COMPETITION LAW IN HIGH TECHNOLOGY INDUSTRIESINSIGHTS FOR AUSTRALIA
Dr Martyn Taylor
Partner, Norton Rose Fulbright
1. Unique competition issues raised by high technology industries
2. Global trends and developments – particularly in the US and EU
3. Insights for Australia in the 21st century – competition law and policy
OVERVIEW
“..the same process of industrial mutation…that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one… it must be seen in its role in the perennial gale of creative destruction…”
Joseph Schumpeter, 1947
UNIQUE COMPETITION ISSUES RAISED BY HIGH TECHNOLOGY INDUSTRIES
Market characteristic Regulatory implication
• High rate of innovation • Greater dynamic effects
• High level of R&D • Competition through innovation
• High sunk costs • Imperfect competition
• Intellectual property intensive • Appropriation of economic profits
• Imperfect competition • More concentrated markets
• M&A, JVs and strategic alliances • High risk of co-ordination
COMMON FEATURES OF HIGH TECHNOLOGY INDUSTRIES
DIGITAL DISRUPTION ARISES FROM A CONFLUENCE OF
ENABLING TECHNOLOGIES
BroadbandHigh-speed
Internet access
ADVANCED DEVICES AND COMMUNICATIONS
SmartphonesAffordable
pocket supercomput
er
Digitalisation
Digital encoding
algorithms
SOPHISTICATED OPERATING SOFTWARE
iOS / AndroidOperating
system software
E-commerceTransactions via digital platforms
SIMPLE AND USER-FRIENDLY INTERFACE
AppsUser-friendly application software
SOFTWARE EATS THE WORLD THE PRACTICAL IMPACT OF
DIGITAL DISRUPTION
7
"Now we stand facing a new industrial revolution: a digital one. With cloud computing its new engine, big data its new fuel. Transporting the amazing innovations of the internet, and the internet of things. Running on broadband rails: fast, reliable, pervasive “
“Take all the information of humanity from the dawn of civilisation until 2003 - nowadays that is produced in just two days.”
“That is the magic to find value amid the mass of data. The right infrastructure, the right networks, the right computing capacity and, last but not least, the right analysis methods and algorithms help us break through the mountains of rock to find the gold within.”
THE DIGITAL INDUSTRIAL REVOLUTION
A CLOUD COMPUTING ENGINE, BIG DATA THE NEW FUEL
Characteristic Implication
Disruption Political concern
Extant regulation Barriers to entry
Rent-seekingRegulatory overreach
Bundling and leveraging
Misuse of market power
Access bottlenecks Discrimination
Multi-sided markets Cross-subsidisation
DisintermediationNew business models
Characteristic Implication
Network effects‘Winner takes all’ tipping
GlobalisationNew market definitions
Platform competition
Exclusivity / foreclosure
High switching costsHigh barriers to entry
Path dependencyFirst mover advantages
Interoperability Strategic behaviour
SynergiesProductive efficiencies
UNIQUE COMPETITION ISSUES ARISING FROM DIGITAL
DISRUPTION AND ‘BIG DATA’
GLOBAL TRENDS AND DEVELOPMENTS – PARTICULARLY IN THE US AND EU
UNITED STATESAPPLYING A GREATER WEIGHTING TO
DYNAMIC ANALYSIS IN ANTITRUST
"The kind of competition embedded in standard microeconomic analysis may not be the kind of competition that really matters if enhancing economic welfare is the goal of antitrust. Rather, it is dynamic competition propelled by the introduction of new products and new processes that really counts.”
“If the antitrust laws were more concerned with promoting dynamic rather than static competition, which we believe they should, we expect that they would look somewhat different from the laws we have today.”
UNITED STATESCONCERNS REGARDING THE PRACTICAL
APPLICATION OF DYNAMIC ANALYSIS
"The simple fact is that economics does not yet provide a useful understanding of the relationships among market structure, competition, and innovation.”
“Without such an understanding, let alone empirical support, dynamic analysis in antitrust law remains in a gestational state, driven largely by intuition and the unique stories told by the proponents and opponents of each merger or business practice that comes under scrutiny.”
UNITED STATESANALYSING MERGERS IN
INNOVATION MARKETS
• A merger may diminish “innovation competition” by encouraging the merged firm to curtail its innovative efforts
Curtailment of innovation
competition
• A merger may diminish “innovation competition” by combining the firms with the strongest capability to innovate in a specific direction.
Removal of strongest innovators
• A merger may remove the potential for a successful innovation where one firm takes sales from another.
Removal of inter-firm innovation
competition
• Post-merger incentives for future innovation may be lower than those in the absence of the merger.
Overall effect on innovation
EUROPEAN UNIONTACKLING (ALLEGED) MISUSE OF
MARKET POWER IN INTERNET MARKETS
• On 27 November 2014, the European Parliament passed a resolution calling for tougher regulation of Internet search.
• In March 2015, The Wall Street Journal published an internal FTC staff paper that concluded: “Google’s conduct has resulted – and will result – in real harm to consumers and to innovation in the online search and advertising markets”.
• On 15 April 2015, the European Commission issued a Statement of Objections to Google containing a number of allegations.
• A number of regulatory investigations into Google are continuing.
EUROPEAN UNIONIMPLEMENTING THE DIGITAL
AGENDA
INSIGHTS FOR AUSTRALIA IN THE 21ST CENTURY – COMPETITION LAW & POLICY
“Some economists contend that
innovative efficiency provides the greatest enhancement of social welfare, suggesting it
is the single most important factor in the growth of real output
in industrial countries.”
“A corporation gaining an advantage through R&D and innovation, or
as a result of economies of scale,
would not be regarded by the ACCC, or the
courts, as a substantial lessening of
competition, even if the conduct caused competitors harm or
forced them to exit the market.”
“On the basis of many studies and long
experience, economists have concluded that the main virtue of
competition is that it provides a very
powerful means of securing important
gains in allocative and especially dynamic
efficiency.”
AUSTRALIAN COMPETITION LAW
TREATMENT OF DYNAMIC EFFICIENCY AND INNOVATION
Fortescue Metals Group Limited [2010] ACompT 2 (30 June 2010)
Pilbara Infrastructure Pty Ltd v Australian Competition Tribunal [2012] HCA 36 (14 September 2012)…
…quoting from Re Duke Eastern Gas Pipeline Pty Ltd [2001] ACompT 2; (2001) 162 FLR 1.
ACCC Chairman Rod Sims, Law Council of Australia Competition & Consumer Committee AGM, 12 September 2014.
AUSTRALIAN COMPETITION LAWDYNAMIC EFFICIENCY AND
INNOVATION IN MERGER ANALYSIS
1. Implicitly, when applying a temporal concept to market definition.
2. Implicitly and explicitly, when applying a future counterfactual analysis.
3. Implicitly, in the concept of a ‘maverick’ competitor.
4. Explicitly, as a merger factor in section 50(3)(g) of the CCA.
5. Implicitly, to the limited extent that efficiencies are recognised in a merger.
6. Implicitly and explicitly, as a factor in any merger authorisation decision
AUSTRALIAN COMPETITION LAWGLOBALISATION OF MARKETS –
IMPACT ON MARKET DEFINITION
Mode 1 – Service delivered into an Australian market
Mode 2 – Consumer crosses into a United States domestic market.
AUSTRALIAN COMPETITION LAWTREATMENT OF DIGITAL DISRUPTION AND
BIG DATA BY HARPER COMPETITION REVIEW
“New technologies are ‘digitally disrupting’ the way many markets operate, the way business is done and the way consumers engage with markets.”
“The challenge for policymakers and regulators is to capture the benefits of digital disruption by ensuring that competition policy, laws and institutions do not unduly obstruct its impact yet still preserve expected safeguards for consumers.”
CONCLUSIONS
SUMMARY OF KEY POINTS
High technology markets are as susceptible to
anti-competitive behaviour as any
other markets and, in some
areas, particularly so.
Many unique competition issues
are raised by software-driven digital platforms incuding multi-sided markets,
network effects, path dependency,
and switching costs.
Reservations have been expressed regarding the
manner in which dynamic efficiency
issues are addressed by US
antitrust law.
Significant competition
developments are occurring in the
EU, including action against
Google and realising a Digital
Single Market.
Australian courts and regulators
clearly recognise the importance of
innovation and dynamic efficiency
in Australian competition law.
The ACCC’s analysis to date
has been sophisticated and discerning, alert
to the risk of imperfect
competition.
The ACCC’s Merger Guideline address dynamic
competition implicitly and explicitly in at
least 6 ways, but evidential
limitations still arise.
In the context of globalised markets,
Australian courts are still grappling with a ‘market in
Australia’, but reforms
recommended by Harper may fix
this.
Australian competition law strikes an appropriate balance between preserving competition and promoting innovation. However, continued prioritisation of high technology markets by Australian regulators is justified given the concerns identified in this presentation, particularly given current global trends.
DR MARTYN TAYLORPartner
Norton Rose Fulbright
Ultimately, the vision for the 21st century endorsed by this presentation is one in which Australian competition law continues to embrace the winds of Schumpeterian change…