Month: September 2015

First predatory pricing case before the Competition Tribunal

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Media24 excludes GNN, Tribunal finds

By Julie Tirtiaux

A year ago, we at AAT reported on the intervention by competitors in the merger between Media24 and Paarl Media.  Today, we want to highlight a “one-year-later” feature about that same company, which has now been found liable of predatory exclusion of its rivals by the South African Competition Tribunal (the “Tribunal”).  The Tribunal found on 8 September 2015 that Media24 had engaged in exclusionary conduct due to predation by removing a rival community newspaper publication, Gold Net News (“GNN”), out of the market. [1]

Two routes explored by the South African Competition Commission’s (“SACC”) to sanction Media24’s predation conduct

In 2009, GNN exited the newspaper community market. Within 10 months of the exit of GNN, Media24 closed down one of its titles, Forum. From then until today, Vista which is another title owned by Media24, is the only title to survive in the Welkom market.

According to the SACC:

  • If Vista is the only local paper operating in the Welkom market, it is because Forum was used as a predatory vehicle to exclude its competitor, GNN.
  • The strategy consisted in pricing Forum’s advertising rates below market cost despite repeated loss making and failure to perform to budget forecasts.
  • Media24 operated Forum as a fighting brand, meaning that Media24 sacrificially maintained Forum in the market to exclude its competitor.

For the SACC the reduction of choice of community newspapers during the period January 2004 to April 2009 can only be explained by Media24’s predatory pricing conduct. In order to condemn this conduct as predation, the SACC relied on two provisions of the Competition Act 89 of 1998 (the “Act”) which respectively lead to different sanctions.

  • First and ideally, the SACC alleged that Media24 should be sanctioned for its predatory behaviour in terms of section 8(d)(iv) of the Act, which is the explicit predation provision and enables the Tribunal to impose a fine for a first offence.
  • Second, should the predation not be captured by the express predation provision of section 8(d)(iv), Media24 should at least be found responsible for engaging in general exclusionary conduct, prohibited by section 8(c) of the Act which only gives the Tribunal the power to impose remedies. No fine is available for a first contravention. Only a repeated offence may be subject to an administrative penalty.

Following the Commission’s investigation after the allegations brought by Hans Steyl, who ran GNN from 1999 until its eventual closure in 2009, the Commission referred the case to the Tribunal in 2011.

The denial of predation conduct by Media24

Media24 (whose slogan is, somewhat ironically perhaps: “Touching lives through the power of media“) denied any casual link between the fates of the Forum and the GNN’s papers. Forum was not used as a predatory vehicle to exclude GNN. Media24 attributed the closure of Forum to the 2008 recession, on-going downsizing in Media24 as a whole, and to the problem of publishing two newspapers, Forum and Vista, in the Welkom area. It further argued that GNN had exited because it was not viable.

The difficulty to prove a direct predatory pricing conduct

For the first time in the sixteen years in which the new Competition Act has been in operation[2], the Tribunal assessed a predatory pricing case.

Predatory pricing means that prices charged by a dominant firm are not market related but below what would be expect to be a market price. Predatory pricing is only a transient pleasure for consumers as once competitors are eliminated or new entrants are deterred from entering, then the low price honeymoon is over and the predator can impose high prices to recoup the losses sustained in the period of predation.

In terms of section 8(d)(iv) of the Act, to find an express predation contravention, the Commission is required to prove that Media24 priced below “its marginal or average variable cost” (“AVC”) (our emphasis)[3]. The Commission argued that this wording is broad enough to include pricing below average avoidable cost (“AAC”)[4]. This is the cost the firm could have avoided by not engaging in the predatory strategy.[5]

To find exclusionary conduct and thus a contravention of section 8(c) based on predation[6], the Commission would not necessarily need to establish that the dominant firm’s pricing is below any specific cost standard.  All that is required is that the conduct (in this case, low pricing) has an anti-competitive exclusionary effect.

In the Media24 case, the Tribunal has effectively established a new test for predatory pricing which does not meet the test under section 8(d)(iv).  It said that if Media24 is found to have priced below its average total cost (“ATC”)[7] accompanied by additional evidence of intention and recoupment of the loss of profits sustained during the predation period, then a contravention of section 8(c) has taken place.

As ATC include more costs than AAC and AVC of marginal cost, it makes a finding of predation more likely.  The AAC test is thus more stringent than the ATC test.  This follows the logic of the consequences of each section.  As a contravention of section 8(d)(iv) of the Act leads to a fine while a contravention of section 8(c) of the Act only leads to a remedy, it is more difficult to fill the requirements of the specific predation section – section 8(d)(iv).

Consequently, a central issue in this case was to determine Media24’s costs, and compare them to the prices charged during the relevant period.  This is no simple matter.

The Tribunal’s findings trigger questions about how section 8 of the Act on abuse of dominance is structured

Following lengthy discussions about what constitute avoidable costs, the Tribunal held that opportunity costs[8] and re-deployment costs cannot be factored into the calculation of Forum’s AAC. Accordingly, the Tribunal found that Media24 did not contravene the express predation section 8(d)(iv) of the Act.

Interestingly, the Tribunal did however found that Media24 contravened the general exclusionary section 8(c) of the Act. Indeed, after establishing that Media24 was a dominant firm in the market for community newspapers[9], the Tribunal found the evidence of predatory intent which resulted from statements and the implementation of a plan that was predatory in nature. Moreover, the Tribunal held that the pricing of Forum was below ATC.

As a result, it was found that GNN’s exit of the market affected both advertisers and readers. While advertisers paid higher prices as they lost an alternative outlet, readers lost the choice of an alternative newspaper.

Accordingly, the Tribunal concluded that Media24 engaged in exclusionary practice because of predation but didn’t find a contravention of the express predation section of the Competition Act.

The implication of this finding is that Media24 is not liable for a fine. The only power left to the Tribunal is the imposition of another form of remedy. Only if Media24 does the same thing again, will it be subjected to a potential administrative penalty under section 8(c).

Such a finding triggers two interrogations about how section 8 of the Act deals with abuse of dominance.[10]

  • Firstly, how can deterrence be guaranteed when the only consequence of a predatory exclusion conduct, in certain circumstances, is a remedy without a monetary fine? This case leaves food for thought as to the necessity to empower the Tribunal to impose a fine for a first offence when a general exclusionary conduct is found.
  • Secondly, if the required test to prove a contravention of the explicit predation section is too stringent and almost impossible, not only a predatory conduct will never lead to a fine but more generally the utility of this section should be seriously considered.
Footnotes

[1] See the Tribunal’s decision: http://www.comptrib.co.za/assets/Uploads/Reasons-for-Decision-Media24-Section-8-Case-Signature-Documentfinal.pdf

[2] See the Tribunal’s press release: http://www.comptrib.co.za/publications/press-releases/media24-press-release/

[3] A variable cost being a cost that varies with changes in output. The AVC is defined as the sum of all variables costs divided by output.

[4] The important difference with AVC is that AAC include an element of fixed costs.

[5] AAC has become a widely accepted cost standard for the assessment of predatory pricing. This acceptance is evident both from its inclusion in the EU‘s Guidelines, the recent International Competition Network Guidelines, and a Department of Justice Report.

[6] See Nationwide Airlines (Pty) Ltd v SAA (Pty) Ltd and others [1999-2000] CPLR 230 (CT), page 10. The Tribunal stated that a predatory pricing could lead to a finding in terms of section 8(c).

[7] ATC includes fixed, variable and sunk costs (sunk costs being costs that have already been incurred and thus cannot be recovered).

[8] An opportunity cost is a cost of an alternative that must be forgone in order to pursue a certain action.

[9] Media24 would have had a market share of approximately 75%.

[10] On this topic, see the articles of Neil Mackenzie, “Are South Africa’s Predatory Pricing Rules Suitable?” and “Rethinking Exclusionary Abuse in South Africa”.

South African Commission conducts dawn raids into recruitment agencies

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The South African Competition Commission (SACC) has conducted a search and seizure (dawn raid) operation at the premises of Human Communications (Pty) Ltd, Kone Staffing Solutions (Pty) Ltd and JobVest (Pty) Ltd.

The firms are recruitment agencies specialising in recruitment advertising services who place job advertisements in media platforms on behalf of clients. The agencies also receive and process responses to the job advertisements on behalf of their clients, which are mainly government departments, agencies and municipalities.

The SACC has indicated that the dawn raid operation forms part of the SACC’s investigation into alleged collusive conduct in the market for the provision of recruitment advertising services.

The SACC alleges that the firms collude when bidding for tenders by discussing responses to requests for quotations and decide on the price at which each would tender for its services.  Finally, the SACC alleged that the agencies agree on how to rotate advertising work amongst them.

The alleged conduct is prohibited by the South African  Competition Act as it amounts to price fixing, market division and collusive tendering.

Zambian Competition Authorities Finalise Guidelines for New Merger Regulations

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zambiaThe Competition and Consumer Protection Commission (“CCPC”) recently published the CCPC Guidelines for Merger Regulations 2015 (the “Guidelines”).[1]

The Guidelines are binding on all “persons” regulated under the Competition and Consumer Protection Act, No 24 of 2010 (the “Act”) insofar as the provisions of the Guidelines are not “inimical” to the Act.

An extensive definition of what constitutes a “merger”

In terms of the Act, a merger is defined as “a transaction between two or more independent parties which results in one party acquiring an interest in the other party”.[2]An “interest” may be acquired through the acquisition of shares, assets or through an agreement such as a joint venture.

The Guidelines confirm that the acquisition of a ‘material interest’ is likely to be considered as a merger. Furthermore, the acquisition of “control” can include indirect control such as the case where minority shareholders are able to exercise veto rights or in the case where a supplier may exercise control over a downstream customer as a result of a long term supply agreement.

The Guidelines have also confirmed that for purposes of establishing an “acquisition”, even a lease agreement over an asset can be considered to be an ‘acquisition’ in certain circumstances. The lease over the asset must, at a minimum, change the competitive situation in the relevant market.

The Guidelines have, therefore, caste the Zambian merger control net broadly in respect of establishing whether control has been acquired (or relinquished).

Clarification regarding joint ventures (“JVs”)

Notably, the Guidelines dedicate a substantial portion to agreements such as JVs. The CCPC has taken a robust approach to JVs and generally JVs will, if the financial thresholds are met, be required to be notified, unless they are “auxiliary” to the activities of their parent enterprises.

A JV will be considered to “auxiliary” if the JV fulfils a specific purposes for their parent company, as opposed to a “full function” JV which operates as an autonomous economic entity on an indefinite basis.

 

Confusion regarding transactions involving foreign enterprises

As far as transactions involving foreign entities are concerned, there appears to be some anomalies in the Guidelines as illustrated by the two scenarios envisaged below.

In the first scenario, the Guidelines state that when a domestic (Zambian) enterprise “falls within the control of a foreign enterprise”, notification will only be required if the “operation has an effect on competition in Zambia”. This requirement seems to place the cart before the horse to some extent in the sense that a competition analysis needs to be performed simply to establish whether the transaction should be notified in the first place. In other words, it appears that if a foreign parent company acquires a domestic company, the merger will not have to be notified (despite meeting all other requirements of a mandatorily notifiable merger), if the proposed transaction would not have an impact on the competitive environment in Zambia.

The second scenario envisaged by the Act, is when a foreign company acquires another foreign company, but where at least one of the parties to the proposed transaction has a “local connection” to Zambia. For instance, a local connection may exist if the foreign entities have subsidiaries based in Zambia or derive at least 10% of its sales in Zambia for a period of at least three years.

In the latter scenario, the mere existence of a local connection is sufficient to trigger a merger notification requirement and no evaluation on the impact of the proposed transaction on competition needs to be considered.

It is likely that the two scenarios should be interpreted simply to confirm that there must be an effect on Zambian commerce before a merger notification requirement is triggered.

Possibility of pre-notification

The Guidelines also make provision for a pre-notification consultation with the CCPC for purposes of clarifying matters such as whether a transaction constitutes a merger or should be notified, as well as obtaining advice in relation to calculating annual turnover, value of assets or market shares.

Risks of prior implementation

Importantly, the Guidelines expressly state that prior implementation of a mandatorily notifiable merger may be result in the firms being liable to a fine of up to 10% of their annual turnover. In this regard, the Guidelines do not limit the ‘10%’ to turnover derived in, into or from Zambia.

The Guidelines further provide for a number of procedural aspects to merger notifications including, inter alia, timelines and the forms required to be completed.

 

Details on the assessment of a merger by the CCPC

As to the substantive evaluation of a merger the Guidelines provide significant guidance.

As a point of departure, the Guidelines recognise the types of mergers and theories of harms which are common to most established competition regulatory regimes.

The Guidelines recognise that most vertical and conglomerate mergers do not raise competition concerns, although there are of course exceptions, especially when a merger can give rise to foreclosure effects.

Importantly, like many African jurisdictions, the CCPC will assess the public interest impact of a proposed merger when deciding whether to approve the merger or not.

The public interest provision is drafted slightly differently to many other legislative instruments containing similar provisions.

In terms of the Guidelines, the CCPC will evaluate whether a merger, which has failed the competition test, should proceed on the basis that there are public interest grounds which justify the approval. The Guidelines do, however recognise that even a pro-competitive merger could be prohibited on public interest grounds. The Guidelines give no more guidance as to how public interest grounds will be considered or evaluated.

The Guidelines provide substantial additional information in relation to how the CCPC will evaluate the various factors taken into account when evaluating the impact of a merger. Some of these factors include:

  • market definitions;
  • market concentrations;
  • counter-factual;
  • market entry, import competition;
  • counter veiling buying power;
  • removal of a vigorous and effective competitor; and
  • and effective remaining competition post merger

The Financial thresholds

On a final note and of considerable importance, the Guidelines, together with the Annexure to the Guidelines, prescribe low financial thresholds for mandatorily notifiable mergers.  In terms of the Guidelines, the combined asset value or turnover figures for merging parties must be at least 50 million fee units to constitute a mandatorily notifiable merger.

The Annex to the Guidelines indicates that 15 million Kwatcha would amount to 50 million fee units, 15 million Kwatcha being approximately (US $ 1 470 000).

The Guidelines also cater for the calculation of filing fees.

[1] See the CCPC’s Guidelines: http://www.ccpc.org.zm/wp-content/uploads/2015/09/CCPC-MERGER-GUIDELINES-FINAL-DOCUMENT-CONSOLIDATED-FINAL-VIEW.pdf

[2] See Section 24 of the Act.

Mauritius competition watchdog places mobile operators under scrutiny

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Mauritius competition watchdog places mobile operators under scrutiny

Julie Tirtiaux writes about an investigation by the CCM into allegedly discriminatory mobile pricing policies by the two main mobile operators in the island nation of about 1.2 million.

On 27 August 2015, the Competition Commission of Mauritius (“CCM”) announced an investigation against two major mobile operators, Emtel and Orange. The CCM has identified similar concerns to those examined in other jurisdictions such as France and South Africa, related to the exclusionary effects of discriminatory pricing policy for calling services.

Price discrimination triggered the investigation

The CCM is concerned that the two major mobile telephony operators may be discriminating between tariffs for calls made between subscribers within the same network (“on-net calls”) and calls to subscribers from other competing networks (“off-net calls”). This raises the question as to why off-net calls are charged at higher rates when compared to on-net calls.

The table below sets out the respective call tariffs charged by Emtel, one of the respondents in the current CCM investigation.[1]

Call direction Per second tariff (Rs) Per Minute (Rs)
Emtel to Emtel Voice call 0.02 1.2
Emtel to Emtel Video call 0.02 1.2
Emtel to other mobile operators 0.06 3.6
Emtel to Fixed land line 0.0575 3.45
Emtel to Emtel Favourite Num 0.016 0.96

The CCM suspects that the higher prices for off-net calls may not be objectively justified by cost differentials. This potential discrimination could thus be “preventing, restricting or distorting competition in the local mobile telephony sector, which ultimately could deter or slow investment, innovation and growth in the sector”.[2] It is argued that such conduct raises a strategic barrier for new and small mobile operators to enter and expand within the mobile market, as rational consumers would likely be inclined to choose the operator which already has a large user base.

mauritius

In other words, this allegedly discriminatory pricing policy for calling services could lead to exclusionary conduct by the duopoly of Emtel and Orange and consequently to the infringement of Section 46(2) of the Mauritius Competition Act of 2007.[3] However, such an infringement will have to be proved by the CCM, as the presence of on-net/off-net price differentiation does not automatically raise competition concerns in and of itself. It has been argued that the existence of two equally large competitors is enough to observe a competitive outcome and thus the maximization of and consumer welfare.[4]  Put differently, it is not the number of players in a market which determines the competitive outcome but rather the intensity of competition between the existing players.

The analysis of the foreclosure effects of on-net/off-net price differentiation by the Autorité de la concurrence[5]

In December 2012, the Autorité de la concurrence fined the three main French mobile operators, i.e. France Télécom, Orange France and SFR a total of €183.1 million for supplying their subscribers with unlimited on-net offerings.[6]

According to the Autorité de la concurrence, “these offerings first of all artificially accentuated the “club” effect, that is, the propensity for close relatives to regroup under the same operator, by encouraging consumers to switch operators and join that of their relatives (…). Once the clubs were formed, these offerings “locked” consumers in durably with their operator by significantly raising the exit costs incurred by the subscribers of on net unlimited offerings as well as by their relatives who wish to subscribe to a new offering with a competing operator”.[7]

In addition, these offerings automatically favoured large operators over small operators (“network effect”). In other words, these offerings induced users to subscribe to the dominant incumbents at the expense of smaller independent operators who would undoubtedly have been faced with higher cost structures directly related to the higher off-net calls rates.

The regulation of the mobile sector in South Africa

Unlike the Mauritian telecom market which allows operators to freely set their prices, South Africa regulates call termination rates, which correspond to fees that mobile operators charge each other to carry calls between their networks, via the Independent Communications Authority of South Africa (“ICASA”). ICASA justified new regulations by saying that the rates had driven up the cost to communicate for consumers, making South Africa one of the most expensive places to use a mobile phone.[8]

 

On 29 September 2014, ICASA modified the asymmetric rates, first introduced in February 2014,[9] in order to ensure a level playing field between the mobile operators. The intended effect of these asymmetric rates is to ensure low off-net call rates for operators with low market power.[10]

 

In addition to the regulatory aspects in the hands of ICASA, in October 2013 Cell C lodged a complaint with the South African Competition Commission against MTN and Vodacom in relation to alleged differentiation between on-net/off-net prices. [11]

Conclusion

In conclusion, the efficient functioning of the crucial mobile sector is a delicate task for both regulating bodies and enforcement agencies. It will thus be interesting to see how this investigation progresses and what learnings the CCM is able to draw through the assessment of the on-net/off-net price differentiation by the two main mobile operators in Mauritius.

[1] See Emtel’s price plans presented on their website on 7 September 2015: https://www.emtel.com/price-plans

[2] See the media release of the CCM of 27 August 2015 opening of investigation on monopoly situation in relation to mobile telephony sector.

[3] Section 46(2) of the Mauritius Competition Act prohibits a monopoly situation held by one or several firms which “(a) has the object or effect of preventing, restricting or distorting competition; or (b) in any other way constitutes exploitation of the monopoly situation”.

[4] Frontier Economics “On-net/off-net differentials the potential for large networks to use on-net/off-net differentials or high M2M call, termination charges as a means of foreclosure” March 2004.

[5] That is to say the French Competition Authority.

[6] Decision of the Autorité de la concurrence of 13 December 2012, France Télécom, Orange France and SFR, case no 12-D-24. This decision has been appealed and is currently pending before the Paris Court of Appeal.

[7] Press release of the Autorité de la concurrence: http://www.autoritedelaconcurrence.fr/user/standard.php?id_rub=418&id_article=2014

[8] ICASA, 16 October 2012 Media Release https://www.icasa.org.za/AboutUs/ICASANews/tabid/630/post/consumers-benefitfrom-a-drop-in-the-actual-cost-of-prepaid-mobile-voice-call/Default.aspx INCASA said that “mobile prices are cheaper in over 30 African countries than they are in South Africa”

[9] The asymmetric rates adopted by INCASA in February 2014 were declared unlawful and invalid by the High Court on 31 March 2014 as they were objectively irrational and unreasonable.

[10] It must be noted that these new asymmetric rates have been challenged and that the case is still pending. See the following article on ENSafrica: https://www.ensafrica.com/news/the-reformulation-of-call-termination-rates-in-South-Africa?Id=1414&STitle=TMT%20ENSight.

[11] This complaint is still being investigated by the Competition Commission.