Digital Maps Go Vertical: Tomtom/Tele Atlas and Nokia/NAVTEQ Carles ESTEVA MOSSO, Michal MOTTL, Raphaël DE CONINCK and Franck DUPONT (1)

Merger control

Digital maps go vertical: TomTom/Tele Atlas and Nokia/NAVTEQ Carles ESTEVA MOSSO, Michal MOTTL, Raphaël DE CONINCK and Franck DUPONT (1)

The Commission recently issued decisions in product lines are not comparable to Tele Atlas or two vertical merger cases in the satellite naviga- NAVTEQ’s. They are not in a position, in particu- tion industry. In October 2007, TomTom notified lar, to provide similar geographic coverage and the Commission of its acquisition of Tele Atlas. cannot offer sufficient functionalities, resulting Four months later Nokia notified its acquisition in digital maps that are unsuitable for advanced of NAVTEQ. Both of these cases are important navigation functions such as car navigation. from a policy point of view. TomTom/Tele Atlas and Nokia/NAVTEQ are the first purely vertical TomTom is a manufacturer of PNDs and a sup- second phase investigations after the adoption of plier of navigation software for use in navigation the non-horizontal merger guidelines. They pro- devices. It is the European leader in the PND vide guidance on how the Commission is going market, way ahead of its competitors, Garmin, to apply the non-horizontal merger guidelines in Mio Tech & Navman. Its activities as a supplier of future cases, in particular in situations where there navigation software to third parties are limited. is a duopoly upstream and where both upstream Nokia provides equipment, solutions and serv- players integrate vertically in a short period. ices for electronic communications networks. The company is principally known as a manufacturer I — Digital map suppliers went for of handsets for mobile telephony (‘mobile hand- vertical integration simultaneously sets’). It also intends to develop mobile online services via its ‘OVI’ portal. Nokia is the world’s Transactions largest supplier of mobile handsets, its main competitors being Motorola, Samsung and Sony Erics- On 22 October 2007, TomTom N.V. (‘TomTom’, son. The share of mobile handsets to incorporate the Netherlands) notified the Commission of its navigation possibilities via the inclusion of a GPS acquisition of Tele Atlas N.V. (‘Tele Atlas’, the chipset is expected to increase dramatically in the Netherlands) (). A few months later, on 19 Feb- short term, and to account for considerably more ruary 2008, Nokia Corporation (‘Nokia’, Finland) than 50% of the mobile handset market within a notified the Commission of its acquisition of few years. Navteq Corporation (‘NAVTEQ’, USA) (). Vertically affected markets The two transactions were put together almost simultaneously. They resulted in the vertical inte- A digital map is a compilation of digital data and gration of the navigable digital map providers Tele typically includes (i) geographic information con- Atlas and NAVTEQ. Both purchasers, TomTom taining the position and shape of each feature on and Nokia, embed digital maps in the devices they a map, (ii) attributes containing additional infor- manufacture in order to provide their customers mation associated with features on the map (e.g. with navigation solutions. street names, addresses, driving directions, turn restrictions and speed limits) and (iii) display Tele Atlas and NAVTEQ are providers of navigable information. In addition to the core database, sev- digital maps. They supply manufacturers of PNDs eral layers of add-on information are provided by (Portable Navigation Devices), car manufacturers, the suppliers of digital map databases. Maps are navigation software producers, mobile handset said to be navigable when they include sufficient manufacturers and location web companies (for functionalities to provide navigation services, instance, Google Maps) with the digital maps they such as real-time turn-by-turn navigation. need to operate navigation solutions. Other digital map suppliers are active on the market, but their In both cases, the Commission considered the relevant upstream market to be the market for (1) Directorate-General for Competition, unit C-5. The navigable digital map databases, where only Tele content of this article does not necessarily reflect the Atlas and Navteq are active, with market shares official position of the European Commission. Respon- of approximately 50% each. Navigable digital map sibility for the information and views expressed lies entirely with the authors. databases are one of the key structural compo- (2) COMP M.4854 TomTom/Tele Atlas. nents of dedicated navigation devices and other (3) COMP M.4942 Nokia/Navteq. navigation applications. The relevant geographic

70 Number 3 — 2008 Competition Policy Newsletter

market for the provision of navigable digital map foreclosure. Such strategies would strengthen the CONTROL MERGER databases was considered to be worldwide since market power of the other supplier of navigable geographic data can be sold to customers any- digital maps, namely NAVTEQ, which would, as where around the world and the transportation a result, be likely to increase its prices. The the- costs and other barriers to trade are minimal. The ory of harm raised under Nokia/NAVTEQ was Commission also established that entry in this similar. The Commission found that the merged market was unlikely in the short- to mid-term. entity could attempt to foreclose its downstream competitors in the mobile handset market and in In the TomTom/Tele Atlas case, the downstream the market for the provision of navigation applica- markets affected were the market for PNDs and tions on mobile handsets. the market for the provision of navigation software. This type of navigation software can be In both cases, the theory of harm relied on the sold to PND manufacturers, but also to mobile increase in market power of the remaining sup- handset manufacturers, Mobile Network Opera- plier of navigable digital maps, which was not party tors (MNOs), or directly to end-customers for self- to the transaction, and its capacity to increase its installation in their mobile handsets. prices. The Commission’s assessment of the likelihood that such a theory of harm would materialise In the Nokia/NAVTEQ case, the downstream mar- was based on the Guidelines on the assessment of kets affected were the market for mobile handsets, non-horizontal mergers under the Council Regu- and the market for the provision of navigation lation on the control of concentrations between applications on mobile handsets (including on- undertakings (‘the non-horizontal merger guide- board, off-board and hybrid solutions). lines’). The Commission analysed the ability and In both cases, PNDs and mobile phones with GPS in particular the incentive of the merged entities were not considered to be part of the same prod- to foreclose their downstream competitors, as well uct market. The market investigation revealed as the overall effect in downstream markets. that there are significant differences between the two types of devices. Whereas the latest mobile Assessment — lack of incentive phones are ultra-portable multi-function communication devices, PNDs are primarily designed In TomTom/Tele Atlas, the Commission con- for navigation. This is reflected in the larger screen cluded that the merged entity would have the sizes of PNDs and the fact that, with some excep- ability to increase prices or degrade quality/delay tions, they do not offer the wide range of func- access for some PND manufacturers and naviga- tions common in most smart phones. Consum- tion software providers competing with TomTom. ers use mobile phones mostly for communication This conclusion was based on the following fac- and PNDs mostly for navigation. However, the tors: (i) navigable digital maps are an essential Commission did not exclude that, as technology input for PNDs and navigation software; (ii) it is evolves, both markets will increasingly converge. unlikely that a market entrant could produce navigable digital maps in the short term; and (iii) the foreclosure strategy by one digital map database II — Assessment of vertical foreclosure supplier could increase the market power of the theory other. Theory of vertical foreclosure Conversely, in Nokia/NAVTEQ the Commis- sion did not reach any conclusion with regard In both cases, the merger led to the vertical inte- to the ability of the merged entity to foreclose its gration of one of the two suppliers of navigable downstream competitors, for instance because digital maps to the downstream competitors of navigation applications in handsets are only one the purchaser. Both transactions therefore raised application among others (video, mobile TV, potential concerns of input foreclosure. Never- music, design, etc.) and therefore constitute only theless, the two transactions had only a limited one of the numerous factors triggering the pur- impact on each other in terms of competitive chase reflex of customers. The question whether assessment, as TomTom and Nokia are essentially the merged entity has the ability to foreclose was active in different downstream markets. therefore left open. The theory of harm raised under Tom Tom/Tele In both cases, the Commission concluded that Atlas was that the merged entity could foreclose its the merged entities would not have the incentive downstream competitors in the PND market and to foreclose their downstream competitors. Post- in the navigation software market, either via an merger, TomTom and Nokia will look at how the increase in the price of its navigable digital maps, sales of map databases to their downstream com- via a degradation of the map quality or via total petitors affect their profits not only upstream via

Number 3 — 2008 71 Merger control sales of Tele Atlas or NAVTEQ maps, but also on could be imposed by either Tele Atlas or NAVTEQ their respective downstream markets. Therefore, on their downstream competitors and eventually when considering the profitability of an input on consumers. foreclosure strategy, the merged entities face a trade-off between the profit lost in the upstream In addition, in TomTom/Tele Atlas the parties market due to a reduction of input sales and the claimed that the transaction would bring about profit gained on their respective downstream efficiencies. Whereas the Commission did not markets by raising their rivals’ costs. come to any conclusion on the merger specificity of the alleged efficiencies, which would allow the The Commission conducted an in-depth quali- merged entity to make better maps in less time, it tative and quantitative analysis () to assess the found that the alleged removal of double margin- incentive of TomTom and Tele Atlas, and of alisation was plausible and merger-specific. Nokia and NAVTEQ, to foreclose their competitors in their respective downstream markets. The Finally, the Commission declared both concentra- analysis led to the conclusion that, although the tions compatible with the Common Market and profits obtained by selling a PND (for TomTom) the EEA Agreement. or a mobile handset (for Nokia) are much higher than the profits from the sale of a map database, III — Impact on the application of neither merged entity would have the incentive to the Non-horizontal Merger foreclose its downstream competitors. Guidelines In Nokia/NAVTEQ, for instance, the economic analysis conducted by the Commission concluded Both TomTom/Tele Atlas and Nokia/NAVTEQ that, under a foreclosure strategy, the merged have been examined by strict application of the entity would only capture relatively limited sales non-horizontal merger guidelines. Point 29 of downstream by increasing map database pricing the non-horizontal merger guidelines formed the to Nokia’s competitors and the loss of revenue due backbone of the theories of harm raised within to decreasing sales of map databases would not be the market investigations: replaced by additional sales of mobile handsets. A ‘A merger is said to result in foreclosure where similar conclusion was reached in Tom Tom/Tele actual or potential rivals’ access to supplies or Atlas as regards limited additional sales of PNDs. markets is hampered or eliminated as a result The Commission finally analysed theeffects of the of the merger, thereby reducing these compa- merger in the downstream markets, although it nies’ ability and/or incentive to compete. Such was not necessary as it had already concluded that foreclosure may discourage entry or expansion the merging parties had no incentive to foreclose of rivals or encourage their exit. Foreclosure their competitors. In both cases, the Commission thus can be found even if the foreclosed rivals concluded that the effects would be relatively lim- are not forced to exit the market: It is sufficient ited, in particular because the low percentage of that the rivals are disadvantaged and conse- the price of a map database in the PND or mobile quently led to compete less effectively. Such handset prices, the evidence regarding limited foreclosure is regarded as anti-competitive pass-through, the limited switching costs and the where the merging companies — and, possibly, competition with the other navigable digital map some of its competitors as well — are as a result supplier all tended to limit the price increase that able to profitably increase the price charged to consumers.’ (4) In order to make an empirical assessment of whether An important aspect of the theory of harm was an input foreclosure strategy would be profitable for the merged entity, the Commission conducted in each case the existence of a duopoly in the market for digital an econometric demand system estimation of the rel- map databases. The issue was therefore not only evant downstream market. In particular, a nested logit that downstream players could be foreclosed by model was estimated using retail data covering monthly the vertically integrated entity, but also that the sales and volumes at stock-keeping unit level, and spe- market power of the remaining upstream player cific product characteristics were used as instruments to control for endogeneity. Using the estimated down- could be increased following the transaction. stream own- and cross-price elasticities, together with The non-horizontal merger guidelines indicate industry data on prices and margins, the Commission that, when competition in the input market is then calculated in each case the critical price increase oligopolistic, a decision of the merged entity to by the upstream competitor that would make a foreclo- restrict access to its inputs reduces the competi- sure strategy profitable for the merged entity. The Com- mission conducted numerous robustness checks in each tive pressure exercised on remaining input sup- case, concerning in particular the choice of instruments, pliers, which may allow them to raise the input the size of the outside good and the nest structure. price they charge to non-integrated downstream

72 Number 3 — 2008 Competition Policy Newsletter competitors (). In essence, input foreclosure by Incentive — vertical foreclosure CONTROL MERGER the merged entity would expose its downstream rivals to non-vertically integrated suppliers with In examining the likelihood of the theories of increased market power. For example, competitors harm raised during the market investigation of TomTom would have to buy from NAVTEQ, actually materialising, the Commission focused the only other supplier not integrated with a PND in particular on the incentive of the parties to manufacturer. foreclose their downstream competitors. It is of interest to analyse how the criteria set out in the non-horizontal merger guidelines in relation to In addition, in TomTom/Tele Atlas a number of the incentive to foreclose access to inputs were third parties expressed a concern that the merged addressed, and what conclusions can be drawn for entity could use the confidential information future cases in this respect. obtained from the customers of the upstream Point 40 of the non-horizontal merger guidelines map-making arm of the company to improve the states: competitive position of the downstream device- making arm. With regard to the question of con- ‘The incentive to foreclose depends on the degree fidentiality, the Commission based its findings on to which foreclosure would be profitable. […]. Point 78 of the non-horizontal merger guidelines, Essentially, the merged entity faces a trade-off which addresses the issue of how access to con- between the profit lost in the upstream market fidential information could lead to competitive due to a reduction of input sales to […] rivals and harm. ‘The merged entity may, by vertically inte- the profit gain, […], from expanding sales […]. grating, gain access to commercially sensitive information regarding the upstream or downstream The non-horizontal merger guidelines provide activities of rivals. For instance, by becoming the guidance in assessing the incentive that the merged supplier of a downstream competitor, a company entity may have to foreclose its downstream com- may obtain critical information, which allows it to petitors, by pointing to the main factors affecting price less aggressively in the downstream market this trade-off. These factors are discussed below, to the detriment of consumers [...]. It may also put together with their relevance to both cases. competitors at a competitive disadvantage, thereby 1. Upstream and downstream margins — dissuading them to enter or expand in the market.’ Point 41 — ‘[…] the lower the margins upstream, the lower the loss from restricting input sales. Similarly, the higher the downstream margins, Companies contacted during the investigation the higher the profit gain from increasing market indicated that they pass sensitive information on share downstream’. In both cases, the percent- to Tele Atlas about their future conduct (prices, age gross margins are higher upstream than promotions, innovations), inter alia, in order to downstream, since digital maps have very low obtain better prices, ask for new map features or marginal costs. In absolute terms, however, the incorporate features developed by third parties, as gross margin achieved when selling a PND or well as to introduce innovative service concepts or a mobile handset with navigation functionali- penetrate new geographic markets. ties can be 10 to 20 times higher than the gross margin achieved on the sale of a map, since maps make up a small percentage of the price The access by TomTom to confidential informa- of the downstream products. tion supplied by customers to Tele Atlas may have two effects. On the one hand, TomTom will know 2. Downstream demand likely to be diverted what the competition is planning. This advance away from foreclosed rivals — Point 42 — ‘The knowledge might allow it to compete less intensely. incentive […] further depends on the extent On the other hand, TomTom’s competitors might to which downstream demand is likely to be choose not to purchase maps from their com- diverted away from foreclosed rivals.’ This refers petitor. The merger might therefore significantly to the own-price elasticity of rivals’ demand, strengthen the market power of NAVTEQ, which which was estimated econometrically in both would increase its ability to increase prices. As cases, but also to the extent to which the price described in the following section, the Commis- of the rivals’ downstream product is expected sion found that the merged entities in both cases to increase if the merged entity were to adopt would not have the incentive to degrade the qual- an input foreclosure strategy. The guidelines ity of the product by, for example, leaking confi- state that ‘[t]he effect on downstream demand dential information. will also be higher if the affected input represents a significant proportion of downstream (5) Non-Horizontal Merger Guidelines, Point 38. rivals’ costs or if the affected input represents a

Number 3 — 2008 73 Merger control

critical component of the downstream product.’ be expected to benefit from higher price levels In both cases, maps make up a small portion downstream as a result of a strategy to raise of the downstream product price, which means rivals’ costs. The greater the market shares of the that map prices would have to increase very merged entity downstream, the greater the base substantially to have a significant impact on of sales on which to enjoy increased margins’. In downstream demand. One difference between both cases, the merged entities have large mar- the two cases is that, while in TomTom/Tele ket shares on their respective downstream mar- Atlas navigable maps were considered to be kets. Indeed, TomTom is the leader on the PND a critical component of portable navigation market in Europe, far ahead of Garmin. Simi- devices, in Nokia/Navteq navigable maps were larly, Nokia is the world leader in the market not considered to be a critical component for for mobile handsets, far ahead of Motorola. handsets. Indeed, navigable digital maps are needed for navigation applications, but mobile It is remarkable to observe that, in both cases, handsets can also be sold without such navi- several of the issues discussed above tend to make gation applications and other features of the the incentive to foreclose more likely. However, mobile handset are equally important (mobile a mere checklist interpretation of the guidelines TV, music, camera, etc.). Even in the TomTom/ would not be productive, as some factors invari- Tele Atlas case, however, given the presence of ably make the incentive to foreclose more likely Navteq in the upstream market, a foreclosure while others make it less likely. Instead of rely- strategy could only lead to an increase of the ing on a checklist, the Commission therefore input price, which would be likely to have lim- conducted a detailed empirical assessment of the ited effects downstream given the small share profit trade-off described in the guidelines, and of the input cost in the total price. concluded that in both cases the parties would not have the incentive to foreclose their downstream 3. Share of diverted downstream demand likely competitors. In Nokia/NAVTEQ, for instance, the to be captured by the merged entity. — Point Commission estimated that a foreclosure strategy 42 — The guidelines further state that ‘[t]his could only be profitable for the merged entity if share will normally be higher the less capacity Tele Atlas increased its prices by more than 200% constrained the merged entity will be relative to as a result. Such a price increase was found to be non-foreclosed downstream rivals and the more unrealistic, and in addition NAVTEQ may have the products of the merged entity and foreclosed an economic interest to undercut Tele Atlas with competitors are close substitutes.’ In both cases, price increases well below 200%. A similar con- capacity constraints would not limit the down- clusion was reached in the TomTom/Tele Atlas stream sales that could be captured by the case. Key characteristics limiting the incentive to integrated companies. Indeed, both Tele Atlas foreclose in both cases are the small percentage and NAVTEQ develop and update an origi- of the input cost with respect to the price of the nal version of their digital map, which can be downstream product, and the presence of a sec- duplicated without any technical, legal or price ond input supplier in the upstream market that is restriction. With this point in mind, the extent not vertically integrated in the same downstream to which the merged entity would capture sales markets. from its downstream rivals was estimated econometrically in both cases. In particular, it The decisions show the willingness of the Com- was found that, on the basis of the estimated mission to examine all factors mentioned in the cross-price elasticities, the integrated compa- guidelines, pointing both to harm and to the nies would gain relatively limited sales from absence of any harm. In both cases, the Commis- their downstream competitors by increasing sion concluded that, on balance, the merged entity their map prices. would not have any incentive to foreclose its competitors. While the Commission would be likely 4. Downstream market share — Point 43 — ‘The to apply a similar analysis to other markets with incentive to foreclose actual or potential rivals comparable characteristics, it is important to keep may also depend on the extent to which the in mind that each case is specific and therefore downstream division of the integrated firm can needs to be assessed on its own merits.

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