In 2020, the South African Competition Commission made clear its intention to increase its focus on the digital economy in South Africa. In its paper Competition in the Digital Economy, the Commission appeared to effectively provide a blueprint for its approach to tackling competition issues in this sector.
The paper outlines the actions that the Commission proposes to take, which are broadly related to two overarching areas of competition law. This article provides a brief overview of some of the important aspects relating to merger control and the more general aspects of market conduct covered in the paper.
From a merger control perspective, the Commission has already increased its enforcement actions in relation to digital mergers. One recent example of this is Naspers' proposed acquisition of We Buy Cars, which was prohibited by the Commission largely on the basis that, in the Commission's view, the transaction would have given Naspers the ability to leverage off the various datasets harnessed by the Naspers Group and it would have given We Buy Cars "an unassailable competitive advantage over its rivals".
In addition, some statistics that have been published by the Commission note that between 2011 and 2018, the Commission investigated approximately 87 digital market mergers, all of which were approved and only five of which were subject to conditions (these were all public-interest conditions and not competition-related conditions.
Therefore, there is a general sense of underenforcement on the Commission's side in relation to the sector. One of the factors that may contribute to this is the current tools employed by competition authorities when reviewing mergers. Traditional merger review theories may no longer be sufficient to interrogate the types of competition issues that arise in digital mergers. For example, tools such as assessing market shares, pricing practices and vertical foreclosures may not be the best measure of potential competition issues in the context of a transaction where:
- significant data is being collated;
- there are datasets to which parties have access; and
- innovation and being a first mover provides an advantage.
Therefore, different tools will likely need to be adopted in order to identify the potential of competition issues in the context of digital mergers, in addition to the traditional tools employed by competition authorities.
Another problem is that many transactions in the sector often escape the scrutiny of competition authorities, which is generally due to the size of the target company. These transactions often involve the acquisition of start-ups, which have very low asset values or turnover at the time of acquisition (ie, small mergers).
One of best examples of this is Facebook's acquisition of WhatsApp in 2015, which was not notifiable to the South African competition authorities on the basis that, at the time, WhatsApp did not generate any revenue in South Africa. WhatsApp has since become a key platform for consumers and businesses.
The Commission has proposed a number of enforcement actions to try and remedy some of these concerns. One proposed action is the notification of mergers that do not meet the financial thresholds, in certain circumstances. The Commission has already published draft guidelines for public comment, dealing with the instances where it may require the notification of small digital mergers. A recent example of such a transaction was the Commission's call for the notification of Google's acquisition of Fitbit. The transaction did not trigger mandatory notification. The Commission ultimately approved the transaction, but not without imposing a set of conditions aimed at addressing competition concerns relating to foreclosure and access to data. The Commission has also proposed to potentially revise the financial thresholds and issue guidelines on how data and intellectual property relating to digital mergers should be properly accounted for when assessing the financial thresholds.
Another method proposed by the Commission is to elevate digital mergers to phase two and phase three in terms of the Commission's internal merger classification guidelines. This means that digital mergers could be considered complex investigations from the outset, which will have an impact on lead times and the scope of the investigation. This will likely result in the Commission requesting a lot more information and documentation from parties relating to business strategies, innovation and specific market features in the context of digital mergers.
From a transactional perspective, parties may be required to do more work upfront to consider potential theories of harm in relation to digital mergers, particularly in transactions where there is a possibility of the Commission imposing stringent conditions. This may impact the parties' motivation and willingness to conclude deals.
From a market conduct perspective, two market inquiries have already been carried out in the digital sector. The first was the data services market inquiry, which dealt with the high price of data in South Africa. This is of course particularly relevant as it dealt with issues relating to the infrastructure of digital markets.
The second inquiry is still ongoing and relates to online intermediation platforms. The inquiry's focus is on digital platforms that intermediate or facilitate transactions between businesses and consumers. It is looking at platforms such as online classifieds, app stores and food services, and whether there are features of those markets that may be hindering competition. Potential features identified by the inquiry include:
- network effects;
- first-mover advantages;
- data access issues; and
- participation in the sector by historically disadvantaged firms or small to medium enterprises (which is a key focus for the competition authorities).
The Commission considers market inquiries as an effective tool to promote competition in markets where common practices may be hindering competition.Therefore, more market inquiries are expected to be initiated in future. However, the Commission has also said it will initiate separate investigations into dominant online platforms, a trend that has been observed in the European Union, the United Kingdom, the United States and other developed competition law jurisdictions.
There is an ongoing trend of competition authorities in Australia, the European Union, India and the United Kingdom taking serious enforcement action against dominant firms in the digital sector. The Commission is likely to be observing this trend to inform its own actions.
Competition enforcement in the sector is also gaining momentum across the rest of the Africa. In March 2022, the competition authorities in Egypt, Kenya, Mauritius, Nigeria and South Africa held a dialogue on competition in the digital economy and agreed on areas of collaboration in tackling competition concerns in the sector. This includes, for example, joint research, know-how sharing and cooperating on global and regional transactions.
It is clear that the digital economy is a priority for competition authorities. While increased competition enforcement may be necessary in these complex markets, a balance must be struck to avoid stringent enforcement actions potentially stifling innovation and growth, which in the long run is beneficial to competition.
This article was originally edited by, and first published on, www.lexology.com/commentary.