State poised to tighten e-market regulations

Competition body recognises that new approaches needed

● The Competition Commission’s first inquiry into the digital marketplace, which began last week, is expected to be the start of extensive intervention in the online economy by the government.

The inquiry was launched the day before trade, industry & competition minister Ebrahim Patel released a policy strategy document that honed in on dominance in digital markets.

Where the Competition Commission referred to online markets and “online intermediation platforms”, the minister emphasised the challenges of “market dominance by platforms, characterised by the network effects and winner-takes-all markets”.

“Network effect” refers to a service becoming exponentially more valuable or dominant as more people start using it.

It is regarded as a euphemism for the dominance of e-commerce in SA by Naspers subsidiary Takealot, and of online advertising by Google and Facebook.

The “Online Retail in South Africa 2021” study, released this month by World Wide Worx, showed that online sales reached R30.2bn last year, with Takealot accounting for about one-third of the market.

Takealot generated R6.26bn from March to September last year, which on an annualised basis would be about R12bn. In 2017, the total online retail market was less than R12bn. This underlines both Takealot’s contribution to online retail growth and its dominance of the market.

Numerous small retailers have become dependent on the Takealot Marketplace Platform, which charges a nominal amount to join, but takes a “success fee” of up to 18% on sales.

Google and Facebook are even more dominant in the online advertising space in SA, where they are believed to account for more than two-thirds of all ad sales.

It came as a surprise, then, when the head of the Competition Commission, Tembinkosi Bonakele, announced last week that social media and search engines would not form part of the inquiry.

“E-hailing services, search and social media, and fintech platforms will not be the focus of the online market inquiry for various reasons,” said Dominique Arteiro, competition law director at Werksmans Attorneys.

“The inquiry marks the commission’s first foray into the digital economy and is likely to identify issues that may be relevant to subsequent market inquiries into different aspects of the digital economy.”

The search and social platforms may be off the hook for now, but any successes the commission achieves in limiting the dominance of major players will embolden it to draw the global giants into its inquiry. As it is, app stores fall neatly into the scope of the inquiry.

Bonakele said in a statement last week: “The online market inquiry will cover online markets that facilitate transactions between businesses and consumers for the sale of goods, services and software.

“Online intermediation platforms relevant to this market inquiry include e-commerce marketplaces, online classified marketplaces, software application stores and intermediated services such as accommodation, travel and food delivery.”

Arteiro spelt out the likely targets: “Online intermediation platforms include e-commerce marketplaces like Loot and OneDayOnly; online classified marketplaces such as Property24, Private Property, MyRoof, AutoTrader, Cars.co.za and Carmag.co.za; software application stores include the Google Play Store and Apple’s App Store; and intermediated services include UberEats, Mr D Food and Bolt Food.”

WeBuyCars, in which Transaction Capital this week increased its stake from 49.9% to 74.9%, would potentially be included if it is subject to new merger activity.

Patel’s statement indicated that the government would watch global precedents closely.

“Many countries, notably the European Union, have proposed laws to enhance competition for the so-called ‘gatekeeper firms’,” he said.

“China has ordered a separation of tech platforms and payment services; Australia is spearheading policy to force revenue-sharing between platforms and traditional media houses.”

The government had prioritised digital markets as part of its post-Covid-19 recovery plan, he said, and these markets would be watched closely from a regulatory point of view “to avoid late interventions where markets would have already reached a tipping point”.

The tipping point refers to the market moving from one of more open competition to dominance by one or two players.

The process would engage “all areas of tools of competition policy, including mergers, abuse of dominance, market inquiries, vertical restraints and cartels”.

This means that the traditional exit strategy of start-ups, namely selling out to one of the dominant market players, may become less attractive in future.

Because the bulk of digital companies are start-ups or operate on a start-up scale, even if they are the most used in their categories in SA they would not be able to remain competitive locally or globally if they were not allowed to merge, acquire or be acquired.

For many tech start-ups, the founding strategy is an exit strategy. It is on this basis that they are able to attract venture capital, and creating a cooling effect on digital mergers & acquisitions would also cool off the already slim funding options.

For these reasons, digital overregulation must be avoided in this market for the foreseeable future, certainly for smaller players and start-ups.

According to Chris Charter, competition practice head at law firm Cliffe Dekker Hofmeyr, however, scrutiny will go beyond competitive issues.

“In the mergers space, the competition policy is squarely focused on public interest and reveals a truth that those in the business of notifying mergers have long understood: the impact of a transaction on certain publicinterest factors will attract as much, if not more, scrutiny as the effects on competition,” he said.

“In addition, the government will increasingly be looking to M&A players in South Africa deliberately and expressly to contribute to transformation ideals.”

The original draft of the platforms market inquiry, issued in February, suggested that the Competition Commission was wrestling with both business and philosophical issues in the digital realm.

It pointed out that the digital economy “requires competition law to not only consider new theories of harm but also to act proactively against entrenchment strategies, to ensure markets are contestable and prevent irreversible concentration”.

In effect, the theoretical underpinning of competition law is being questioned, suggesting that we are seeing the dawn of a new era in understanding the remedies required.

The impact on public-interest factors will attract as much scrutiny Chris Charter

Head of competition practice, Cliffe Dekker Hofmeyr