Competition, Localisation & Innovation — Q&A

James: I’m gonna just warn the audience that we might start to shed panel members through this process as Helen needs to catch a flight at 20 to five and Daryl has a meeting. But Helen you work with clients locally, local tech companies and maybe some global ones, but we heard from Andre that at least in Russia some of the local ones are now sizable participants in the market, that may or may not be the case in South Africa. I mean do you think there’s reason to distinguish the two because a lot of the global debates to be fair are focused on GAFA firms and and when we go there at least with our digital inquiry we say it’s not really about GAFA firms it’s about about local and in that framework you know there’s a lot of activity now in the tech industry moving on regulations or stronger enforcement. Do you think that could hamper domestic innovation as opposed to global?

Helen: Sure thanks and thanks so much for having me as well. So I think perhaps I would suggest to take a step back and ask where do consumers turn to just to first understand the scope of the market, to sound like a typical economist, but understanding where do consumers switch to, do they switch to international firms? So just starting at the basics there and of course in digital markets this is likely to be more prominent compared to other traditional markets where you may not be able to transact so easily or engage so easily across borders.

So definitely I wouldn’t be able to answer give you an outright answer about how often do local firms compete with global firms how insulated are our local firms or how protected are they already, that’s very that’s a very product specific, service specific, firm specific question. But I think everyone is aware of the fact that we have many fantastic local tech and digital firms, also many brilliant platforms and we should be extremely proud of this, it’s definitely on my observation not the case in many developed countries. Prince and I were talking about it this morning it’s for many reasons we have many supporting factors — good logistics, good payment systems, I mean there are many reasons why we have such a well-performing market in this sense. So I think that’s just to start with what are we talking about and when we think about local firms, are they already constrained by global firms, should we be trying harder to protect the local firms.

As a side note I should also mention as you said I also do work with some global firms and I say this because it’s not, for me, it’s not just about boxing firms into local versus global, one should also be aware of the fact that many global firms that operate in a very specific line of service are very worried about — and I believe them most of the time — they are very worried about other global firms that have the depth and the breadth to be able to move into another market to so-called envelope them fairly quickly. So local versus global but also being aware that there are other concerns.

Also in South Africa we see global firms taking market share from each other very quickly. Anecdotally in my own personal experience I see so many people using Bolt instead of Uber now, I see the competition for streaming services — I am purposely trying to stay away from the inquiry — the competition for streaming services, every month people are switching to a different streaming service so I also mention this because I wonder if the issue is not so much about whether global firms might be weakening the competition or the presence of local tech or digital firms and but rather that South Africa is simply witnessing what we are seeing everywhere where the global firms themselves are taking share from each other.

Then to your question of should we, I think generally you’re implying should we be treating local firms differently to when we think about global firms, should we be perhaps a little bit more relaxed about the regulation on them? I would approach this in the same way that I would any other competition matter, as I started off, understanding the market in question, understanding the positions of the firms that we’re talking about, and understanding all the critical factors, barriers to entry, scale economies, network effects, I mean a huge amount of work needs to go into that, and then understanding what is the problem here — in the case of the market inquiry a feature of a market or in other cases an anti-competitive practice.

So of course not regulation for the sake of regulation but understanding what the problem is and then critically — and I think this is probably something I feel strongly about as an economist — is thinking through and trying to find whatever evidence you can to think through the effects of what might be proposed so whether you’re regulating a global firm or a local firm thinking through those effects. To pin this down to maybe a concrete example going back to what I said just now if we regulate global firms with the intention of stimulating more local firms is that likely to transpire, similarly if we regulate or remedy something on a global or a local firm is that likely to stimulate further competition from the entrants coming into the market? So I think that’s, I think that’s most to that question James, I know you wanted me to speak about um mergers as well, I’m not sure if you want to touch on that a bit later or…

James: Well maybe as you may be most pressed with time have two minutes you know we used in in inquiry giving very short extensions so two minutes you have.

Helen: Okay no I’ll be here to the end. So the other points in passing that James said perhaps I can touch on is whether merger control particularly with regard to digital firms hinders innovation. I’m sure the Commission has done brilliant studies on this and of course there is not one conclusive answer on this. I think the best way for me to answer is to share from my own experience how I would approach a merger so as not to perhaps make an error in judgment that is to say, you know, as firms come to me and say we see horizontal competition, we see price effects here, we really strongly advise against this.

So obviously there are many other things that you need to consider, innovation being one of them, often it may be dressed up under potential competition and efficiencies, and other things, but you need to also consider innovation and I think the way in which I would unpack this when I was you know thinking about this question is to just understand a few basics. So firstly what I would set aside the merger entirely and ask what in this industry drives innovation? For the reason that often one thinks that the merger is sitting in front of you, everything hinges on this merger, innovation happening or not happening and often it’s not, there’s you know, many factors such as capital or IP law or putting certain people and resources together, many other things drive innovation beyond mergers. So just understanding the broader context and then understanding the rationale for the transaction.

A little while ago I dealt with, I won’t mention any specifics, a merger where it was a combination of two very high tech firms and these were players say position two and three where the firm number one was streaks ahead of the rest of the market and four and five were also considering a merger at the same time and putting the two firms together, their two technologies together, although there was some horizontal overlap, also these totally different technologies, putting them together would allow for an entirely new product offering that had never, quite literally never, been seen before. So understanding this whole bigger picture I think is really critical to ensure that as an economist I don’t make an error in judgment advising you know that this is going to be a very problematic merger and perhaps missing a bigger story that is there.

One thing I should also mention on rationale is on global transactions which are quite prominent in of course this space, and Liberty and I wrote a paper and another colleague wrote a paper a while back, it was called “playing golf with one hand” and it was all about how clumsy or smooth a merger review process might be depending on whether you understand the global context such that say a structural remedy in one country, South Africa in that case, might detract from the bigger picture of efficiencies and maybe other conditions might be better, so if there isn’t a suitable buyer then licensing, pricing, etc might be a bit better, and although that was dealing with efficiencies I think similar might be said about innovation, understanding the global picture, understanding South Africa.

Yeah last point I’ll make that’s very overlooked is the people aspect of mergers as well, I know this is a tiny paragraph in most reports but often entrepreneurs start businesses, they want to move on, they want to hand it over to someone who’s capable, they don’t want to sit with a big firm, and so naturally there would be many transactions around them and the product or service would fare better in the hands of others, same with family businesses, often people see that they’ve taken it as far as it’s going to go. So yeah I think these are my thoughts on how I would check to make sure I’m not advising against a transaction that may be innovation enhancing.

James: Maybe I’d be to pass it on to you Helen as well as an economist. I mean can we really make these predictions on nascent moves where firms haven’t developed necessarily the revenue streams but the value and potential is clearly there and the purchaser sees that yeah, and it may be a killer acquisition type, it may be a strengthening of a portfolio type merger. Are we equipped to really make those predictions because I think we focus on getting them notified I’m worried when we get them notified are we ready?

Helen: Yeah it’s — I wish I had one single answer — it’s very difficult, even if we look back at transactions that were prohibited for that reason — potential competition — and then you look at what happened thereafter, did the other firm move in, and they didn’t, that does not necessarily tell you that the decision was correct or not.

So it is a very difficult thing, of course if we’re talking about potential competition all the facts, the legal strategic documents, go a long way to determining is this firm definitely going to enter but then I would say the bulk of the work as an economist would be on effect is this firm being in the market, is it going to have a competitive effect? We don’t simply want an additional headcount of firm, we want competitive effects.

Just thinking about are we equipped, I mean given the broader discussion, I’m often working on mergers where they’re being notified in multiple countries and in South Africa too, and we often don’t have sight of the international documents for a big part of our work which is inefficient of course, so definitely if in future there could be some learnings, of you know, tracking these cases and some learnings, whilst not breaching confidentiality, I think that would go a long way, although I completely agree with Daryl that it has to be evidence-based in the jurisdiction that you’re talking about.

And then last word I would say on this since you use the word equipped, I would say we need more than economists and lawyers in this space for sure, I mean especially if we’re talking about these digital markets there are a range of other skills that I hope would find this profession attractive, because we need them and definitely definitely if we want to really step up our game in terms of how we deal with these cases and transactions.

All views are my own and not the views of any firm or other person