The last days of the CD and DVD market and the failing firm defence

On 16 March 2016, the Competition Tribunal approved, with conditions, a merger between CTP Limited (CTP) and Compact Disc Technologies, a division of Times Media Proprietary Limited (CDT). The transaction involved an acquisition of CDT’s digital disc manufacturing and replication business by CTP.

Both CDT and CTP operate in the market for the manufacture and replication of CDs and DVDs and were, at the time of the transaction, the only operators in the market capable of servicing large recording companies. The Commission opposed the merger on the grounds that the merger would substantially lessen competition as the merged entity would become a near monopoly resulting in supra-competitive price increases and adverse terms of trade for customers. It prohibited the merger after the merging parties could not agree with an inflation linked price cap condition proposed by the Commission.

The merging parties argued that CDT was a ‘failing firm’ in a dying market. The reality for the merging parties was that they operated in a market that was in steep decline and CTP had already lost significant customers. As such, the merger was the only way to save the CDT’s business as its current owners had already decided to exit the business. However, the Commission did not accept that the failing firm test had been met because in its view the merging parties did not show that there was no other buyer of the business or that attempts at rationalisation had been made.

On the contrary, the Tribunal identified that CDT had met the requirements of the EU test for failing firms based on, among other things, its recent performance in the market and the steady loss of its customers to CTP over the years. The facts also showed that if CDT had exited the market, its market share would have been acquired by CTP in any case. The Tribunal also stated that the merger would produce certain efficiencies as it would increase the merged entity’s capacity to meet demand quickly at times when demand is high in the market such as Christmas time.

The Tribunal approved the merger on, among others, the following conditions: CTP will not make the use of its services to customers as a CD and DVD replicator conditional on the customer using its distribution services; customers are permitted to place minimum orders of between 100 and 300 CDs; CTP may not compel customers to commit to exclusivities in respect of its replication services; and no more than 23 employees of either firm may be retrenched as a result of the merger.

Written by Albert Aukema, Sean Jamieson and Bheki Nhlapho