AUSTRALIAN COMPETITION TRIBUNAL

Application by Tabcorp Holdings Limited [2017] ACompT 1

IN THE AUSTRALIAN COMPETITION TRIBUNAL

THE TRIBUNAL DETERMINES THAT:

1.    Subject to the condition in the Annexure to this determination, Tabcorp Holdings Limited (ACN: 063 780 709) (“Tabcorp”) is granted authorisation pursuant to s 95AT and s 95AZJ of the Competition and Consumer Act 2010 (Cth) to acquire shares in Tatts Group Limited (ACN: 108 686 040) (“Tatts”) as set out in a Merger Implementation Deed between Tabcorp and Tatts dated 18 October 2016.

2.    This determination includes the Annexure and the Attachment and all Schedules thereto.

ANNEXURE TO THE DETERMINATION DATED 22 JUNE 2017

CONDITION OF THE TRIBUNAL’S AUTHORISATION

The authorisation is subject to the condition that Tabcorp give to the ACCC an undertaking pursuant to s 87B of the Act in the same form as the undertaking filed with the Tribunal and dated 29 May 2017 and attached hereto.

ATTACHMENT

REASONS FOR DETERMINATION

INTRODUCTION

1    Attached to these Reasons is a Primer of Agreed Facts (to which the Tribunal will need to return) (Annexure 1), and a Dictionary of various terms used in the Reasons (Annexure 2).

2    Under s 95AT of the Act, the Tribunal may grant an authorisation to a person to acquire shares in the capital of a body corporate. A person who wants such authorisation must apply to the Tribunal: s 95AU.

3    Tabcorp lodged an application on 13 March 2017, seeking authorisation of a proposed acquisition by Tabcorp of the issued share capital of Tatts, as agreed between Tabcorp and Tatts in a Merger Implementation Deed entered on 18 October 2016. The Tribunal was tasked with either making a determination within 3 months of the application, or extending the period by up to another 3 months: s 95AZI.

4    On 7 June 2017, the Tribunal issued the following notice to Tabcorp and the interveners:

NOTICE

TAKE NOTICE that pursuant to s 95AZI(2) of the Competition and Consumer Act 2010 (Cth) (the Act), the Australian Competition Tribunal (the Tribunal) extends the period by which it is authorised to make a written determination in respect of the above application from 13 June 2017 (the relevant period as defined in s 95AZI(2) of the Act) to the period ending 10 September 2017.

The Tribunal determines that this matter cannot be dealt with properly within the relevant period because of special circumstances.

The Tribunal anticipates that it may need additional time to consult with the interested parties to ensure that the final determination and reasons comply with the confidentiality regime established by the Tribunal.

The Tribunal also anticipates that, should it decide to grant an authorisation subject to conditions, additional time may be required in order to finalise the conditions (in consultation with the relevant participants) prior to the granting of that authorisation.

The Tribunal is mindful that it can only extend the relevant period once for a period of no more than 3 months.

5    The Tribunal refers to the interveners below.

Confidentiality regime

6    In preparation for determination of the application by Tabcorp, it became clear that the participants and interested third parties held information that was both relevant to the decision and commercially sensitive. It also became clear that there were a number of surrounding legal issues, some of which may be the subject of commercial negotiations or litigation at a later stage. Wherever possible, the Tribunal’s preference was to maintain a public hearing while making documents available on the merger authorisation register pursuant to s 95AZ(2) of the Act. This was made more challenging by the filing of more than 2,500 documents accompanied by a claim of confidentiality.

7    The Tribunal responded by ordering that four levels of confidentiality be applied. First, the Tribunal, the ACCC, external counsel, and a small number of external solicitors were provided access to all documents, provided that relevant confidentiality undertakings were signed. These practitioners were permitted to attend all hearings of the Tribunal. Secondly, a wider number of external solicitors received access to all information and attended all hearings, except where those documents or hearings related to possible future legal proceedings or extremely sensitive contemporaneous commercial negotiations. Thirdly, internal counsel were permitted access to information that was considered commercial-in-confidence in that it was not in the public domain, but was otherwise generally known within the relevant industries. Fourthly, the Tribunal ensured that redacted versions of confidential documents were publicly available, and more often than not, the general public was able to attend the hearing. The Tribunal was greatly assisted by participants, and in particular by the ACCC, when assessing the claim of confidentiality over submitted information.

The Tribunal

8    The Australian Competition Tribunal is a statutory body performing an executive role. It considers the merits of applications submitted under s 95AU, and makes determinations under the Act in compliance with the prescriptions of the Act. For the purpose of hearing and determining proceedings, the Tribunal is constituted by a Division consisting of three members: s 37. Members are appointed by the Governor-General: s 30(3). The Division is an expert panel, whose members are qualified for appointment by virtue of their knowledge of, or experience in, industry, commerce, economics, law or public administration: s 31(2).

Tabcorp

9    Tabcorp Holdings Limited is a public company incorporated in Australia and listed on the ASX. It is a supplier of gambling and entertainment products divided into three main business divisions: wagering and media, gaming services, and Keno. Wagering and media is the dominant business division, contributing 85% of Tabcorp’s revenue and 73% of EBIT in the financial year ending 30 June 2016.

10    Tabcorp’s Australian wagering operations include pari-mutuel (also known as totaliser or ‘tote’) wagering and fixed-odds wagering on racing, sports and other events. Tabcorp offers wagering services on-course and off-course, in agency outlets and third-party licensees in Victoria, New South Wales and the Australian Capital Territory. Consumers of wagering services may alternatively place bets with Tabcorp nationwide by telephone, and online via web-based applications and mobile apps. (Except where there is a material distinction, ‘online’ wagering includes wagering on smartphone apps, tablet apps, and web browsers on personal computers.) Tabcorp owns and operates a Northern Territory-licensed subsidiary Luxbet Pty Ltd, which is another nationwide platform for online and telephone tote derivative wagering and fixed-odds wagering. It also operates a computer-simulated racing product called Trackside in retail venues within Victoria, New South Wales and the Australian Capital Territory.

11    Western Australian pari-mutuel wagering is operated by Racing and Wagering Western Australia (‘RWWA’), a publicly-owned body corporate with a statutory entitlement to conduct off-course totalisator wagering in Western Australia. Tabcorp provides pooling services to RWWA by combining the Western Australian pool with its own Victorian and Australian Capital Territory pools into one pool (‘SuperTAB’). The larger pool produces efficiencies for both RWWA and Tabcorp, and Tabcorp earns revenue from RWWA for provision of pooling services. Tabcorp also operates several international wagering-related businesses, including pooling arrangements with international wagering operators.

12    The racing media operations of Tabcorp include the production and distribution of three Sky Racing television channels: Sky Racing1, Sky Racing2, and Sky Thoroughbred Central. Sky Racing broadcasts thoroughbred, harness and greyhound racing, and other sports, to licensed venues and pay TV subscribers nationwide. Tabcorp also broadcasts audio racing content via traditional wireless radio broadcasting (in its exclusive retail jurisdictions) and online nationally.

13    The gaming services division supplies licensed venue operators with gaming systems and related services which assist in the operation of Electronic Gaming Machines (EGMs, colloquially known as ‘poker machines’ or ‘pokies’) and compliance with regulatory requirements. It does so under the brands Tabcorp Gaming Services, Intecq, and Odyssey Gaming. Tabcorp does not manufacture EGMs, nor operate venues with EGMs.

14    Keno is a game of chance: in its common form, a consumer either selects numbers or is electronically provided them within the range of 1 to 80. Consumers win a return if a certain quantity of their numbers match some of 20 numbers drawn at random from the same range. Tabcorp distributes Keno products in licensed venues in Victoria, New South Wales, the Australian Capital Territory and Queensland, and in TAB agencies in Victoria, Queensland and the Australian Capital Territory. When compared with weekly lottery products, Keno prize pools are relatively small, but draws may be held far more frequently, even as often as once every three to four minutes.

Tatts

15    Tatts Group Limited is a public company limited by shares listed on the ASX. It is an Australian provider of lotteries, wagering services, and gaming products and services, with three corresponding divisions. The largest division is in lotteries, accounting for 72% of revenue and 65% of EBIT in FY 2016.

16    Lotteries are generally a chance-based activity in which a distinct set of numbers is randomly drawn from a larger set of numbers; a player with a combination of those numbers, whether chosen by the player or automatically allocated, wins a prize. Tatts currently operates all public lotteries in all jurisdictions except Western Australia, which is yet to privatise both lottery services and wagering services. Not all lottery products are dependent on a future contingency such as a draw of numbers; Tatts also sells instant-scratch products, which are a pre-ordained set of winning and losing tickets within a print run. In South Australia, Tatts distributes Keno products via licensed premises in a similar manner to Tabcorp’s Keno business in other jurisdictions. Uniquely, Keno in South Australia is also distributed via a wider range of venues, including newsagencies, convenience stores, supermarkets and chemists.

17    Tatts’ wagering operations include on-course and off-course pari-mutuel and fixed-odds wagering in Queensland, South Australia, Tasmania and the Northern Territory. Tatts also offers nationwide totalisator and fixed-odds wagering online and by telephone.

18    Tatts broadcasts audio racing content via RadioTAB, an online and traditional wireless radio broadcasting service. Wireless broadcasting is largely confined to Tatts’ exclusive retail jurisdictions.

19    Tatts’ gaming services are provided by two separate business units. Maxgaming provides EGM systems and services to venues in New South Wales, Queensland and the Northern Territory. Bytecraft provides repair and maintenance services to venues in all States and Territories except the Australian Capital Territory and Tasmania.

20    As the subject of the proposed acquisition (but not the applicant), Tatts was given leave to intervene in the proceeding and it supported the proposed acquisition.

Competition between Tabcorp and Tatts

21    There are a number of fields of endeavour in which the Merger Parties compete.

22    The provision of retail wagering services in Australia is restricted to a single licensed operator in each State and Territory. Superficially, each jurisdiction has legislated to create a monopoly in the provision of retail wagering services, and therefore the Merger Parties do not compete with each other (or with any other entities) to provide retail wagering services. However, the Merger Parties do compete in the provision of telephone and online wagering services to consumers across Australia, alongside bookmakers including Sportsbet, CrownBet, William Hill, Ladbrokes, Betfair, Bet365, and Betchoice.

23    The exclusive State and Territory licences to operate pari-mutuel and retail wagering are awarded on an infrequent basis, and for extended periods of time. Of existing arrangements, the Victorian licence is due to expire in 2024, or 2026 if an extension is taken up by the Victorian government. This is notwithstanding the expiration of the exclusivity period of the South Australian licence earlier in 2017; the Tribunal understands negotiations regarding any extension of exclusivity are ongoing, but Tatts retains the right to operate pari-mutuel and retail wagering in South Australia until 2100. The exclusivity period for Tasmania expires in 2027; for New South Wales it expires in 2033; for the Northern Territory it expires in 2035; for Queensland it expires in 2044; and for the Australian Capital Territory it expires in 2064. It is unclear whether the Western Australian licence will be open for tender before 2024, if at all. In the past, the Merger Parties have competed with each other, and with other entities, to acquire these exclusive licences.

24    Tabcorp provides pooling services to RWWA. Additionally, both SuperTAB and Tabcorp’s New South Wales pool (‘NSWTAB’) are combined with international pools for greater scale and efficiency. Tatts does not provide pooling services to non-Tatts retail wagering jurisdictions, nor does it combine its pools with other international pools.

25    Tatts does not produce visual racing media in competition with Tabcorp’s Sky Racing service. Tabcorp and Tatts compete to a limited extent in the nationwide online broadcast of audio racing calls and commentary. However, traditional wireless radio broadcasting is largely confined to each of the Merger Parties’ exclusive retail jurisdictions.

26    Tabcorp and Tatts overlap in the provision of EGM services, particularly in Queensland, New South Wales and Victoria. As with wagering, the provision of EGM services occurs within the regulatory frameworks of each State and Territory. Both Merger Parties have several gaming operations. Tabcorp operates Tabcorp Gaming Services (‘TGS’) and eBet in Victoria and New South Wales, and Odyssey in Queensland. Tatts operates Maxgaming in New South Wales, Queensland, and Victoria; UBET in the Northern Territory; and Bytecraft in all States and Territories except the Australian Capital Territory and Tasmania.

27    Treating Keno and lotteries as separate subjects, Tabcorp provides Keno services to consumers in Victoria, New South Wales, Queensland and the Australian Capital Territory, while Tatts provides Keno in South Australia. There is no overlap except to the extent that these services may be available online. The Australian Capital Territory licence to deliver Keno services permits online play, but the vast majority of consumers purchase Keno products in licensed venues.

28    Tabcorp does not supply lottery products in any jurisdiction.

The proposed acquisition

29    As will be clear from these Reasons, the Tribunal does not consider that there is any distinction in terminology between ‘merger’ and ‘acquisition’ when making its determination, and the terms are used interchangeably.

30    Under a Merger Implementation Deed entered into by Tabcorp and Tatts on 18 October 2016, Tabcorp proposed to acquire the issued share capital of Tatts by means of a scheme of arrangement made under s 411 of the Corporations Act 2001 (Cth). The consideration offered for the transfer of Tatts shares to Tabcorp comprises a combination of cash and Tabcorp shares. At 8 March 2017, the transaction bore a value of approximately six billion dollars.

31    Tabcorp submitted that the proposed transaction would combine the largely complementary businesses of Tabcorp and Tatts, producing a diversified Merged Entity operating in wagering and media, lotteries, Keno and gaming services. It was said that Tabcorp’s strengths lie in wagering, while Tatts’ strengths lie in lotteries, based partly on historical patterns of trade. However, all participants agreed that the Tribunal’s role is to look forward, not to the past. Historical matters are useful only insofar as they indicate future competitive practices.

32    The proposition that Tabcorp and Tatts are complementary rather than competitive businesses found some support in the contributions made by each business unit to the current financial performance of the Merger Parties. In FY2016, Tabcorp earned $1.873 billion in revenue and $252 million EBIT from its wagering division (including racing media); $107 million and $41 million respectively from its gaming services division; and $208 million and $50 million from its Keno division. Tatts earned $610 million in revenue and $116 million EBIT from its wagering division; $211 million and $53 million respectively from its gaming services division; and $2.139 billion and $320 million from its lotteries division (including Keno). While large sums were earned by both Merger Parties from wagering and gaming services, a significant proportion of these were earned under exclusive licences held by one or the other party in various State and Territory jurisdictions. With respect to the supply of those services to consumers, the exclusive nature of these licences means that there is no competitive tension in the retail channel within their exclusive jurisdictions. This is not to dismiss the observation that the Merger Parties do compete head-on in the provision of some services in other channels, and in the bidding process for those exclusive licences.

33    The proposed acquisition is not only dependent on Tribunal authorisation. It also requires approval by a relevant Federal or Supreme Court in accordance with s 411(4)(b) of the Corporations Act 2001 (Cth), various State and Territory regulatory approvals, and approval by Tatts shareholders.

Original request for informal clearance and role of ACCC

34    A corporation must not directly or indirectly acquire shares in the capital of a body corporate if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in any market: s 50. A corporation can only acquire merger clearance (as distinct from merger authorisation) by applying to the ACCC: s 95AD. The ACCC may grant clearance to a merger proposal, in which case s 50 no longer applies to prevent the acquisition: s 95AC.

35    Prior to Tabcorp’s application to the Tribunal for merger authorisation, Tabcorp applied to the ACCC for informal merger clearance. The ACCC conducted a review of the proposed acquisition to determine whether it was likely to substantially lessen competition in a market. The ACCC published a Statement of Issues on 9 March 2017, expressing a preliminary view that several issues raised competition concerns. In its Statement of Issues, the ACCC reached no definitive conclusion as to whether the acquisition would result in a substantial lessening of competition in a market. However, in final submissions before this Tribunal, the ACCC proffered the view that the proposed merger should not be allowed.

36    On 13 March 2017, Tabcorp applied to the Tribunal for merger authorisation. This had the effect of bringing the informal clearance request to the ACCC to an end.

37    Upon the Tribunal receiving an application for merger authorisation, the ACCC has an important role, as recognised by the Act, in assisting the Tribunal. The ACCC also has an important regulatory role under the Act, and its views as expressed to the Tribunal must be given due weight having regard to this role. Nevertheless, it is the responsibility of the Tribunal to assess for itself all the information provided to the Tribunal and to make an evaluation on that basis.

38    The Tribunal makes these further comments on the role of the ACCC. The ACCC’s statutory responsibility to assist the Tribunal in its determination involves making enquiries and providing a report to the Tribunal regarding the application for authorisation: s 95AZEA and s 95AZFA. It may also call witnesses, examine or cross-examine witnesses, report on statements of fact, and make submissions to the Tribunal: s 95AZF. In this respect, when the ACCC appears before the Tribunal, it occupies a different role to that of a traditional regulator. As regulator, it reaches its own conclusion regarding informal or formal merger clearance. When appearing before the Tribunal, the ACCC uses its resources and expertise to assist the Tribunal in an impartial manner, regardless of any conclusions it may have drawn from its earlier analysis in the clearance process. The circumstances of this application have required the ACCC to act first as regulator with the decision-making power that entails, and then transform into an adviser without the ability to make a determination. The transition from decision-maker to adviser cannot always be easy, but the Tribunal was grateful to receive the constructive contributions of the ACCC in this proceeding.

Formal authorisation

39    The legal test by which the Tribunal makes its determination is not the test in s 50. Under s 95AZH, the Tribunal must not grant authorisation unless it is satisfied in all the circumstances that the proposed acquisition would result, or be likely to result, in such a benefit to the public that the acquisition should be allowed to occur.

40    In support of its application, Tabcorp submitted witness statements from nine senior executives of Tabcorp and Tatts, expert reports from four consultant economists, and witness statements from 23 participants in the racing industry. The application was accompanied by an annexure entitled ‘Industry Background and Application Overview’ that was largely duplicative of the initiating application. A second annexure contained confidential tables of information in support of Tabcorp’s application, including financial information, take-out rates, key customers and suppliers, Tabcorp’s estimation of market concentration, and pricing information. A third annexure to the application provided similar information with respect to the Tatts business. Additional information was provided by Tabcorp during the course of the hearing, including information directed to be provided by the Tribunal at the request of the various participants.

Victorian Racing Interveners

41    Racing Victoria Limited (‘Racing Victoria’) is the governing thoroughbred racing authority in Victoria. It is an unlisted public corporation established pursuant to the Racing Act 1958 (Cth) (‘Racing Act’). The Harness Racing Board (‘Harness Racing Victoria’) is a statutory body established under the Racing Act as the governing authority for harness racing in Victoria. Similarly, the Greyhound Racing Control Board (‘Greyhound Racing Victoria’) is established under the Racing Act to govern greyhound racing in Victoria. These entities were jointly represented and referred to collectively as the Victorian Racing Interveners.

42    Generally, the constitutional or statutory objectives of these bodies include the promotion of their respective racing codes; supervising and managing the conduct of those in the industry; and providing support to Victorian racing clubs. PRAs such as the Victorian Racing Interveners seek to aggregate or otherwise coordinate the sale of media rights by racing clubs in pursuit of what they perceive to be in the best interests of the three racing codes in Victoria. In a sense, the racing clubs are the content providers for the wagering and racing media industries.

43    In their application to intervene, the Victorian Racing Interveners noted that tens of thousands of people gain their livelihood from the Victorian racing industry; the Merger Parties are the two largest sources of Victorian wagering revenue and prize money for Victorian racing clubs; and that no Victorian industry representatives were included in the 23 witness statements provided by Tabcorp. The merger was said to affect the Victorian Racing Interveners because it would lead to a vertically-integrated entity with increased market power when bidding for racing media rights from the Victorian Racing Interveners. It was also said to reduce the competitive tension for the exclusive Victorian wagering licence, therefore reducing future returns to the industry.

44    Racing Victoria, Harness Racing Victoria and Greyhound Racing Victoria were granted leave to intervene in the proceeding and opposed the proposed merger.

CrownBet

45    CrownBet Pty Ltd is a bookmaker which supplies off-course wagering products nationwide via online and telephone betting. It is a competitor to Tabcorp and Tatts licensed in the Northern Territory under the Racing and Betting Act (NT), and operates as a subsidiary of Crown Resorts Ltd. Crown Resorts Ltd also owns Betfair Pty Ltd, the only betting exchange operator licensed in Australia.

46    CrownBet sought leave to intervene with respect to wagering and racing media. Although companies related to Crown Resorts Ltd operate casinos that offer EGMs to consumers, CrownBet did not seek to intervene with respect to EGM services. Nor did it make a submission with respect to lotteries or Keno.

47    The application to intervene submitted by CrownBet noted that the Tribunal would need to consider market definition and the competitive effects of the proposed merger in wagering and racing media. As a participant in these markets (as either a supplier or a customer), it was argued that CrownBet had a real and substantial interest in the proceeding. Although CrownBet had offered assistance to the ACCC, there was no scope for CrownBet to critically assess Tabcorp’s submissions during the informal merger clearance process, whereas an intervener in the Tribunal proceeding could lend assistance with its own submissions. No other bookmaker sought to intervene, but Sportsbet, Betfair, William Hill, Ladbrokes, Bet365 and Unibet provided letters in support of CrownBet’s application.

48    CrownBet was granted leave to intervene in the proceeding and opposed the proposed merger.

Racing.com

49    Racing.Com Pty Ltd began operating in August 2015 as a joint venture between Racing Victoria Limited (‘RVL’) and Seven West Media Limited. It supplies audio-visual racing content online and via free-to-air and subscription television. RVL (as distinct to Racing.com) also sub-licences Victorian thoroughbred content to bookmakers for use on their digital platforms.

50    Racing.com seeks to acquire thoroughbred racing media rights from PRAs in Australia. As such, it is a competitor to Sky Racing when bidding for racing media licences. It recently competed with Sky Racing to acquire broadcasting rights from the Perth Racing Club, and was in negotiations to acquire South Australian broadcasting rights during this proceeding.

51    Racing.com noted in its application to intervene that it was the only competitor seeking to disseminate racing media online and on free-to-air, digital and subscription television. It was suggested that the presence of Tatts was a counterweight to Tabcorp in racing media, even though Tatts did not participate in racing media, because Tatts’ retail network was an alternative customer to Tabcorp’s retail network for Racing.com’s product. The implication was that this gave Racing.com the confidence to bid for racing media rights, knowing that Tatts has no incentive to foreclose access by Racing.com to its retail network.

52    Insofar as Tabcorp has both racing media and wagering operations, it has a degree of vertical integration that Racing.com does not. In the event of a merger, this vertical integration would encompass Tatts retail jurisdictions. It was said that a ‘nexus’ would arise between wagering and racing media rights that would constrain Racing.com from acquiring media rights in the future, and would foreclose competition for racing media rights more generally. Therefore, Racing.com had a real interest in the proceeding. The application also alluded to issues pertaining to the supply of racing media to third-party venues.

53    Racing.com was granted leave to intervene in the proceeding and opposed the proposed merger.

Primer

54    As already referred to and attached to these Reasons as Annexure 1 is a Primer of Agreed Facts which contains, with two qualifications, the agreed framework relating to wagering, racing and racing media, EGM services, lotteries and Keno. These two qualifications are as follows.

55    First, in relation to paragraph 44(g), Tabcorp objected to Luxbet being included as one of the major corporate bookmakers in Australia. Tabcorp pointed out that the turnover of Luxbet is less than half that of the smallest of the other corporate bookmakers referred to in paragraph 44. With this observation in mind, it is true that Luxbet should not be treated as a major corporate bookmaker in Australia, although nothing turns on this particular qualification.

56    Secondly, in relation to paragraph 105, CrownBet suggested that sub-paragraph 105(a) read as “racing industry funding obligations (primarily contributed to be State TABs through product fees and State TAB racing payments under arrangements entered into as a condition of the grant of the exclusive totalisator licence and retail exclusivity in the relevant State or Territory)”. This wording was objected to by Tabcorp. Tabcorp suggested that sub-paragraph 105(a) read as “racing industry funding obligations (primarily contributed to be State TABs through product fees and State TAB racing payments under licences and racing industry agreements)”. Again, nothing turns on this particular debate.

LEGAL PRINCIPLES

57    All participants agreed that the legal principles to be applied are not controversial.

58    Section 50 prohibits a corporation from acquiring shares or assets if the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition in any market. However, the Tribunal may grant authorisation to a person to acquire shares in the capital of a body corporate or acquire the assets of another person: s 95AT(1). The Tribunal may grant authorisation subject to specified conditions, including a condition that a person must make and comply with an undertaking to the ACCC under s 87B: s 95AZJ(1) and (2). If Tribunal authorisation is granted the prohibition in s 50 does not apply, provided the authorised acquisition is carried out in accordance with the conditions of its grant: s 95AT(2) and (3).

Test to be applied: s 95AZH

59    The Tribunal must not grant an authorisation unless satisfied that, in all of the circumstances, the proposed acquisition would result, or be likely to result, in “such a benefit to the public that the acquisition should be allowed to occur”: s 95AZH(1).

60    Section 95AZH(2) specifies certain matters to which the Tribunal must have regard in determining what amounts to a public benefit. If as a consequence of the proposed merger there is likely to be a significant increase in the real value of exports, or a significant substitution of domestic products for imported goods, the Tribunal must regard these as a public benefit: s 95AZH(2)(a). The Tribunal must also take into account, in determining what amounts to a benefit to the public, all other relevant matters that relate to the international competitiveness of any Australian industry: s 95AZH(2)(b).

61    However, the Tribunal is not confined to these matters when considering whether such a public benefit has arisen that the transaction should be allowed. The expression “benefit to the public” has been interpreted broadly by the Tribunal since Re Queensland Co-operative Milling Association Ltd; re Defiance Holdings Ltd (1976) 8 ALR 481 (‘Re QCMA’) where the Tribunal said (at 510) that public benefit included:

anything of value to the community generally, any contribution to the aims pursued by the society including as one of its principal elements (in the context of trade practices legislation) the achievement of the economic goals of efficiency and progress.

A public benefit arises “if the benefit would not exist without the acquisition or if the acquisition removes or mitigates a public detriment which would otherwise exist”: Application by Sea Swift Pty Ltd [2016] ACompT 9 at [42] (‘Sea Swift’).

62    The Tribunal has previously adopted a modified total welfare standard when identifying and assessing public benefit: see Qantas Airways Limited [2004] ACompT 9 at [185] (‘Qantas’). This means that the Tribunal has considered that gains flowing to only a limited number of members of the community may constitute a benefit to the public, but those gains will carry less weight than gains which flow to the community generally.

63    In Qantas, the Tribunal considered whether ‘public benefits’ include the gains made by a domestic company’s foreign shareholders. Endorsing Re Howard Smith Industries Pty Ltd (1977) 28 FLR 385, the Tribunal emphasised that:

it is benefits to the Australian public, not to the overseas public, to which the Tribunal should have regard. However, the Tribunal noted the practical difficulties involved in limiting one’s consideration to benefits to the Australian public.

64    The Tribunal in that instance concluded that supra-competitive returns and deadweight loss that accrues to foreign shareholders should be disregarded. However, returns to foreign shareholders of Australian companies would constitute a public benefit where they are re-invested in the Australian economy or result in further foreign investment in Australia: Qantas at [199].

65    The method by which the Tribunal assesses the existence and weight of a public benefit was described in Sea Swift at [42]:

A public benefit arises from a proposed acquisition if the benefit would not exist without the acquisition or if the acquisition removes or mitigates a public detriment which would otherwise exist. If a claimed public benefit exists, in part, in a future without the proposal, the weight accorded to the benefit may be reduced appropriately. Public benefit is a wide concept and may include anything of value to the community generally so long as there is a causal link between the proposed acquisition and the benefit: see Application by Medicines Australia Inc (2007) ATPR 42-164; [2007] ACompT 4 (“Medicines Australia”) at [107], [118]-[119]. Benefits not widely shared may nevertheless be benefits to the public: Hospital Benefit Fund of Western Australia Inc v Australian Competition and Consumer Commission (1997) 76 FCR 369 at 375-377. However, the extent to which the benefits extend to ultimate consumers is a matter to be put in the scales: [Re AGL] at [168].

66    Although s 95AZH does not explicitly refer to public detriment, assessment of public benefit does not occur in a vacuum. The Tribunal must have regard to “all the circumstances” in applying the authorisation test prescribed by the CCA. In Re Queensland Independent Wholesalers Ltd (1995) 132 ALR 225 (‘Re QIW’), the Tribunal said at 234:

The examination of “all the circumstances” must in our view involve the tribunal in an examination of matters of detriment, including anti-competitive detriment, in order to conclude whether in all the circumstances there is such a degree of benefit to the public that the acquisition should be allowed to proceed …

67    Public detriments can include, but are not limited to, the reduction of competition resulting from an acquisition: Re QCMA at 512. They may include detriments other than those that relate to anti-competitive effects: Sea Swift at [43]. Much like public benefits, public detriments are broadly framed to include “any impairment to the community generally”, including “any harm or damage to the aims pursued by society including as one of its principal elements the achievement of the goal of economic efficiency”: Qantas at [150], quoting Re 7-Eleven Stores Pty Ltd, Australian Association of Convenience Stores Incorporated and Queensland Newsagents Federation (1994) ATPR 41-357 at 42,683.

Market definition

68    The consideration of public benefits and detriments arising from a merger necessarily includes the competitive effects of the transaction. This includes consideration of the effects of the merger on the international competitiveness of Australian industry under s 95AZH(2). It also includes any other pro-competitive or anti-competitive effects in a market. The Act includes two definitions of a market: s 4E states that ‘market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services’. Section 50(6) is directly applicable to the prohibition in s 50(1) of acquisitions that would substantially lessen competition; it adds that ‘market means a market for goods or services in Australia, or a State, or a Territory, or a region of Australia’. Certainly, s 50(6) does not exclude the concept of substitutability, a concept to which the Tribunal will return.

69    To assess competitive effects in a market, the market would normally need to be defined, or at least considered.

70    In considering the competitive effects of any transaction, there is an emphasis on substitutability (amongst other factors) and the commercial context and the commercial realities relevant to the market and competition. Market identification is an economic tool or instrumental concept to analyse competitive behaviour. Any analysis will necessarily involve value judgements, as such analysis concerns human behaviour and commercial norms of behaviour.

71    The Tribunal observes that the High Court of Australia has recently confirmed the principles relevant to market definition and any analysis of competitive behaviour in Air New Zealand Ltd v Australian Competition and Consumer Commission [2017] HCA 21 (‘Air New Zealand’). At [12]-[14], Kiefel CJ and Bell and Keane JJ stated:

12    The authorities confirm that a market, within the meaning of the TPA, is a notional facility which accommodates rivalrous behaviour involving sellers and buyers. In Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd, Deane J, after noting that “[s]ection 4E confines ‘market’ for the purposes of the Act to ‘a market in Australia’”, went on to say that “‘market’ should, in the context of the Act, be understood in the sense of an area of potential close competition in particular goods and/or services and their substitutes”. Dawson J agreed generally with Deane J, adding:

“A market is an area in which the exchange of goods or services between buyer and seller is negotiated. It is sometimes referred to as the sphere within which price is determined and that serves to focus attention upon the way in which the market facilitates exchange by employing price as the mechanism to reconcile competing demands for resources”.

13    Similarly, in Boral Besser Masonry Ltd v Australian Competition and Consumer Commission, McHugh J observed:

“[T]he market is the area of actual and potential, and not purely theoretical, interaction between producers and consumers where given the right incentive … substitution will occur. That is to say, either producers will produce another similar product or consumers will purchase an alternative but similar product.”

14    Section 4E of the TPA proceeds upon the express footing that, notwithstanding the abstract nature of the concept of a market, it is possible to locate the market where the competition protected by the TPA occurs in Australia. Reconciling the abstract notion of a market with the concrete notion of location, so that they work coherently, presents something of a challenge. Particularly is this so because “competition” describes a process rather than a situation. But given that the TPA regulates the conduct of commerce, it is tolerably clear that the task of attributing to the abstract concept of a market a geographical location in Australia is to be approached as a practical matter of business. It is important that any analysis of the competitive processes involved in the supply of a service is not divorced from the commercial context of the conduct in question.

(Emphasis added).

72    At [39], Nettle J (whilst agreeing with Gordon J) stated as an additional comment:

39    As the majority in the Full Court of the Federal Court (Dowsett and Edelman JJ) recognised, market definition is a question of fact. More precisely, it involves “a fact-intensive exercise centered on the commercial realities of the market and competition”. And, as a consequence, the definition of a market is liable to vary according to the purposes of the exercise undertaken.

(Emphasis added).

73    At [57]-[65], Gordon J stated:

57    Market identification is not a task undertaken at large, or in a vacuum. The task, and the extent of the task, are tailored to the conduct at issue and the statutory terms governing the contravention. The need to identify the market arises only in the context of determining whether the conduct constitutes a particular contravention of the TPA. That is, the question of whether there is a market “in Australia” is to be asked and answered in the statutory context in which that question arises. It is not to be asked or answered in isolation from that context or by looking only at what appears in s 4E of the TPA.

58    The first step is to identify “precisely what it is that is said to have been done in contravention of the section”. As has been rightly said in the Federal Court of Australia, the court begins with the problem at hand and asks “what market identification best assists the assessment of the conduct and its asserted anti-competitive attributes”. Identifying a market is a “focusing process” which is “to be undertaken with a view to assessing whether the substantive criteria for the particular contravention in issue are satisfied, in the commercial context the subject of analysis” … .

59    That approach recognises that the concept of a “market” is “not susceptible of precise comprehensive definition”. It recognises that market identification is an economic tool, or instrumental concept, that uses and integrates those legal and economic concepts best adapted to analyse the asserted anti-competitive conduct. It recognises that market identification is “not an exact physical exercise to identify a physical feature of the world” and that there is often little or no utility in debating or identifying “the precise physical metes and bounds of a market”. It recognises that market identification is “not a physical thing, or essence, which can be identified in a manner divorced from the relevant context”. And it recognises that market identification depends upon the issues for determination – the impugned conduct and the statutory provision proscribing anti-competitive behaviour that the conduct is said to contravene.

60    That is not to say that a market can be identified arbitrarily. It must be based on findings of fact. “The premise of that proposition”, as the Full Court of the Federal Court said in Australian Competition and Consumer Commission v Australia and New Zealand Banking Group Ltd, is that the identified market “has economic and commercial reality”:

“It must accordingly not be artificial or contrived. Economists frequently construct economic models to analyse complex commercial or economic events or scenarios. But a model is unlikely to be a useful analytical tool if based on unrealistic assumptions that materially depart from the real world facts and circumstances involving commercial behaviour in which the events to be analysed occur.”

61    The identification of the market must therefore “accurately [and] realistically describe and reflect the interactions between, and perceptions and actions of, the relevant actors or participants in the alleged market, that is, the commercial community involved”.

62    Embedded in the “focusing process” is the recognition that the substantive criteria for a particular contravention in issue will depend on the particular statutory provisions. That process “may lead to the drawing of different lines in different circumstances depending upon the purpose of the provision in question”. In turn, that process may “lead to different market definitions in relation to the same industry” or even different markets within the same case. That potential was recognised more than 25 years ago by Professor Brunt, who wrote that “[t]here can be more than one ‘relevant market’ for a particular case, in the sense of markets that will attract liability”. There is nothing odd about that conclusion. As Professor Brunt pointed out, it reflects the fact that market identification “is but a tool to facilitate a proper orientation for the analysis of market power and competitive processes – and should be taken only a sufficient distance to achieve the legal decision”.

63    Recognising that market identification is an economic tool has other important consequences. Economics is a social science and “does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps its possessor draw correct conclusions”.

64    The nature of economics as a social science is often highlighted by the existence of conflicting expert opinions about the identification of a relevant market. Deane J acknowledged as much in Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd, when his Honour said:

“The economy is not divided into an identifiable number of discrete markets into one or other of which all trading activities can be neatly fitted. One overall market may overlap other markets and contain more narrowly defined markets which may, in their turn, overlap, the one with one or more others.”

65    When a court is required to draw its own conclusions about market identification, it is therefore inherent in that task – being one founded on economics as a social science – that the court will be required to make “value judgments about which there is some room for legitimate differences of opinion”. As a result, “[m]arket identification and definition is not an exact science. It is rooted in the analysis of commerce as an aspect of human behaviour”.

(Emphasis added).

74    However, in this proceeding, there has been no real contest as to market definition although the Tribunal will make some observations specifically relating to various areas of debate in this regard. As indicated, market definition is only a tool for analysing the extent of competitive constraints that apply to the participants engaging in the market.

75    The Tribunal appreciates that care must be taken in the consideration of substitutability in any discussion of the concept of a market. Substitutability has never, as a matter of legal principle, been the sole criterion to consider in any debate in defining a market. As the plurality said in Air New Zealand at [24]-[26]:

24    In QCMA the Trade Practices Tribunal explained that a market is “the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution … if given a sufficient price incentive”. Later, in discussing the distinction between markets and sub-markets, it was said that:

“Where the defining feature of a market is the existence of close substitutes (whether in demand or supply), the defining feature of a sub-market is the existence of still closer and more immediate substitutes.”

25    The Tribunal did not say that substitutability will be the defining feature of a market in every case. The passage takes as its premise that it is the defining feature for the question at hand.

26    This is not to suggest that substitutability may not be an important, or even a decisive, factor in market definition in some cases, just as barriers to entry may be. It is rather that concepts such as market and cross-elasticity of supply and demand provide no complete solution to the definition of a market, as Dawson J observed in Queensland Wire Industries. Much will depend upon the context in which the question arises. The exercise of market definition needs to take into account the conduct in question and its effects, and the statutory terms governing the question.

    (Emphasis added).

76    Gordon J (with Nettle J agreeing) made the following comments as to substitutability at [85]-[89]:

85    As s 4E of the TPA relevantly provided, a market in relation to services includes a market for those services as well as other services that are substitutable for, or “otherwise competitive with”, those first mentioned services.

86    In QCMA, the Tribunal said that “[w]here the defining feature of a market is the existence of close substitutes (whether in demand or supply), the defining feature of a sub-market is the existence of still closer and more immediate substitutes” (emphasis added). In Queensland Wire, Mason CJ and Wilson J referred to that oft cited passage in QCMA as explaining that “the defining feature of a market is substitution”.

87    There are a number of points to be made about that statement in Queensland Wire. First, as the Tribunal itself recognised in QCMA, the existence of close substitutes is not the defining feature of every market. Second, as Dawson J pointed out in Queensland Wire, “[i]mportant as they are, elasticities and the notion of substitution provide no complete solution to the definition of a market”. Focusing too closely on the concept of substitutability can obscure the proper identification of the market and undermine the purpose of the relevant statutory provisions.

88    As noted earlier, s 45 is concerned to promote competition. Relevantly, it is concerned to proscribe contracts, arrangements or understandings that contain a provision which has the purpose, effect or likely effect of “substantially lessening competition” by, for example, controlling the price for services supplied by a party to that contract, arrangement or understanding. And the competition that is to be promoted is competition in any market in which a corporation that is a party to the contract, arrangement or understanding supplies those services. In that context, questions of substitutability may be relevant but are unlikely to be determinative in the process of market identification.

89    The proposition that questions of substitutability are not determinative is not limited to s 45. In the context of s 50 of the TPA, a substantial lessening of competition is assessed by reference to a range of matters. The extent to which substitutes are available is just one of those matters. Other matters relevant to an assessment for the purposes of s 50 include the height of barriers to entry to the market, the degree of countervailing power in the market and dynamic characteristics of the market such as growth, innovation and product differentiation.

    (Emphasis added).

77    The Tribunal, to the extent that it has needed to consider the concept of a market, has been mindful not to limit itself to questions of substitutability, although this is an important consideration which in economic terms encapsulates, for instance, barriers to entry to the market and product differentiation. It will be apparent from these Reasons that the Tribunal has emphasised substitutability, but necessarily takes other factors into account as specifically identified.

78    The Tribunal observes that market definition in Australian law can involve the application of the hypothetical monopolist test to measure substitutability. Put simply, if a small but significant non-transitory increase in price (‘SSNIP’) in one set of products leads consumers to substitute another set of products, then the market could be defined to include both sets of products. Dimensions of substitutability may include product characteristics, geographical limits, the functional level of the transaction, and the temporal aspect.

79    The hypothetical monopolist test can, in some instances, be an over-simplification of complex market practices. First, it asks for consideration of consumer responses in aggregate, whereas different consumer sub-markets (or niches) can show very different responses to a SSNIP. Secondly, price takes on differing levels of significance in different markets. For instance, to raise the price even slightly would be to destroy the business model of products which have traditionally been offered for free, such as social media platforms or online search engines. The experts that the Tribunal heard from agreed that competition in wagering services takes place in both price and non-price terms. However, price usually remains the most objective lever to manipulate when considering substitutability.

80    The ACCC’s position was that “[s]eparate relevant markets appear to exist” for wagering, gaming, lotteries and Keno. Therefore, any analysis of the proposed merger’s competitive effects needed to be performed separately for each of these product types. There was, perhaps, some indication of the substitutability of these different gambling products contained in the small amount of material tendered before the Tribunal with respect to problem gambling in Australia. The ACCC noted in its s 95AZEA report to the Tribunal that at least some consumers (problem gamblers) switch between different types of gambling product, rather than only participating in one. However, without further agitation of the issue, the Tribunal proceeds on the agreed basis that these product types are to be treated as separate markets.

81    The Tribunal pauses here to mention the issue of problem gambling. The ACCC cited the Productivity Commission’s Inquiry Report into Gambling (2010), which estimated that the social cost of problem gambling was at least $4.7 billion a year. The Productivity Commission noted definitional difficulties with respect to ‘problem gamblers’, but concluded that the concept relates to people experiencing a cluster of significant harms. Those harms include health problems, financial distress, difficulties controlling gambling and psychological impacts.

82    Wagering, EGM machines, lotteries and Keno are services lawfully provided under regulatory regimes. The merger does not of itself constitute an attempt to target problem gamblers with services that may be harmful if not used in a controlled manner. However, Tatts has the largest database of customers who engage in some sort of gambling through its user accounts. [XXXX XXX XX XXXXX XXX X XXXX XXXX XXXXXX X XXXXXX XXX X XXXXX X XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX] Several witnesses raised the possibility that the Merged Entity would have an increased ability to engage in customer profiling, targeted digital marketing and cross-selling of gambling products to customers on this database. These witnesses included Mr Tyshing of CrownBet, Mr Twaits (formerly of Racing Victoria and Betfair), and the ACCC’s economic expert, Mr Mellsop. The ACCC raised the possibility that increased profiling and promotional efforts would inevitably be received by vulnerable problem gamblers. Mr Joy of the Australian Lottery and Newsagents Association also raised concerns that the merger may lead to the increased availability of lotteries services to children and problem gamblers, and would certainly increase the prevalence of impulse purchases of lottery tickets.

83    As a competition regulator, the ACCC may not be best-placed to assess the implications with respect to problem gambling of the Merged Entity having access to a more extensive customer database. Tabcorp’s economic expert, Dr Simes, addressed the issue most directly. Consistent with the need to balance benefits and detriments under the net public benefits test, Dr Simes concluded that increased consumer welfare outweighed the corresponding detriment from problem gambling, with Mr Mellsop agreeing.

84    The net public benefits test must also compare the future with the merger and the future without the merger. According to Mr Cooke, Chief Executive Officer and Managing Director of Tatts, the database of approximately two million user accounts is largely made up of lotteries consumers. Mr Cooke also stated that Tatts had already tried to leverage that database to increase turnover in Tatts’ wagering operations. Whether or not that leveraging had been successful, it was occurring before merger authorisation was sought, and (if it brings commercial results) is likely to continue regardless of whether the merger occurs. There may be questions of efficiencies arising when the databases of Tabcorp and Tatts are merged, but the Tribunal saw no evidence that the intensity of profiling and promotional activity would increase because of the combination of those two databases, or that a larger database would cause problem gambling in the community. The Tribunal notes the broader concerns surrounding problem gambling, but also again notes that the merger does not target vulnerable members of the community, nor does it alleviate any service providers of their obligations under responsible gambling regulations.

Future ‘with and without’

85    In applying the net public benefits test, the Tribunal has previously considered it useful to compare the likely future ‘with’ the proposed acquisition to the likely future ‘without’ the proposed acquisition. Citing Re QIW, this was described by the Tribunal in Application for Authorisation of Acquisition of Macquarie Generation by AGL Energy Limited [2014] ACompT 1 (‘AGL’) at [169]:

This test is not a “before and after” test but one in which the Tribunal is to appraise the future in which the acquisition does take place “in light of the alternative outcome, were the acquisition not to take place” …

86    Conclusions as to the ‘future without’ (or ‘counterfactual’) necessarily require the assessment of several hypotheticals. The correct approach to the counterfactual is to determine, on the balance of probabilities, the most likely of those hypotheticals: Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297 (‘Metcash’) at [225] (Yates J, Finn J agreeing).

Degree of satisfaction required

87    As indicated already, the Act requires that the Tribunal not grant authorisation unless satisfied that the proposed acquisition would be likely to result in such a benefit to the public that it should be allowed to occur. Because it is expressed in the negative, in order to grant authorisation the Tribunal must be satisfied of an outcome that is, in all the circumstances, preferable to the outcome under the counterfactual.

88    The Tribunal’s assessment must be based in the real world and not rest on speculation or theory alone: see Sea Swift at [47], citing Australian Gas Light Company v Australian Competition and Consumer Commission (No 3) (2003) 137 FCR 317 (‘Australian Gas Light Company’). It is the balance of public benefit and detriment with the merger, compared to the balance of public benefit and detriment under the counterfactual, which leads to the Tribunal’s conclusions.

89    The Tribunal must be satisfied that “there is a real chance, and not a mere possibility” of the benefit or detriment eventuating: Qantas at [154]-[156], citing Australian Gas Light Company; see also Re VFF Chicken Meat Growers’ Boycott Authorisation [2006] ACompT 2 at [83]. There must be a commercial likelihood that the applicant will act in such a way as to bring about the claimed benefits or detriments. Various options for achieving claimed benefits or avoiding claimed detriments, including any less anti-competitive options, may be explored and weighted appropriately: Qantas at [206]; AGL at [163].

90    Claimed benefits and detriments must be of substance and have durability: see Qantas at [205]; see also Sea Swift at [46]. They should be sufficiently capable of exposition, whether quantitatively or otherwise, rather than “ephemeral or illusory”: see Qantas at [156]; see also Sea Swift at [45]. Any estimate as to their quantification should be robust and commercially realistic: see Qantas at [206]; see also Sea Swift at [46]; see also AGL at [163]. The assumptions underlying claimed benefits or detriments must be spelled out in such a way that they can be tested and verified: see AGL at [163]; see also Sea Swift at [46]-[48].

91    As stated in Qantas at [207]:

Whilst we recognise that public benefits are easy to assert, but are much harder to prove in advance of their creation, that does not deter us from demanding a high standard of commercial and social accountability in the estimates presented to us. Accordingly, we do not believe that there is anything to be gained by fanciful and speculative modelling of benefits where the underlying assumptions are not clearly spelled out, where the estimates have not been subject to rigorous sensitivity analysis, and where the estimating process is not wholly transparent.

92    Nevertheless, in AGL at [172], the Tribunal stated:

The language of s 95AZH does not dictate mathematical precision. In practice it will often be the case that the factors going to the balancing exercise to determine whether the Tribunal has the necessary satisfaction as specified do not lend themselves to precise quantification. Even if precise quantification of the value of all competing benefits and detriments to the public cannot be made, the Tribunal is required to decide whether it has the specified level of satisfaction. If it does not, it may not approve the proposed merger or acquisition. If it does, it may do so. As the ACCC said in its final submissions, the Tribunal is called upon to make a robust and commercially realistic judgment, exposed by its reasoning process: cf Re Qantas at [206]-[210].

93    Finally, it is to be observed that even if the Tribunal is satisfied that the acquisition is likely to result in such a benefit to the public that it should be allowed to occur, the Tribunal has a residual discretion to refuse authorisation: Application by Medicines Australia Inc [2007] ACompT 4 at [122]-[128] (‘Medicines Australia’).

PRELIMINARY OBSERVATIONS

94    It is useful to make some preliminary observations.

95    Merger control must be carried out with great care, because it involves a prediction of events which are more or less likely to occur in any given scenario, the substantive analysis being forward-looking. Significantly in this proceeding, the realities must be considered: it is unacceptable to proceed purely on the basis of theory. This is particularly the case in this proceeding where the wagering industry is in a state of change and various views have been expressed as to the future.

96    There are different types of evidence or material that can be of assistance to the Tribunal. These include documents that were produced before the merger was contemplated, such as corporate strategy documents; documents produced for the purpose of the merger, such as planning and economic analysis; descriptive evidence from participants in the market, such as customers and competitors; written responses to requests for information from the Tribunal; and expert and quantitative evidence, as from industry experts or economists. To various extents, the Tribunal has had the advantage of considering each of the above types of evidence. Despite calls for more information by various participants during the hearing, the Tribunal considers that by the end of the hearing, it was in possession of sufficient information to make a determination in the terms of the statutory requirements.

97    The Tribunal has allowed the interveners to take a very active part in the proceedings, recognising that they have an ability and an incentive to put before the Tribunal relevant material in opposition to the proposed merger. This opportunity given to the interveners has been availed of within the confines of the function and responsibilities of the Tribunal.

98    By the end of the hearing, the Tribunal had before it a wealth of material provided by Tabcorp, Tatts, the interveners, other third parties and the ACCC. Whilst the Tribunal has an inquisitional role, with the assistance of the ACCC, and having regard to the role taken by the participants before the Tribunal, the Tribunal primarily relies upon the material specifically referred to by the participants and relied upon by them. These Reasons focus on what the Tribunal regards as the relevant and determinative matters for reaching a final decision on the application of Tabcorp.

99    Various witnesses have been called to give evidence, and some have been cross-examined by various participants. The cross-examination has been confined – necessarily so because of the issues before the Tribunal, the function of the Tribunal, the responsibility of the Tribunal to proceed within statutory time limits, and the Tribunal’s own expertise to assess and evaluate for itself the material before it.

100    Included within the witnesses heard by the Tribunal were a number of experts. Many matters of opinion were agreed by the time the experts provided their joint statements and appeared before the Tribunal, but a number of differences of opinion still remained between the experts as to the substantive issues. Each expert contributed to the debate, and provided to the Tribunal the various approaches that could be taken to the issue of competition and public benefit.

101    At a very general level, the Tribunal observes that the various issues that arise in this proceeding require an evaluative approach by the Tribunal. There are many competing considerations, each of which may be valid, but which need to be considered in context and evaluated side by side. It is also to be remembered that the Tribunal needs to assess for itself the future of the wagering industry, based upon historical behaviour trends, various participants’ views as to the future, and the Tribunal’s own assessment of business incentives, practices, and behaviour. Whether one describes the current position of the wagering industry as ‘dynamic’, there is no doubt that the wagering industry has been in recent years, and will continue to be for the relevant time frame the Tribunal is considering, in a rapidly changing environment.

102    It is useful for the Tribunal to indicate at the outset that the retail wagering model that has operated in Australia on a State and Territory basis is under threat as customer preferences move online and away from traditional pari-mutuel products to fixed-odds wagering. The question is not simply to determine whether as corporate entities Tabcorp and Tatts are businesses in decline. With the corporate bookmakers now on the competitive scene, the merger will enable Tabcorp and Tatts to compete effectively. The Tribunal will be returning in detail to these matters.

103    All persons who gave information to the Tribunal presented that information based upon their experience, knowledge and own perspectives. In addition, those witnesses who presented evidence and were cross-examined similarly gave truthful evidence based upon their experience, knowledge and own perspectives. In many respects, the evidence given by industry participants and the parties related to future trends and predictions as to the wagering market. Many of the witnesses called by the participants had a material interest in proffering a particular view as to the future of the wagering industry and their part within that industry. This evidence must be weighed with the documentary material put before the Tribunal but, more importantly, must be considered by the Tribunal as an expert Tribunal entitled to evaluate the evidence based upon this expertise and experience. This is the reason the Parliament establishes tribunals such as the Australian Competition Tribunal. This is not to say the Tribunal ignores the material before it, or the invaluable assistance given by those participants in the industry, and the expert evidence relied upon in this proceeding. Whilst the Tribunal is not bound by the rules of evidence, it must formulate its views based upon relevant material put before the Tribunal. However, it is for the Tribunal to finally evaluate the different views given by various witnesses, viewed with the aid of the Tribunal’s own expertise and experience.

104    The Tribunal accepts that, given the purpose of the Act and the subject matter the Tribunal is considering, a very important consideration of detriment or potential detriment will be any anti-competitive effects. Further, Tabcorp has a responsibility to place relevant information before the Tribunal to satisfy the Tribunal that the authorisation should be made. In considering both detriments and benefits, the Tribunal, in making an appraisal, must do so with an appreciation of the competitive functioning of the wagering industry, with and without the merger. To a large extent, the Tribunal is concerned with commercial likelihoods. In looking at the alleged benefits, it will be necessary to make certain predictions as to market behaviour and market performance of the companies involved and of the market or markets generally, with and without the merger.

WITNESSES AND OTHER EVIDENCE

Mandatory considerations

105    Section 95AZG(2) sets out matters that the Tribunal is required to take into account in making its determination which include:

(1)    any submissions in relation to the application made to it within the period specified by the Tribunal. Written and oral submissions were received from Tabcorp, Tatts, the ACCC, the Victorian Racing Interveners, CrownBet and Racing.com. In addition, the Tribunal received written submissions from Australian Leisure and Hospitality Group, Arana Leagues Club, Australian Hotels Association (National), Australian Hotels Association (Victoria), Australian Lottery and Newsagents Association, Community Clubs Victoria, Mr David Fowler, Mercury Group Victoria, Queensland Hotels Association, RWWA, Racing Clubs Tasmania, Responsible Wagering Australia, TAB Agents’ Association of NSW, Tasmanian Hospitality Association, and Victorian Off-Course Agents Association;

(2)    any information received pursuant to a notice issued by the Tribunal under s 95AZC. Notices were issued to Tabcorp, and responses received;

(3)    any information received pursuant to a notice issued by the Tribunal under s 95AZD(1). Notices were issued to Tatts, the Victorian Racing Interveners, CrownBet, Racing.com, and interested third parties including VicRacing, Ladbrokes, William Hill, Betchoice, Sportsbet, Betfair and Bet365;

(4)    any information obtained from consultations under s 95AZD(2);

(5)    a report by the ACCC provided to the Tribunal under s 95AZEA (received 27 April 2017); and

(6)    any information or evidence provided to the Tribunal in the course of the ACCC assisting it under s 95AZF.

106    The Tribunal has not canvassed individually each and every submission or piece of information provided to the Tribunal. However, the Tribunal has taken into account in the course of these Reasons the information and submissions provided to it. The vast majority of the content of the submissions and information provided to the Tribunal was covered in the submissions and information provided by the various participants at the hearing.

Lay witnesses    

107    The Tribunal received statements from each of the lay witnesses set out in Annexure 3 to these Reasons. Lay witness included officers and employees of Tabcorp, Tatts, and the non-Tatts interveners; competitors, customers, and suppliers of the Merger Parties; Principal Racing Authorities (referred to as ‘PRAs’); industry associations; and individuals with industry experience. Some gave oral evidence before the Tribunal.

Industry support

108    It is relevant to consider whether, in the views of industry participants, the proposed transaction is likely to yield benefits or be productive of harm.

109    The evidence before the Tribunal from the racing industry and retail sector is overwhelmingly supportive of the proposed merger or does not actively oppose the proposed merger:

(1)    With only one exception (Victoria), all of the State racing peak bodies support the proposed merger and have put evidence before the Tribunal to this effect. There is evidence before the Tribunal from Racing NSW, Harness Racing NSW, NSW Greyhound Breeders, Owners & Trainers’ Association, Wyong Racing Club/Provincial Racing Association of NSW, Racing Queensland, Brisbane Greyhound Racing Club, Albion Park Harness Racing Clubs, RWWA, Perth Racing, Thoroughbred Racing SA, Harness Racing SA, Greyhound Racing SA, Canberra Racing, Canberra Harness Racing Club, Thoroughbred Racing NT, Darwin Turf Club, Darwin Greyhounds Association, Australian Trainers’ Association, and Australian Jockeys’ Association.

(2)    With respect to media rights, specifically, the proposition that the merger will impact on competition for such rights is expressly rejected by certain rights holders themselves. It is expressly rejected by Dr Forbes, CEO of Racing Queensland, Professor Yovich, CEO of Perth Racing, Mr Watters, CEO of Thoroughbred Racing SA, Mr Matthew Corby of Greyhound Racing SA, Mr Peter V’landys of Racing NSW, Mr Dumesny, CEO of Harness Racing NSW, Mr Vaughan Lynch of Tasracing, Mr Andrew O’Toole of Thoroughbred Racing NT, and Mr Gregory Aldam of Darwin Greyhounds Association.

(3)    No State government has opposed the merger.

(4)    With respect to retail venues, the proposition that the merger will be harmful to such venues is expressly rejected in the evidence of representatives from various peak hotel and clubs bodies, including Mr Stephen Ferguson of the Australian Hotels Association (‘AHA’) National, Mr Leon Wiegard of Community Clubs Victoria, Mr David Curry of Australian Leisure and Hospitality Group, Mr Patrick O’Sullivan of AHA Victoria, Mr Bernie Hogan of the Queensland Hotels Association, Mr Steve Old of the Tasmania Hotels Association, and Mr Ian Horne of AHA SA. An exception in this regard is the Registered Clubs Association of New South Wales (‘ClubsNSW’), which has recently entered into a commercial partnership with CrownBet.

110    Tabcorp referred specifically as follows to evidence that reveals broad and reasoned support for the transaction:

(1)    Brett Dixon, Chairman of the Darwin Turf Club: “I support the Tatts/Tabcorp Transaction because I consider that the Transaction is likely to lead to increased funding for DTC, which will in turn enable DTC to increase its investment in the Darwin racing industry”.

(2)    Jim Watters, Chief Executive Officer of Thoroughbred Racing South Australia (‘TRSA’): “I believe that the merger has the potential to bring about significant benefits for TRSA and the South Australian thoroughbred racing industry”.

(3)    John Lewis, Chief Executive Officer of Harness Racing SA: “HRSA believes that a merger of Tabcorp & Tatts Group is essential in ensuring that we have a viable harness racing industry into the future”.

(4)    Matthew Corby, Chief Executive Officer of Greyhound Racing SA: “The merging of Tabcorp and Tatts will foreseeably result in a more competitive wagering market, evidenced by greater innovation, better product offering and enhanced service levels. That heightened competition will produce improved outcomes for wagering customers and act as a catalyst for greater customer choice … The synergies that the merged entity will be capable of realising will only serve to bring it into closer alignment with the circumstances of the online corporate bookmakers within the context of the greater cost and regulatory impositions under which Tabcorp and Tatts are required to operate. I believe that this will produce a healthier competitive environment generally that will drive stronger returns back to the racing industry and government”.

(5)    Andrew Nicholl, Chief Executive Officer of Australian Trainers Association: “Increased prize money and funding for racing clubs would also allow [clubs] to improve the quality of facilities, with flow on benefits for the whole industry. As a representative of trainers, I consider these to be extremely positive features of the Proposed Transaction … In summary, while there will always be challenges with securing the necessary funding to sustain the immediate and longer-term future of the Australian racing industry, I believe the opportunity to anchor this objective exists with the Tabcorp/Tatts merger. There will also be benefits for the wagering public (particularly through product innovation and customer engagement) and industry participants as a result of greater capital investment, improved race club facilities and the prospect of further increases in prizemoney”.

(6)    Andrew O’Toole, Chief Executive Officer of Thoroughbred Racing NT: “I support the Proposed Transaction for a number of reasons. These are set out in TRNT’s letter to the Australian Competition and Consumer Commission of 12 December 2016”.

(7)    Luke Gatehouse, Chief Executive Officer of Brisbane Greyhound Racing Club: “I consider that the Proposed Transaction will strengthen the Queensland wagering operator and allow additional benefits to flow to the Queensland racing industry”.

(8)    Dr Eliot Forbes, Chief Executive Officer of Racing Queensland: “I consider that the Proposed Transaction is likely to deliver better returns for the racing industry in Queensland …”

(9)    Greg Aldam, Manager and Secretary of Darwin Greyhounds Association: “I consider the alignment of product offerings between Tatts’ and Tabcorp’s wagering operations will mean the merged firm is in a better position to compete with corporate bookmakers in the Northern Territory because Tabcorp currently has better product offerings than UBET, in particular for exotic bet types. I expect that the benefits of the Proposed Transaction will pass through to the greyhound racing industry in the Northern Territory as a stronger tote promotes the ongoing funding arrangements of the racing industry”.

(10)    John Dumesny, Chief Executive Officer of Harness Racing NSW: “I consider that it is important that the Proposed Transaction proceed for the racing industry to remain sustainable. I do not consider that the Proposed Transaction will reduce competition in the wagering industry, and instead it will allow the merged company to compete with other large international wagering operators in Australia”.

(11)    Peter V’landys, Chief Executive of Racing NSW: “[T]he health of the NSW thoroughbred racing industry is directly linked to the health of NSWTAB, due to the revenue it receives under the RDA and tax parity. A successful totalizator operator in New South Wales is essential to the ongoing viability of the NSW thoroughbred racing industry … For the reasons set out above, I am of the view that the Proposed Transaction will result in a significant increase in competition which is beneficial to both the consumers and to the NSW racing industry. This in turn will help sustain and potentially increase the economic and social contribution of thoroughbred racing throughout NSW”.

111    The relevance of this evidence for present purposes is that it demonstrates a very general level of support for the proposed acquisition from a range of differently situated stakeholders around Australia. However, the Tribunal does not conclude that this in itself is suggestive of the fact that the proposed transaction has significant public benefits and no real public detriments.

112    The Tribunal needs to determine the issues before it on the basis of all the evidence, material and analysis before it, including the submissions of the participants.

113    Generalised statements of support for the proposed acquisition need to be carefully considered. Some PRAs have relied on presentations given by Tabcorp propounding the benefits of the proposed acquisition and this may well be the basis of their support. In some cases, such as Racing Queensland and RWWA, the PRAs have entered into arrangements with Tabcorp designed to protect the interests of those PRAs in the future with the proposed acquisition.

Expert evidence

114    Seven expert economist witnesses were engaged by Tabcorp, the ACCC, or the interveners. Each provided an individual report, and several provided individual responses to the individual reports of others. All experts were called to give evidence at the hearing.

115    Other witness statements were accompanied by claims of expertise founded on experience. The Tribunal found it useful to equate ‘expert’ evidence with the technical evidence of economists, rather than equating it with the expertise of experienced industry professionals. These are distinctions of classification, rather than of the relevant weight that ought to be afforded to these statements by the Tribunal.

116    Experts who provided reports include:

    Professor Flavio Menezes, University of Queensland, on behalf of Tabcorp;

    Dr Christopher Pleatsikas, Vice President of Charles River Associates, on behalf of Tabcorp;

    Dr Ric Simes, Senior Advisor of Deloitte Access Economics, on behalf of Tabcorp;

    Mr Patrick Smith, Partner of RBB Economics, on behalf of Tabcorp;

    Mr James Mellsop, Managing Director of NERA Economic Consulting, on behalf of the ACCC;

    Mr Gregory Houston, Partner of HoustonKemp Economists, on behalf of CrownBet; and

    Dr Tom Hird, Director of CEG Asia-Pacific, on behalf of the Victorian Racing Interveners.

117    The parties agreed that the best course was to hear oral evidence from experts via four ‘hot tubs’ with distinct themes. Those four themes were ‘Consumer wagering’, ‘Bidding for licences’, ‘Racing media’, and ‘Public benefits’. Each hot tub constituted two Tabcorp experts, and two non-Tabcorp experts, as agreed by the parties. After an initial statement, experts were given an opportunity to respond to each other. The Tribunal and counsel followed with questions of their own.

118    The Tribunal first heard from Dr Pleatsikas, Mr Smith, Mr Mellsop and Mr Houston with respect to competition in the consumer wagering market. Secondly, Dr Hird, Mr Mellsop, Professor Menezes and Dr Pleatsikas discussed bidding for licences, with a focus on the Victorian and Western Australian wagering licences. Thirdly, Dr Pleatsikas, Mr Smith, Dr Hird and Mr Houston participated in the racing media hot tub. Finally, Dr Simes, Dr Pleatsikas, Mr Mellsop and Mr Houston considered the existence and quantification of public benefits arising from the proposed merger.

THE PROPOSED ACQUISITION

Overview of the regulatory environment

119    Wagering services in Australia may only be lawfully provided by licensed bookmakers. The most prominent licensed bookmakers in Australia include Tabcorp, Luxbet, Tatts, the Western Australian TAB (‘WA TAB’), Sportsbet, William Hill, Ladbrokes, CrownBet, Bet365 and Betchoice. The Tribunal received some submissions which noted the occurrence of unlawful wagering activity with foreign bookmakers, the subject of the Commonwealth Government’s Review of Illegal Offshore Wagering. However, the Tribunal received scant evidence of the scale of unlawful wagering, and could make no assessment of the impact of the proposed merger on the magnitude of such activity.

120    Wagering services in Australia are provided on-course, via retail venues, online and by telephone. Each State and Territory in Australia has its own regulatory regime within which wagering operators are licensed to operate. These regimes regulate who may offer wagering services within the State or Territory; the circumstances in which those services can be supplied; the maximum revenue that operators may take from the sum of all wagers placed with that operator; the taxes that must be paid on wagering services; the products that may be offered by wagering operators; and the advertising of wagering services and products.

121    The largest wagering services provider in each jurisdiction has traditionally been the licensed pari-mutuel (or totalisator) wagering service provider. All State and Territory governments have privatised their pari-mutuel wagering services provider, except for Western Australia. In each jurisdiction, only one pari-mutuel wagering licence has been issued. That licence generally lasts for decades: for example, the New South Wales and Queensland licences expire in 2097 and 2098 respectively. The Victorian licence is scheduled to expire before any other jurisdiction, in 2024 (or 2026 if extended within the terms of the current licence).

122    The pari-mutuel licence in each jurisdiction generally also confers exclusivity over the provision of retail wagering services. However, the decision in Betfair Pty Ltd v Western Australia (2008) 234 CLR 418 (‘Betfair’) prevented State or Territory governments from denying consumers in that jurisdiction access to the online or telephone services of a bookmaker licensed in another jurisdiction, on the basis that such State or Territory legislation was in breach of the constitutional right to freedom of interstate trade. As a result, a bookmaker may acquire the least expensive wagering licence available in any jurisdiction in Australia, and provide online and telephone non-pari-mutuel wagering to consumers anywhere in Australia.

123    Licensed wagering service providers who do not have a licence to provide pari-mutuel wagering services, nor a licence to provide retail wagering services, are known in Australia as ‘corporate bookmakers’. Luxbet (owned by Tabcorp), Sportsbet, William Hill, Ladbrokes, CrownBet, Bet365 and Betchoice are corporate bookmakers licensed in the Northern Territory due to the favourable licensing conditions and regulatory environment in that jurisdiction. As is apparent, licences issued in the Northern Territory are non-exclusive.

124    The holder of the retail and pari-mutuel monopoly licence in Victoria, New South Wales, Queensland and South Australia is required to pay what Mr Cooke of Tatts refers to as ‘Product Fees’, what Mr Freeman of Tabcorp calls ‘racing industry agreement payments’, and what Mr Tyshing of CrownBet characterises as the “consideration payable for their exclusive totalisator licences and retail exclusivity”. ‘Race field fees’ apply to all licensed bookmakers in all jurisdictions in Australia. They are levied in return for the use in their wagering businesses of race field information compiled by State and Territory racing bodies. Because they apply equally, there is no relevant distinction in the levying of race field fees between the exclusive retail licensee and all other licensed bookmakers.

125    As already alluded to, the current and future regulatory environment is rapidly changing, and likely to have to respond to legal and technological changes that have eroded the value of exclusive retail licences. State governments were previously able to exercise effective control over gambling by licensing wagering in retail venues (on-course, agencies, and licensed pubs and clubs) and to use the proceeds to support the racing industry and generate significant tax revenue for State Treasuries. After Betfair, State-based retail licensees were exposed to national competition both from each other and from corporate bookmakers via on-line and telephone wagering. Although this competition was initially limited, the advent of pervasive mobile internet access means wagering is now national and State governments are no longer able to control the level of turnover or returns to the racing industry or taxation solely through regulation of licensed bookmakers’ take-out rates. The future regulatory environment, including the terms of any bidding for retail licences, will have to adapt to this.

126    As concisely explained by Mr Burt, Chief Executive Officer of RWWA in testimony:

Actually – and this is my firm view – I actually believe that the landscape has changed demonstrably from the lead-up period of around 2009/10 leading into the relicensing of the Victorian licence in 2012, [and] has changed dramatically to what it will be when it expires in 2024. The landscape [for] retail betting will be substantially low [sic] as a share of channel, pari-mutuel betting will be substantially lower, and the presence of competitive brands will be substantially different. So I think the relicensing conditions for governments to consider will be a lot more open and I think they will be a lot more complex and they will have to change the model or the way in which they approach it as less of an exclusive monopoly relicensing process and much more of an innovative approach [regarding] what conditions prevail at that time.

Proposed conditions

127    The Tribunal will return to proposed conditions later, but it is convenient at this stage to mention some preliminary matters.

Legal framework

128    The ACCC may accept written undertakings given by a person in connection with an application for merger authorisation – s 87B(1A). As the Act makes clear, the Tribunal may grant authorisation subject to specified conditions, including a condition that a person must make and comply with an undertaking to the ACCC under s 87B: s 95AZJ(1) and (2). The Tribunal can express conditions in other ways, and in framing those conditions it may seek assistance from anyone to whom it makes inquiries under s 95AZC and s 95AZD.

129    Unless an enforceable undertaking is required as a condition of authorisation, the only recourse if a breach of a condition is identified would be for the ACCC or another party to:

(1)    apply to the Tribunal for a revocation of the authorisation pursuant to s 95AZM(6)(b); or

(2)    to commence proceedings in the Federal Court alleging a contravention of s 50, by reason of the operation of s 95AT(2) which provides that an acquisition is not in accordance with an authorisation if any conditions are not complied with (whether before, during or after the acquisition).

130    Neither of these actions would involve directly enforcing the terms of the conditions imposed by the Tribunal when authorising the merger.

131    The Tribunal accepts though that the prospect that authorisation would be revoked (which leads to potential exposure under s 50 of the Act) is a strong incentive for Tabcorp to comply with the conditions.

132    Expressed broadly, s 95AZJ does not limit the discretion exercisable by the Tribunal solely to conditions framed as undertakings under s 87B. Nor is the Tribunal confined to accepting or rejecting conditions in the form in which the applicant, the ACCC or an intervener has presented them. However, as the ACCC rightly pointed out, the enforcement of behavioural conditions of authorisation may raise practical difficulties unless they are contained in an undertaking provided to the ACCC under s 87B.

133    Nevertheless, it will always be a matter for the Tribunal to assess whether it is preferable that an undertaking be provided. In addition to providing for a direct and practical remedy for enforcing a condition given by way of undertaking to the ACCC, a form of condition that is dealing with ongoing matters may be better suited to be given by way of undertaking.

134    The Tribunal also observes that the discretion to set conditions is not limited to factors relevant to the satisfaction of the statutory test for authorisation. The Tribunal in Medicines Australia at [133] decided that “in a case in which the proposal has satisfied the relevant public benefit test”, a discretion remained to impose conditions.

135    For instance, conditions may be imposed to reduce the weight – relative to the likely public benefits – to be given to anti-competitive detriment if such detriment is likely to arise from the proposed merger. This is a relevant matter in this proceeding to consider in the context of (particularly) media rights and visual media, and Tabcorp’s Sky Racing Service. The Tribunal will address this in more detail later in these Reasons, but one point should be emphasised. The Tribunal should not just impose conditions to give comfort to potential competitors of the Merged Parties or impose conditions not likely to be required or be of any real impact in the future with the merger in place. For the reasons explained later, the Tribunal does not consider it should, or needs to, impose any conditions other than in respect of one matter upon which Tabcorp and ACCC had agreed that an undertaking should be made and complied with by Tabcorp, namely relating to the divestment of Odyssey.

136    The Tribunal is of the view that the imposing of the conditions sought by some of the participants is not critical to the ultimate view the Tribunal has reached, namely that the proposed merger would result, or would be likely to result, in such a benefit to the public that the acquisition should be allowed to occur. In other words, without any of the conditions as suggested by various participants being imposed, the Tribunal has still reached the level of satisfaction required to determine that the merger should occur. Further, the Tribunal does not consider there is a need (in the exercise of any residual discretion) to impose any conditions other than the condition relating to the divestment of Odyssey.

Content of conditions

137    With the exception of the ACCC, Tabcorp and the interveners participate in the markets under consideration by the Tribunal in this application. For its part, the ACCC brings a wealth of expertise in competition matters. On this basis the Tribunal notified participants that where possible it was preferable for conditions to be formulated by parties and interveners, rather than by the Tribunal itself. If the application presented concerns regarding detriments to the public, the Tribunal may find the conditions as formulated by participants to be a useful guide to their commercial practicality.

138    In the Statement of Issues released on 9 March 2017 as part of its informal merger clearance processes, the ACCC had expressed a preliminary view that the proposed merger was likely to substantially lessen competition in Queensland for the supply of EGM monitoring and repair and maintenance services by combining Maxgaming and Odyssey Gaming (subsidiaries of Tatts and Tabcorp respectively). This concern was largely addressed before the hearing and the position of Tabcorp was that the Odyssey Gaming business in Queensland would be divested if authorisation was granted, and that this divestment should be a condition of authorisation, but no other conditions were necessary to meet the net public benefits test permitting authorisation. No doubt mindful of the Tribunal’s earlier suggestion that it would prefer to rely on conditions as expressed by participants, Tabcorp (on its own motion) submitted a number of additional conditions expressed in terms that Tabcorp found acceptable. These conditions related to the supply of Sky Racing to the providers of retail channel wagering, the supply of pooling services to RWWA and any future rival pari-mutuel wagering operator in Victoria, a commitment to dispute resolution mechanisms, and a commitment to compliance reporting.

139    Suggested conditions were also received from the ACCC, Racing.com and the Victorian Racing Interveners. CrownBet made broad suggestions as to the objectives of which the Tribunal should be mindful if and when it turned its mind to conditions; however, it did not frame conditions with any specificity.

140    Conditions suggested by the ACCC and interveners were directed to various potentially anti-competitive outcomes of the proposed merger. With respect to racing media, some conditions sought to prevent exclusivity in Tabcorp’s acquisition or supply of media rights, including the waiver of first or last rights of refusal when bidding for racing media content; others were directed towards avoiding the withholding of Sky vision from racing venues who promote wagering service providers in competition with Tabcorp. With respect to bidding for State and Territory licences, some sought to ensure that under future agreements PRAs would retain no less favourable share of wagering revenues than in current agreements; and others were directed to ensuring that any competitor who won a State or Territory bidding licence could combine their pool with that of Tabcorp in other jurisdictions on reasonable terms.

141    The Tribunal received responses to some of these conditions from Mr Watters of TRSA, and from Professor Yovich, CEO and Managing Director of Western Australian Turf Club. These responses highlighted that, far from having the effect of constraining any anti-competitive conduct by Tabcorp, the suggested conditions had the effect of constraining PRAs from achieving the best outcome for their members and affiliates. These submissions emphasised that the respective PRAs already considered themselves capable of constraining the market power that the Merged Entity would have in future negotiations to acquire racing media rights because the PRA could set bidding conditions.

142    The Tribunal shall return to these matters later in these Reasons.

The position of the Merger Parties

143    Tabcorp outlined several public benefits which it is worthwhile to summarise here. First, it forecast the Merged Entity would deliver substantial synergies to the Merged Entity [XXXXX XXX XXXXXXX XX XXXX XXXX XXX XXXXX XX XXXXXX XXX XXX XXX XXXXX XX XXXX XXXX XXXX XX XXXXX]. Secondly, while some of these synergies would be retained by Tabcorp, more than half would pass through to PRAs, third-party licensed venues, sporting bodies, and Federal and State governments. [XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XX]. Thirdly, because PRAs are responsible for managing the ongoing financial strength of racing codes in Victoria, New South Wales, Queensland and South Australia, it was argued that the financial benefit to PRAs would maintain the viability of the racing industry [XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX X]. Fourthly, greater investment in existing businesses and new product development would lead to enhanced customer experience. Fifthly, the Merged Entity would compete more effectively against other bookmakers, enhancing competition for the supply of wagering products and services. Sixthly, a national pari-mutuel wagering pool would be more efficient than two or more separate pools; the likelihood of national pooling would increase by removing the need for two separate and competitive commercial entities to negotiate a mutually beneficial outcome. Finally, the synergies would produce a consequential substitution of domestic products for imported products in such industries as tourism, improving the productive efficiency of the broader Australian economy as a result.

144    Tabcorp did not concede that any detriment to the public would arise as a result of the merger.

CONSUMER WAGERING

145    It is helpful to consider the current state of wagering in Australia according to the outcomes the subject of the wager (the content), the types of wagering product, the distribution channels for wagering services, and the complexity of wagering products. Demand trends and supplier profiles are considered. Having engaged in this process, the Tribunal is then in a position to assess whether a substantial lessening of competition (and therefore a public detriment) will arise from the potential merger.

Wagering content

146    The vast majority of wagering in Australia is placed on outcomes of the three racing codes (thoroughbred, harness and greyhound) and sports. Provided that a bookmaker is willing to offer odds on that outcome, and provided that it is not unlawful to provide wagering services on that outcome under legislation, regulations, or the terms of the bookmaker’s licence, a wagering consumer may place a bet on any contingency. Some limitations on the ability of bookmakers to offer wagering services vary by jurisdiction. For instance, Tabcorp noted restrictions on its ability to accept wagers on election results in New South Wales, while the Victorian Commission for Gambling and Liquor Regulation prevents Tabcorp from accepting wagers on Ultimate Fighting Championship events. However, the volume of wagering on these contingencies is very small, and these limitations therefore have very little impact on a bookmaker’s operations.

147    As background, there is an important distinction to note between wagering on racing and wagering on sport. Sporting events seek to derive revenue primarily from attendance fees, sponsorships and licence fees for the broadcast of its events. The racing industry derives its revenue primarily from product and race field fees drawn from wagering. As a result, the racing industry and wagering service providers share a mutual dependence that does not exist to the same degree for peak sports authorities and sports clubs.

The concept of ‘price’

148    Wagering services do not readily lend themselves to a discussion of ‘price’. One consumer may choose to place $2 on the favourite in a five-horse race, while the next may place $500 on the same horse, or on the rank outsider in a 22-horse race. Certainly, the value of the wager (or ‘stake’) placed by a consumer cannot be the price because, with the exception of extremely large bets that a bookmaker may refuse to accept owing to the increased risk, consumers can vary the stake as much or as little as their purposes require.

149    The expected payout (or ‘odds’) is certainly a factor in descriptions of price for wagering services. But how are odds determined? Despite the terms being used interchangeably in many of the submissions to the Tribunal, price, odds, take-out and yield are all separate concepts.

150    The economic experts commissioned by the ACCC and interveners relied on yield as a measure of price, following a standard practice in the economic analysis of gambling products, such as lotteries and poker machines, for which there is a clear link between the lottery organiser’s target take-out and the odds offered to the gambler to influence their decision to take particular gambles.

151    In light of their obvious importance, the ACCC provided a useful summary of these price concepts as Annexure A to their closing submissions:

1.    The concepts of price, take out rate and yield are central to understanding the competition issues in this case.

2.    The assumptions provided by Tabcorp to Dr Simes define:

a)    “Turnover” as the total amount of money staked by punters; and

b)    “Revenue” as an operator’s return on gambling, which is equal to the total amount of turnover, less the value of any payouts paid.

3.    Takeout rates and yield refer to the relationship between a wagering service provider’s level of turnover and revenue. In the context of pari-mutuel wagering, the amount of revenue earned by a totalisator operator is sometimes referred to as the “takeout”. The “takeout rate” is, therefore, the proportion of turnover wagered on a product that is kept – or taken out – by the wagering service provider as its fee for providing the wagering product to punters.

4.    The opposite of the takeout rate is the “payout rate”. This is equal to the proportion of turnover wagered on a product that is returned (or “paid-out”) to punters in the form of winnings.

5.    An equivalent concept often used in the context of fixed odds wagering is yield. Mr Johnston defines fixed odds yield as the proportion of turnover that fixed odds bookmakers retain after the payment of winnings. The statement of Mr Johnston also suggests that the term “payout” is relevant when describing the amount returned to punters who make fixed odds wagers.

152    In reviewing the submissions, it quickly became clear to the Tribunal that the structure of racing wagering products meant that the links between operator take-out and the odds faced by punters were not direct, and that neither yield nor take-out could necessarily be interpreted as the price of wagering in the usual economic sense of a cost per unit of additional consumption, with all its attendant implications for consumer welfare and economic efficiency.

153    The participants in this proceeding spent some time discussing whether price equates to the odds offered to a given consumer, or whether price is better considered to be the yield that bookmakers earn on their entire book in aggregate. Wagering is, essentially, both a financial product and an entertainment service. As a simple financial product, it may provide a rapid return on investment. For sophisticated wagering consumers, variations in odds offered by different bookmakers on the same outcome can be used as a hedging strategy.

154    As an entertainment product, a consumer who places a losing bet (and therefore receives no financial benefit) still receives some utility from the thrill of the event, in the same way that a consumer who buys a cinema ticket leaves the cinema with nothing but the memory of the film’s events and an entertaining night out. But entertainment usually has a set price per event; the consumer wagers as much or as little as is required to provide the enjoyment sought. Potential suppliers use price to make an evaluative judgment as to whether to commence supply to that market. Potential consumers use price to make an evaluative judgement as to whether to enter the market to purchase that product.

155    An individual consumer placing a single bet will not have enough information to make an assessment of the bookmaker’s yield. That single wager will be made as a function of the consumer’s assessment of the probability of a certain contingency, in the context of competitive offers from other bookmakers. At this level, the odds for each contingency appear to act as the price. Over time, repeat consumers may make an assessment of the yield provided by given bookmakers, and this may influence their choice of wagering service provider.

156    Some wagering consumers are loyal to a single bookmaker, while others demonstrate agnosticism, particularly in online wagering where a consumer can efficiently select the bookmaker that offers the most favourable odds on a given contingency. Smartphone apps facilitate a timely comparison, and some corporate bookmakers offer best-odds products. Regular consumers may identify differences in yield that lead them to form a preference as to the competitive set of wagering service providers from whom they seek ‘quotes’ on a given contingency, but consumers buy a discrete product, rather than an ongoing stream of yield according to the bookmaker’s take-out. When one accepts that bookmakers run a business for profit and that the house (almost) always wins, there is a degree of irrationality in aggregate consumer behaviour. However, each individual consumer is discretely buying a potential reward based on a single contingency (or a combination of single contingencies, in the case of exotics, discussed further below).

157    Therefore the Tribunal considers odds a better indication of price, and this will vary according to the vastly differentiated offers in the market. Differentiation occurs not only in the forms of wagering on offer: win, place, exotics, first goal, fastest ace, and so on. It also exists within each event, as a ten-horse race has ten possible winners, and an exponentially more complex series of contingencies when one considers possible combinations of place-getters. As will become clear, there is a direct link between the odds offered and the take-out in pari-mutuel wagering; the link may be less obvious to consumers in fixed-odds wagering, but it is critical to a sustainable bookmaker’s operations.

Types of wagering product

158    Tabcorp identified and defined four types of wagering product: totalisator (or pari-mutuel) wagering, fixed-odds wagering, tote derivative wagering, and wagering via a betting exchange. The ACCC accepted that this is a useful way to classify wagering services. No single operator offers all four types of wagering product.

Pari-mutuel products

159    Totalisator (pari-mutuel) wagering occurs where all bets are pooled by a single operator, the operator deducts a set rate (known as the ‘take-out rate’) from the pool, and the remainder is distributed to winning customers. There is a single operator licensed in each State or Territory to provide pari-mutuel wagering in that jurisdiction. The Merger Parties are the only private corporations licensed to provide pari-mutuel wagering services in Australia; RWWA is a public body corporate with the only licence to provide pari-mutuel services in Western Australia.

160    The revenue taken by a pari-mutuel wagering operator is used to meet its regulatory and commercial commitments. It is apparent that the operator of a pari-mutuel wagering pool bears virtually no risk; regardless of the outcome of a race or sporting contest, the operator takes its revenue from the total amount of wagering turnover by reference to a certain take-out percentage. There are circumstances in which the take-out rate may be increased, but generally the take-out rate is restricted by licence conditions and regulations (which set a maximum) or by agreements between pari-mutuel wagering operators and PRAs (which set a minimum).

161    Two conclusions may be drawn about the essential nature of pari-mutuel wagering. First, consumers are essentially betting against each other. As much was confirmed by the Executive General Manager of Commercial Development for Tabcorp, Mr Freeman, when discussing the attractiveness of pari-mutuel pools to premium customers who “want to bet into those pools because they’re effectively betting against losing punters”. At its extreme, if all consumers bet in a pari-mutuel pool for the same horse to win, then they cannot make a return on their wagering. Secondly, the corollary of a fixed take-out rate is uncertainty, on the part of both consumers and bookmakers, as to exactly what has just been purchased. Mr Freeman also provided support for this conclusion in noting that premium punters “want to win money off the losing punters and … to do that well, they cannot afford to be too much of the pool”. As both Mr Cooke and Mr Freeman noted in their statements, the larger the pool, the more even the distribution of funds wagered on each outcome, and the greater the stability between the quoted odds and the consumer’s payout.

162    For pari-mutuel products, the operator is not directly in control of the odds faced by punters at the time they place their bets. Those odds will be “indicative”, reflecting the balance of wagers already in the pool and the predetermined take-out rate applied by the operator to the pool, and will vary as the pool grows if the new bets do not follow the distribution of prior wagers. The actual payout received for a winning bet is determined by the take-out rate and the balance of wagers at the close of bets and can be considerably different from the indicative odds displayed before the event, particularly if a relatively large wager is placed just before the close of bets. A pari-mutuel operator cannot set odds for particular wagers, but through the take-out rate does set the average yield on the event (or combination of events in the case of “exotic” pari-mutuel products such as a trifecta).

163    A punter deciding to place a pari-mutuel wager therefore faces a price which comprises the indicative odds and an uncertain return that depends on both the probability of winning and the unknown pattern and quantity of other wagers into the pool after they place their bet. Punters cannot easily tell ex-ante what take-out rate has been set for a particular event, although once details of pool sizes became available it may eventually be clear to them that an operator had increased their take-out rate (and therefore raised the price/worsened the odds/increased their yield) on a particular pari-mutuel product. Although punters are therefore unlikely to react quickly to changes in take-out rates for pari-mutuel products, those rates are an important determinant of the long-run demand for pari-mutuel wagering.

164    Pari-mutuel operators can influence odds and indicative payout by varying their take-out (and the risk-free yield on the event) but, since the take-out rate for a particular event is set before the pool opens, cannot use it to influence the quantity of wagers placed or compete with rival pari-mutuel operators (or other forms of wagering, such as tote derivatives and traditional fixed-odds wagers) for a higher share of wagers on a particular event. Pari-mutuel take-out is therefore unlikely to be a driver of short-run demand and turnover, although it will quickly affect revenue. Competition between operators for short-run pari-mutuel wagering is more likely to respond to non-price initiatives such as brand marketing and improvements in quality of service (eg simpler smartphone apps) and, where possible, direct price initiatives unrelated to payouts, such as loyalty rebates or bonus payouts.

165    Although punters are unlikely to respond quickly to a change in the pari-mutuel take-out rate, such a change would eventually lead to a demand response, so that ex-post take-out rates (and the equivalent yield) can be used as measures of ex-ante prices of pari-mutuel products. Some caution still needs to be exercised when drawing inferences about the welfare consequences of changes in take-out rates in the short-term, but sustained changes in take-out rates can be treated as equivalent to a change in price.

Fixed-odds wagering

166    Fixed-odds wagering, as the name suggests, is a wagering service where the odds do not change from the moment the bet is placed to the completion of the event (and payment to winning consumers). With only minor exceptions for contingencies such as scratchings, a winning customer will receive payment that reflects the odds offered by the bookmaker at the time the bet was made.

167    Bookmakers directly set the price of fixed-odds products through the odds offered on individual wagers. Those odds are the product of “balancing the book” on events for a given level of target take-out (as opposed to the fixed, risk-free take-out in tote wagering) and the bookmaker’s own assessment of the probabilities associated with event outcomes. Although bookmakers are able while building their book to vary their ex-ante target take-out, to encourage a larger turnover or attract market share, their realised take-out, and consequent ex-post yield, will depend on the outcome of the event.

168    Unlike tote, where payout is uncertain, punters know their winning payout at the time they place their bet. However, they run the risk that the bookmaker might offer better odds later in the process of building their book. Again, there is no direct link ex-ante between a bookmaker’s target yield and odds, since odds may be varied to encourage wagers that help balance the bookmaker’s exposure on particular outcomes, even though the target yield remains constant.

169    Realised yields will reflect the price offered to punters on average, but also the bookmaker’s success in assessing the objective odds of outcomes, in building a balanced book and in otherwise managing the risk in the portfolio of wagers placed with them. Even holding all of these factors constant, realised yield will vary from event to event for a given bookmaker simply as a result of luck – the random factors that mean even the most rational and sophisticated assessment of odds will not always successfully predict outcomes. Over time, with other factors constant, a bookmaker with higher target take-out rates would earn a higher average yield and their customers would be paying a higher price for their wagers (bet at worse odds/receive lower payout).

170    Nevertheless, changes in fixed-odds yield can arise separately from the odds offered to punters. Consequently, caution is needed when drawing conclusions about odds offered, and the associated welfare implications, solely on the basis of realised fixed-odds yields when, as has recently been the case in Australia, bookmakers have been improving their book building and risk management techniques.

171    All operators (the Merger Parties, corporate bookmakers, and traditional track-side bookmakers) offer fixed-odds wagering.

Tote derivative wagering

172    In tote derivative wagering, a bookmaker without a pari-mutuel wagering licence sets wagering odds by reference to the final dividend (or odds) offered by the licensed operator of a pari-mutuel pool. For the consumer, pricing stability is not as certain as it is for a fixed-odds bet. However, a corporate bookmaker providing tote derivative wagering may make a promotional offer that increases the payout relative to the pari-mutuel payout, using expressions such as “tote plus five per cent”.

173    It is apparent that consumers who prefer to bet against other consumers in the pari-mutuel pool may find tote derivative wagering an appealing substitute to pari-mutuel wagering. For a bookmaker, however, the risk profile of tote derivative wagering is similar to fixed-odds wagering. This is because a bookmaker offering tote derivative wagering does not derive revenue according to a set take-out (as in pari-mutuel wagering) and then pay out winning bets. Instead, the bookmaker must pay out winnings as determined by the final odds of a rival wagering service provider’s pari-mutuel pool. The best way to mitigate the risk is to try to ensure that the corporate bookmaker’s spread of bets closely matches the pari-mutuel operator’s spread of bets for that event, which in turn is best achieved by accepting the largest and widest possible spread of bets. However, the risk in providing tote derivative products cannot be eliminated in the same way that pari-mutuel pools eliminate risk.

Betting exchanges

174    Betting exchanges match a customer’s bet with a directly opposing bet from another customer. For instance, in a ten-horse race, a wager that Horse A will win must be matched against a wager that Horse A will not win (rather than a wager that Horse B will win). This differs from pari-mutuel wagering because pari-mutuel wagering merely requires consumers to wager on a range of outcomes that cannot all occur. However, as with pari-mutuel wagering, the bookmaker acts as a customer-matching platform to take a commission without taking on risk.

175    Tabcorp stated that Betfair is the only participant in betting exchange wagering in Australia. Tabcorp is also licensed to offer a betting exchange, but does not offer this product at present. Whilst Betfair did not make submissions to the Tribunal, Betfair and CrownBet are related parties: Crown Resorts Ltd owns 100% of Betfair and 62% of CrownBet.

Aggregation effects

176    It was also clear to the Tribunal that the calculation of average yields across products was disguising important changes in the composition of the products offered and sold by the Merger Parties and corporate bookmakers and that these changes were being driven by the competitive adjustment of the wagering industry to new entrants and the rapid growth of online wagering. Whilst the take-out rate and yield are directly related for individual pari-mutuel products, average yield across a number of products with different take-out rates can vary with changes in the balance of turnover allocated to products. Therefore, when interpreting trends in average yields, care needs to be taken to distinguish changes due to variations in take-out for individual products types, and changes due to the mix of product types.

Demand trends

177    Total national wagering expenditure has grown steadily for the past decade. In FY2006, total wagering turnover on racing and sports in Australia was $18.45 billion; in FY2015, it was $30.05 billion, having grown in every financial year. Tabcorp estimates that the compound annual growth rate (‘CAGR’) of total Australian wagering turnover from FY2001 to FY2015 was 6.3% per annum.

178    The Tribunal received evidence of a number of significant trends in consumer wagering behaviour. The existence of these trends was generally accepted (notwithstanding some questions of nuance) by all participants and witnesses, including representatives of the Merger Parties, the ACCC, corporate bookmakers, PRAs and racing media. They fall within the topics of wagering products, content, channel, and bet complexity.

Types of wagering product

179    Fixed-odds wagering and tote derivative wagering are increasing their shares of total wagering turnover, at the expense of pari-mutuel wagering. In the period 2001-2015, Tabcorp estimated that pari-mutuel wagering turnover in Australia grew at 0.1% CAGR, while fixed-odds racing wagering turnover grew at 17.2%, and fixed-odds sports grew at 14.2%. These trends meant that while pari-mutuel wagering in FY2001 accounted for 81% of all wagering turnover in Australia, this figure had declined to 35% in FY2015. In the same period, fixed-odds wagering turnover (including tote derivative products) increased from 19% to 63% of Australian wagering turnover. (The remaining 2% in 2015 is accounted for by Tabcorp’s computer-simulated race wagering product, Trackside.)

180    The trend is not being driven by the performance of individual operators. Rather, it is consistent across the three pari-mutuel wagering operators in Australia. As reported in Tabcorp’s Annual Reports in FY2015 and FY2016, Tabcorp’s totalisator revenue declined by 2.1% and 4.4% per annum. [XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX X] The Chief Executive Officer of RWWA, Mr Burt, stated that wagering customers (in aggregate) are migrating from traditional pari-mutuel pools to fixed-odds betting products. In oral testimony Mr Burt stated that pari-mutuel pooling was “reducing over time” and that in 2024, when the Victorian licence was due to be awarded, pari-mutuel wagering would be “substantially lower”. Racing Victoria’s evidence showed that fixed-odds wagering eclipsed the popularity of pari-mutuel wagering (by turnover) between 2010 and 2015. [XXXX XXXX XXXX XXX XXXXX XXXXX XXX XXX XXXXXX XX XXX XXXXXXX XXX XXXX XXX XXX XXXX XXXXXX]

181    A great cause for concern amongst pari-mutuel wagering operators is the risk of a vicious circle of reducing liquidity. Put simply, consumers are attracted to pools that provide stability of odds. The smaller the pool, the less stable the odds. The less popular pari-mutuel wagering becomes, the smaller the pool, and the more difficult it is for these bookmakers to convince consumers to choose pari-mutuel wagering over fixed-odds wagering. Mr Thompson of Racing Victoria noted that “liquidity is important in a pool to help address some of the decline”. Mr Attenborough of Tabcorp noted the “structural trend” away from pari-mutuel wagering. Mr Cooke of Tatts noted the risk of network effects exacerbating the decline of pari-mutuel:

The beauty of the licences we’ve got is … we can migrate our business from pari-mutuel to fixed price … we’re not beholden to one or the other. So we can deal with where the customer ultimately wants to go. But my personal view is… I think the tote will get to a position where it – where it plateaus out. The risk to that thesis is if the pool sizes aren’t sustainable and the liquidity drops away and then they keep declining.

Content

182    In the period 2006-2015, racing wagering turnover in Australia showed growth in each financial year, with a CAGR of 4% per annum. Sports wagering turnover showed a 14% CAGR, albeit from a smaller base. The impact of these different rates of growth in turnover was to lift sports wagering’s share of total wagering from 11% in FY2006 to 21% in FY2015. Tabcorp’s own sales data showed similar trends [XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XX]. Consumers can engage in wagering on events other than racing and sports, but turnover volumes are negligible.

183    The Tribunal was presented with data showing that wagering on sports is relatively more popular amongst younger consumers, wagering on racing is relatively more popular amongst older consumers, and a significant proportion of consumers bet across both racing and sport.

Wagering channels

184    The licensed off-course, retail wagering model that has operated in Australia since the 1960s is being challenged by low-cost online business models, and by consumer preferences for online wagering. The operators of traditional retail channels must invest in online product delivery to compete with the primarily online business model of corporate bookmakers. This trend is important for at least two reasons. First, it has a direct impact on competition in the provision of consumer wagering services. Secondly, the value of the exclusive retail wagering licence in future will be dependent on the degree of consumer demand for wagering services in retail channels.

185    From FY2001 to FY2015, Tabcorp estimated that the retail share of wagering turnover in Australia declined from 66% to 33%, while the share of online wagering turnover increased from 3% to 51%. [XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXXXXX] As mentioned, overall expenditure was growing strongly; despite the declining share of retail, retail wagering turnover in nominal terms actually increased by 1.2% CAGR in the same period. As a result, there was some conjecture about whether online and retail services are in direct competition with each other, or whether online bookmakers are introducing new consumers to wagering services. This question is revisited below.

186    During the same period, telephone wagering declined from 18% to 10% of wagering turnover. The advantage of telephone services to provide in-play betting services was diminished when click-to-call functionality became unlawful. The Tribunal takes the view that without a regulatory advantage, it is difficult to imagine telephone wagering experiencing a renaissance against the speed and convenience of smartphone apps and websites.

187    Mr Cooke summarised a commonly reported trend in wagering distribution channels:

The nature of the retail franchise has changed from when I started in the business in 1999 … [T]he pub and club network is the largest part of the footprint, and that is an important part of our distribution model, and I would see that as continuing. It’s part of the social fabric. You go to the pub, people tend to bet. It’s an activity people do in a more social environment, and that is where the retail network, in my view, will continue to be, you know, sustain itself in that type of environment. But it does come with more challenges as the digital devices are becoming more prevalent and people are betting more, you know, in a digital sense. So they will go to an outlet but they might be on a digital device and they might be betting with a competitor in a – in a pub or club.

188    In response to these shifts, retail operators have implemented strategies to engender consumer loyalty to their wagering products when consumers are not in a venue, whether at home or anywhere else, via smartphone apps, websites and telephone. [XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX XXXXX]. These strategies also attempt to counter the competitive effects of ‘multi-homing’: the use of rival apps or websites by a consumer within the same market. [XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX]

Wagering complexity

189    ‘Exotic’ wagering occurs where a consumer places a bet on more than one contingency. A ‘multi’ is a type of wager where bookmaker permits a consumer to combine a series of single wagers (or ‘legs’) into one larger wagering product, with the odds multiplying with each additional leg. Each time a leg is successful, the dividend and original stake from that leg are wagered on the next leg. The combinations of exotics and multis offered, and the nomenclature, can vary from bookmaker to bookmaker. For the purposes of this proceeding it was not necessary to define these products in detail, and the Tribunal uses the terms ‘exotics’ and ‘multis’ interchangeably, notwithstanding the differences that they may imply to any individual bookmaker or consumer.

190    ‘In-play wagering’ occurs where consumers place a wager after an event has started, allowing consumers and bookmakers to react to what is happening as the event unfolds. By definition, time is a restrictive factor for the provision of in-play wagering, although there is obviously less time pressure where there is a long period before the outcome of an event (such as a Test match or the Tour de France) is known. The online provision of in-play wagering is unlawful under ss 5, 8A and 15 of the Interactive Gambling Act 2001 (Cth), whereas the provision of in-play wagering via retail or telephone channels is not unlawful. Therefore corporate bookmakers can only offer in-play wagering via telephone. This was previously facilitated by ‘click-to-call’ functionality, where bookmakers used automated voice recognition, allowing consumers to place a bet more quickly. In 2016 conditions were imposed on the licences issued to corporate bookmakers, effectively prohibiting ‘click-to-call’ functionality, causing increased call-centre costs and decreases in the volume of wagers accepted within the limited window of time that in-play betting could occur.

191    ‘In-play’ wagering, and the relative competitive advantage held by retail wagering operators compared to corporate bookmakers, was the subject of some attention during Tribunal proceedings. As with other subjects of possible future legislative change, including point of consumption (‘POC’) taxes and advertising restrictions, this discussion was useful to the extent that it informed the Tribunal’s view of the future with and without the merger. However, to the extent that the Tribunal was asked to consider factors that remain unchanged by the merger, the Tribunal was mindful not to allow its proceedings to be used for a collateral purpose.

Market definition

192    In closing submissions, the Tribunal heard from Tabcorp of the “Australian online wagering market”; Tatts spoke of Sportsbet as the market leader in the “online wagering market”; CrownBet analysed the “relative market shares in sports wagering”. It is understandable that when considering the behaviour of consumers and suppliers, one looks for patterns that can increase one’s understanding, and it is easy to slip into the commercial language of a ‘market’ for wagering on the Melbourne Cup field, on smartphone apps, or for tote derivatives. But each of these statements is conclusory, and therefore unhelpful to the Tribunal’s task of legally defining markets.

193    The Tribunal has already referred to the principles relevant to market definition as recently stated by the High Court in Air New Zealand. However, it is useful to refer to Metcash, where Yates J (Finn J agreeing) stated at [245]-[246]:

The seminal expression of “the market” for the purposes of Australian competition law is to be found in [Re QCMA] (1976) 25 FLR 169 at 190; 8 ALR 481 at 516-517, where the Trade Practices Tribunal said:

We take the concept of a market to be basically a very simple idea. A market is the area of close competition between firms or, putting it a little differently, the field of rivalry between them. (If there is no close competition there is of course a monopolistic market.) Within the bounds of a market there is substitution — substitution between one product and another, and between one source of supply and another, in response to changing prices. So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive. Let us suppose that the price of one supplier goes up. Then on the demand side buyers may switch their patronage from this firm’s product to another, or from this geographic source of supply to another. As well, on the supply side, sellers can adjust their production plans, substituting one product for another in their output mix, or substituting one geographic source of supply for another. Whether such substitution is feasible or likely depends ultimately on customer attitudes, technology, distance, and cost and price incentives…

The need to consider the possibilities of substitution in defining a market for competition law purposes is enshrined in the definition of “market” for the purposes of the Act …

194    Relevantly here, markets are defined by reference to substitutability. In the experts’ joint report on wagering competition, there was general agreement that the ‘hypothetical monopolist test’ remained a conceptual basis for market definition for the purposes of the determination by the Tribunal.

195    The ACCC submitted that the wagering market is highly complex and involves the provision of differentiated products. These differentiated products have varying degrees of substitutability along dimensions of wagering product type, channel, and geography. It remains to be considered whether there is or is not substitutability across these three dimensions.

Product type: demand-side substitution

196    Product differentiation in consumer wagering was noted by the ACCC and interveners. For instance, the Tribunal was asked to consider the impact of the merger on ‘premium’ consumers: a very small number of high-value, high-volume professional operators who generally reside in foreign jurisdictions, will place wagers anywhere in the world, and are unlikely to switch from their preferred pari-mutuel products into fixed-odds products. Markets are not generally defined by the intrinsic characteristics of consumers, nor by the volume or value of their consumption (although the distinct functional levels at which customers operate may contribute to the definition). Despite the existence of ‘core’ customers such as premium punters, the Tribunal is of the view that a SSNIP in pari-mutuel wagering will lead to lower demand and profitability as consumers switch to fixed-odds, tote derivative, or betting exchange wagering.

197    The Tribunal also takes the view that the market for consumer wagering products is not defined according to a preference for a particular distribution channel. There are many reasons for this conclusion. First, the availability of retail, telephone and online wagering is close to ubiquitous. Some consumers may prefer wagering in a social environment, or the convenience of a smartphone app, but if one channel was to experience a SSNIP there would be very little to prevent consumers acquiring wagering services via a different channel.

198    Secondly, these channels offer very similar products. Most differences in products (such as the lack of tote offerings by the corporate bookmakers, or the lack of tote derivative offers in retail) are caused by the terms of statutory licences, not the nature of consumer demand. If corporate bookmakers want to supply pari-mutuel wagering products, they could do so by successfully bidding for a licence in any Australian jurisdiction. Thirdly, there were many reports of consumers entering a retail venue, watching the events on the venue’s televisions, and wagering via smartphone apps. The presence of online consumer behaviour in venues demonstrates a high degree of substitutability between retail and online wagering. Fourthly, Tabcorp, Tatts, Sportsbet and CrownBet consider the retail monopolies of the Merger Parties to be an advantage in recruiting multi-channel wagering consumers. The exclusive retail licensee has the commercial opportunity to convert retail consumers into online consumers of their own wagering products.

199    Lock-in effects can lead to more tightly defined markets; they arise when a supplier is able to inhibit a customer’s ability to seek similar products from rival suppliers. For example, the operators of mobile telephone networks originally denied portability of a customer’s unique phone number to another network; as a result, consumers would have to take on a different number if they were to switch networks, and would need to engage in the time-consuming process of informing their contacts of the new number. The existence of lock-in effects is less likely where consumers can easily switch suppliers, and this is facilitated in consumer wagering by the adoption of ‘multi-homing’: the use by a consumer of more than one app or website offering similar products. Within the digital wagering channel, the number of bookmaker mobile apps used by consumers has increased [XXXXX XX XXXX XXXX XXXX XX XXXXX XXXXX XX XXXX XXXX XXXX X] The presence of multi-homing behaviour signifies a lack of structural lock-in effects or consumer loyalty to a particular supplier, and is an indication of strong competition within a market.

200    Demographic differences in preference for sports and racing wagering are accepted by the Tribunal. However, this does not lead to the conclusion that there is no substitutability between the two. Tabcorp’s own data showed that in some age groups up to [XXXXX XX XXXX XXXX] of consumers wagered on both forms of content.

201    Wagering complexity appears to appeal to a subset of wagering consumers. Exotics and in-play wagering are rightly seen as a particular configuration of standard wagering products, rather than separate product classes in their own right. While the yields offered for exotics show consistent differences to those of standard single-leg products, the Tribunal considers that this may be more a function of the probability of multiple contingencies arising, rather than a function of the odds having undergone a SSNIP without a demonstration of substitutability. Therefore, the wide array of wagering products are included within the single consumer wagering market.

Product type: supply-side substitution

202    To some extent, different wagering products have different inputs, and competitive rivals vary in these capabilities. For instance, the systems involved in running a pari-mutuel pool and managing risk may differ from those required to run a fixed-odds book and manage the different types of risk faced. However, Mr Burt of RWWA rejected the proposition that experience in the operation of pari-mutuel pools is an important advantage held by the Merger Parties: XXXXX XXXXXX-XXXX XX XXXXXX XXXXXXX XXXXXX XXXXXXX XXXXXX XXXXXXX XXXXXX XXXXXXX XXXXXX XXX XXXX Tabcorp, Tatts and the corporate bookmakers offer fixed-odds wagering, which is reliant on more complex systems and requires greater expertise than running a pari-mutuel pool. Therefore, the Tribunal considers that barriers to entry into pooling are low, and in a perfect market a SSNIP in pari-mutuel wagering by existing players would entice new entrants into the field. Government licensing restricts such entry, but this remains a relevant consideration when we turn to the process of bidding for licences.

203    Systems and risk management capabilities will also impact on the ability of a bookmaker to commence supply of highly complex wagering products. This is considered in detail later in this determination, with respect to Tabcorp’s claimed revenue benefits. Certainly, capital and time must be invested in building systems capable of offering exotics with multiple permutations of legs and exit points (that is, ‘cashing out’). For his part, Mr Burt of RWWA stated that he believed that these capabilities are “easily replicated”.

204    Distribution channels present another obstacle for new players who may wish to take advantage of a SSNIP. Even if regulatory frameworks preventing multiple retail operators were absent, it is clear that a large capital investment would be required to enter the retail channel. However, to the extent that retail operations or highly complex wagering products only require investments of capital and labour, and any new entrant can make such investments, the Tribunal does not consider that these systems represent a barrier to entry. This is particularly apt where specific potential entrants have been identified. Those specific entities include several well-resourced international corporations such as Sportsbet’s parent company, Paddy Power Betfair PLC (with ‘proforma revenue’ in its 2016 Annual Report of GBP £1,551 million), and domestic corporations such as CrownBet’s parent, Crown Resorts Ltd (with ‘normalised revenue’ in its 2016 Annual Report of AUD $3,585 million).

205    The regulatory frameworks that prevent entry into the provision of pari-mutuel and retail wagering services constitute an insurmountable barrier to entry – but only when the tender process closes. This legislative obstacle operates for the duration of a licence, but does not operate to prevent rivals from bidding to win that licence, and therefore over the long-term the primary restriction to providing retail and pari-mutuel wagering services is access to enough capital to secure the licence.

206    No arguments were mounted to the effect that a wagering operator in one type of content (such as racing) would not also supply wagering services for other types of content (such as sports or elections). While one can imagine an on-course bookmaker, as a sole trader, not offering sports wagering due to a lack of personal expertise, this is not to the point. Apart from a few local regulations that differ by jurisdiction, there is no structural barrier preventing the offer of wagering services on other content. Therefore, there is a high level of supply-side substitutability in the provision of wagering services by content.

Geography

207    Clearly, each jurisdiction imposes a monopoly over the supply of retail wagering services. If wagering services could only be sourced from retail venues, this would restrict market definition to that jurisdiction. There was some conjecture about whether online and retail services are in direct competition with each other, or whether online bookmakers are introducing new consumers to the market that would not have otherwise visited a retail venue. If the two channels were so distinct that they operated in different markets, then geography would serve to limit market definition to each separate State and Territory under which exclusive licences are awarded. However, the Tribunal considers the various channels to be substitutable.

208    The strength of online and telephone wagering operations, coupled with the ubiquity of online access via smartphones, tablets and personal computers, leads to the conclusion that the single retail licence cannot restrict the geographical definition of the market. As much follows from the decision in Betfair at [114]-[115]:

The evidence shows that there is a developed market throughout Australia for the provision by means of the telephone and the internet of wagering services on racing and sporting events … Within the Commonwealth the events may take place in one State, the customer be in another and the licensed bookmaker or TAB be in a third … The inhibition to competition presented by geographic separation between rival suppliers and between supplier and customer is reduced by the omnipresence of the internet and the ease of its use.

The apprehension expressed in the Report as to the operations of betting exchanges, with lower commission rates, upon the revenue streams derived by TABs and licensed bookmakers, is indicative of cross-elasticity of demand and thus of close substitutability between the various methods of wagering.

209    The single licence issued by each jurisdiction for the supply of retail wagering services also confers exclusivity over pari-mutuel wagering services. However, this cannot constitute a monopoly in pari-mutuel wagering, because of the availability of online pari-mutuel wagering services from interstate suppliers. Again, the reasons in Betfair continue to apply, such that there is no relevant geographic restriction on competition in the provision of pari-mutuel wagering services in Australia.

Market definition: conclusions

210    Tabcorp submitted that there is a single national market in Australia for the supply to consumers of wagering on horse races and other sporting events, comprising pari-mutuel, fixed-odds and tote derivative odds betting as well as wagering through a betting exchange. The ACCC agreed that this single broad market definition may be appropriate, although the market dynamics are highly complex. The joint expert report on wagering competition records that none of the experts disagree with the definition of a national market for the supply of wagering services, noting differentiation within that market according to forms of wagering product, channels by which wagers are made available to punters, and geographic locations for retail wagering. To this, the Tribunal adds that some differentiation exists in wagering content and complexity. Ultimately, the Tribunal agrees that consumer wagering occurs in a single national market.

Substantial lessening of competition

211    The Tribunal is then in a position to assess whether the merger will lead to a substantial lessening of competition in that market, such that a public detriment will arise from the merger.

Market share

212    By combining the market shares of each Merger Party, the Merged Entity’s share of turnover and revenue in the market will be aggregated [XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXXX]. However, as stated in Qantas at [430]:

It is a simple exercise to take a snapshot of a market at a moment in time and see a combined market share … However, such a snapshot tells us nothing about the conduct in the market leading to that market share, or about the potential dynamic interaction in that market with other competitors within the market who have either recently entered it or who have recently commenced an expansion of their activities in it.

213    The Tribunal adopts this statement. A substantial lessening of competition in the consumer wagering market is not demonstrated by a snapshot of market share arising from the proposed merger.

214    The Tribunal whilst mentioning market share makes the following observation. The Tribunal agrees with the proposition, put by Tabcorp, that a firm in a growing market cannot simply accept a continuing decline of market share on the basis that it is holding its historic revenues stable in absolute terms. The fact that this decline is driven in the two fields of endeavour in which the Merger Parties hold their exclusive licences – retail and pari-mutuel wagering – indicates that the business models of the Merger Parties will continue to come under substantial pressure.

Yield comparisons

215    The distinctions between yields of various operators have already been noted, as have the reasons for those distinctions. The Tribunal does not conclude that yield is a definitive measure of the ability of suppliers to charge either a marginal cost price or monopoly pricing. Analysis of the details of Tabcorp’s Project Alfred is a case in point.

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218    [XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXX] Indeed, the economic theories of optimal taxation and pricing suggest that, for a fixed level of revenue in excess of marginal costs, overall consumer welfare can be increased if a supplier engages in price discrimination between distinct market segments, albeit at the likely risk of leaving some consumers worse off in the process. Even if revenue is allowed to increase, introducing a degree of price discrimination can allow an increase in total surplus (consumers and producers combined) because it reduces the deadweight costs associated with uniform pricing across distinct market segments. An increase in total quantity demanded after the price changes would generally indicate increased welfare.

Competition between Tabcorp and Tatts?

219    The ACCC noted that fixed-odds and pari-mutuel wagering appear to be differentiated, and drew attention to the competition between Tabcorp and Tatts as the only two providers of pari-mutuel wagering in Australia (apart from RWWA, which is dependent on pooling arrangements with Tabcorp, and is therefore more of a partner to Tabcorp than a competitor). Once the market has been defined to include all types of wagering product, and not simply pari-mutuel wagering, it becomes difficult to describe any lessening of competition arising from restrictions on a segment of that market as ‘substantial’. With the introduction of tote derivative products, it may be doubted that Tabcorp and Tatts could ever really engage in any anti-competitive profiteering in pari-mutuel wagering. Even if it was possible, such conduct by the Merged Entity in pari-mutuel wagering will inevitably lead to substitution into fixed-odds products. The same comments apply to any submissions regarding the effect of the merger on the Merger Parties’ fixed-odds performance.

220    Market definition guides the analysis, and having concluded that there is a market in which there are more participants than just the Merger Parties, it is appropriate that the analysis factors in all actual and potential suppliers to that market. As the ACCC suggested, there is good reason to consider whether the target of the acquisition is likely to be a vigorous competitor under the counterfactual, and more is said of this with respect to public benefits and merger specificity below. But analysis of the counterfactual is only necessary if analysis shows that the merger is likely to result in a detriment; and we can only reach that point if the Tribunal concludes that there will be a substantial lessening of competition in the market for consumer wagering services. Therefore, the starting point for competition analysis is the market, not a limited view of competition between the two Merger Parties.

Competition in wagering

221    Mr Cooke expressed the view that many current demand trends are likely to continue into the future:

[It is] always difficult to go out that far, but, look, my view, in five years’ time, you will continue to see – and this is assuming all things stay the same – you will continue to see growth in the digital arena. I think that is something consumers are looking for… the convenience, the ease of use and the choice that the digital arena provides in… the wagering space, and I think digital will continue to grow strongly.

As I’ve – as I’ve mentioned in my evidence, I think there will be continuing decline in totalisator betting in the win/place arena, but I do think that will, as I mentioned, normalise at a point in time but there will be pressure on some of the minor codes and the night meetings, as I – as I mentioned…

I think the consumer appetite for betting on sport will continue to grow. I think – and the challenge for racing is its positioning in the product mix. I think there is a natural tendency for people to be attracted to betting on sport. It’s part of the everyday. It’s a simpler betting proposition and it is something that people are passionate about and the betting activity on that sort of fits hand in glove. The demographic, you know, the 18s to 45s, I mean, that’s the spot that they’re really operating in, and the wagering punter tends to be an older – older demographic, and more – you know, it’s been part of – part of their lives for a long time but the racing industry’s challenge is how it attaches itself to the younger market and I think that’s something the industry is grappling with and will continue to grapple with. But I think sport will continue to grow strongly. I think racing will have some challenges.

222    The Tribunal agrees broadly with this view. Clearly, it has some ramifications for the business model adopted by the Merger Parties relative to that adopted by corporate bookmakers. Competition in Australia is a means to the end of protecting the interests of consumers rather than competitors in the market: Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd (1989) 167 CLR 177 at 191 (Mason CJ and Wilson J). However, the performance of rivals is relevant to the analysis, and particularly so when rivals have very different business models. The Tribunal received detailed submissions as to the current performance trends of all major wagering suppliers.

223    The corporate bookmakers have collectively experienced rapid growth in the recent past. Tabcorp claims that as a group they have increased their turnover by 19.6% CAGR from FY2011 to FY2015, and now represent over 40% of total wagering turnover. Tabcorp also claims that the total marketing spend by corporate bookmakers has increased threefold in the same period. Intuitively this seems correct: in a rapidly growing market, it is natural for rivals to want to ensure that they build revenues and market share, so that when the market reaches maturity consumer behaviour favours them as an incumbent.

224    However, corporate bookmakers must not be treated as a single entity. The fact that they collectively earn over 40% of turnover does not lead to the conclusion that they are able to constrain the Merger Parties through some sort of collective influence. They each have their own management, structures and strategies. The past six years has seen consolidation of wagering operators in Australia: Crown Resorts acquired Betfair, Ladbrokes acquired Betstar, William Hill acquired Tom Waterhouse.com, Centrebet and Sportingbet, and Paddy Power acquired Sportsbet. Notwithstanding Mr Freeman’s assertion that Tatts earns the second-largest wagering revenues in Australia, Sportsbet is in fact larger than Tatts on many metrics [XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX]. Using turnover as the measure, medium-sized rivals in the Australian market include William Hill, Bet365, Ladbrokes and CrownBet [XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX]. Smaller rivals include Unibet/Betchoice, Luxbet (owned by Tabcorp) and Betfair.

225    Each rival competes with the Merger Parties. They also compete with other corporate bookmakers. Even amongst rivals of similar turnover, differences in strategy are apparent. Some seek rapid growth at the expense of yield, while others opt to maintain yield and devote resources to marketing expenditure. The difference is enlightening because low yield is likely to appeal to a particular type of high-volume consumer, while the use of promotional campaigns such as brand advertising and ‘free’ bets appeal to different types of consumer.

226    The different structural advantages and strategies of each competitor lead to differences in performance measures. As a crude summary of the operating profitability of each competitor, the Tribunal noted trends in EBIT before and after marketing and sponsorship costs were removed. CrownBet pointed out that one must be careful in using EBIT, because EBIT is not a good measure of market power or the relative profitability of different firms with different product ranges and cost structures, especially if they have high capital costs. In particular, if certain competitors incur promotional costs that are not accounted for by EBIT, the calculation may inflate their revenue disproportionately when compared to the revenue of other competitors. However, the Tribunal is tasked with considering the likely future with and without the merger, and with respect to future trends in both demand and supply. EBIT may still be used as an indicator of current profitability for all firms in the market, upon which the Tribunal may form a view as to the ongoing competitive performance of existing firms who may or may not represent a competitive constraint on the Merged Entity in the event of authorisation.

227    Larger firms show remarkably consistent EBIT measures (with and without marketing and sponsorship costs) over the period FY2013 to FY2016. [XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXX] Others showed marked changes in these measures, coinciding with new ownership (in the case of William Hill, Ladbrokes and Bet365) or new entry into the market (in the case of CrownBet). [XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX]

228    These results indicate the margins that are available to the corporate bookmakers to invest in marketing in order to build demand for their fixed-odds products, and their market share relative to the Merger Parties. This is not to deny the importance of large promotional budgets for rivals without a retail network who cannot rely on convenience, a high street presence, or hospitality services to attract custom. But given that firms with a primarily online business model must attract consumers through marketing spend in the future, it is important for the Tribunal to draw a conclusion as to whether this expenditure is sustainable.

229    The Tribunal agrees with Tabcorp that for many of the Merger Parties’ rivals, the combination of global scale, a lower cost base, and heavy investment in marketing and promotion has delivered very significant growth in turnover for corporate bookmakers over the last decade [XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXXX]. The Tribunal considers Tabcorp’s application to be consistent with the larger trend to industry consolidation which has been seen to occur repeatedly in the recent past, and was spoken of by Mr Barry of Sportsbet in March 2016:

If you look at any e-commerce sector there’s typically only one or two dominant players – there’s only one Facebook, there’s only one Google, one Amazon. I don’t think there’s any reason why online betting doesn’t end up in the same place … There’s a really, really material gap now between the likes of Bet365, Paddy Power/Betfair at a global level and what are effectively becoming small local players like Tabcorp and Tatts … As technology gets more sophisticated, the investment required to create that quality product increases.

The Tribunal does not necessarily share the view that there will only be “one or two” wagering rivals in Australia in the medium-term. However, it does anticipate ongoing consolidation.

230    More importantly for the sake of this analysis, the Tribunal takes the view that there will not be a substantial lessening of competition in the consumer wagering market as a result of the proposed merger. In this respect, no detriment to the public is likely to arise.

Obstacles to competition arising from future regulatory change

231    The Tribunal mentions one other matter in this context of the consumer wagering market. Laws controlling in-play wagering and click-to-call functionality demonstrate that regulatory change can impact on different competitors in different ways. The Tribunal was taken to the introduction of a POC tax in South Australia as indicative of the uneven impact of widespread regulatory change said to be planned by Federal, State and Territory governments. South Australia’s POC tax legislation does appear to disproportionately impact corporate bookmakers and Tabcorp relative to the exclusive licence holder, Tatts. But to second-guess the impact of wider regulatory change on the competitive field of rivalry in wagering services is counter-productive unless the Tribunal has been taken to the terms of legislation that is likely to be implemented. The Tribunal will return to this issue.

WAGERING LICENCES

Future bidding environment and public benefits from licence auctions

232    The Tribunal was presented with an expert report from Professor Menezes which primarily addressed the public benefit consequences of the merger for the likely outcomes of future bidding for State licences. Professor Menezes’ report also addressed the strategies that a seller could use in designing the auction to mitigate the consequences of the loss of a second-highest valuation bidder, or to otherwise extract more of the winning bidder’s valuation (that is, gain a higher price from the winner for any given pool of other bidders). Although these other matters were debated by the experts, there was no consensus on the likely practical consequences of Professor Menezes’ theoretical framework for the form and likely outcomes of future bidding for retail or pari-mutuel licences.

233    Two specific propositions emerged from Professor Menezes’ report and the subsequent exchange of experts’ views:

(1)    Economic efficiency only requires that the strongest bidder wins the licences.

(2)    Consequently, if the merger does not change the identity of the winning bidder, its effects on public benefits can only be through the distribution of the surplus created by the licence auctions between the winner and the public (through the State governments and, consequently, PRAs).

234    These propositions, with some caveats, were agreed to by the expert economists and have important implications for the Tribunal’s decision.

235    The first proposition arises as a simple consequence of the standard economic measure of the gains from exchange. The gains from a trade are the benefits shared by the buyer and seller from the exchange of an item: the seller obtains a price higher than the value they placed on retaining ownership (otherwise they would not sell); and the buyer gains the item at something less than the maximum amount they would be willing to pay (otherwise they would not buy). Given a seller’s original valuation, these gains are maximised if the item is sold to the buyer with the highest valuation (willingness to pay).

236    It was generally accepted that, as the incumbent licensee, Tabcorp would be the strongest bidder for the upcoming Victorian retail and pari-mutuel licences, and would also be a strong, if not the strongest bidder for the WA TAB license, if it came to market. The merger is unlikely to change, and should actually strengthen, that position. On that basis, the merger causes no reduction in economic efficiency nor any public detriment. It is also worth noting that, if the merger did strengthen the winning bidder (the Merged Entity), the State government might then be able to negotiate a higher price (inclusive of returns to industry) than Tabcorp could have afforded absent the merger, something that would add to the claimed public benefits.

237    This point was made by Professor Menezes in his discussion of total welfare and the efficiency measures used to assess auction outcomes:

It follows that if the total welfare is defined as total surplus from the auction, then irrespective of what happens to the auction price, total welfare will increase for a merger that creates synergies. It also follows that total welfare is unchanged by a merger that does not alter, through synergies or dissynergies, the value of the object for sale.

238    Mr Mellsop drew the relevant implication for the Tribunal’s decision:

This is a very important finding, because it implies that any merger affecting bidding markets should be authorised (assuming there are no dis-synergies), even if the merger would lead to reduced auction prices (in the situation when the auctioneer is the seller, as the state governments would be).

239    Mr Mellsop then went on to note:

This finding does assume that we should treat a dollar in the hands of the merged entity’s shareholders the same as a dollar in the hands of a taxpayer or participants in the racing industry. Professor Menezes briefly discusses this issue at [40]. Whether a dollar in different hands should be treated equally or distinctly is a distributional issue rather than a question of economics.

240    Distributional issues do potentially arise for two reasons. First, because the merger removes Tatts as a potential second bidder in upcoming auctions, there is a possibility that the prices agreed between Tabcorp and the State governments will be lower, shifting the gains from the sale towards the Merged Entity. Secondly, the merger may change the composition of the ‘price’ agreed (for instance, the division between the up-front licence fee and on-going taxes and racing industry support), even if it does not change the notional total value. That is, once distributional issues arise, the allocation of the value created by the auction, both between the winning bidder and the government and between the government and the racing industry, potentially becomes important, a point noted by Dr Hird in qualifying his agreement with the proposition that changes in the auction price between a seller and a particular buyer only constitutes a transfer.

241    In order to identify potential detriment from the merger (as opposed to additional benefit), the Tribunal therefore needed to consider, and substantial argument before it was devoted to, whether, in the counterfactual, Tatts was likely to be the ‘second-highest’ bidder in future licence auctions; if so, whether the State governments could structure the auction processes to compensate for the effect of this if the merger proceeded; and, if the absence of Tatts was not likely to influence the price paid, whether the merger would otherwise reduce the payments to government or industry and whether this could be considered a detriment. The balance of this section addresses these questions.

242    If the proposed acquisition proceeds, Tabcorp will, with the exception of Western Australia, hold a monopoly on retail and totalisator wagering operations in Australia. One question for the Tribunal’s consideration is the extent to which the proposed acquisition will impact upon future bidding processes for wagering licences. In particular, there are two bidding opportunities which could arise in the medium term: the Victorian retail and totalisator wagering licence in 2024, and the potential privatisation of the WA TAB. As the Tribunal has indicated, each of these bidding opportunities should be considered as a separate competitive environment at the time of or about any sale or bidding process. However, this environment must be viewed in the context of the wagering market as a whole.

243    The proposed acquisition will remove Tatts as a potential bidder for both of these bidding opportunities. The Tribunal needs to consider whether, in the context of the future bidding process:

(1)    Tatts would have been the only other credible potential bidder for those wagering licences (or one of the two highest bidders for the wagering licences);

(2)    the proposed acquisition is likely to affect the terms on which Tabcorp might bid for those acquisitions in the absence of Tatts as a rival bidder, and in particular, whether this may impact upon:

(a)    the bid price received by the Victorian and Western Australian governments for the provision of the Victorian licence and the sale of the WA TAB, respectively; and

(b)    the nature of the profit-sharing arrangements with the respective racing industries that the Victorian and Western Australian governments could respectively impose on the bidders as a condition of the licence or sale; and

(3)    any reduction of the bid price, and terms on which wagering revenue is to be shared with PRAs, and whether this affects total welfare, or just effects a transfer of surplus between the seller (ie the Victorian and Western Australian governments) and the purchaser (Tabcorp).

244    However, all these issues need to be considered in the context of the continuing importance of pari-mutuel wagering and the continuing significance of retail exclusivity. There is a strong body of evidence to suggest that there will be a declining value in exclusive retail and totalisator licences into the foreseeable future, and governments will need to adjust to exploit whatever opportunities there are in this field.

245    Tabcorp and Tatts have submitted that it is difficult to predict the nature of any future bidding process for the Victorian licence. The Tribunal agrees. The nature of the bidding process for the 2024 Victorian licence is currently unknown, although for the exclusive retail/totalisator licence issued in 2012, the Victorian government conducted competitive tender processes.

246    Whilst there is no evidence before the Tribunal which provides a definitive suggestion that the 2024 process is going to be different, the wagering industry is in a state of immense change. [XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX X XXXX XXXX XXXX XXX XX XXXXX XXX], the reality is that it is not likely that the process for the 2024 bid will be the same as the earlier bid. Each government will become aware of the change in environment, just as the Tribunal has become aware.

247    The competition for the 2024 licence will only commence once the Victorian Government has settled upon the design of that licence and the process by which it will be awarded. There is no evidence to suggest that this aspect of preparatory work for the future bid will occur within the next three or so years. The reality is that the actual competition for the next licence will not commence for several years. Indeed, if the Victorian Government elects to extend the current licence to 2026, that competitive environment might be eight or nine years away.

248    The premise of the ACCC and interveners in respect of the 2024 Victorian wagering licence is that the Victorian Government will offer effectively the same bundle of wagering rights in the same form in 2024 as it did in 2012, notwithstanding the substantial changes in the wagering industry since that time. The Tribunal does not accept this will be the likely position.

249    The wagering industry has changed dramatically since 2012. In the lead up to the bidding process for the 2012 licence, Ernst & Young (‘EY’) prepared some modelling for the Victorian Racing Interveners as to the likely future growth in industry funding which assumed an annual growth rate in pari-mutuel wagering turnover of between 2.0% and 3.5% between 2007 and 2024. The actual levels of growth in pari-mutuel wagering since that time have demonstrated that this assumption was optimistic. [XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXX XXX XXXXX XXXXX XXXX XXXX XXXXXX]