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

martyn.taylor@nortonrosefulbright.com

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…