Opinionista Ivo Vegter 5 March 2013

Anti-competitive competition law

The Competition Commission has its sights set on a new sector. Media. And while I may seem biased, I’m no fan of the companies I’m about to defend against government intervention.

The Competition Commission has turned its guns on the media sector, over “growing allegations of monopolistic behaviour among the four major publishers”, according to a recent Daily Maverick piece by Chris Vick, a spin doctor who revels in his repute.

How four competitors in a mature market free from exclusionary government protection are capable of “monopolistic behaviour” is assumed to be obvious to the powers that be. For one, the government probably feels that it could harm publications that publish views more attuned to its own political objectives, instead of exercising the more celebrated role of a free press: protecting citizens from abuse of power by their elected government.

The fact is, however, that most of the examples are just cases of hyper-competitive aggression towards would-be upstarts.

In brief, the argument is this: in a market that is not protected by government licensing or price controls, even the most aggressive behaviour against start-ups is generally perfectly legitimate. When market power is freely earned, its use against upstarts is logical, expected and defensible. Moreover, that mature companies consolidate into a few large players is a perfectly natural development of the market. That they get together to cooperate on matters of mutual interest, is neither surprising, nor preventable even if you wanted to. That some of those matters are detrimental to customers (such as price fixing or turf division) while others are beneficial (such as interoperability standards), is neither here nor there.

Small players, which are the ostensible beneficiaries of government’s competition law muscle, are not in themselves worth defending. They are only useful to consumers if they offer something incumbents do not or cannot offer, and exploit the complacency of their larger rivals. Think of it from a consumer’s point of view: how is low pricing, designed to drive competitors to the wall, bad for consumers? What prevents a new entrant from responding if such a competitor proceeds to capitalise on its victory by raising prices later? And what, in the interim, prevents the market from seeing through the obvious strategy and dismissing the artificially cheap goods as below standard, even if that means the smaller rival will have fewer, more discerning customers?

Unless there are extraneous barriers to entry, imposed not by the scale and reach of incumbents, but by government decree, making the case for anti-competitive behaviour is hard, in principle. I wish our law would differentiate between government-protected monopolies and cartels (such as telecommunications, broadcasting, and casinos for example) and so-called cartels that earned their market power by being better at their business than their competitors.

The irony is that licenced cartels are deliberately established by government, which then proceeds to whine about the power of free companies in free market segments. This undermines government’s credibility to pronounce on competition matters.

A “competition commission” should focus on abuse by protected monopolies and cartels. In markets where dominant incumbents are unprotected, the authorities have very little, if any, constructive role to play. Even if incumbent behaviour is exploitative, collusive and contrary to the interest of customers, intervention seldom works any better than public exposure, informed consumer choices, and aggressive competition by start-ups.

The bread price-fixing scandal was a case in point. It would make sense to find a small bakery whining to a sympathetic Competition Commission that its competitors charge too little. It wouldn’t have a valid case unless those incumbents also had unfair protections that kept it from competing, such as industry-wide price floors or exclusive licences, but it would be understandably unhappy. It is hard to compete with someone who is able to undercut your retail pricing and thereby serve customers better than you can.

But what happened here is that a small competitor complained that its bigger rivals “colluded” to charge too much! This is patently absurd. If a so-called “cartel” rips off consumers by fixing prices higher than competition would have driven them, it stands to reason that the solution is to compete, not to decree lower prices. Start a company that makes cheap bread, and blow the incumbents out of the water.

That’s the history of successful market innovation and competition. It is dramatically visible in the technology sector, because it moves so much more quickly than more sedentary manufacturing and agricultural industries. IBM was unceremoniously dethroned after decades of dominance by upstarts like Dell and Microsoft, who were in turn unseated by a smelly hippy with an attitude problem who picked apples on weekends and took down Nokia and Sony while he was at it. (RIP, Steve Jobs, who took Apple from a garage start-up, literally, to the most valuable company in the world in just 30 years.)

The companies that, instead of competing, whined to competition authorities about awful practices like offering customers extra software and services at no charge – imagine! a computer that comes with a rudimentary browser pre-installed! the horror! – were losers like Digital Equipment Corporation, Word Perfect and Novell. Clearly, competition law helped them… oh, no wait, it didn’t. They died despite getting the government to declare war on their smarter, faster, and more successful rivals, because they were unable to convince customers that their products were worth the extra cash.

Ironically, the anti-trust case against IBM led to the demise of something computer users are desperately trying to claw back today: free software. Yep. The government’s protracted and damaging action against IBM succeeded only in raising consumer prices for software from zero in 1969, in order to create a market in which software makers who didn’t sell hardware could compete “fairly”. That objective achieved, the government promptly turned to the first company that fully took advantage of the newly levelled playing field: Microsoft.

That’s consumer protection and competition law in action, right there.

Demonstrating the confusion in the local bread case, once the Competition Commission had made its settlement with big bakeries, it urged retailers to “pass on” the savings, instead of setting prices at market-clearing levels that balance supply and demand, as an efficient, competitive market would have done. It compounded this by adding that “the agricultural value-chain was being targeted as a key driver of new job creation.”

Of course. A value chain that makes less money is going to create more jobs, in the War is Peace, Freedom is Slavery, and Ignorance is Strength world of interventionist doublethink.

After 1994, South Africa’s new government made wise and welcome moves to abolish state-controlled “marketing boards”, remove price controls, privatise state-owned industries, reduce tariffs, and open up the market. By no means are we worse off than under the cronyist state control of Apartheid. However, despite this progress, we still suffer a grave legacy. State-owned companies persist, protected cartels remain, and other anti-competitive measures continue to hobble our markets.

The Competition Commission would do us a great service if it tackled the likes of Eskom, the regulated fuel price and Sasol’s free ride, anti-competitive import tariffs on clothing, and a policy of making luxury German cars for rich German customers but subsidised by poor South African motorists.

Competition law could help South Africa take advantage of the modern data-driven information society by addressing the legacy of a telecommunications industry which, protected for decades by licences and tariffs, keeps calling itself “world class” while overcharging customers for sluggish data services.

That intervention alone will go a long way giving the “big four” media houses their come-uppance. Google’s advertising revenue alone now exceeds that of all US print publications. The UK was the first major market where online advertising overtook even television, and worldwide, online advertising revenue will exceed newspaper spend this year, and surpass all print spend by 2015, with only television to catch. Even in South Africa, Internet ad spend comprised 20% of all spending in 2011, compared to 25% on newspapers and magazines and 26% on television. Online will overtake television to reach 31% by 2016, according to a recent PwC report, almost entirely at the expense of print advertising.

So in the title of Chris Vick’s piece, “Freedom of the press belongs to those who own one,” lies a deep irony. Who in their right mind would want a printing press, in this day and age? Was Sergey Brin, co-founder of Google, seen at the Oscars pointedly reading a yellowed newspaper?

Besides, what does commercial dominance of one sector have to do with freedom of anything, including “the press”? Competitors, provided that they have a good idea of where dominant incumbents are failing, are free to target their Achilles heels. Consumers have a choice, and increasing numbers today prefer community free-sheets, radio, television or the Internet. Likewise, advertisers have the choice not to do business with “big four” of print if they feel those publishers are guilty of market-rigging and price-gouging. Advertisers, for their part, are perfectly free to follow their target market, which figured out the inadequacies of the “big four” long before they did, and long before the government got all huffy about supposed anti-competitive behaviour.

It would be nice if our competition law could distinguish between anti-competitive practices and competition itself. The former is the behaviour of protected cartels. The latter includes aggressive rearguard action by large incumbents hoping to save their businesses in a fast-moving, dog-eat-dog market.

Being “anti-competitive” is the objective of companies operating in a free market. All that so-called competition law can do in such a market sector is to drag down the successful, and support the unsuccessful. It does not establish a level playing field so much as ensure the survival of equally mediocre teams. DM

Disclosure: Other than writing the occasional freelance article, I have never worked for or had any other interest in any of the “big four” media houses facing competition investigations. That means I have no motive to defend them, and every reason to cheer government intervention designed to reduce their power and benefit start-up competitors like the Daily Maverick. I just don’t think government intervention and competition law is all it’s cracked up to be.


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