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The Commission first found that the relevant product market was large commercial aircraft, and since they are sold and operated throughout the world under similar conditions of competition, the relevant geographic market was the world market. It then pointed out four main areas of concern: (1) the merge would considerably increase Boeing’s market share and customer base, thereby strengthening its already established dominant position (2) Boeing’s twenty-year exclusive supply agreements with American Airlines, Delta Airlines and Continental Airlines would foreclose the market; (3) the merged parties would be able to dictate to European clients and create a barrier for the only other competitor, the Airbus; and (4) Boeing’s acquisition of MDC’s defense and space activities would enhance Boeing’s access to publicly funded research and development and increase its bargaining power with suppliers. The Commission thus required the parties to modify the merger plan. The parties argued that the Commission did not provide a fair view of the proposed merger because it was catering to the interests of Airbus. They also argued that under the EU-U.S. Agreement, the FTC was better placed to decide the case, and the Commission should have given deference to the FTC’s clearance without condition. The Commission countered that it sought to ensure a level playing field in the EU commercial aircraft market, and that the agreement did not cover mergers where there is specific legislation empowering the EU to take action.
Realizing that the Commission would not rescind its required concessions, and that delaying the merger or merging without taking the conditions would causing damaging uncertainty for all concerned, Boeing agreed on July 22, 1997 to: (1) refrain from entering into exclusive supply contracts until 2007, and not enforce the exclusivity rights in its existing contracts with three U.S. airlines; (2) license to competitors non-exclusive patents developed from publicly financed research and development; (3) maintain DAC, the commercial aircraft manufacturing unit of MDC, as a separate legal entity for ten years; and (4) refrain from using its dominant position to abuse relationships with customers and suppliers. On July 30, 1997, the Commission declared the merger compatible with the common market.
This case shows a rather aggressive exercise of extraterritorial jurisdiction which can not be satisfactorily explained by either the implementation approach or the effects test. Take the exclusive supply contracts for example. The implementation approach does not apply since the contracts were between Boeing and U.S. airlines and were not in any way implemented or to be implemented in the EU. The effects test might provide stronger grounds, but since the three airlines accounted for less than 11% of all the U.S. demand for commercial jet aircraft , the Commission would have quite a task to show that the foreclosure of this part of the market had a substantial effect in the EU. This foreclosure might be felt in the EU if it forced Airbus to raise prices or allowed Boeing to raise prices to hurt purchasers in the EU. However, with sales around $ 9 billion and profits of about $ 1 billion per year, Airbus arguably is too strong to be substantially affected thereby.
The Commission’s application of the Merger Regulation, however, does not appear to be inconsistent with the objectives and criteria set forth in the document. This leads to the belief that the criteria in the regulation give the Commission too much power to create competition legislation to satisfy European needs and then to review a broad range of transactions having cross-border impact. The Commission’s uncompromising attitudes towards Boeing underscores EU’s efforts to protect European customers and prevent European competitors from being forced out of the common market. Even Europeans share this view. For example, shortly after the merger was announced, some Commission officials and anti-competition lawyers claimed the Commission’s attack on Boeing reflected a “political desire” to protect the European consortium Airbus.
2. AOL/Time Warner
The more recent AOL/Time Warner case indicates again the Commission’s strong position in protecting the EU industries when applying the Merger Regulation to U.S. firms. AOL, a major provider of Internet online services, proposed to merge with Time Warner, the media and entertainment giant. Pursuant to the merger plan, AOL and Time Warner each would merge with newly created subsidiaries of a newly formed holding company, AOL Time Warner, and as a result of the mergers, both AOL and Time Warner would become wholly owned subsidiaries of AOL Time Warner. The proposed merger was notified to the Commission on April 28, 2000. After preliminary examination the Commission decided that it raised serious doubts as to its compatibility with the common market and initiated formal proceedings on June 19, 2000.
During the formal investigation, the Commission found that the relevant markets for competitive assessment were on-line music, music software, Internet dial-up access (narrow-band access) and broad-band Internet access, and that the merger might give AOL Time Warner a dominant position in the first two markets. When assessing the merger’s impact on the on-line music market and the music software market, the Commission particularly took into account the special relationship between AOL and Bertelsmann, the German media titan. The Commission observed that after the merger AOL/ Time Warner would control Time Warner publishing rights and, because of the joint ventures and agreement with Bertelsmann, would have access to Bertelsmann’s music library and corresponding rights. Since Time Warner and Bertelsmann accounted for approximately 30% to 40% of the music publishing rights for both mechanical and performance rights in the Community, AOL Time Warner would control a sizable music catalog and could exercise substantial market power over its customers wishing to acquire such rights (such as Internet retailers offering music downloading and streaming). The Commission continued to assert that the combined entity could decide to format the music of Time Warner and Bertelsmann to make it compatible only with Winamp, the AOL music player, thereby making Winamp the dominant music player and forcing other players out of the market. The Commission thus concluded that the new entity would become dominant in the markets for on-line music and music software.
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