The right tools for the job? The merger control proposals in the ACCC’s Digital Platform Inquiry Preliminary Report

The ACCC’s Digital Platforms Inquiry Preliminary Report proposes a number of important reforms to Australian merger control law and practice, to ensure close scrutiny of acquisitions by large digital platforms. However, the ACCC has not made the case that its current toolkit is inadequate for that purpose. If implemented, its merger control proposals are likely to be redundant.

Background

The ACCC’s focus is on curtailing the inorganic growth of multinational digital platforms. It already considers Facebook and Google to have market power in their core markets, and is seeking to prevent them from acquiring emerging competitive threats and extending their dominance into adjacent markets.

Like many global regulators, the ACCC has expressed second thoughts about recent acquisitions by multinational digital platforms. It is aware of the challenges in reviewing mergers in fast-moving digital markets, and wants to ensure that it has the right tools to review and remedy potential issues.

In December 2017, the Government directed the ACCC to undertake a public inquiry into the impact of multinational digital platforms. The ACCC delivered a Preliminary Report on 10 December 2018 (Preliminary Report) and a final report is due by 3 June 2019.

The Preliminary Report’s findings included that Google has market power in online search and search advertising, and Facebook in social media and display advertising.

For the ACCC, multinational digital platforms – while positive – are unavoidable, dominant gateways. They have both the ability and incentive to favour their own businesses over third party suppliers. In a recent press release, ACCC Chair Rod Sims said that: 'the strong market position of digital platforms like Google and Facebook justifies a greater level of regulatory oversight….'.

In that context, as Mr Sims said in a recent speech, the ACCC’s proposed merger control amendments are driven by a concern about the difficulties of: “assessing what may be a small possibility of a large reduction in competition and [considering] future development paths of digital markets, for which there are unlikely to be precedent or historical data”.

The Preliminary Report cites the Facebook/Instagram transaction (2014) as one where the competitive impact of Instagram, which had no revenue and 13 employees at that time, was difficult to establish.

The ACCC is aligned with other regulators in this regard. Other agencies also appear to be eyeing the way in which large players can distort market outcomes through M&A practices. In her opening remarks to a recent conference, EU Competition Commissioner Margrethe Vestager noted that her agency has repeatedly heard that large companies are 'blocking paths' to innovation and promising ideas are 'disappearing', because large market players are acquiring their creators in order to 'kill them'.

The merger control proposals

Of the ACCC’s 11 preliminary recommendations and eight areas for further analysis, two are directed to the merger control provisions of the Competition and Consumer Act 2010 (Cth) (CCA). The ACCC recommends in the Preliminary Report that those provisions be amended to include two new mandatory factors to be considered in evaluating whether an acquisition substantially lessens competition:

• whether an acquisition would remove a potential competitor; and
• the amount of data to which an acquirer would have access.

The ACCC also proposes asking large digital platforms to undertake to notify acquisitions of business activities in Australia and to provide sufficient time for an ACCC review. This proposal is discussed further below.

Potential competition and access to data

As the ACCC itself notes in the Preliminary Report, it is currently not prevented from looking at potential competition or access to data and it will continue to consider those factors even without a legislative amendment. So it is unclear why any legislative amendment is required to 'signal the significance of these factors in relevant cases and remove any ambiguity as to their relevance' (page 63).

Indeed, it will be seen that the ACCC can – and does routinely– look at potential competition and data access.

• The CCA does not limit the factors which the ACCC may take into account in determining whether the acquisition would have the effect, or be likely to have the effect, of substantially lessening competition.
• Several of the existing mandatory factors for consideration in the CCA (sections 50(3)(c), (e), (g), (h) and (i)) are directly relevant to assessing potential competition or access to data:
  • the level of concentration;
  • the market’s dynamic characteristics, (eg growth, innovation, product differentiation);
  • the removal of a vigorous and effective competitor; and
  • the nature and extent of vertical integration.
• The ACCC’s general Merger Guidelines already state (at [1.13]) that the ACCC will assess potential competition. And the ACCC says it will look at 'expected' competition for example in media markets, where parties do not presently constrain one another, but would be likely to in the foreseeable future (Merger Guidelines, at [3.20]).
• The ACCC regularly considers the long-term effects of mergers. For example, in media markets it will take into account the changing nature of technology and the competitive impacts of technology, if there is evidence that changes will occur. In pharma cases, the ACCC will analyse products in early-stage clinical development. In one oncology matter, it looked at two molecular targeted therapies in the early testing stages, where oncology products have a less than 5% chance of securing regulatory approval (see eg Novartis AG/GlaxoSmithKline plc (2015)).

These recent examples also demonstrate the ACCC’s existing approach:

• In a 2018 review of the acquisition of a Sydney toll road project by a consortium led by Transurban, the ACCC examined four sources of Transurban’s incumbency advantages:
  • exclusive access to data from existing NSW toll roads;
  • traffic modelling capability and expertise, due to ownership of existing NSW and other toll roads;
  • lower costs of finance based on the perception of financiers (debt providers and equity partners) that Transurban has significant exclusive data and superior traffic modelling capability; and
  • its strong position to negotiate unsolicited proposals with the NSW Government.

These meant that rivals could not compete on an equal footing. The ACCC cleared the deal in question only after Transurban offered a data access undertaking to publish very detailed traffic data.

• In its protracted 2017 review of the Tabcorp/Tatts merger, one ACCC focus was the extent to which Tatts was a legitimate potential competitor for racing media rights, even though Tatts had not sought to obtain racing media rights directly from any rights holder previously. The ACCC lost on this point before the Australian Competition Tribunal, which found that the evidence showed the theory was 'pure speculation'.

Ultimately, the test is and will remain whether the merger is likely to substantially lessen competition, and the ACCC’s success in any given case will depend on the strength of the evidence. If the potential competition or risks around the use of data are no more than speculative, then – with or without a legislative amendment – the ACCC will be unlikely to oppose, due to the risk of losing in court.

Previous legislative experience

Previous 'reactive' and industry-specific legislative amendments have been found to be confusing, redundant or difficult to apply. A 2012 amendment to the CCA prohibited certain price signalling conduct in the banking sector, and was proposed because of apparently 'strong evidence' that banks were signalling pricing intentions to undermine competition.

Also, a new predatory pricing-specific prohibition was introduced in 2007 in response to a concern that the CCA’s market power provisions did not adequately cover predatory pricing.

In 2015 a competition policy review panel concluded in its final report that both provisions were unfit for purpose and should be repealed. Neither was ever litigated.

Where the Preliminary Report’s proposals add little to the ACCC’s enforcement toolbox, on balance any increased risk of redundancy, confusion or misapplication recommends against their adoption.

Undertakings to notify

In addition to legislative change, the ACCC proposes requesting prior notification of proposed acquisitions by large digital platforms and a 'longer' period for ACCC review – although the Preliminary Report does not suggest a length for these extended review periods.

Australia has a voluntary merger control system, but the ACCC sometimes requests such a commitment where highly acquisitory large companies have made a large number of transactions.

A requirement to notify would not strongly support the ACCC’s practice. Large digital platforms’ transactions are sufficiently public, and the ACCC can use its practical and CCA powers to investigate and enforce as appropriate.

The ACCC regularly sends detailed information requests to parties where it finds out about proposed or completed acquisitions that could substantially lessen competition. It also regularly opens merger reviews ex officio. As an example, in 2016, the ACCC launched an extensive investigation into Primary Health’s completed acquisition of certain Healthscope pathology assets. To resolve substantial competition concerns, Primary Health undertook to divest a large proportion of the pathology assets that it had acquired, largely reversing the acquisition.

Our thoughts

We would recommend that the ACCC continue its current merger control practice, under the recently amended CCA.

The ACCC already has the right tools – and 'if it ain’t broke, why fix it?'.