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Q3 2020 - (released November 2020)

SA's quarterly Private Equity & Venture Capital magazine

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Big tech – cage the tigers, or unleash the hounds?

by Heather Irvine

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A lawsuit filed by the United States Department of Justice (DOJ) against Google, one of the biggest in the history of American antitrust, follows months of debate by competition lawyers and economists around the world about how to deal with “Big Tech”. Last week, our Competition Commission joined the debate, with the publication of a discussion paper on competition in the digital economy.

The DOJ complaint alleges that Google has monopolised search advertising and that “American consumers are forced to accept Google’s policies, privacy practices, and use of personal data; and new companies with innovative business models cannot emerge from Google’s long shadow.”  It alleges that Alphabet Inc. maintains its status as a gatekeeper through an unlawful web of exclusionary and interlocking business practices which shut out competitors. For example, the government alleges that Google uses its substantial advertising revenues to pay mobile phone manufacturers, carriers and browsers to pre-set Google as the default search engine. Google has vociferously denied contravening any competition laws. In its press statement on the complaint, Google admits  that it pays to promote its services, just like a cereal brand might pay a supermarket to stock its products at the end of a row, or on a shelf at eye level. For digital services, the home screen is the equivalent of an “eye level shelf” which, in the mobile phone space, is controlled by Apple, as well as companies like AT&T, Verizon, Samsung and LG. In the desktop computer space, that shelf space is controlled by Microsoft.

The DOJ lawsuit follows the publication of a report on competition in digital markets by the United States House of Representatives Antitrust Committee, after a 16-month investigation, which concludes that “companies that once were scrappy, underdog startups that challenged the status quo have become the kinds of monopolies we last saw in the era of oil barons and railroad tycoons.” The report alleges that “by controlling access to markets, these giants can pick winners and losers throughout our economy. They not only wield tremendous power, but they also abuse it by charging exorbitant fees, imposing oppressive contract terms, and extracting valuable data from the people and businesses that rely on them.” It suggests that United States lawmakers should define a new standard for antitrust violations, to ensure that competition law is “designed to protect not just consumers, but also workers, entrepreneurs, independent businesses, open markets, a fair economy, and democratic ideals.”

 

This echoes a growing chorus of policy recommendations at European Union and European national levels for new ‘ex-ante measures’ in order “to ensure that markets characterised by large platforms with significant network effects acting as gate-keepers, remain fair and contestable for innovators, businesses, and new market entrants”. It is proposed that these ‘up front’ rules should apply to all digital firms – regardless of size – in order to set the ground rules for how they interact with consumers and competitors at all times – rather than merely tackling them piecemeal, if they decide to merge, or engage in conduct which causes customers or competitors to complain to the competition authorities.

The South African Competition Commission’s paper on the Digital Economy, published just a week before the DOJ’s lawsuit, asks what our authorities should do in order to preserve contestable digital spaces in South Africa, and ensure that the digital revolution contributes to transformation and inclusive growth.  It suggests a series of interventions, including enhancing the scrutiny of digital mergers and applying new provisions of the Competition Act to restrict abuses by dominant online platforms which purchase from small South African suppliers. However, all of the remedies proposed by the Commission would occur within the existing statutory framework which empowers the Competition authorities, as well as the Consumer Commission and the Information Regulator.

 

It is by no means clear that any of the more drastic measures which are currently being contemplated in the United States or Europe could be swiftly implemented in South Africa. Firstly, there is a jurisdiction problem: the Competition Appeal Court recently made it clear, in a decision on the Commission’s attempt to prosecute several offshore banks for alleged forex price fixing, that the Commission has to demonstrate that it has jurisdiction over both the company and the conduct which forms the subject of a complaint, by demonstrating “sufficient connecting factors” to South Africa. This may not be easy, with respect to some of the global “digital gatekeepers”. Secondly, while our legislation does allow for the Competition Tribunal to make interim orders pending investigation by the Commission, like those being applied in Europe, very few applications for interim relief have been granted to date, mainly because the Competition Tribunal has required that complainant’s seeking this kind of remedy show that they will suffer “irreparable harm”. It is particularly challenging to show this in complaints about exclusion of rivals in digital spaces.

 

Lastly, South Africa has a poor track record when it comes to successfully applying ex ante regulation. The Electronic Communications Act (ECA) enables the Independent Communications Authority (ICASA) to define relevant product, geographic and functional markets, to identify licensees which wield significant market power (or dominant firms) in those markets and, if it finds that the normal competitive functioning of the market has failed to apply pro-competitive measures, to foster competition. Whist ICASA has regulated wholesale mobile call prices using this process, this was interrupted by High Court litigation and took several years. Subsequent inquiries by ICASA – in terms of section 67 of the ECA – to address high mobile data prices, as well as a persistent lack of competitors in subscription television broadcasting, have stalled. Although both the Commission and ICASA have jurisdiction to deal with competition complaints in the communications and broadcasting sectors, to date, not a single complaint about an abuse of dominance has been litigated by either authority.

The most immediate outcome of the Commission’s report seems likely to be a market inquiry into competition in the digital sector by the Commission, in terms of the Competition Act. This would at least allow the Commission to study the South African elements of the various digital markets in detail, and to identify whether there are barriers to South African competitors, or practices which harm local consumers when they search, shop or socialise online. The Commission has been able to score some quick wins for smaller competitors as a result of these inquiries in the past – for example, by concluding agreements with the major retailers to eliminate exclusivity provisions which hamper smaller retailers from leasing space in large shopping malls. The Commission has also used these inquiries to extract promises of short-term relief for poorer consumers, for example, by means of agreements reached with the mobile operators to eliminate higher priced, lower volume data bundles.

However, deeper structural changes to enhance competition in digital markets in South Africa over the longer term are likely to require extensive legislative changes. This typically takes years: for example, a previous round of proposed amendments to the ECA has been mired in the parliamentary process for more than 2 years and, so far, no bills have been tabled to address the concerns about competition in the communications sector, as identified by the Commission in its report on mobile data prices. Amendments to the Competition Act, late last year, enable the Commission to approach the Tribunal for an order compelling a company to sell part of its business pursuant to a market inquiry. In theory, this could provide the mechanism for the Commission to force the “break up” proposed by the US lawmakers – but the new market inquiry provisions are poorly drafted, and digital firms facing litigation or regulation in multiple jurisdictions may be far more willing than the local retailers or mobile networks to test the Commission’s findings and proposed remedies in the Tribunal, the Competition Appeal Court, and beyond.

Any regulation – whether by the Commission after a market inquiry or a complaint, or ‘ex ante’ – will have to balance consumers’ needs to access innovative (and often free) online services, with the broader “public interest” imperatives envisaged in the Preamble to the Competition Act, which include providing small and historically disadvantaged suppliers with an opportunity to participate fairly in the national economy. The national lockdown has driven millions of South Africans online, and poor consumers, in particular, are increasingly dependent on services like Facebook for access to education and healthcare information. The pace of this digital revolution in South Africa will only increase after the planned spectrum auction. The question for competition authorities, including our own, is likely to remain: how to regulate digital companies in a manner that doesn’t harm consumers and hinder innovation.

 

Irvine is a Partner in Bowman’s Competition practice.

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