Fair Trade Commission Policy Statements on the Business Practices Cross-Ownership and Joint Provision among 4C Enterprises	Guidelines

Passed by the 534th Commissioners' Meeting of January 31, 2002

1. Foreword

(1) Background

With the development of the National Information Infrastructure (NII), and the common view expressed by the international community on Global Information Infrastructure (GII), network commercialization has become an inevitable trend. The increasing number of network users has resulted in a substantial growth in the amount of business conducted on commercial websites. Business markets which are largely products of the Internet have made it even faster for the 4C enterprises, namely, the telecommunications sector, the cable TV sector, the computer network sector, and the E-commerce sector, to converge. Given the liberalization of telecommunications, the relief from regulations, and the elimination of controls, the convergence of these high tech communications media will eventually send shocks trembling through traditional controlling structures as well as challenge the regulations of fair competition in those markets.

To evaluate the influences that the development of these 4C enterprises might have upon market competition, to determine potential problems vis-a-vis competition that may arise from the management of 4C enterprises, and to explore how the Competition Law should intervene in situations in which information broadcasting media converge, the Fair Trade Commission of the executive Yuan, hereinafter the FTC, the regulatory authority responsible for administering the Fair Trade Act, announced the "Establishment of Competition Regulations for 4C Enterprises" as a special political project between July 1999 and July 2000. The FTC has also cooperated with the academic field, setting up five research projects - "Research on Competition Regulations for the Telecommunications Sector", "Research on Competition Regulations for the Cable TV Sector", "Research on Competition Regulations for the Computer Network Sector", "Research on Competition Regulations for the E-commerce Sector" and "Research on Competition Regulations for the Convergence of 4C Enterprises" - which lay the groundwork for analysis of potential issues which might arise as a result of the convergence of 4C enterprises. Since late February 2001, the FTC has formed the "4C Enterprises Special Group" to observe and assess the convergence of 4C enterprises and has also produced "How the Fair Trade Act Might Apply to Cross-Ownership and Joint Provision between 4C Enterprises", a special political project of 2001. This paper is for use as a reference for policy coordination between the competition law authority and the industrial authority so that 4C enterprises might better understand the Fair Trade Act and the FTC is able to deal with relevant cases appropriately.

(2) Cross-Participation and Market Competition of 4C Enterprises

With the increasing development of communication networks and digital technology, a tendency towards the convergence of communications, broadcasting and information technology is foreseeable. The realization of liberalization, the lifting of regulations and the elimination of controls is likely to further invite 4C enterprises to participate in different markets and compete with each other. Broadly different in definition, two major categories that 4C enterprises might be involved in are: cross-ownership and joint provision. "Cross-ownership" refers to the situation where an enterprise enters an adjacent market by virtue of owning shares or establishing and operating another legally separate enterprise, such as a telecommunications enterprise merging with a cable TV enterprise and thus becoming involved in the cable TV market. "Joint-provision" describes the situation in which an enterprise provides services that originated in another market, and does so through the use of its existing assets, such as infrastructure, services, and technology. Examples include the telecommunications sector that uses its telecommunications network to provide video-on-demand services and the cable TV sector that uses its cable to provide cable telephony or cable modem broadband access services. Both cross-ownership and joint provision blur the boundaries of each relevant market, thereby encouraging competition and providing consumers with more choices. However, cross-ownership and/or joint provision in the 4C enterprises may potentially give rise to an undue concentration of economic power or an improper expansion of market power and, as a consequence, restrain competition or impede the development of technology.

(3) The Fair Trade Act and the Cross-Participation of 4C Enterprises

The Fair Trade Act is the competition law that regulates competition activities of enterprises. It was enacted to maintain both trading order and the best interests of consumers and to further ensure fair competition and promote economic stability and prosperity. The Fair Trade Act contains two major parts: regulating activities that might lessen competition through monopolies, unapproved mergers and concerted actions, and those that might involve unfair competition practices on the part of enterprises. The cross-ownership of 4C enterprises might involve a merger or concerted action, which are both regulated under the Fair Trade Act. The joint provision of 4C enterprises might also involve the abuse of monopoly power and other unfair competition practices. Nevertheless, since the cross-participation of 4C enterprises may serve to strengthen market competition and provide consumers with more choices, the evaluation of such activities based on the competition law will not necessarily be negative. In fact, only when the participation of these enterprises in different industries leads to restraints on competition or unfair competition should the Fair Trade Act intervene.

(4) Structure of this Paper

This paper is divided into nine parts. First, the background of convergence between 4C enterprises as well as the relationship between participation in different markets, market competition and the Fair Trade Act are introduced. Second, the aim and the scope of this paper are explained, including the reasons for submitting this paper, the goals of the FTC and the scope of this paper. Third, the structure of competition regulations for 4C enterprises are discussed, the relationships between sector-specific regulations and general competition rules for 4C enterprises and the coordination of the industrial authority and the competition law authority are analyzed, and the industrial authority of 4C enterprises is advised that it should consider the general controlling principles in the planning and execution of its related industrial policies. Fourth, the definition of relevant market and an analysis of competition are explained, including the concepts of market share and market power in terms of competition law. The fifth section is about the abuse of market power and several kinds of activities that might constitute market power abuse when 4C enterprises converge are illustrated. The sixth section is about mergers of 4C enterprises, the situations that might arise and how the FTC would evaluate each case. The seventh section concerns regulations on concerted actions by 4C enterprises. Situations in which the Fair Trade Act might apply to the cross-ownership of enterprises are illustrated. In the eighth section, regulations in relation to other unfair competition practices and conduct that might affect trade order are discussed, so as to remind the relevant enterprises to make fair and transparent rates accessible to the public and to pay attention to the related principles concerning unfair competition. The ninth section presents some conclusions.

2. Aim and Scope of this Paper

(1) Aim of this Paper

1. To enable 4C enterprises to comprehend and follow the regulations of the Fair Trade Act in their efforts to extend their business to other markets and to ensure and enhance a more open and more competitive relevant market for 4C enterprises so that consumers may have more choices.
   
2. To provide references for the FTC in its execution of the Fair Trade Act and in its dealing with cases related to 4C enterprises' participation in different markets.
   
3. To advise the industry authority of 4C enterprises that it should, in planning relevant industrial policy and executing controlling measures, consider general controlling principles like market priority, purpose and proportionality, technology neutralization and the division of platform control and contents control.

(2) Scope of this Paper

The 4C enterprises discussed in this paper are the telecommunications sector, the cable TV sector, the computer network sector, and the E-commerce sector, including e-communication networks built up by telecommunications, broadcasting and information connection networks, as well as any other communication activities, video content, e-trade and online games that are based on the e-communication networks mentioned above. Cross-participation as defined in this paper comprises cross-ownership and joint-provision, two practices that 4C enterprises often engage in, in order to participate in a related market.

3. Structure of Competition Regulations for 4C Enterprises

(1) Sector-Specific Regulations and General Competition Rules

Sector-specific regulations are those set up to meet the specific needs of different industries. Specific regulations related to 4C enterprises include the Telecommunications Act, the Cable Radio and Television Law, the Satellite Broadcasting Law, the Electric Signature Act and any other regulations that might be enacted in the future to keep pace with the development of the Internet and E-commerce. In current regulations concerning the convergence of 4C enterprises, such as the Telecommunications Act and the Cable Radio and Television Law, it is stated that the industrial authority should require 4C enterprises to comply with related industrial regulations (e.g. Article 4 of the Cable Radio and Television Law), or establish clear accounting separations (e.g. Article 19 of the Telecommunications Act and Article 51 of the Cable Radio and television Law). Consequently, when dealing with the converging activities of 4C enterprises, the Fair Trade Act is able to intervene in depth. With regard to competition regulations for 4C enterprises, the Telecommunications Act, and the Cable Radio and Television Law are ex-ante regulations. Ex-ante regulations serve to diminish the possibility of anti-competitive activities through regulation of, for example, network connections, accounting separations, fee control measures (e.g. Articles 16, 19 and 26 of the Telecommunications Act, Article 51 of the Cable Radio and Television Law), and limitations concerning scale of business operations (e.g. Article 21 of the Cable Radio and Television Law). The Fair Trade Act, on the other hand, is an ex-post regulation that serves to safeguard the competition order of the market by investigating enterprises' unfair competition practices.

(2) Coordination between the Industrial Authority and the Competition Law Authority

In executing current competition regulations, the FTC shall observe the relevant industrial policy or regulations planned by other industrial authorities and investigate enterprises' unfair competition practices. In case the principles or regulations promulgated by the industrial authority impede competition or affect fair competition, the FTC would, according to Section 2, Article 9 of the Fair Trade Act, coordinate the related authorities. Furthermore, when determining which law should apply, the FTC would refer to Article 46 of the Fair Trade Act: "Where there is any other law governing the conduct of enterprises with respect to competition, such other law shall govern provided that it does not conflict with the legislative purpose of the Fair Trade Act."

(3) General Controlling Principles

In order to coordinate the industrial authority and the competition law authority and to diminish the possibility that market functionality is distorted on account of improper control, the FTC, in its capacity as the competition law authority, shall advise the industrial authority to take into account the following principles when it plans related industrial policies and executes controlling measures.

a. Market Competition is a priority

Controlling measures should only be applied to markets that are not functioning in a competitive manner. Competitive markets should not be subject to controlling measures.

b. Purpose and Proportionality

It is necessary that any application of controlling measures contributes to achieving policy goals and that such controlling measures do not exceed their purpose. When policy goals can be achieved through market competition, any unnecessary controlling measures should be removed.

c. Technology Neutralization

During this time of rapid technological development, forcing industry to apply a specific kind of skill and discriminating against different technologies should be avoided, with the exception of necessary standardization such as that concerning technology interfaces.

d. Platform Control vs. Content Control

In response to the trend toward convergence between 4C enterprises, the principle of horizontal consistency should be applied in dealing with any 'control over platform'. That is, the same controlling regulations shall be applied to those technical platforms that belong to different industries yet provide the same services. With respect to control over contents, the nature of the contents should determine the applicable regulations.

4. Definition of Relevant Market and Calculation of Market Share

(1) Definition of Relevant Market

The term 'relevant market' refers to the field of rivalry in which enterprises provide products or services and compete with each other. A market includes both product market and geographic market dimensions. A product/service market is composed of products/services that, in the view of consumers, have reasonable interchangeability in terms of price and functionality to meet specific needs. A geographic market is the area in which enterprises provide products/services and compete with each other and in which consumers can freely choose and switch suppliers. In light of the trend by which 4C enterprises extend their business and converge, the interchangeability of services will inevitably increase, and the borders of product/service markets and/or geographic markets will gradually blur. It is, therefore, necessary that factors such as technical improvement be taken into account when determining the relevant market in each individual case.

(2) Calculation of Market Share

Generally speaking, market shares of 4C enterprises can be computed in one of two ways:

1. For an enterprise that has a fixed number of customers, such as in the telecommunications sector or the cable TV sector, market share is determined by the proportion of the enterprise's number of customers to the total number of customers.
   
2. For an enterprise that is unable to calculate its number of customers, such as an online search engine service, the proportion of the specific business sales to the whole sales determines market share.

5. Abuse of Market Power

(1) Essential Facility

An "essential facility," as articulated in a US judicial decision[1] and in reference documents published by the WTO, refers to a facility that meets all of the following criteria:

1. An essential facility is controlled by a monopolist;
2. Competitors (including potential competitors) are unable to duplicate an essential facility in an economically reasonable way within a short period of time;
3. An essential facility is inaccessible to competitors with the result that competitors are unable to compete with the controller of such a facility; and
   
4. It is not feasible to provide a competitor with a facility.

Since competitors do not have access to an essential facility, they lack the ability to compete with the controllers of such a facility. Enterprises controlling an essential facility, therefore, could possess sufficient power to impede or exclude competitors from competition. This is especially so when 4C enterprises undertake the integration of services. They might use the essential facility they already possess to hinder other enterprises from competing. Hence, if those 4C enterprises with monopoly power deny the use of the essential facility to their competitors, cease providing the essential facility without justification, or provide the facility in a discriminative way that restrains and impedes fair competition, they might violate Article 10 of the Fair Trade Act.

(2) Leverage of Market Power

'Leverage of market power' refers to the situation in which enterprises force their trading counterparts, by means of a tie-in or bundling sale, to purchase two or more products or services that could be sold separately. It also includes situations where enterprises compel their trading counterparts to give up any single product or service by offering gifts, free services or improper discounts. While undertaking their service integration, it is possible that 4C enterprises might use the strategies of tie-ins or bundling sales to extend their market shares in new services. For example, the telecommunications sector might combine the services of voice mail and ADSL, or the cable TV sector might combine their TV services with cable modem services. Since the conduct mentioned above may extend the enterprise's remaining market power to the market of new products or services or may result in either a restriction of market competition or an impediment to fair competition, such conduct might violate Article 10 or Article 19 of the Fair Trade Act. Provided that a tie-in or bundling sale conforms with the conditions of a combined production economy, or meets consumption habits or simply provides the convenience of one-stop shopping, a tie-in or bundling sale could be deemed reasonable.

(3) Predatory Pricing

Predatory pricing refers to the practice adopted by a monopolist to sacrifice its short-term profits and set prices below costs so as to exclude its competitors from competition, to stop potential competitors from entering the market, to protect and/or expand its market share and to benefit from extra profits in the long run. Three conditions need to be satisfied when determining predatory-pricing.

1. The product or service is priced below the average variable cost or the average incremental cost of the enterprise. (When the combined costs share a major portion of the gross cost, the average incremental cost should be taken into account when determining predatory pricing.)
2. The enterprise intends to impede or exclude its competitors through its pricing policy.
   
3. The enterprise is capable of recovering its losses and raising its prices to the level of those of a monopoly after competitors have been impeded or excluded.

If, in participating in other markets, 4C enterprises with monopoly power set a predatory price, with the intent to impede or exclude specific competitors, they might violate Article 10 of the Fair Trade Act. However, such conduct could be regarded as reasonable when lower prices are used as part of a short-term promotion method or when an unexpected fall in costs results in lower prices.

(4) Undue Cross-Subsidies

A 'cross-subsidy' refers to the situation in which enterprises providing multiple services subsidize or transfer a specific service cost to other service categories so that they can make use of the revenues from those services in subsidizing a specific alternative type of service. A cross-subsidy might exist in one of the following situations:

1. A long-term imbalance exists between profits and losses in the services provided by an enterprise; and
   
2. Inside departmental trade is at unreasonable cost;

When participating in different markets, 4C enterprises are expected to make every effort to establish separate accounting systems for each service provided. In the case where a 4C enterprise uses revenue from a monopolizing business to subsidize a competing business, or uses the revenue from a controlled business to subsidize a non-controlled business, it would be deemed an undue cross-subsidy. This might violate Article 10 of the Fair Trade Act. However, if the subsidy results from obligations that the telecommunications firm has to meet to make its services available to all, or the subsidy is to comply with the controls of the government, it would be regarded as being justified.

(5) Raising Rivals' Costs

If enterprises controlling productive elements, such as a telecommunications enterprise providing Internet connection services, improperly set the price on a productive element and if this results in an increase in their competitors' costs and subsequently forces competitors to leave the market, it is called "raising rivals' costs".

In order to assess whether or not an enterprise sets an improper price on a productive element, the relationship between the price and the stand-alone cost of that element must be examined. The stand-alone cost is the cost that occurs when the controlling enterprise only provides a specific productive element, including the incremental cost and other total costs. If the controlling enterprise sets a price that is higher than the stand-alone cost, the enterprise engages in raising a rival's cost and might violate Article 10 of the Fair Trade Act.

6. Regulations on Mergers between 4C Enterprises

Mergers between enterprises can be classified into three categories: horizontal mergers, vertical mergers and conglomerate mergers. Any one of the three types of mergers is likely to take place between 4C enterprises. If mergers of 4C enterprises conform with any of the scenarios listed in Article 6 of the Fair Trade Act, satisfy any of the conditions listed in Article 11 of the Fair Trade Act and do not fall under any of the exemptions listed in Article 11-1 of the Fair Trade Act, 4C enterprises should report their merger to the FTC. The FTC then reviews each case in accordance with Article 12 of the Fair Trade Act and evaluates both the economic advantages and disadvantages of restricting competition that might arise as a result of proceeding with the merger.

In evaluating the economic advantages, the FTC focuses on the following matters:

(1) How will the merger affect productive efficiency, allocative efficiency and dynamic efficiency?

(2) Will the merger contribute to competition in the relevant market?

(3) Will the merger enhance service provision in respect of quality, variety or geographic coverage?

(4) Will the merger enhance competition power in the global society and promote research as well as development?

(5) Will the merger include any network externalities in terms of consumption?

(6) Is the merger the only way to achieve the above goals?

(7) How will the merging enterprises transform their internal profits into an externality?

In contrast, when examining the disadvantages of restricting competition, the FTC focuses on the following matters:

(1) How will the merger affect the structure and concentration of the relevant market?

(2) Is the merger likely to harm competition in the relevant market and increase barriers to entry to the relevant market?

(3) Will the merger decrease significantly consumers' choices?

(4) Will the merger increase the potential for the abuse of market power?

(5) Will the merger result in an increased likelihood of concerted action?

(6) If the merger is a horizontal one, will it increase market concentration? Will the increased concentration result in increased anti-competitive activities by other horizontal competitors?

(7) If the merger is a vertical one, will it result in the merged enterprises using their increased market power to block other competitors from competition?

(8) If the merger is a conglomerate one, will it result in market power abuses such as tie-ins and undue cross-subsidies?

In evaluating merger cases by 4C enterprises, the FTC shall take the above elements into account and assess the economic advantages as well as the disadvantages in terms of restraints on trade.

7. Regulations on Concerted Practices between 4C Enterprises

The cross-ownership and joint provision of 4C enterprises might violate Article 14 of the Fair Trade Act if they involve conduct that jointly determines the prices of products or services based on contracts, agreements or any other form of mutual understanding, or conduct that limits the quality, technology, products, facilities, trading counterparts or trading territories of such products and services and therefore restricts the business activities of an enterprise. 4C enterprises may possibly engage in the following concerted actions:

(1) Price-Fixing

Price-fixing involves competing enterprises jointly determining the prices of products or services, or restricting price adjustments and discounts as a result of a contract, agreement or other form of mutual understanding. Since price competition lies at the heart of effective competition and price-fixing directly limits competition, 4C enterprises are not allowed to engage in price fixing unless otherwise approved by the FTC.

(2) Restrictions on Output and Market Allocation

Concerted actions between or among enterprises are not limited to price related agreements or price-fixing. If competing 4C enterprises agree to restrain their productive quantities, qualities or facilities, or agree to allocate the market, it would inevitably have an anti-competitive effect. Unless otherwise approved by the FTC, 4C enterprises are not permitted to engage in such conduct.

(3) Exchange of Crucial Information

Competing 4C enterprises might also engage in concerted actions that result in the disclosure and exchange crucial information such as their enterprises' pricing, discounts, costs of production, research information and customer data. The disclosure and exchange of any of this information might provide access for competing enterprises to contact each other and might be used as a means of conspiracy. It is also likely to result in parallel acts between enterprises, thereby restraining market competition. Hence, unless it is necessary, 4C enterprises are not allowed to exchange crucial information with each other.

(4) Boycotts

'Boycotts' refers to situations in which 4C enterprises agree to a concerted price reduction, concerted refusals to deal or refusals to provide network connections in an effort to exclude or impede others from competing and to block the whole market. Boycotts result in negative effects on market competition and might violate Article 14 of the Fair Trade Act. Furthermore, if 4C enterprises use their market position improperly when they agree to share facilities or rare resources and force the provider(s) of such facilities or rare resources to accept unfair trading conditions, or exclude new enterprises from sharing the facilities or rare resources, they might violate Article 14 of the Fair Trade Act.

(5) Concerted Research and the Establishment of Technical and Quality Standards

Although concerted research and the establishment of technical and quality standards among 4C enterprises have the advantage of decreasing costs and risks and of providing economic benefits and service qualities, they might, on the other hand, lessen the variety of products and services relative to a situation of competition. This might also hinder the development and application of new technology, as well as exclude new enterprises from entering the market, and therefore restrain competition. Unless legally approved by the FTC or publicly processed, the above practices might violate Article 14 of the Fair Trade Act.

(6) Strategic Alliances

Strategic alliances, especially vertical strategic alliances, are a common business practice among 4C enterprises. Since forming a strategic alliance involves gathering different enterprises together and enabling them to cooperate or engage in concerted business practices and promotional activities, such an alliance might violate Article 14 of the Fair Trade Act. In the event that a strategic alliance is formed to integrate transaction flows, cash flows, material flows or information flows, and that the participating enterprises come from industries that do not compete with each other, a strategic alliance, generally speaking, will not meet the criteria to be considered a concerted action as set out in Article 7 of the Fair Trade Act. However, this might not be so in the case of websites that provide B2B (business to business) or B2C (business to consumer) services. These B2B/B2C websites run their businesses by providing transaction platforms to several enterprises. This situation, in which different enterprises that provide the same kinds of products or services are assembled at the same website, and further, those enterprises set the same price, promotional methods and transaction conditions, is identical to the situation in the real world in which different enterprises entrust their business to the same consulting company. Due to the competing relationship between the integrated enterprises, as long as the elements of Article 7 of the Fair Trade Act have been met, their strategic alliance might be regarded as a concerted action.

8. Regulations in relation to other Unfair Competition Practices and Conduct that Affect Trade Order

Given the various products and complicated transaction types of 4C enterprises, transparent pricing by 4C enterprises may be difficult. For example, in relation to telecommunication charges, consumers might be charged by item, such as local phone calls, long-distance phone calls, international phone calls, pager and mobile phone calls, by destination and by the length of time of the call. Items like a basic charge, a monthly service fee, a setup fee or a security deposit may further confuse consumers when they try to understand or double-check the details of their charges. Furthermore, the government used to be the one and only provider of telecommunications services, and because consumers had no other choice of supplier, they tended to be less sensitive to the price of items or adjustments in the price of items. This situation could be exacerbated once 4C enterprises converge and offer combination specials for telecommunication services, cable TV services and/or network connection services. In order to make prices transparent to everyone, to protect the best interests of consumers and to encourage fair competition, converged enterprises should articulate in their adhesive contracts "ways to get updated service rates and information on maintenance charges", and also unequivocally inform their consumers of the charges for both the single item and the bundled service items.

In relation to other business practices that 4C enterprises might be involved in, such as counterfeiting, transmitting misleading advertisements, comparison advertising, slander and deceptive or obviously unfair conduct, the FTC has previously announced related guidelines such as the "Principles Governing the Application of Article 20 of the Fair Trade Act", "Principles for Handling Cases of False, Untrue or Misleading Presentations or Symbols", "The Chart of Comparison Advertisements that Violate the Fair Trade Act", "Guidelines for the Review of Cases Involving Enterprises Issues Warning Letters for Infringement on Copyright, Trademark and Patent Rights", and the "Principles Governing the Application of Article 24 of the Fair Trade Act". 4C enterprises should observe and obey those relevant regulations.

9. Conclusion

This paper illustrates the conduct that 4C enterprises participating in different markets might engage in which may be in violation of the Fair Trade Act. Specific cases shall be processed and determined by their substantial facts.