Tuesday, 22 May 2018

We've got one of them

We may only be a small economy on the edge of the world, but - at least in the fields of competition and regulation - we can end up wrestling with exactly the same leading edge issues that bother the big guys. And sure enough we've just had a prime example, involving all the hot topics overseas: technology, social media, big data, vertical integration. You name it, it's got it.

It's Trade Me's proposed acquisition of Motorcentral (strictly speaking, acquisition of Limelight Software, who operate Motorcentral). The Commerce Commission turned it down on March 9. While it took forever (well past the Commission's own performance target) to publish the written reasons, they finally appeared last Friday, and they've been worth waiting for.

The reasons run to 111 pages (maybe I should cut some slack on how long they took to see the light of day) but relax - I've saved you the bother of reading the whole thing, and boiled it down into this reasonably self-explanatory picture showing the 600-pound gorillas and the minnows in the two markets involved, plus a lurking 800 pound gorilla (insofar as 800 pound gorillas can lurk).

There were three issues involved.

One was horizontal aggregation in the online car ad trade, where the Commission found there'd be no competition issue, albeit for the brutal reason that Trade Me is so dominant that losing Need-a-Car made no difference.

The second was horizontal aggregation in the dealer software ('DMS') market, where the Commission found that there would be a substantial loss of competition, since, absent the acquisition, Trade Me would likely have improved its DealerBase DMS to compete more effectively. Trade Me appears to have disputed that, but all the interesting corporate strategy documents on that and other issues are (necessarily) redacted so we'll have to assume the Commission read that right.

The most interesting issue, though, was vertical integration in the context of  big data. Even before big data became a thing, vertical integration could always facilitate anti-competitive strategies like foreclosure or predation. But the permutations and combinations have become even more complicated when there is big data at one or (as here) both levels of a vertical tie-up.

Because lurking in the background is Facebook. It already has one side of a two-sided ad platform (eyeballs in New Zealand),  and in the States it is already getting the other side (the car listings) by partnering with DMSs. So it likely would do the same here: "While it is possible that there are other ways of entering the advertising market, the recent instances of entry that we have observed occurred through the new entrant listings platform entering into a relationship with DMSs holding large amounts of listings data" (para 462 of the decision).

But the Commission found that a Trade Me / Motorcentral combo could and likely would stymie Facebook's efforts to get at the only DMS that really matters by - on some sliding scale of foreclosure insidiousness - making it more difficult or expensive to get at the car listing data. Even as big a bruiser as Facebook could be seen off: "We have not found any evidence to suggest that a potential new entrant such as Facebook would, in circumstances where access to listings data in Motorcentral is restricted, incur the cost and risk of changing the entry model that it has employed overseas to enter the relatively small New Zealand advertising market" (para 465).

No doubt there are some who would be just as happy to see the already ginormous Facebooks and Googles seen off. And there are probably some who may be thinking that if a market like online car ads is going to 'tip' in any event into one big site where all the cars and buyers are clustered, it might as well be a Kiwi one.

But, as always, it's competition we care about, not competitors. There's been a trend overseas where well-entrenched incumbents have bought out what might have been the foundation for a competitor: ironically in our context, people have pointed to Facebook's purchases of WhatsApp and Instagram as possible examples. The important thing - as the Commission has done here - is to keep the options open for new entrants to have a crack at the tough nut.

Which, incidentally is why I still have a soft spot for the minority dissent in the Commission's clearance of Z to buy Chevron. Chevron and its Caltex stations might have been a complete waste of space as a vigorous competitor, but in different hands who knows what competitive discipline it might have brought to the petrol trade.

In any event, the lasting significance of this decision - and one that I think we'll see overseas authorities citing - is that it sets a good precedent for being protective of potentially subversive competitors to the status quo in markets with big data and technological innovation.

Not that's not always going to be easy to identify them: who can really look at a start-up and accurately tell that it's maybe the germ of the next Google? And there are going to be companies who will sincerely argue that there's nothing to see here folks, move on. All that's happened is that a start-up has built a better mousetrap than their own - Motorcentral's DMS really does have far more bells and whistles than Trade Me's DealerBase - and they're buying it to improve their users' experience. With the redactions, I can't tell, but I'd guess Trade Me made that case or something like it this time round.

So it's going to take a good deal of commercial savvy to make the right analytical and factual calls in dynamic markets like technology. How'd we go in this one? This acquisition was going to fall over anyway because of the horizontal aggregation in the DMS market, but if the whole thing had hinged solely on the vertical integration issues, I reckon the Commission got it right in protecting the only viable way for a new entrant to get into the game in a meaningful way.

Finally, if you're interested in the big data aspects, a while back the Commission's Reuben Irvine, Greg Houston of Houston Kemp, and I put together a short reading list you'll likely find useful (we were talking about it as a panel at the Asia Pacific Industrial Organisation conference). And if that's not enough for your inner nerd, the Trade Me decision also pointed me to this very useful OECD resource, 'Rethinking Antitrust Tools for Multi-Sided Platforms'.

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