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The authors are Aditya Singh and Maanya Kocher, third and second year students, respectively, at Dr. Ram Manohar Lohiya National Law University.
Introduction
Venturing into mergers & acquisitions (M&A) has proven to be an all-encompassing means for companies to widen their reach, expand into new markets, acquire strategic skills, achieve higher market share, gain greater influence over customers and gain competitive advantage in the market. This trend of companies amalgamating to create a larger entity with more capital at its disposal, bigger bargaining power and a more prominent market presence has enveloped India, just like the rest of the world.
All industries have been exposed to ever-expanding competition, both from domestic and international players, making gaining a competitive advantage an imperative for growing and surviving. However, such competitive advantage when gained from avenues such as M&A must be reasonable, based on fair market shares, and not a scenario which clearly leads to the creation of an oligopolistic market.
In this article, the authors aim to explain the amalgamation of ZEE and Sony and show how mergers of such kind bring with them the risk of plunging an industry into a dystopian oligopoly where no newcomers are allowed and the existing players are pawing at every possible resort for their survival.
OTT scenario of India
There is a growing concern regarding the sustainability of OTT platforms in India owing to cut-throat price wars and razor-thin profit margins. All major companies have gone down one of the few selected paths, none of which are indicators of a healthy market. The Netflix route (the most dreadful of the lot) involves bleeding a lot of money and also losing subscribers in the process. It was forced to rethink its pricing strategy in a market where value for money triumphs every other deciding factor.
Amazon has been much more successful in its OTT venture, Amazon Prime Video, but much of that success can be attributed to having bundled other perks and services such as Prime delivery, early access to sales, the somewhat helpful Amazon Music etc. Disney and Star have adopted a similar approach with their app, Hotstar, where the only differentiating factor is that instead of offering other services, they have exclusive rights to the biggest cash cow in the entertainment industry- the Indian Premier League.
The other common route of survival is one with the most Darwinistic flair- adaptation. The approval of the ZEE-Sony merger was preceded closely by the merger between JIO Cinema OTT platform and Viacom 18 getting the CCI’s approval. The perfect embodiment of the line, ‘if you can’t beat them, join them’, such deals show how difficult it has become even for giants of the entertainment industry to survive on their own and how they are compelled to join hands with competitors in order to ensure their perpetuity.
The ZEE-Sony merger
On 4th October, headlines were made when the CCI (Competition Commission of India) gave conditional approval to the amalgamation of ZEE Entertainment Enterprises Limited (ZEEL) and Bangla Entertainment Private Limited (BEPL) with the Indian leg of Sony Pictures, Culver Max Entertainment Private Limited (CMEPL). This deal has gained a lot of traction due to the nature of the deal, which is the creation of the largest entertainment network in India whose combined market share and strength of numbers that the merger commands can lead to the creation of a media giant that can transcend the fields of TV channels, OTT platforms, film productions, etc.
This coming together of two stalwarts of the Indian entertainment industry, with unparalleled dominance in the Hindi general entertainment sector was greeted with much enthusiasm by Dalal Street. Double-digit growth in the scrip of ZEEL, with a 6% rise on the day of the announcement alone, when pitted against the pale 3-4% gain in the benchmark index of the BSE shows how much the investors believe in the future of this merger. After the merger, Sony is touted to have majority control with 51% of the new entity and a cash pile of 1.5 billion dollars to invest in new ventures and potential money-makers.
While the exact conditions for the approval, which were voluntarily put forth by the parties themselves, have not been divulged to the public for scrutiny, it is the general belief of the market that it involves shutting down or selling off one of the general entertainment channel segments or some of the regional channels to satiate the CCI. From a revenue viewpoint, the proposed merger is said to be a perfect match and will aid the new entity in becoming a dominant force in the entertainment sector, at par with or even superseding the likes of Disney Hotstar, Netflix and Amazon Prime.
Such conditional approvals have become common practice for the top antitrust regulatory body in the country. Across various industries deals of such nature were given nods with certain modifications suggested wherever the agency saw fit. In the famous mergers of Sun Pharmaceuticals and Ranbaxy, structural changes were suggested and the merged entity was directed to divest seven of its drug formulations in which its combined market share was up to 95%, as not doing the same would have resulted in a monopoly. In the one involving PVR's acquisition of DT Cinemas (INOX), complaints regarding anti-competitive ramifications were rejected by CCI. In others like Schneider Electric and L&T, the CCI, inter alia, put forth a white labelling arrangement and a transfer of technology as a prerequisite to giving the go-ahead for the deal.
However, the CCI’s nod for the ZEE-Sony merger has raised concerns regarding the sustainability and rise of anti-competitive practices owing to such a deal, especially in the context of OTT platforms in India. The deal is an embodiment of the use of mergers and acquisitions as a survival mechanism for these giants in the entertainment industry. The same leads to potentially adverse effects in the market, wherein the regulator has failed to look at the bigger picture and the harm that such a deal may have on the smaller players or the new entrants in the field.
Ramifications of the Deal
Such deals and tales of companies failing are detrimental to the entry of new players in this market, as they are inevitably spooked by the fates of such giants, some of whom have had the experience of providing streaming services globally and have still failed here. Even companies like HBO and Paramount have turned cautious and postponed their entry into the Indian market. Moreover, if the top players consolidate the market share amongst themselves through such mergers, they would further restrict new entries in the market.
The reasoning employed by the CCI for this approval as pointed out by analysts was that in terms of viewership share, Zee and Sony are at below 40% as a combined entity across genres, except the movie genre where the share is above 50% for the merged company and that there is no major overlap between the two companies. However, the CCI has failed to look at the bigger picture of the market, which shows how just 5 companies will now command over 90% of the market share. This allows them not only to make entries of competitors near impossible but also to set the price standard of the industry. Amazon, Hotstar, Sony and ZEE have adopted similar price models and have therefore forced the smaller competitors to drop their prices just to remain a viable option for the consumers. Such indicators of having just a few sellers, high barriers to new entry, price-setting ability, interdependence of firms and maximized revenues fully satisfy the elements required to deem a market an oligopoly.
Conclusion
The CCI must re-evaluate its criteria for allowing mergers and acquisitions in such market spheres. The comment of Abdullah Hussain, Partner at DSK Legal, that “the CCI has never blocked a transaction till date; it has, however, approved transactions subject to certain modifications or commitments”, makes it painfully clear that there must be some change in the bar for mergers in this country. The CCI showing little to no reservations in approving such mergers has turned various markets like telecommunications and entertainment into fully functional oligopolies. Mere modifications or conditional approvals are not enough, and the market's future as a whole must also be considered.
Moreover, the Government must amend the Competition Act to incorporate additional factors, as the working of the merger control regime in any country is also affected by multiple extraneous considerations (nature of economy of the country, whether the country is developed or developing) which the CCI may consider while approving mergers. Furthermore, a mechanism must be devised which focuses on blocking mergers which might turn the market into an oligopoly.
While the top watchdog of fair market practices in the country sees its main prerogative as preventing the establishment of monopolies, it has allowed many industries to conveniently become an oligopoly. It must therefore pay special attention to the formation of such systems in the market where a few players through mergers and other means of cooperation create such ‘legitimate cartels.’