Lessons for Australia in New Zealand’s regulatory backlash against Fairfax media deal

5 November 2018 4:01pm

31 October 2018. By James Panichi.

When New Zealand’s competition regulator put the kibosh on the merger plans of Fairfax and NZME, the rival publishing companies were incensed. They argued that when competition officials started freestyling on readers’ rights to quality news outside of a paywall, it was time to call in the lawyers.

It would prove to be a very bad move. A year after the publishers launched court action against the Commerce Commission over its decision to block the merger, they’ve had to throw in the towel. The central plank of their argument — that watchdogs should stick to purely economic considerations — has collapsed.

The court action has been a train wreck for Fairfax and NZME. Last month’s Court of Appeal’s judgment followed a very similar one by the mid-tier High Court late last year, supporting the Commerce Commission’s right to take into account non-economic factors such as media plurality.

But the courts' pushback went further. Quoting British economist and philosopher John Stuart Mill, the Court of Appeal judges said a diversity of views in the media was intrinsically valuable and that the community benefited from the “marketplace of ideas.”

Media diversity would be compromised if the NZ55 million ($36 million today) deal had been allowed to proceed, the judges said. Quality detriments would have been “likely and substantial.”

Other than a minor quibble over whether the merger could prompt political interference, the two courts were on the same page and uncompromising in their support for the Commerce Commission's decision. 

But should we care? After all, the merger is now dead and buried, with both NZME and Fairfax New Zealand (recently renamed “Stuff”) now reconciled with their roles as competitors. And, of course, New Zealand's regulatory regime is peripheral, at best. 

The answer is yes — we should care. The New Zealand court judgment matters because Fairfax — Fairfax New Zealand’s Australian parent — is facing a do-or-die regulatory battle on the other side of the Tasman Sea. Its recent regulatory vicissitudes remain pertinent.

In July, Fairfax and Nine Entertainment — the owner of the commercial Nine TV network — announced a plan to merge, taking advantage of Australia’s new media ownership laws. A statement by the companies’ managers suggested that obtaining regulatory clearance for the deal would be a doddle.

Why the cockiness? Because, the managers explained, the two companies weren’t competitors. Nine’s main game was TV content; Fairfax’s Australian operations were all about newspapers (the Sydney Morning Herald, Melbourne’s The Age and the national Australian Financial Review) and radio networks.

The comments were incautious — particularly in the light of Fairfax’s legal travails in New Zealand. It's true that the nature of the deal is different and that New Zealand’s regulatory environment may be idiosyncratic, yet the Commerce Commission’s take on media ownership can’t be dismissed.

Right to quality news

On one point, last month’s judgment of the New Zealand Court of Appeal is crystal clear: The Commerce Commission had every right to consider the “public good” in deciding whether to authorize what all parties conceded was a deal that would have led to anticompetitive outcomes.

The authorization process in New Zealand allows anticompetitive mergers to occur if the benefit to the community outweighs the detriments. The commission put the loss of media diversity and the possibility of staffing cuts in newsrooms firmly on the detriment side of the ledger.

The other take-home of the New Zealand legal ordeal is that the commission was justified in taking a narrow view of what constituted the market in which the companies’ flagship papers — NZME’s New Zealand Herald and Fairfax’s Dominion Post and The Press — were competing.

The publishers had argued that online platforms such as Google and Facebook, as well as foreign media and free online offerings, had created a broad and vibrant market. But the judges weren’t buying it: they couldn’t get past the fact that the merged company would control 90 percent of New Zealand’s daily papers.

The judgment also tells us that the publishers’ dire warnings that the hemorrhaging of advertising to online platforms would end publishing as we know it held little sway. As for the argument that slashing newsroom staffing levels could be done without affecting news quality and diversity — again, the judges weren’t falling for it.

“We think the reductions would likely exceed those estimated by the appellants in the argument before us, with a correspondingly substantial effect on quality,” the judgment concluded.

“It is difficult to gauge, but we think that staff reductions … would cause quality effects of a substantial magnitude… It follows that in our opinion the transaction would be very likely to result in quality reductions and these would likely be of a substantial nature.”

If competition assessments are about deciding how a deal might alter both the price and the quality of widgets produced by the merging parties, news was the widget that the Commerce Commission and the courts were focused on. Would the price of news go up (via a paywall)? Would the quality of news decline?

Australian connection

The merger between Fairfax and Nine was announced in July to the Australian Securities Exchange, on which both companies are listed. The deal is being reviewed by the Australian Competition & Consumer Commission, with a decision expected next week.

As had been the case ahead of the Fairfax-NZME review in New Zealand, all statements from the companies are predicated on the assumption that regulators will stick to narrow notions of competitive overlap and market share. The deal’s impact on news quality hasn’t been mentioned once.

That’s quite an assumption. Speaking to MLex in August, ACCC Chairman Rod Sims was adamant that his review of the deal would look at “more than price” and that “service standards” would also factor into his considerations. Sims has repeated such comments since then.

Could such considerations include the impact of newsroom personnel cuts on the quality of news produced by a merged Fairfax-Nine operation? The Australian managers don’t appear to be entertaining that thought. But in the light of Fairfax’s regulatory woes in New Zealand, the question should at least be raised. 

As for the argument that, without the merger, ailing media companies might struggle to survive — again, there are no assurances that the ACCC will take that into account, even if Australia’s new media ownership laws appear designed to allow media companies to bulk up. 

In an unrelated matter, this month the Australian regulator claimed a tactical win in its fight against rail transport company Aurizon. The company had claimed that unless the ACCC cleared a proposed merger, it would be forced to close down part of its operations.

Those claims proved to be untrue — the ACCC held its nerve, obtained a court injunction to keep the business operating, and another buyer was found. That led Sims to conclude that the watchdog must “always question claims that businesses will be shut if we don’t approve a merger.”

The recent New Zealand court decision also draws a clear line to Australian legal precedents — something that may become relevant, should an ACCC decision on the Fairfax-Nine merger ever be challenged in an Australian court.

According to the New Zealand Court of Appeal, the “Australian approach to [defining] public benefit was applicable in New Zealand.” The court also pointed to the Australian legal precedent of a “total welfare approach” in allowing the Commerce Commission to take a broad view on how the deal would affect public welfare.

None of these may prove to be insurmountable obstacles in the Australian case; not all of the Commerce Commission’s considerations may find a home in Australian competition law. Yet if New Zealand’s regulators are prepared to weigh up the value of media diversity, the ACCC may be willing to do the same.

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