Completed acquisition by Eastman Kodak Company of the services and micrographics businesses of Bell & Howell Company

No. ME/1095/01

Report under Section 125(4) of the Fair Trading Act 1973 (the Act) of the Director General's advice dated 24 May 2001 to the Secretary of State for Trade and Industry under Section 76 of the Act

Jurisdiction

The merger satisfies the share of supply test of the FTA in respect of services for micrographics equipment and scanners in the UK. The ECMR does not apply.

The parties

Eastman Kodak Company ('Kodak') is a US company that operates worldwide and supplies imaging products and services to numerous sectors. Kodak's Document Imaging Division, which in Europe operates primarily from Germany, has responsibility within the group for the products and services that are the subject of this investigation. For the year ended 31 December 1999, Kodak reported sales of US$14,089 million (approximately £10,158 million) and total assets of US$14,370 million (approximately £10,360 million). Turnover attributable to the Document Imaging Division's UK sales was [detail excised] in 1999.

Bell & Howell Company ('B&H') is also a US company. It is a global information solutions and services provider. B&H has a subsidiary in the UK, Bell & Howell Limited, which sells and services micrographics products and mail handling equipment. For the 1999 tax year, B&H reported net sales of US$963.3 million (approximately £694.5 million) and total assets of US$970.5 million (approximately £699.7 million). Kodak has calculated the worldwide value of gross assets of the target businesses as [detail excised]. In 1999, the company had turnover in the UK of US$114 million (approximately £82.19 million), [detail excised] of which was attributable to its document imaging business as a whole.

Assessment

Relevant markets

The parties overlap in the manufacture and supply of micrographics equipment and servicing for micrographics and scanner equipment. Micrographics equipment and scanners are used by data-intensive organisations to capture, store and retrieve documents. Micrographics equipment is based on analogue technology and scanners are based on digital technology.

As far as the equipment market is concerned, there is a group of users of micrographics equipment for whom switching costs may be high. They are unlikely to switch to digital equipment now, primarily because of the need to keep back copies of records. In particular, banks and libraries still use micrographics equipment, often in tandem with scanners. However, there is evidence that a large proportion of end users has switched or would consider switching to scanners. Scanner sales are certainly growing at the expense of micrographics equipment sales. For the purposes of this advice, however, I do not consider that it is necessary to reach any final conclusion on whether the relevant product market is for all document imaging equipment or whether there are separate markets for micrographics equipment and for scanners.

With respect to micrographics equipment, I have considered whether capture equipment (micrographic cameras), retrieval equipment (reader printers) and consumables (microfilm) should be treated as distinct markets. The only overlap in manufacture and supply of these products by the parties is in micrographic cameras. Although B&H supplies reader printers, they are manufactured by Minolta and rebadged. [Detail excised] I do not consider it necessary to reach any final view on whether micrographics equipment is one or a number of distinct markets.

As far as the geographic market for equipment is concerned, manufacturing and supply is global, the products being traded internationally. Indeed, neither of the parties manufactures any micrographics products in Europe. The relevant markets at this level therefore appear to be global.

With respect to the market for servicing of equipment, considerations of supply substitutability suggest that the market might be wider than servicing of micrographics equipment and scanners. It may embrace the servicing of other document handling office equipment such as photocopiers. However, although micrographics equipment and scanners are clearly based on different technology, manufacturer/suppliers, in-house engineers, resellers of equipment, and independent service organisations may carry out servicing of both types of equipment, provided that they are able to obtain the spare parts to do so (see below).

Despite there being a number of international companies providing services for micrographics equipment and scanners, they tend to have a local presence and to compete with local service providers for business. Therefore, I consider the geographic market for servicing equipment to be at least local but not wider than national.

It is Kodak's view that the UK market for micrographics equipment is worth approximately [detail excised] per annum and approximately [detail excised] per annum for servicing of micrographics equipment and scanners.

MICROGRAPHICS EQUIPMENT

Horizontal issues

Robust market data for this market are not available and we have received conflicting market share information. Kodak estimates that Kodak and B&H branded micrographic cameras account for [detail excised] of micrographic camera sales in the UK, and that the parties have a combined market share of [detail excised] for micrographics equipment as a whole. There are two other large international players manufacturing and supplying micrographics equipment and five other players manufacturing and supplying scanners. I believe that the parties have similar market shares on a global basis as they do in the UK. And, as stated above, the relevant markets appear to be global.

There have been no recent manufacturers or suppliers of micrographics equipment entering the market, reflecting the declining demand for micrographics equipment. For scanners, incentives to enter are higher, this being an area of growing demand and of considerable technological innovation.

Purchasers of micrographics equipment are generally either large organisations such as banks and government departments or systems integrators - ie, companies that purchase a package of office equipment on behalf of their customers (of which only a proportion of the value of the system will be attributable to document imaging equipment). I consider that these customers are relatively sophisticated in their purchasing behaviour and are likely to exert a degree of buyer power.

Vertical issues

B&H is the sole distributor in the UK of Minolta's micrographics camera and its reader/printer. [Detail excised]

Other issues

The Department of Justice in the USA, the Bundeskartellamt in Germany and the Austrian competition authority have all cleared this transaction.

Third party views

I have received a number of representations from competitors and customers. With respect to areas of overlap, any concern expressed centred on what would happen to the B&H/Minolta agreement.

SERVICING OF MICROGRAPHICS EQUIPMENT AND SCANNERS

Horizontal issues

Market share data in respect of servicing are not independently confirmed. However, Kodak has estimated that the merged entity will have up to [detail excised] by value (increment [detail excised]) of the UK document imaging equipment servicing market. There are numerous smaller competitors currently operating in the servicing market.

Provided that competitors have access to spare parts, barriers to entry are not high. Indeed, there has been recent new entry to this market. Despite suggestions from some quarters that Kodak has a policy of not supplying spare parts to servicing competitors, information from Kodak and some third parties indicates that spare parts are sold to independent service organisations as well as to in-house engineers. Kodak has said that it does not have a policy of discrimination between those to whom it supplies spare parts.

There is a theoretical possibility that the merger would alter Kodak's policy in respect of supply of spare parts. However, it is not clear that there would be an incentive for Kodak to do so since limiting supplies of Minolta spare parts would be likely to affect adversely both Kodak's sales of Minolta equipment and Kodak's share of the servicing market. In any event, any company in Kodak's situation would have regard to competition law.

Vertical issues

Following the merger, the B&H servicing business is now directly linked with Kodak, which is strong in manufacture and supply of both micrographics equipment and scanners. However, as there are other competing manufacturers in these markets, I do not consider that Kodak has monopoly power in relation to equipment that could be 'leveraged' into servicing.

I have also considered whether any renewal of the B&H/Minolta agreement could provide an incentive for Kodak to limit supplies of spare parts of Minolta equipment, as discussed above.

Third party views

I have received representations from customers and competitors. These raised no concerns other than those I have addressed above.

Conclusion

In the light of the above assessment, I conclude that in respect of neither manufacturing and supply of micrographics equipment nor manufacturing and supply of document imaging equipment is the merger likely substantially to lessen competition. In any event these are global markets.

Of greater potential for concern is the merged entity's [detail excised] market share and increment for servicing of micrographics equipment and scanners. However, on balance I do not consider that the merger is likely to be detrimental to competition provided competitors have continued access to spare parts. In this regard, evidence of sales of spare parts to third parties, including independent service providers, indicates that Kodak does supply spare parts for its machines. In these circumstances, I consider that recommending a merger reference to the Competition Commission on the grounds of a theoretical possibility of Kodak limiting access to spare parts after the merger would be disproportionate.

I therefore conclude and recommend that you should not refer this merger to the Competition Commission.

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