TomTom/Tele Atlas: navigating DG COMP s decision

Transcription

1 TomTom/Tele Atlas: navigating DG COMP s decision Prepared for the 2008 ACE annual conference Budapest Matthew Johnson, Senior Consultant

2 Overview - Oxera s role in the case - issues - the position of Garmin - switching costs - future innovations - efficiencies - conclusion 2 November 27th 2008

3 Oxera s role - requested by a large investment fund to assess the likely outcome of the European Commission s investigation using - publicly available data - data from broker reports - constructed a simple model of upstream and downstream profits to examine the incentive for the merged entity to engage in input foreclosure 3 November 27th 2008

4 Oxera s analysis Downstream Upstream Base-line scenario Profit from other PND suppliers Profit from sale of maps used in TomTom PNDs Profit from TomTom sales Foreclosure Profit from other PND suppliers Profit from sale of maps used in TomTom PNDs Profit from TomTom sales An increase in TomTom s revenue is necessary to raise overall profits - foreclosure would be profitable if it led to TomTom capturing just an extra 2% of the PND market compared with the baseline - but would foreclosure increase its market share at all? 4 November 27th 2008

5 Concern 1: the position of Garmin White knight or victim? - negotiated a long-term contract with NAVTEQ potentially up to Contracts are usually less than five years - two ways of viewing this decision: (1) protects Garmin, and potentially others, from harm (2) sub-optimal choice forced on Garmin by the merger, putting it in a weak negotiating position with NAVTEQ - risk of backing the loser in the upstream innovation race - not protected from higher relative prices if market price falls faster than expected 5 November 27th 2008

6 Concern 2: switching costs - the Commission found that switching costs were not insurmountable - a number of PND manufacturers complained that switching costs were significant ( 1m, at a timescale of 18 months) - the merged entity would have an increased incentive to raise prices or lower quality to TomTom s rivals, up to the point where they would be indifferent between switching and not switching 6 November 27th 2008

7 Concern 3: future innovation - Evidence suggests NAVTEQ currently offers similar quality product to Tele Atlas - PND providers have an alternative, so there is limited ability to harm competition downstream - however, merged entity will have increased incentive to hold back innovations from TomTom s rivals in order to strengthen market share - for example 3D mapping 7 November 27th 2008

8 2D mapping 8 November 27th 2008

9 3D mapping 9 November 27th 2008

10 Concern 4: efficiencies To what extent are likely efficiencies merger-specific? - removal of double marginalisation - could be achieved by two-part tariff? - Commission asked instead whether two-part tariffs are currently used. Is this the right question? - better alignment of incentives to invest - removal of hold-up problem; however, not clear to what extent this would be a key issue without the merger - also, to some extent achievable though contracts as pre-merger - overall, however, reasonable to expect merger-specific efficiencies 10 November 27th 2008

11 Conclusion The right decision but not for the right reasons? - key benefit of vertical mergers are efficiencies - effectively mergers of complements - starting point for vertical mergers should be pro-competitive presumption - Commission does not rely on efficiencies in order to clear the merger - efficiencies should be at the heart of any analysis of vertical mergers - in this case, risks of harm to competition likely to be outweighed by fundamentally pro-competitive nature of the deal 11 November 27th 2008

12 Contact: Matthew Johnson +44 (0) Oxera Consulting Ltd is registered in England No and in Belgium No Registered offices at Park Central, 40/41 Park End Street, Oxford, OX1 1JD, UK, and Stephanie Square Centre, Avenue Louise 65, Box 11, 1050 Brussels, Belgium. Although every effort has been made to ensure the accuracy of the material and the integrity of the analysis presented herein, the Company accepts no liability for any actions taken on the basis of its contents. Oxera Consulting Ltd is not licensed in the conduct of investment business as defined in the Financial Services and Markets Act Anyone considering a specific investment should consult their own broker or other investment adviser. The Company accepts no liability for any specific investment decision, which must be at the investor s own risk. Oxera, All rights reserved. Except for the quotation of short passages for the purposes of criticism or review, no part may be used or reproduced without permission.