[26 September 2020] The deadline for comments has been extended to 30 October 2020.
[25 September 2020] What is this document about? In order to harness the promised benefits of digitisation South Africa must create a commercial and regulatory environment designed to extract those benefits and distribute them in a way that ensures inclusive economic growth, i.e. (1) increased and meaningful employment; (2) equality; and (3) shared prosperity.
There is already a new era of global concentration leading to further marginalisation of vulnerable countries and businesses. Therefore, intentional regulation is required to avoid harmful outcomes. This paper sets out:
- The intentions of the Commission in enforcing existing competition law.
- What the Commission believes to be the broader regulatory environment required in order to extract maximum benefit from the digital economy.
Competition issues and the Commission’s approach
The digital economy has novel characteristics which distinguish it from traditional markets and suggest the need for a different approach.
- Rapid and responsive innovation present in digital markets is also the desired outcome of competition policy. Regulatory interventions, therefore, need to balance the need for inclusivity with the desire to maintain innovation.
- There is a tendency towards concentration arising from first-mover advantage, data accumulation and network effects as well as exclusionary conduct. Competition policy must pro-actively identify and prevent entrenchment strategies before they are too difficult to reverse.
- Well-informed consumers can define their preferred benefit with relative speed and accuracy. Competition agencies must balance the long-term policy goals of economic growth with the more immediate stated preferences of consumers.
- The rapid pace of change requires regulators to constantly monitor developments and to adapt their approach as circumstances change.
South Africa’s history in assessing mergers in the digital economy suggests there may have been under enforcement in this area. In order to bring about a more robust assessment of digital markets the Commission intends to:
- Issue a guidance note clarifying the valuation of assets for digital companies in assessing merger thresholds.
- Require companies dominating digital markets to inform the Commission of all small domestic acquisitions, including investments in startups and global acquisitions of targets with some presence locally.
- Prioritise digital markets within merger control for the 2020-2025 period.
- Develop a practice note on the assessment of digital market mergers, updating the existing toolkits to account for the specific features of digital markets.
- Issue a practice note on the assessment of merger creep and when such mergers would warrant intervention.
- Ensure that domestically notifiable global tech mergers are concurrently filed in South Africa and other major jurisdictions to allow the Commission to benefit from collaboration with other major jurisdictions.
Digital markets present new forms of collusion and new challenges for competition agencies trying to detect and investigate collusion. The use of algorithms , for example, can facilitate agreements on price and other trading conditions and the detection, investigation and prosecution of such conduct requires the Commission to have the requisite tools, skills and jurisdiction to do so. The Commission intends to:
- Develop appropriate tools for detecting digital cartels and assessing the effects of agreements amongst competitors.
- Pilot a tender bid-rigging detection programme.
- Build and staff a cartels forensic lab.
- Develop guidelines for establishing the Commission’s jurisdiction in cases of digital collusion with an effect in South Africa.
Abuse of dominance and vertical restraints
The Commission notes that:
- The global reach of digital markets means that conduct found to be anti-competitive in one jurisdiction may be considered anti-competitive in other jurisdictions.
- Digital markets tend to be “tipping markets”, i.e. there is a likelihood for the rapid expansion of one large dominant platform within a particular market.
- Regulated incumbents tend to be at a disadvantage when global unregulated digital firms enter the local market.
- Cases against dominant digital companies are challenging to investigate because of jurisdictional reach and the difficulty of proving an abuse-of-dominance contravention.
Forms of abuse in digital markets
The accumulation of big data, coupled with network effects, can confer market power and a durable competitive advantage, leading to several concerns:
- Vertically integrated digital firms can benefit from owning a platform and simultaneously competing with sellers on that platform. The platform owner can use the information it collects from the seller to obtain an unfair advantage.
- Vertical integration also incentivises self-preferencing, i.e. platforms will give preferential treatment to their services over the services of other companies.
- Conglomeration can negatively impact inclusive growth, even where several big players are competing. This is particularly concerning in the South African context where market concentration levels are already high.
- Online resale price maintenance.
The Commission believes that there is a contestable digital space for local firms to take part in. To preserve this, the Commission intends to:
- Map the local digital landscape in order to inform proactive initiations on market conduct by dominant firms and to focus a future market inquiry or research into specific digital markets.
- Proactively investigate conduct by dominant online firms that may be exclusionary and entrench dominance;
- Issue guidelines, where appropriate, in respect of conduct deemed likely to contravene the Competition Act.
- Institute a scoping study, impact study or market inquiry into digital markets.
- Cooperate and coordinate with other competition agencies to address market conduct of firms such as Google, Facebook and Apple which also dominate domestically, and potentially also second tier globally important digital firms such as Uber, Airbnb, Bookings.com.
Broader regulatory issues
The Commission raised the following issues which must link with competition policy to ensure inclusive growth in the digital economy:
- Urgent investment in digital technology and infrastructure: the Commission references plans to increase broadband connectivity in under-served communities; the rollout of 5G networks; the creation of an open access network (WOAN) that provides access to essential facilities; infrastructure sharing and rapid infrastructure deployment; and digital terrestrial television as opportunities for growth in the ICT sector.
- Avoiding regulatory responses that distort markets: regulation should be technology-neutral without differentiating whether firms traditionally operate their business or whether they make use of digital platforms. The Commission advocates for regulatory responses that are geared at levelling the playing field and reducing regulatory barriers to entry and expansion.
- Local agencies responsible for competition, consumer protection and protection of personal information must collaborate and extend this to similar agencies in other developing countries.
- Update industrial policy to assist start-ups: strategic industrial policy levers should feature in a national digital framework that will act as a roadmap for the wider industrial effort in the digital economy.
- Digitise and synchronise e-Government services.
- Reconsider how the financial system is defined and regulated given the evident disruption in this sector. The ability to process and learn from data is now the biggest barrier to entry and digitisation requires a regulatory shift that encompasses financial networks (which include firms in telecoms, e-commerce) more broadly.
[8 September 2020] The Competition Commission has published a document intended to inform government and corporate stakeholders of its approach to regulating competition in the digital economy.
The Commission has invited interested parties to make submissions by 5 October 2020. These can be sent to Mr Sipho Mtombeni (firstname.lastname@example.org).