Digital giants look for clues in Australian wrangle over future-focused regulation

There’s a growing consensus among Australian legal practitioners on why the country’s competition regulator is calling for law changes to help it assess mergers of technology companies based not on what the parties look like today, but what they’re likely to become tomorrow.

The Australian Competition & Consumer Commission’s call for competition legislation to be reworded to include a reference of the risk that a “potential competitor” — rather than a mere “competitor” — may be removed from a market is an ambit claim, lawyers say, that it isn’t something the ACCC needs.

In fact, what’s becoming clear is that the first recommendation of the watchdog’s much-discussed interim report on the impact of digital platforms on news and advertising industries is directed neither at the regulated companies nor at Australia’s lawmakers, but at the country’s judiciary.

To use an Italian proverb, the ACCC was speaking to the wife so that the mother-in-law may hear what it had to say.

'Ex ante' assessments

There’s no ambiguity that under existing laws the ACCC can already make predictive assessments — that is, the regulator is authorized to employ an “ex ante” approach to mergers. But by asking for a tweak to the wording of section 50(3)(h) of the 2010 Competition and Consumer Act, the regulator wants to spell it out for the judges.

Speaking at a conference in Melbourne this week, the ACCC’s chief economist conceded that convincing the courts that a digital giant’s acquisition of a relatively small startup could lead to serious competition problems further down the track remained a stumbling block.

“You have to convince the judge that [the deal] is likely to have the effect of a substantial lessening of competition. You have to convince the judge that [the acquired company] is likely to become the next big thing,” Graeme Woodbridge told a panel of competition experts. “A judge ... is going to look at that and say ‘well, I just can’t predict that future, so I’m going to just let the acquisition go ahead.' ” 

The issue of “ex ante” merger assessments is fast becoming one of the most controversial parts of the ACCC’s sprawling review of digital platforms, which has so far focused on Facebook and Google but has implications for other US technology companies as well.

The ACCC, in line with other regulators around the world, sees problems in the removal by acquisition of online companies and startups before they develop into competitors. It fears the practice has become a means of preemptively eliminating competitive restraints.

Importantly, the watchdog has identified Australia’s cautious judiciary as the weakest link in any move to rein in the practice. The ACCC may already have the powers to deploy “ex ante” criteria in its merger assessments, but it believes that such a muscular approach could unravel in court.

The technology companies know this too. They’re dismissive of the ACCC’s first two recommendations that deal with mergers and fear that predictive considerations would simply lead the regulator to pick winners and make wild, uninformed guesses about what the future landscape may look like.

“In general, competition laws work OK,” Woodbridge said. “It’s more about whether the courts would have the appetite to interfere with a merger … It’s an open question.”

Regulatory timidity

The first recommendation of the ACCC’s preliminary report into the operation of digital platforms calls for competition laws to include a reference to potential competitors, as well as the need to define the competition regulator’s role in assessing the impact of data on the proposed deal.

In the detail of the interim report, the ACCC appears to acknowledge that the demand for legislative changes is a piece of regulatory theatre, designed to woo skeptical judges who may be reluctant to embrace considerations about the future competitive implications of a deal.

“The ACCC notes that it is currently not prevented from taking [the removal of a potential competitor] into account in reaching a view as to whether a merger or acquisition is likely to substantially lessen competition,” the interim report says.

The draft document goes on to say that the recommendation is “intended to signal the significance of these factors in relevant cases and remove any ambiguity as to their relevance.” In particular, the changes would signal “the importance of these factors to the courts.”

At least one observer speaking at this week’s Melbourne conference saw the wording of this proposal as an act of cowardice. If the ACCC already has the power to assess technology-company mergers pre-emptively, why wouldn’t this already be happening?

Stephen King, a senior official with Australia’s top economic advisory agency, the Productivity Commission, said there were plenty of examples in Australian history of regulators moving pre-emptively to avoid future competitive shortcomings and there was no reason why the ACCC shouldn’t be doing this.

“Maybe the ACCC should be saying ‘hang on, we don’t need to accept the current jurisprudence,’ ” King told the panel. “Maybe we can push these matters before the courts; we can take the appeals and try to get that precedent changed in Australia.”

“We don’t need new antitrust laws, we don’t need new competition laws. Maybe what we need is regulators more willing to take on actionable abuse,” King added.

As an example of the ACCC’s timidity, King pointed to the European Commission’s legal pursuit of Google over the conduct of its AdSense shopping advertising business, which saw the EU watchdog impose a fine of 1.49 billion euros ($1.67 billion today) on the Silicon Valley giant six weeks ago.

If Google had violated European laws with a service that it also offered in Australia, then it’s likely to have violated Australian competition law as well, King said. “Why aren’t we seeing the same kind of case in Australia?” he asked.

Those comments prompted a response from the joint general manager of the ACCC’s digital inquiry, Morag Bond, who pointed out that the extended timeframe of the Google investigation just wasn’t an option for the ACCC.

“We’re not talking about fundamentally rewriting the misuse of market power law or the abuse of dominance law, or introducing something separate,” Bond said. “What we are talking about is more proactive enforcement.”

“We recognize that there are very complex cases, and Google Shopping took nine years,” she said. “The chances of the ACCC being able to bring a case like that … I just think nine years is an unrealistic timeframe to get resolution.”

‘Informed bets’

The ACCC’s interim report has also attracted the attention of regulators in other jurisdictions, many of whom are also grappling with notions of “ex ante” regulation, with particular reference to the assessment of acquisitions involving large technology companies.

Philip Marsden, deputy chair of the Bank of England’s Enforcement Decision-Making Committee, said both the ACCC’s interim digital-platforms report and the UK’s Furman report on unlocking digital competition identified the need to look forward when assessing technology deals.

Marsden, who was one of the co-authors of the UK report with US economist Jason Furman, told MLex that most regulators around the world acknowledged the need for solid information and research before launching into “ex ante” assessments, and many authorities were struggling with how far into the future they could look.

But that didn’t mean regulators would be put in the position of picking industry winners, as the technology companies had suggested. It merely suggested that regulators needed to take a “more dynamic picture” of the market and to look more closely at potential competition.

Howard Shelanski, a partner with US law firm Davis Polk, told the conference that the reluctance of American competition regulators to embrace any kind of forward-looking regulatory norms amounted to a “systematic bias towards under-enforcement in US merger law and US anti-monopoly law.”

However, Shelanski suggested that the regulatory bias may be coming to an end, with an increased recognition that “we have the tools and knowledge and techniques whereby we can actually make informed decisions about the future.”

“Let’s make informed bets, informed not just by the evidence of what might happen in those markets but informed about the risk involved and see how that works out for us," he said. 

Geoffrey Manne, from the International Center for Law and Economics, a US free-market think tank, said that any push towards “ex ante” decision making would be regrettable because, in legal terms, it suffered from an “evidentiary problem.”

Referring to Facebook’s 2012 acquisition of Instagram, which is often held up as an example of regulators’ inability to prevent mergers that may lead to subsequent competition concerns, Manne said that to say that the deal could have been stopped pre-emptively was “really problematic.”

“That is basically saying: ‘ex ante evidence that we admit is not enough to get us to the outcome that we think we should have means we should rejig the regime so that we get to the outcome that we want to have,' ” he said. “It strikes me as recipe for false positives.