Newsletter
FTC BLOCKS KTV MERGER
On 8 March 2007, the Fair Trade Commission (FTC) determined that the proposed merger between the KTV chain operators Holiday Group Co. Ltd. (Holiday) and Cashbox Party World Karaoke Parlors (Partyworld) would re-strain competition to a degree that would not be in the overall economic interest, and therefore prohibited the merger pursuant to Article 12 Paragraph 1 of the Fair Trade Act. This is the second time that the FTC has blocked a merger since the regulatory review system for business combinations was changed to one of prior filing for clearance.
The FTC's investigation showed that the busi-ness turnover of the proposed merger partici-pants accounted for approximately half of the total national turnover of the multimedia karaoke parlor market, that the market was already highly concentrated, and that the market in Taipei City and Taipei County accounted for approximately one third of the national market by turnover. The enterprise resulting from a merger between Holiday and Partyworld would have had a mar-ket share of some 90% in Taipei City and County, thus acquiring monopoly status. Therefore the proposed merger was likely to significantly re-strict competition.
With regard to the restraint of competition likely to result from the proposed merger, the FTC stated that there were already no other operators within Taipei City or County able to effectively exert competitive pressure on the proposed merger participants, and that monopoly enter-prises generally lack incentives to reduce costs, innovate, or enhance service quality, yet are able to unilaterally increase the remuneration for their services. Thus it was evident that the merger was likely to negatively impact consumers' interests.
Secondly, on the issue of whether new busi-nesses could readily enter the market after a merger of the two enterprises, so that the com-petitive market mechanism would be maintained, the FTC stated that because the proposed merger participants already enjoyed a dominant position in their supply channels, all Taiwanese record companies currently required karaoke music distributors to guarantee that they would supply all the music tracks issued by the record compa-nies to the Partyworld and Holiday KTV chains; moreover, the two enterprises worked with spe-cific distributors, which affected record compa-nies' choice of distributors. Thus, if the post-merger enterprise were to take advantage of its high market share to require karaoke music distributors to apply unequal treatment to new businesses wishing to enter the KTV sector, this would inevitably impact such new businesses' ability to survive and their willingness to enter the market, and thus would adversely impact competition in that market.
The FTC further stated that the overall economic benefit of the merger proposed by Partyworld and Holiday did not outweigh the adverse con-sequences of restraining competition. The overall economic benefits claimed by the two enterprises included: creating a virtuous eco-nomic cycle by increasing competitive advan-tage and enhancing consumer prosperity; en-hancing international competitiveness; creating employment opportunities and enabling per-sonnel to acquire international business experi-ence; and reallocating resources to develop second-tier urban and rural townships, thereby creating local prosperity and generating tax revenue. However, the FTC's investigation showed that the monopoly position that the post-merger enterprise would attain in Taipei City and County would in all probability be det-rimental to consumers' interests, and that to achieve the advantages of enhancing interna-tional competitiveness, providing employment opportunities, developing second-tier localities, etc., in no case was it necessary for market competition to be eliminated. Therefore the proposed merger participants' assertion that the overall economic benefit would be greater than the adverse consequences of restraining compe-tition was not convincing.
Holiday and Playworld previously applied to the FTC for permission to merge in 2003. At that time the two enterprises had a combined market share of slightly over 40%, and the FTC con-sented to the merger subject to the condition that the post-merger enterprise "must not exploit its post-merger market position". However, the two companies subsequently cancelled their merger plan on the grounds of differences of business philosophy and issues regarding the share ex-change ratio. In 2004, the FTC fined the com-panies NT$2.5 million each for concerted actions sufficient to impact the supply and demand mechanism in the specific market for karaoke music licensing, due to an arrangement between them for joint purchasing of karaoke music tapes.