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Hong Kong’s first antitrust judgment since the new competition regime’s entry into force

Autumn fall leaves

On 29 January 2016, Hong Kong’s Court of First Instance quashed a 2013 decision (“Decision”) by the Communications Authority (“CA”) – upheld by the Chief Executive In Council (“CEIC”) – against Television Broadcasters (“TVB”), primarily on the grounds that the CA and CEIC are inherently political entities lacking objective impartiality as decision makers due to their concurrent policy, advisory and executive roles.

While the Decision was ultimately set aside on constitutional grounds, as the CA and CEIC were not found to be an independent and impartial tribunal, the Honourable Justice Godfrey Lam of the Court of First Instance upheld most of the competition analysis by the CA and confirmed that TVB’s practices were anticompetitive. As the first President of the Competition Tribunal under Hong Kong’s new competition regime, Justice Lam’s judgment provides considerable insight as to how future competition cases might be interpreted in Hong Kong.

September 2013 Decision

In September 2013, the CA found that TVB had violated the antitrust provisions of the Broadcasting Ordinance, in that the station had imposed certain restrictions with their artistes and singers with the purpose and effect of restricting or distorting competition in the Hong Kong television programme service market (“downstream market”). The restrictions included the:

  • “no promotion policy” which prohibited TVB’s contractual artistes from appearing in promotional activities of other local television stations, even if they starred in the production promoted
  • “no original voice policy” which prohibited TVB’s contractual artistes’ original voice from being used in productions featuring their images broadcasted by other local or overseas television stations
  • “no Cantonese policy” whereby artistes on contracts with TVB were prohibited from speaking Cantonese in programmes of other television stations in Hong Kong
  • “no-obligation-to-use-clause” whereby TVB was not under an obligation to use a contracted artiste.

As a result of the above, the CA found that TVB had imposed exclusivity on singers and artistes. Due to the “no-obligation-to-use-clause,” TVB was not bound to make any actual use of an artiste’s services and did not in fact fully engage significant numbers of artistes and singers it contracted with. This enabled TVB to “warehouse” them at low cost. The CA found that the above provisions and policies had the effect of foreclosing rivals’ access to an essential input for television programme production. Such foreclosure was found to produce significant harm on television viewers as end consumers by causing a deterioration of quality of rivals’ programme offerings. The CA imposed a HK$ 900,000 penalty on TVB.

Despite the ability for the artistes or singers to seek consent prior to appearing on or providing services to other television stations in Hong Kong, in reality, the artistes and singers considered requesting TVB’s consent to be futile or feared that seeking consent would be detrimental to their careers.

Court of First Instance’s 2016 judgment

The framework for competition analysis to be applied was set out in the Guidelines to the Application of the Competition Provisions of the Broadcasting Ordinance, which were applicable to the telecommunications industry prior to the Competition Ordinance coming into force in December 2015. It applies a sequential
methodology comprising three broad stages:

  • defining the relevant market
  • assessing market power
  • identifying an anti-competitive purpose or effect in the relevant market.

Justice Lam considered the appropriate standard of proof is the balance of probabilities.

Market definition

While TVB agreed with the CA’s definition of the downstream market as the “all TV viewing market,” it contended that the CA erred in failing to define the relevant upstream market since the allegation was that conduct in such market impaired competition in the downstream market. TVB wanted to include in the definition of upstream market new or aspiring artistes and singers, and artistes not currently contracted with Hong Kong television broadcasters.

However, the judge held that the central focus remains on evaluating whether the contested conduct has an anti-competitive effect in a particular relevant market –
in this case, the downstream market. It is not essential to formally define the upstream market in every case where input foreclosure is the underlying theory of harm, nor is there a general mandatory requirement in competition law to carry out a formal market definition exercise. Further, by applying a substitutability
analysis to determine the size of the available pool of talent for producers of TV programmes in Hong Kong, it was unlikely that a local broadcaster could rely significantly on new artistes or high value artistes not under contract with any TV broadcasters to participate in entertainment programmes to drive rating and
advertising revenue, as it was found on the evidence that it takes time to nurture new talents.

Market power

Justice Lam rejected that the proper assessment of market power needed to be based on revenue. He remarked that assessing market power depends on the nature of the competition being studied. For broadcasters, this was best reflected in their share of viewership, since both free to air (“FTA”) and pay TV broadcasters were found to compete with each other to maximise viewership – the former to attract higher advertising revenue, and the latter to attract subscription fees.

The Broadcasting Ordinance defines dominance in terms of the ability “to act without significant competitive restraint from its competitors and customers.” Thus, Justice Lam agreed that the relevant test is whether TVB was able to behave independently of its rivals and ultimately consumers, either by profitably raising prices or, in a FTA context, profitably reducing production cost. This is in line with international practices and is also the test favoured by the Hong Kong Competition Commission in its guidelines. If a broadcaster can reduce the quality of its programming without suffering a significant drop in viewership, this would be an indication of the extent of its market power. On the evidence, 40% of all households in 2009 did not have a pay TV subscription. They would not necessarily respond to a small drop in quality of TVB’s programmes by switching to pay TV given cost and other considerations.

The CA also based its finding of market power on other factors including:

  • the fact that TVB’s market share was significantly higher than its rivals’
  • high barriers to entry and exit from the market
  • the absence of any real countervailing buyer or supplier power.

Proportionality of remedies

Justice Lam held that the CA had imposed disproportionate remedies that went beyond what was necessary to redress the anti-competitive harm found. The judge held that there was no reason for requiring TVB to abandon all restrictive clauses and policies in relation to all artistes on all types of contracts – i.e., serial-based, minimum one-show or singer contracts – when releasing artistes on the minimum oneshow commitment contracts could already bring the infringing system to an end.

Conclusions

This case is of considerable significance to competition enforcement in Hong Kong, as it is the first case decided by the President of Hong Kong’s new Competition Tribunal.

While the Decision was struck out on constitutional grounds, Justice Lam upheld the entirety of the competition analysis by the CA – except the proportionality of the remedies – and confirmed that TVB’s practices were anti-competitive. The judge found that the “no original voice policy” rendered rivals’ programmes less appealing to TV viewers, and imposed a direct cost on rivals by requiring them to dub acquired programmes. Similarly, the “no promotion policy” exacted a direct cost on rivals in the form of extra advertising and promotional expenses incurred to promote a drama series. The “no Cantonese policy” also reduced the quality of the interviews with singers on rival TV stations, thus impairing rivals’ ability to compete with TVB. On the balance of probabilities, restricting artistes’ services had a high potential of causing harm to consumers by resulting in a deterioration of quality of rivals’ self-produced TV programmes for which artistes services are a key input.