Europe's Competition Equalizer
He is a soft-spoken, unemotional former university professor, by all appearances a paragon of academic modesty and introspection. But Mario Monti is something much more--as chief of the European Commission's competition office in Brussels, this man's ideas are shaping the boundaries of the New Economy in both Europe and the U.S. With Monti and his lieutenants preparing to decide on the propriety of the AOL-Time Warner merger and Vivendi's acquisition of Seagram's media properties, lawyers, lobbyists, and executives are wondering just how this economist views the world.
It's a dark vision, with crowds of potential Microsoft-style predators trying to dominate the new digital landscape. Although Monti can't turn back the clock and give the fallen heroes of America's PC wars another chance, associates say the former professor knows the Bill Gates story by heart--how the software titan assumed control of a nascent industry, squashing competitors like digital gnats. Monti wants to kill off any new Microsofts, even if it means hobbling innovation in inchoate markets such as the mobile Internet, digital TV, and online exchanges.
Critics across the Atlantic say Monti seems driven by resentment of U.S. dominance of the Internet and aims to protect the interests of Europe's national champions. These barbs seem to leave no mark on the Brussels regulator, though. Europe's trustbuster wields formidable power to impose his will and voice his fears about every big-time merger. Since no digital wannabe can afford to ignore Europe's 350 million potential customers, Monti considers it his duty to review every major merger and acquisition, even those between American companies. Unlike those of American regulators, his decisions cannot easily be challenged in court. Monti is a consummate technocrat who has never held elected office and who doesn't like to compromise. "Once Monti makes up his mind, nothing will budge him," declares Elizabeth Kraus, an antitrust specialist at Weil, Gotschal & Manges LLP in Brussels.
These days, Monti's thumb is often pointing downward. Over the summer, he helped block the MCIWorldCom/Sprint merger. Now he seems ready to torpedo Time Warner's $20 billion marriage with British music-maker EMI Group PLC. Even Time Warner's $183 billion merger with America Online Inc. seems in danger. "Monti is going for quick, dramatic fixes, even though these are fast-moving, difficult-to-understand markets," worries Stephen Kinsella, an antitrust expert with the Herbert Smith law firm in Brussels, which represents Time Warner.
The Brussels bureaucrat's aggressive new approach has provoked a powerful corporate backlash. Business leaders are pressing for new limits on the EC's vast regulatory powers. "We have to be very, very careful about how we define markets in new technologies," says Emmanuel Kohnstamm, Managing Director of Corporate Affairs for Europe's largest cable TV operator, United Pan Europe Communications. His company is facing tough scrutiny in its plans to join up with the portal Excite and offer high-speed Internet access.
But Monti's tough approach has suited the interests of regulators in Washington. Hamstrung by greater political and legal constraints, they have so far appreciated European activism. The Justice Dept.'s Joel Klein went out of his way to brag about close cooperation with his European colleagues when he visited Brussels earlier this month to celebrate the tenth anniversary of the founding of Brussels' Merger Task Force.
Such camaraderie could vanish if Monti nixes a deal that Washington likes--and the shape of the Internet is at stake. Many of his merger attacks are directed at American companies. Will he be just as aggressive in cases concerning European national champions? Also, with an eye always on Microsoft, Monti is aggressively applying a legal concept called collective dominance. He argues that a merger should be stopped simply if it results in a small number of competitors with the power to set prices, even without making one company dominant. Thus, Monti may nix Time Warner's takeover of EMI on the grounds that it would reduce the number of global music companies from five to four. He may also be concerned that a U.S. company is buying one of Europe's three music giants.
And while American regulators concentrate on blocking deals that create dominance in well-defined markets, Monti worries about the implications for new industries whose dynamics are still vaguely understood. When MCIWorldCom tried to merge with Sprint, for example, U.S. authorities focused on the established American long-distance voice market, where only two major competitors would have remained. In contrast, Monti's investigation in Europe zeroed in on the much more complicated, harder-to-define Internet backbone, a market with many competitors, where new entrants from Global Crossing Ltd. to KPNQwest are investing billions. Monti zapped the deal because he thought MCIWorldCom would be too powerful in the Internet backbone, though this is hotly contested by the company, which plans to appeal.
PREDATORY PRICING. Another Monti specialty is to target companies specializing in different areas that together create a potentially fearsome combination. Take the AOL-Time Warner deal. American regulators are frightened about Time Warner tying its extensive TV cable system with AOL's existing Internet access. But neither AOL nor Time Warner owns European cable-TV networks, and AOL does not enjoy as big an Internet presence in Europe as it does in America. So why should Monti oppose the deal? The European fear is that, down the road, an AOL-Time Warner-EMI monolith could strangle Internet access by leveraging its media assets, especially in music.
According to Monti's logic, the more AOL-Time Warner makes its music available online, the more Europeans become dependent on the Americans for their Net-delivered entertainment. Also, other music companies may be forced to offer their wares on AOL's network if they want to reach customers. In a nonpublic EC document obtained by BUSINESS WEEK, Monti's staff voices the fear that "AOL's online outletwill become a sort of essential facility." The paper goes on to the say that the result could be predatory pricing by AOL.
For similar reasons, Monti could well rule against the proposed $41 billion Vivendi-Seagram tie-up. While AOL-Time Warner has weak distribution for their content in Europe, Vivendi owns Europe's largest pay-TV station, Canal Plus, in addition to fixed- and wireless-Internet access services, which would all combine with Seagram media and music assets. BUSINESS WEEK has learned that Vivendi has already promised Monti that its European distribution channels would carry content from movie studios and music companies competing with Seagram's Universal Studios and Universal Music, and that Universal films and music would be available to other European distributors. But Monti might ask for a total sell-off of certain businesses.
Does Monti's nightmare vision of new Microsofts add up? Instead of intervening now, critics say, Monti would be better off waiting to see how markets mature. Otherwise, he risks cutting off investment in budding industries by killing deals that could nurture innovation. The next stage in Europe, for example, is the mobile Internet. But even before it gets off the ground, Monti has intervened to put restrictions on plans by giants Vodafone Group and Vivendi to set up their Vizzavi joint venture. "Since it is very hard to see how these fast-moving markets are going to evolve, it's hard to tell whether these actions will encourage competition or kill it," says Catriona Hatton, a competition lawyer at the Hogan & Hartson law firm in Brussels.
AUTOCRATIC DECREES. If he waits and lets AOL develop a Windows-style monopoly for downloading music, or allows Bertelsmann and Kirch to take over interactive TV, Monti fears he will never be able to restore free competition. "I do not have the luxury of being able to see how the market develops," he argued in a recent speech that outlined plans to crack down on everything from electronic marketplaces to new mergers like Vivendi Seagram.
One danger, though, is that Monti's stubborn personality could transform good intentions into autocratic decrees. What's more, Monti wields far more power than Washington regulators. EC trustbusters serve as prosecutor, judge, and jury, and once their verdicts are delivered, appeals must be made to the European Court of Justice, a process that takes two years or more. On Sept. 27, Monti announced a reform that would increase the powers of national European regulators. But at the same time, he requested greater powers for his investigators to search private homes, among other things--all the while insisting that "the EC will keep its central role in maintaining competition policy." The Italian professor may have left the classroom, but he clearly believes he has plenty of lessons left to teach.