a result of the merger, SK Telecom holds 30 percent of equity in the merged entity while the three major television broadcasters hold equal shares of the remaining 70 percent of equity.

The KFTC regarded the merger as both a horizontal integration between OTTs and a vertical integration between content providers and an OTT. In terms of horizontal integration, the KFTC held that the merger was not anti-competitive, finding that, in spite of the high market share of the merged entity, competition was fierce and entry barriers were low. On the other hand, in terms of vertical integration, the KFTC imposed multiple corrective orders as it was concerned that there could be upstream foreclosure that was likely to restrain competition.

Since the merger was ultimately approved and the merging parties regarded the corrective orders as tolerable, one would be tempted to think that it was a satisfactory outcome for everyone involved. However, the KFTCs definition of the OTT market and its competitive assessment of the vertical integration aspects of the merger are questionable. In this article, I will point out how the KFTC overly relied on outward resemblance in defining the OTT market and how it neglected dynamic changes in the market landscape in its competitive assessment of the vertical integration aspects of the merger.

. Challenges of Defining the OTT market in Korea.
As of 2018, 42.7 percent of consumers in Korea used online video streaming services, with the number increasing every year. In fact, more than 70 percent of those in their 30s or younger now use video streaming services. Until recently, this user expansion was mostly driven by YouTube, although starting in 2019, SVOD (subscription-based video-on-demand)-type OTT services have been growing in conjunction with the rapid increase in the number of Netflix viewers.

As of 2019, there were over ten OTT service providers in Korea, but OTTs with stable independent revenue streams are relatively rare. POOQ was a joint venture of the major Korean broadcasters and sold content from those stations in the form of online subscriptions. As late as 2018, it had the largest number of paying subscribers as a standalone OTT, which was still only a little over 700,000. Meanwhile, Oksusu offered its services mostly as a free-of-charge add-on service to SK Telecom mobile users. While it had approximately 15 million subscribers as of 2018, the number of paying subscribers was negligible.

The KFTC defined the relevant product market as the SVOD market in Korea, including POOQ and Oksusu, and calculated the combined market share as 44.7% based on monthly active users (MAUs). The KFTCs market definition appears to rely on the outward resemblance between the parties, in that both were OTTs that supplied ready-made content (RMC), but some may disagree as to whether this is an accurate definition of the relevant market. There are largely four categories of products that could be substitutes for POOQ: (i) SVOD services such as Netflix that operate on the basis of subscription fees paid directly by consumers; (ii) advertising revenue-based video streaming services such as YouTube; (iii) video streaming services such as Oksusu provided free of charge with other services or bundled with other services; and (iv) general cable television services. The KFTC found (largely based on intuition) that the first and third category of services directly compete with one another while the second and fourth categories are not sufficient competitive constraints. However, is this actually the case?

A critical matter of interest in this case is whether Oksusu functioned as a direct competitor to POOQ. Since SK Telecom and other major mobile carriers in Korea offered their own OTT services to their users as an add-on benefit/service, a POOQ user who is a mobile phone user is likely to also have subscribed to Oksusu or other similar services. This means that POOQ subscribers are likely to have paid to gain access to the unique content provided by POOQ. Under these circumstances, it would be unrealistic to assume that a hypothetical monopolist who owns POOQ would be able to increase its price by acquiring a service like Oksusu, unless there is empirical evidence supporting such assumption.

. Competitive Effects of Vertical Integration
The KFTC found that there was a vertical integration component in the POOQ-Oksusu merger, between the broadcasters as content providers and an OTT, but the accuracy of this finding is doubtful. POOQ was already a vertically integrated entity, and the merger reduced the stake held by the broadcasters from 100 percent to 70 percent. In fact, one could regard the vertical disintegration effect as greater, with SK Telecom now operating the merged entity as the largest shareholder.

Even if the merger was a vertical integration, the KFTCs competitive assessment is still questionable. The KFTC did not perform any calculations pursuant to the vertical arithmetic approach or vGUPPI, which are used in the competitive assessment of vertical mergers. Instead, the KFTC mainly relied on the high market share of the combined entity under its market definition and the fact that the three major broadcasters collectively have a high market share and significant influence in the content supply market. That is, the KFTC regarded the combined entity as having the ability and incentive to engage in upstream foreclosure, such as suspending the supply or increasing the price of content from the broadcasters.

However, for this to happen, the combined entitys market share in the downstream market must be high enough to still generate profits even after foreclosing sales to its competitors, which is based on the premise that the KFTCs market definition is accurate, but as already explained, there are doubts in this regard. Second, while the broadcasters would earn the same amount of revenue as they did in the past for an item of digital content when they sell it to independent downstream players, they would actually make less money than before if they sell the same content through the combined entity because their stake is now smaller, which further reduces the incentive to foreclose. Lastly, while the three broadcasters may have been influential content providers just few years ago, it is difficult to regard them as having a dominant position in the upstream market anymore, as demonstrated by the halving of their VOD viewership in just a year. Taking all this into consideration, it is doubtful as to whether the merger increased the chance of upstream foreclosure.

. Conclusion
Formulating competition policy for OTTs is not an easy task because they are part of a dynamic market that is rapidly changing in every respect in terms of service format, competitive landscape, and the composition of competitors, and its relationship with traditional markets such as the terrestrial broadcasting market and the cable television market must also be monitored. The POOQ-Oksusu merger is in large part a response from domestic OTTs, which have not yet secured a stable base of operations, against global service providers such as YouTube and then Netflix, which have rapidly grown their number of Korean users. The KFTCs approval, albeit conditional, appears to have taken this factor into account. However, the logic behind the decision leaves something to be desired. OTTs will continue to create challenges for competition policy, which requires that we keep refining our thinking despite the difficulties they pose.
      
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