Case No IV/M KODAK / IMATION. REGULATION (EEC) No 4064/89 MERGER PROCEDURE. Article 6(1)(b) NON-OPPOSITION Date: 23/10/1998

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1 EN Case No IV/M KODAK / IMATION Only the English text is available and authentic. REGULATION (EEC) No 4064/89 MERGER PROCEDURE Article 6(1)(b) NON-OPPOSITION Date: 23/10/1998 Also available in the CELEX database Document No 398M1298 Office for Official Publications of the European Communities L-2985 Luxembourg

2 COMMISSION OF THE EUROPEAN COMMUNITIES Brussels, In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EEC) No 4064/89 concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus [ ]. Where possible the information omitted has been replaced by ranges of figures or a general description. PUBLIC VERSION MERGER PROCEDURE ARTICLE 6(1)(b) DECISION To the notifying party Dear Sirs, Subject: Case No IV/M.1298 KODAK/IMATION Notification of pursuant to Article 4 of Council Regulation N 4064/89 1. On 22 September 1998 the Eastman Kodak Company ( Kodak ) notified an operation pursuant to Article 4 of Council Regulation (EEC) No 4064/89 as last amended by Council Regulation (EC) No 1310/97, ( the Merger Regulation as amended ), by which it would acquire certain businesses from Imation Corp ( Imation ). The businesses concerned are Imation s medical imaging business world-wide, Imation s dry imagesetting film technology, and Imation s document imaging business in Germany. I THE PARTIES 2. Kodak is an international group active in several fields involving the supply and/or manufacture of photographic imaging products and services to various sectors including consumer, health, business systems, entertainment, professional photography and graphic arts. Imation is an international, publicly-traded group created in 1996 by the spin-off of the imaging and information business of the Minnesota Mining and Manufacturing Company (3M). Imation is active in information storage, medical imaging, document imaging, printing and publishing, photo-colour products, Internet services and customer services. II THE OPERATION AND THE CONCENTRATION 3. By the notified operation Kodak will acquire sole control of Imation s medical imaging business world-wide, (although it will not acquire all of Imation s medical manufacturing assets) by outright transfer of certain assets and businesses as specified in the Asset Purchase Agreement. The businesses concerned are Rue de la Loi 200, B-1049 Bruxelles/Wetstraat 200, B-1049 Brussel - Belgium Telephone: exchange Telex: COMEU B Telegraphic address: COMEUR Brussels.

3 conventional X-ray systems; medical dry and wet laser imaging systems; medical image management systems; medical image servicing; chemicals for medical imaging; dry imagesetting (graphic arts application) and Imation s German document imaging business (including servicing) and contract manufacturing services performed for other persons at certain Imation facilities in the United States. III COMMUNITY DIMENSION 4. The world-wide turnover of Kodak in 1997 was in excess of ECU million and its Community-wide turnover was in excess of ECU million. The world-wide turnover of Imation in 1997 was ECU 462 million and its Community-wide turnover was in the order of ECU 190 million. Neither company earned more than two thirds of their EC turnover in one and the same EC member state, nor more than two-thirds of their EFTA turnover in one and the same EFTA state. However the case falls to be treated under the Merger Regulation as amended, because the combined aggregate turnover of the parties exceeds ECU 100 million in France, Germany and Italy; each of the undertakings concerned earns more than ECU 25 million in all three states; and the aggregate Community-wide turnover of each of the two undertakings is more than ECU 100 million. The notification does not fall to be treated as an EFTA co-operation case. IV COMPATIBILITY WITH THE COMMON MARKET A. Introduction 5. The notifying party argued that the sectors concerned by the notified operation were medical imaging, document imaging and dry imagesetting (graphic arts). As regards the latter two business activities, the transaction will not have any significant impact, given that the overlaps are too small to constitute an affected market within the meaning of Form CO, even if product and geographic markets are taken at their narrowest possible definition. Accordingly the assessment of the transaction has focused on medical imaging. 6. Medical imaging, for the purpose of assessing the present notification, can be regarded as the capture of data for the production of images of internal organs of the human body, by essentially non-invasive means, for the purpose of clinical diagnosis and review. 7. The field of medical imaging can be looked at in terms of four essentially distinct stages of technological development. The first relates to conventional X- radiography. Until the 1980s medical imaging was confined largely to X-ray photography using conventional X-ray film, an activity which required hospitals to purchase not only film, but also processing equipment, film handling machines and wet chemicals in order to have the necessary in-house facilities. 8. In the 1980s new types of equipment began to make their appearance in hospitals, such as ultrasound and magnetic resonance scanners, as well as more sophisticated types of X-ray. This new generation of machines generated data in digital form (ie as a series of electrical pulses) and thus required equipment capable of dealing with such data. 2

4 9. Although digitally generated images could be viewed on a screen (initially a cathode ray tube), in order to reproduce clinical quality, permanent hard-copy records of digitally generated images, an appropriate type of printer, or imager, was required. The first type of imager, developed in the 1980s, used a wet laser process. This involved exposing conventional photographic film to laser light, followed by subsequent processing of the film within the imager using traditional wet chemical developing, fixing and drying methods. 10. One of the disadvantages of the wet laser method is that, like conventional film, it requires the handling of wet chemicals. The chemicals concerned not only require a certain expertise in storage and handling if they are to be used to optimum effect, but their disposal also raises environmental issues. 11. In the 1990s a new generation of imagers has begun to appear using various types of dry process which dispense with the need for film. The technology varies slightly according to the different manufacturers, but can be classified into two broad types: the so-called dry laser, which uses laser light but a specially treated photographic film which is self-processing when activated by heat; and thermal imaging in which the image is implanted using heat onto a suitable film base. Since the processing in wet laser machines uses conventional film technology, the film and wet chemicals necessary to operate the machine can be supplied by any manufacturer of such products. By contrast the various dry imaging technologies each require their own specialised film which is supplied only by the manufacturer of the equipment concerned. 12. Although dry digital processing does away with wet chemicals handling, it still has the disadvantage that it requires archiving and retrieval systems for stored hard copy records. In the future, technological advances are likely to do away with the use of hard copy records almost completely, and the digitally generated images will be stored, retrieved and viewed electronically by clinicians at workstations, without the need for printing out a hard copy image. An additional advantage is that, if the electronic imaging system is configured in the form of a local area network, it can be interconnected with wide area networks and the public Internet to allow transmission of the images to remote locations, thus facilitating clinical review. B. Product markets 13. The narrowest product markets which could be defined in this case relate broadly to these four separate technological stages. All conventional X-ray film 14. The shadow image generated by conventional X-radiography needs to be processed, that is, developed, fixed and dried, to produce a permanent visible image in hard copy form. Hospitals therefore need supplies of conventional X-ray film. Most X-ray film used in hospitals is of general purpose application. There are some types of film which are used for specialised purposes, eg for mammography, but these do not constitute a separate product market because in supply terms the differences in specification from general purpose film are not significant, it is easy to change to manufacturing film for these specific applications and most manufacturers 3

5 produce the full range. Accordingly the narrowest product market category which was considered to exist was one for all X-ray film as used for medical imaging. Conventional X-ray handling and processing equipment 15. For in-house processing of exposed X-ray films, two pieces of equipment - a film handling machine and a film processing machine - are usually employed. For ease of handling, films are usually loaded in standard-size cassettes which can be quickly mounted and dismounted from the X-ray equipment. The cassettes can be unloaded and reloaded with fresh film manually, but the job is more usually done in a piece of equipment known as a mechanical film handling device, after which the removed exposed film is fed to an adjacent processor for developing, fixing and drying. 16. Over time, a series of standard sizes have evolved for the films and cassettes used in radiography, and of course for the associated film handling and processing equipment. As a result, most suppliers, whether of film or equipment, have to supply products in a format compatible with one another, which can handle films and cassettes supplied by firms other than the manufacturer of the original equipment. 17. The film handling unit and processor are essentially two different types of equipment. In order to avoid the exposed film being ruined by exposure to full daylight, the two units have to be both placed in a darkroom, unless a light-tight connection can be made between the two, which usually means having to buy the two pieces of equipment from the same manufacturer. The notifying party considered that, in functional terms, film handling and film processing equipment were not readily substitutable and formed separate product markets, even if the two pieces of equipment were often bought and used together. Film handlers and film processors were therefore assessed on the basis that they constituted separate product markets. 18. For the sake of completeness it should be mentioned that Kodak manufactures a product which can be used as an alternative to conventional silver halide film in traditional X-ray work, provided that the hospital has the equipment to deal with digitally generated images. This is a re-usable phosphor screen which is mounted in the beam path in place of conventional film. This will hold the image long enough for it to be taken off and read into a laser scanner which generates a digital version of the image. This technique is sometimes referred to as CR or computerised radiography. Because this equipment is only an imperfect substitute for conventional film, and because in any event only Kodak manufactures it, it was not considered part of the conventional film product market. Wet processing chemicals 19. The processing operation requires the application of chemicals to the exposed film for the purposes of developing, fixing and drying the image. Hospitals who process film therefore have to buy regular supplies of wet chemicals for use in their processors. Those hospitals which use wet laser imagers will have to buy essentially the same sorts of chemical for use in wet laser imagers (see below). The supply of wet processing chemicals was therefore treated as a separate product market. All digital imagers 4

6 20. The parties argued that all digital imagers, whatever technology they used, formed part of the same product market. According to them the price of dry imager units (broadly ranging from about US$ to US$ per machine) is some 15-20% higher than the price of wet systems, but the higher capital costs are offset by the lower running costs associated with avoiding the use of wet chemicals, and therefore the systems are substitutable. That said, wet machines still retain certain advantages, notably higher processing rates, and a better stability for the hard copy image. These advantages however could be quickly eroded, as dry imaging technology is in its relative infancy and further technical improvements can be expected. 21. A good number of respondents foresaw over the next few years a shift from wet to dry technology. Such a shift which may have already begun, to judge by the decline in sales of wet units following the introduction of the dry technology. 22. Consideration was also given to the possibility that digital imagers might be split into two separate segments, based on wet and dry technology, or even further on the dry side, into thermal and laser variants. On this basis no overlap would have arisen on a market for dry imagers, as Kodak do not have a commercially available dry imager. Those relatively few third parties who suggested such further sub-segmentations referred to technical differences, but it was not clear that these were such as to prevent economic substitutability. Since the weight of evidence was against such further sub-segmentation, the issue was not pursued further. 23. An assessment was therefore made on the basis of a market for all digital imagers. Wet digital film 24. The film used in all such imagers, whether thermal or laser, and whether wet or dry, is sometimes referred to as digital film. This term covers both the conventional silver halide film used in wet lasers and the specialised products used in dry laser and thermal processes. It should be noted that the term digital film can be a source of confusion. In traditional X-radiography the film acts as the direct medium for image capture. Digital film, by contrast, has nothing to do with initial image capture, but is merely the medium on which an already existing digital image is reproduced in hard copy form. Thus digital film fulfils the same role as, say, the paper used in a conventional ink-jet printer. 25. In the case of wet laser imagers, the film and chemicals used in the operation are conventional and generic and can be bought from any supplier of such products. In dry technology the imagers need a special film depending on the particular technology employed, and at present that film can be obtained only from the supplier of the original equipment. There is therefore no open market for the purchase of dry digital film, and the assessment for digital film has been limited to a market for wet digital film. 5

7 Wet processing chemicals for the wet laser process 26. Wet laser digital imagers need processing chemicals as well as film. However, since these are the same as the processing chemicals used in film processors handling conventional X-ray film, they are treated as part of that market. Electronic image management systems ( IMS ) 27. Developments in computer technology have also introduced the possibility of a filmless image management system, which relies on electronic archiving of digital images, and electronic retrieval of such images to computerised clinical workstations where they can be viewed on high resolution monitors. In principle, equipping a medical imaging unit dispenses with the need to create and store hard copy records in the form of either conventional or digital film, although hard copies could be printed out on an imager connected into the system if such copies were ever needed. The use of digital technology would also permit the interconnection of workstations and data generating equipment in local and wide area networks, thus allowing for the possibility of the transmission of images to remote locations. 28. With the exception of the imagers and the software, and possibly subject to the need for higher resolution monitors than might normally be found in the office environment (albeit not specific to the medical sector), the hardware required for an electronic image management system is broadly the same as that in use in other types of networked computer application. The equipment could thus be supplied by any supplier of computer equipment and not just by firms currently active in the medical imaging sector. 29. The only piece of equipment which is specific to the medical imaging sector is the imager itself, and in this context it should be borne in mind that the purpose of moving to an electronic system is to do away with the need for imagers. It is possible that, given time, conventional printers might well be capable of developing the degree of resolution required for medical-imaging purposes, in which case there would be no equipment in the electronic medical imaging sector which would be specific to that sector. 30. If a market for electronic medical imaging systems were to be defined, the parties combined shares on it would be low and not sufficient to give rise to competition concerns. Accordingly, as no competition concerns arose even on the narrowest definition, it was unnecessary to pursue this question further. Convergence 31. It was noted that the wet laser system faced the same problems as conventional film processing in terms of the need to handle wet chemicals. In addition, the likely introduction of further regulation on toxic waste might increase the cost of disposing of wet technology and render wet chemistry still more unattractive and costly by comparison with dry imaging alternatives or film-free systems. Thus any hospital whose objective is to cut the costs and environmental problems associated with the handling of wet chemicals and film images is unlikely to regard wet laser technology as a satisfactory alternative. Other users may see another disadvantage to conventional film, which is the costs associated with archiving and retrieval of hard copy images. For such customers, the use of imagers of whatever sort will not 6

8 address the problem, and the only long term solution is to move to a film-less electronic medical imaging system. In this respect, it is worth noting that according to independent studies the IMS market has shown an annual revenue growth rate of 20% between 1994 and 1997, and is expected to grow at rates of 25% between now and Over time therefore there is likely to be a move towards film film-free electronic imaging systems, with progressive replacement of wet conventional systems by digital, wet digital by dry, and perhaps with some hospitals missing out a step in the process entirely. C Relevant geographic markets 32. As for the relevant geographic markets, in a recent case involving similar products the Commission considered these markets as being European-wide 1. Accordingly, the parties claimed that the relevant geographic markets were EEA-wide due to a number of factors: in particular that the major manufacturers are global companies competing on a world-wide basis; that the regulatory context is now fully harmonised thanks to the entry into force of the medical devices directive; that customers (mostly public hospitals) procure these goods largely through public tenders; and that the products concerned have high value and are easily transportable. 33. The evidence to support these assertions was mixed. Some third parties who responded said that, when identifying suppliers, they looked, or were ready to look, on a European or global basis. That said, most respondents appeared to buy the bulk of their purchases from multinational suppliers such as Kodak, Fuji and Agfa through the local supplying offices in each of the countries concerned. The use of tender procedures might well limit the readiness of, say, Kodak s subsidiary in the UK to bid for a tender published in Germany if they knew that Kodak s German subsidiary would be likely to bid. 34. The parties provided evidence to suggest that, despite the above, there was some parallel trading, particularly on the part of distributors. They estimated for example that some 8-10% of medical imaging film sold in Germany might be sourced outside Germany. Imation estimated that some 45 and 65] % of its total wet laser film sales and 15 % of its conventional film sales in Germany might be accounted for by parallel trade. Kodak believed there were some small dealers active in France exporting medical imaging film to Spain and medical imaging products to Belgium. Imation had identified a 45 and 65] % projected drop in 1998 sales of film for its Dry View laser imager compared with 1997, despite a higher installed base, and believe that the drop can only be accounted for by parallel trade of the film into the UK. 35. On the other hand, there remain some indications militating in favour of national markets. First, there are variations in price and market shares of competitors across the different countries of Europe. Second, as in other medical sectors, the presence of public reimbursement systems in a large number of EU countries has partitioned off the markets at national level. In particular, most EU countries directly or indirectly constrain prices by fixing budgets for the hospitals. 1 See case M.986-Agfa/Dupont. 7

9 36. With respect to price variations, the parties argued that valid price comparisons could be made only with difficulty, given the differences in the content of contracts in the various national markets. In addition, they provided evidence to demonstrate that prices, if adjusted to take account of a number of distorting factors (quantities purchased, product mixes, payment terms, exchange rates, interest rates), were steadily converging across Europe. In conventional film, for instance, it was demonstrated that for the large majority of EU countries (the UK and Ireland, Germany, France, Austria, Belgium, Italy, Netherlands) prices fluctuate within a limited range (from a minimum of 10.1 US dollars to a maximum of 13 US dollars). As for digital printers, the parties contended that any comparison was misleading, because there were too many distorting factors to be taken into account. It is likely therefore that markets are in the process of moving towards being Europe-wide, and this should be taken into account in assessing the competitive impact. In the event, since the concentration would not create a dominant position even on the narrowest definition, it was unnecessary to resolve definitively the question of geographic extent. D Competitive assessment 37. A factor which is common to all markets in the medical imaging sector concerns the purchasing procedures. Although these procedures differ to some extent in different European countries, there are commonly-found elements which tend to militate against the exercise of market power by a supplier with a high market share, such as, in particular, the use of tendering procedures. The position in the countries which are most affected is outlined below. 38. According to the parties, approximately 70% of medical equipment purchases in Austria are effected by means of a published tendering procedure, advertised either regionally or Europe-wide. Purchasers will sometimes go back to the supplier to renegotiate price during the term of the contract, and if no agreement can be reached, the customer is entitled to switch suppliers. And although prices in Austria have been relatively high, both Kodak s and Imation s prices have declined between 15 and 35] % and 25 and 45] % between 1995 and In Finland 95% of the medical imaging sector is accounted for by competitive bidding purchases in which a large market share would not necessarily enable the firm concerned to maintain supra-competitive prices. 40. In France, the public hospital segment represents just over half the sector. Public hospitals use published tender procedures for purchases of both film and equipment. Contracts are awarded by a committee including hospital and government representatives. The names of the supplier and the price of the purchases are published and can act as a guide to private sector buyers. 41. In the UK/Ireland, 90% of the medical imaging market is represented by NHS Trust purchases. Because of the size of contracts they are normally advertised in the Official Journal of the European Communities. In the majority of cases the NHS Supplies Organisation acts as a purchasing agent in negotiating contracts on behalf of NHS trusts. Tenders are monitored by government procurement organisations. 42. In Italy, some 80-85% of the medical imaging market is represented by Units of the Sistema Sanitario Nazionale. Contracts are generally awarded after publication of 8

10 tenders, either in national or in European- journals and awarded via a formal tender process according to rules set by the central and regional governments. (a) (i) Conventional X-ray film European-level markets 43. If the market for conventional film is taken at European level, the combined group would have some 30 %, but its nearest competitor, Agfa would have some 30 %, Fuji 10 %, and Sterling 5 and 15]%. Strong competitors would therefore exist and the combined market shares would not give rise to concern. (ii) National level markets 44. The table below shows the instances within the EU where, if there were a separate product market for conventional X-ray film based on national markets, the parties would have the largest share and a combined market shares of 40% or more. Kodak Imation Kodak+Imation Italy and 55] Austria Finland 30 1 and 10] 35 and 45] France 30 1 and 10] 35 and 45] UK & Ireland In each of these markets the combined entity would be faced with its multinational competitors with market shares sufficient to pose a competitive threat. In Italy, Agfa, the nearest competitor has a 20 %. In Austria, Agfa, the nearest competitor, has a 20 % market share. In Finland, the market share of the nearest competitor, Agfa, is 30 % and Fuji has 20 %. In France, Agfa would have 20 % and Fuji 10 %. In the UK/Ireland, Sterling has 20 %, Agfa 10 %, and Fuji having 10 %. 46. Moreover, the tendering procedures as described above and used generally by European purchasers of medical imaging products would make it difficult for even a player with a strong market share to impose supra-competitive prices while there were still effective competitors. It was said by the parties, and the view was echoed by third party respondents, that the demand for conventional X-ray film across the EEA is in decline. According to the parties estimates, the EEA-wide demand for conventional X-ray film had declined somewhat in recent years, from some ECU 500 million in 1995 to ECU 450 million in In addition, there is currently over-capacity in the sector which supplies conventional X-ray film, as well as the equipment film handlers, film processors required to 9

11 deal with it. Moreover, evidence received suggested prices in the sector are in decline, against a background of increased budgetary pressure on hospitals to deliver healthcare at the lowest possible cost. In this respect, it should also be noted that customers, i.e. hospitals, are becoming ever more sophisticated purchasers and paying increasing attention to cost efficiencies. From the above it follows that even with a relatively high market share the combined entity would be hampered in any efforts to raise prices by all the elements described above, including the fact that any increase in prices is likely to accelerate the switch among hospital users to digital systems, or possibly to encourage hospitals who were not already digital to move direct to the installation of film-free electronic image management systems. (b) Conventional X-ray film handling, and conventional X-ray film processing equipment 48. For convenience the markets for these two pieces of equipment are discussed together. The market for the sale of this type of equipment is subject to similar influences as were discussed in relation to the sale of conventional X-ray film, and like conventional film, is in decline. (i) European level Sales of units of conventional equipment, and percentage decline 95-97, on EEAmarket basis (source of data: parties estimates) Film handling (Nos of units) Processors (Nos of units) In value terms, taking the combined sales of processors and handling machines, there has been in the EEA a decline from ECU million to million. 50. The parties market shares on a market defined at EEA-wide level is as follows: 1997 market shares (%) for conventional X-ray film handling and processing equipment, based on units of equipment sold (source of data: parties evidence) Kodak Imation Combined Agfa Fuji Film handling systems 15 and 25] 15 and 25] and 15] Film processors

12 (ii) National level 51. Published estimates of equipment sales broken down at national level are not available. The parties have however provided estimates of their position and that of competitors. The markets in which combined market shares of over 40%, and the position of their principal competitors, is estimated as follows. Percentage market shares 1997, based on units sold of film handling equipment for conventional X-ray film Kodak Imation Combined Agfa Fuji Austria 1 and 10] 35 and 45] France and 15] Italy and 70] 30 5 and 15] Netherlands and 70] 20 0 Spain 40 5 and 15] UK/Ireland X-ray film processors 1997 market shares based on units sold Kodak Imation Combined Agfa Fuji Austria Italy and 15] Spain 40 1 and 10] and 15] 52. Despite the very significant market shares held by the parties in a number of European countries, competition will remain effective for a number of reasons. Again, as noted above, first the markets for the supply of this type of equipment are markets with freely available technology and no barriers to entry. Second, in each of these markets the combined entity would be challenged by its multinational competitors with market shares sufficient to pose a competitive threat. Third, the tendering procedures would make it difficult for a player even with a strong market 11

13 share to impose supra-competitive prices while there were still effective competitors. Fourth, the demand for such equipments is in decline, and prices have been decreasing over the last three years, which demonstrates that the market is working competitively. Finally, the customers budgetary constraints impose their own competitive pressures on suppliers. (c) Wet chemistry 53. If markets are taken at European level Kodak would have a 20 % share based on 1997 figures, and Imation a 5 and 15] % share, or 30 % combined, a figure which would not give rise to serious competition concerns. 54. If markets are taken as national, there are combined shares above 40% as follows Kodak Imation Combined Denmark 30 and 40] 1 and 10] 40 and 50] Finland 35 and 45] 1 and 10] 40 and 50] France 30 and 40] 1 and 10] 40 and 50] Italy 10 and 20] 25 and 35] 40 and 50] 55. Again, despite the high market shares held by the parties in the above mentioned countries, it should be stressed that the chemicals concerned are commodity products, and there are no barriers to the entry of new suppliers. As a consequence, not only will the parties face competition from the operators present already in this segment, but also such a market is contestable in the light of potential competion. In addition, there is a decline in the use of this technology as well as a price decrease, which demonstrates again that the market is competitive. Furthermore, the demand for wet chemicals is a function of the use of conventional film and wet laser processors. As medical imaging units progressively switch to dry film and filmless technology, the demand can be expected to decline. Conclusions on conventional segment 56. In sum, despite the high concentration in terms of market share resulting from this transaction in the conventional sector, competitive concerns arising from the merger may be excluded for the following reasons. 57. As to the possible creation of a single dominance, following the merger, the new entity will acquire a leading position at both European and national level in all three above described markets, with market shares between 40 and 50%, and in some countries even higher. However, its position will be challenged primarily by the presence of one large competitor, Agfa, but also by three other operators, namely Fuji, Sterling and Konica. Considering, then, that from a structural point of view the 12

14 conventional market is characterised by a widespread excess capacity, a risk of single dominance can be excluded since any attempt from the merging entity to raise prices above competitive levels will encounter price competition from other players present on the market, which are all capable of facing an increasing demand with their excess capacity. 58. With respect to the possible creation of a collective dominance as a result of the present transaction, it should be noted that some of the typical structural features characterising oligopolistic markets are absent in this case. More particularly, there is very little market transparency which is normally required for an oligopoly to function effectively. This is due to the fact that contracts are normally the result of tendering procedures, or are negotiated with customers on an individual basis. In addition, customers often place package orders, negotiating together durables and consumables. This renders even less transparent the pricing policy decided by suppliers on each item. More importantly, the parties have provided data showing a constant decrease in price trends over the last three years both at European and national level. This evidence proves at least that price co-ordination in such markets is unlikely. 59. The asymmetry of market shares between the two most important players of the market (Kodak/Imation and Agfa), quite significant at national level, and less pronounced at European level, is another element militating against a possibility of joint dominance. 60. Finally, in terms of potential competition, if in the conventional sector prices were to be raised to supra-competitive levels, such a trend would push the demand to switch more rapidly to more advanced available technologies. In this respect, while the simultaneous strong presence of the parties in the digital sector might be a source of concerns, it should be noted first that any possibility of collective dominance in such a sector is to be excluded given the characteristics of such a segment (the digital sector is a highly technological market growing at a very high rate, where products are extremely complex and there is no transparency in terms of price). Secondly, an additional competitive pressure comes from the IMS technology, where none of the above mentioned players has a significant presence. Not to mention, finally, that the closest substitute for conventional technology remains the CR technology. In the latter segment, however, Imation is absent and Kodak has a marginal presence, while Fuji appears to have acquired a leading position with a market share around 60 and 80]% at European level. (d) (i) All digital imagers European market 61. The market for digital imagers covers the sale of both wet and dry technology imagers, and is growing at a significant rate. But this overall figure masks a rebalancing between the sales of wet and dry. The table belows shows the sale of digital imagers over the past 3 years, on a unit basis at an EEA-wide level. Since 1995, sales of dry imagers have risen tenfold, and made significant inroads into the market. 13

15 Dry units 50 and 200] 400 and 800] 400 and 800] % dry 5 and 20 %] 5 and 50 %] 5 and 50 %] Wet units Total 1000 and 2000] 1000 and 2000] 1000 and 2000] 62. It will be seen that, while the market as a whole has been expanding, most of the expansion is accounted for by the dry imagers, where sales have expanded 10-fold in 3 years, while sales of wet imagers have declined slightly. 63. The shares for an all European digital printer market, and the constituent wet and dry elements, would be as follows: Kodak Imation Combined All digital printers 10 and 20%] 30 and 40%] 40 and 50%] Wet digital imagers 10 and 20%] 1 and 10%] 20 and 30%] Dry digital imagers 0 50 and 80%] 50 and 80%] 64. In terms of market share, Kodak estimated that their position has been in relative decline, with a drop in percentage terms from 20 % share in 1995, to 10 % in Imation s sales of wet imagers have also fallen, from 150 and 250] units EEA wide in 1995 to 20 and 80] in But the great increase in the market is accounted for by Imation s sales of dry imagers, from 20 and 80] to 500 and 1000] over the 3 year period. 65. Although Imation was not the first company to put a dry imager on the market, its Dry View imager gained market share rapidly from 1995 when it was introduced. This early market lead is now being eroded by competitors such as Agfa and Fuji developing competing dry systems, and its share has fallen [by 10%] within the space of one year. 14

16 (ii) National level 66. If an all digital product market is considered to exist at national level the markets where combined shares of over 30 % would arise would be as follows Kodak Imation Combined Agfa Fuji Austria and 65] Belgium 1 and 10] and 65] 20 1 and 10] Finland 1 and 10] and 35] 10 France Germany and 35] 10 Italy and 10] Netherlands 1 and 10] Portugal and 10] Spain UK&Ireland 1 and 10] (figures may not sum due to rounding) 67. Despite the apparent position of market strength suggested by these figures, it must be remembered that they merely echo the pattern on a European wide market. The strong shares are attributable to Imation s early, and eroding, technological lead in the dry imaging sector. As Imation s early competitive advantage is eroded, the future market shares are likely to fall. In this respect, the very high market shares held by Imation are typical of a market in transition and should not be viewed as necessarily faithful indicators of market power. Dry imagers represent a new and emerging technology and the growth rate is very high (from 50 and 200] units sold in 1995 to 400 and 800] in 1997). Furthermore, the acquisition would not lead either to a reduction in choice for consumers or a restriction of competition, because Kodak is not active in such a market. 15

17 68. On the other hand, Kodak, while still holding a significant presence in wet printers, is suffering from the steady decline of the whole segment. The new entity resulting from the merger will face strong competition primarily in the dry segment due to the recent entry of the other major players, but also in the wet segment. In addition, and perhaps more importantly in prospective terms, digital technology is exposed to competitive pressure stemming from the IMS technology, where the parties have a negligible position and encounter competition from a far larger number of operators. In this respect, the IMS market has shown an annual revenue growth rate of 20% between 1994 and 1997, and is expected to grow at rates of 25% between now and (e) (i) Wet digital film European level 69. The EEA-wide market for wet digital film has remained relatively stable over the past three years, growing slightly from ECU 179 million in 1995 to ECU million in In line with the general trend, Kodak s sales of wet digital film have risen in value from ECU 30 and 45] million to ECU 30 and 45] million. Imation s sales are broadly parallel, at ECU 30 and 45] million in 1995 dropping slightly to ECU 30 and 45] million in In volume terms, Kodak s share of an EEA-wide market has remained reasonably steady over the past 3 years at about 15 %, while Imation s share has fallen [by 6] %. Agfa s share has remained static at around the 25 and 35]% mark, whilst Fuji s has grown slightly from 10/20 and 15/25%]. (ii) National level 71. Combined market shares of over 40% would arise in Italy ( 35 and 55] %), UK/Ireland ( 35 and 55] %) and France ( 30 %). Once again, the strength of these shares should be assessed against the background of a steady decline in the wet technology, which will have its effect equally on the demand for digital film and on the demand for digital imagers themselves. Kodak Imation Combined Agfa Fuji France Italy and 55] UK & Ireland and 55]

18 VI ANCILLARY RESTRAINTS 72. The parties have agreed on i) a non competition clause for a period of seven years under which the seller will not seek to compete against the purchaser in the medical imaging business; ii) a supply agreement under which Kodak will supply on exclusive basis for five years Imation with certain document imaging business products; iii) an intellectual property agreement under which Imation transfers certain IP rights to Kodak including rights used at the Ferrania plant; iv) a settlement agreement under which the parties agree to settle some disputes relating the ownership of some IP rights. 73. As to the first clause, the parties claim that such a long duration is due to the fact that the merger involves a transfer of both goodwill and know-how. In addition, the economic life cycle of the products concerned (around 5-7 years) should be duly taken into account. In so far as only the dry digital technology being transferred appears to deserve a special protection by taking account of the know-how incorporated and the life cycle of such technology, the non competition clause is covered by this decision up to a period of 5 years. As to the rest of the business being transferred, i.e. the conventional sector, it seems reasonable to accept a non competition clause for a duration of three years since there is neither a special technology, nor a know-how to be protected. 74. As to the second clause, according to the parties the 5 years duration of the exclusive supply agreement is designed to ensure an indispensable transitional period to Imation. In this respect, it should be noted that the manufacturing plant transferred to Kodak currently manufactures for Imation document imaging products which do not form part of the transaction. Accordingly, Imation needs to ensure continued supplies of its proprietary silver paper. Conversely, no specific motivation has been provided in relation to the exclusivity clause. As a consequence, the supply agreement between the parties is covered by this decision only in so far as it is not based on exclusivity. 75. As for the third clause, in order for the acquisition to be implemented, it is necessary for Imation to transfer certain IP rights to Kodak. This clause is ancillary to the transaction. As for the settlement agreement, this appears to be completely unrelated to the transaction at stake, and therefore is not covered by the present decision. VI CONCLUSION 76. In view of the above the Commission has decided not to oppose the notified operation, and to declare it compatible with the common market and with the functioning of the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of Council Regulation No 4064/89, and Article 57 of the EEA Agreement. For the Commission, 17