The Competition Commission fears that if it does not come up with a regulatory framework a few companies could end up dominating the digital space in South Africa. This kind of power could be detrimental to South African businesses.
The Competition Commission’s (CompCom) discussion paper on the digital economy in South Africa highlights issues around why this sector must be regulated.
The Competition in the Digital Economy paper points out that if the country does not set up a regulatory framework, it could soon find itself trying to govern companies that have quickly amassed a lot of power. The paper notes that this is likely, as digital markets are prone to extreme ‘winner takes all’ outcomes that have resulted in companies such as Google, Facebook and Alibaba dominating their respective local markets and around the globe. It warns that this kind of power could be detrimental to South African businesses.
The paper says this frequently plays out on a global interconnected and virtual stage, “resulting in tech giants dominating entire areas of global commerce, such as social media, search, digital advertising, mobile operating systems and e-hailing. Digital markets, therefore, threaten a new era of global concentration and the marginalisation of developing- country businesses unless purposefully regulated”.
Killer acquisitions
While the CompCom acknowledges it has little sway over what happens in other jurisdictions, it says discussing what happens in the local digital market is important as it could prevent market power abuse in emerging sectors.
It fears, for instance, that if it allows the merger of two seemingly unrelated companies, it would unintentionally concentrate power in a market by approving so-called ‘killer acquisitions’.
This is where start-ups or emerging competitors are bought with the express purpose of closing them down.
As the CompCom paper says, such strategic behaviour in merger activity “has played an important role in entrenching Google’s position in search and search advertising, with acquisitions of companies such as YouTube and DoubleClick. Facebook’s acquisition of WhatsApp and Instagram could be viewed in the same light”.
The CompCom warns that another danger in allowing some acquisitions is the combination of datasets. This is where the merging companies seemingly don’t have overlapping datasets, but the resulting merger
gives them “an advantage over competitors to improve on products in a way that cannot be matched”.
The merged dataset concern was one of the reasons the CompCom recommended that the Competition Tribunal not approve the Naspers takeover of WeBuyCars. It reasoned that as Naspers controls e-classifeds OLX and Autotrader, an online vehicle-listing site would have had considerable market power.
So far, vetoing proposed mergers such as this has been the exception as until 2019, the CompCom had investigated 87 mergers in the digital- markets space, prohibiting none.
What it needs
The CompCom says given the complexity of digital markets, regulators like itself need to be better resourced to be able to detect, investigate and prosecute these kinds of cartels. This is why it needs the requisite tools, skills and jurisdiction to do so.
In order to achieve these outcomes, 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 cartel forensic lab. Develop guidelines for establishing the commission’s jurisdiction in cases of digital collusion that have an effect in South Africa.
The CompCom admits that when it comes to properly regulating digital markets, it’s still finding its feet, but says that if it’s not proactive when it comes to the enforcement of competition law, there is the danger of a concentration of power in digital markets.
This strategy is premised on the belief that digital markets have tendencies to tip towards a ‘winner takes all’ environment, where one or a few firms dominate. It fears that reversing this position once the markets have tipped, as well as regulating the behaviour of dominant firms, would be very difficult.
This story was first published in Lame Duck Digital, an initiative of CaxtonCTP, which was published on behalf of the broader media industry. The brief was simple: address the wide-ranging and dangerous effects social media and tech giants have had, and will continue to have, on the media sector. It can be downloaded here.
Larry Claasen is deputy editor of Moneyweb. A graduate of the University of the Western Cape, Claasen is an experienced and award-winning business journalist and editor.
