Life in the fast lane challenge for regulators

Disruption is a term almost certainly overused these days and bordering on the faddish but its effects are powerful and are creating real challenges for regulatory authorities everywhere – and in particular for competition regulators.

Disruption is a term almost certainly overused these days and bordering on the faddish but its effects are powerful and are creating real challenges for regulatory authorities everywhere – and in particular for competition regulators.
The scale of change pulsing through the global economy is unprecedented. High Street retailers are under siege from online distributors such as Amazon. The internet is the core infrastructure of the modern consumer, embedded in almost every aspect of our lives. Artificial intelligence, automation and ever more sophisticated data analysis are putting the squeeze on expert advisers.

Legacy businesses often struggle to respond to the competitive threat. Think Kodak. Or postal services anywhere. Even innovative technology companies that were once disruptors have in turn been displaced. In 2010 Blackberry’s handsets represented 41 percent of the US consumer mobile market. In September of 2016 Blackberry announced it would no longer make phones.

Survival in this changing world requires threatened businesses constantly to re-position. Some opt for consolidation, driving efficiencies – and competitiveness – through scale. Others converge, exploring synergistic opportunities up and down the value chain.
Both strategies have clear competition implications and require difficult decisions from the regulator, often in circumstances where the working assumptions which have traditionally been applied seem no longer apt. How soon will disruption really bite? And how hard? Will prices rise in the meantime and, if so, by how much? What happens to the merger parties if they don’t merge? Is the threat genuine, or is this really a play for market dominance?

The New Zealand Commerce Commission has recently dealt with several transactions that were essentially responses to disruption.

Cavalier/NZWSI was a classic example of consolidation in the face of an apparently existential threat. The challenge for the Commission was to assess and weigh the downsides of the transaction against the alleged risk of the imminent collapse of the wool scouring industry.

Sky/Vodafone was convergence in action. A single line in the clearance application hints at the defensive motivations that underpin this transaction:
Consumers' viewing behaviours and the relevant markets are changing rapidly, and consumers' expectations of their telecommunications and pay-TV providers are ever increasing.

In both cases, the Commission was being asked to do two things:
  • to look beyond the status quo and the traditional touchstones of competition analysis – high market share and barriers to entry, and
  • to accept that the increasing pressure on the parties’ traditional business models warranted pre-emptive action.
The Commission is becoming more comfortable with arguments in this vein. It accepted that the consolidation of Expedia and Wotif was unlikely to lessen competition given the rapid evolution of online travel services. And it cleared the acquisition of Arc’s metering business by lines company Vector in part because it judged that the pace of technological development in metering would nullify any apparent market power resulting from the purchase.

In the regulatory area, the Commission is also grappling with the implications of disruption. 

Regulation of broadband has long rested on the bedrock assumption that telecommunications infrastructure was a natural monopoly. But the introduction of 4G (and soon 5G) mobile services, fixed wireless services, and the now fragmented fibre market, mean that premise should be revisited.

Similarly, New Zealand’s electricity sector – since industry separation – has been characterised by reasonably clean delineations between transmission, distribution and retail. But new technologies – batteries, PV, electric vehicles – blur the distinctions. The Commission has been asked to clarify and codify the respective roles of retailers and distributors in relation to these new businesses but has so far resisted the urge to pre-empt the market. 

These scenarios would be daunting for any competition regulator charged with safeguarding the long term interests of consumers. The regulator must walk the line between false positives and false negatives. Yet, in doing so, it cannot be expected to see perfectly into the future.

What to make of it all?
The New Zealand Commission, as with other competition regulators, is naturally conservative. It rightly demands evidence that disruption to a traditional business model warrants regulatory endorsement of a strategic shift. But no responsible company would wait for rigor mortis to set in before taking action.

This means timing and evidence are critical. The disruption story is most compelling when the evidence is clear and present, tangible and real. That places an onus on companies to invest in collecting that evidence.

But equally, on occasion, competition regulators need to be brave and accept that their traditional reference points may no longer be appropriate.

There will be times where the long-term interests of consumers will be better served by anticipating disruption rather than waiting until it is has completely bedded in, and by facilitating a robust response from incumbents rather than holding them back and allowing disruptors a free shot.

Responding to disruption means looking ten, twenty, thirty years into the future. The Commission has limited resources to engage in that kind of long-term forecasting. That creates both a responsibility and an opportunity for businesses to build a long-term strategy for Commission engagement to safeguard their continued success.

Lucy Cooper and Simon Peart are Senior Associates at Chapman Tripp, specialising in competition law.

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