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Words matter. That’s why the ACCC has got it wrong.

Words matter.

With Australia’s competition laws, the wording of our ‘abuse of market power’ laws are ahead of the rest of the world. But the Australian Competition and Consumer Commission (ACCC) wants to change the words and introduce ambiguity just as the rest of the world is starting to recognise the benefits of the Australian approach.

What is the issue?

Australia’s competition laws make it illegal for “[a] corporation that has a substantial degree of power in a market” to “take advantage of that power” for an anti-competitive purpose. The ACCC wants to make three changes:

“The ACCC considers that making this provision effective could be best achieved through the introduction of an effects test, including a substantial lessening of competition, and amendments to overcome limitations inherent in the current interpretation of the ‘take advantage’ test.”

Making it clear that the law covers any acts that have a purpose of substantially lessening competition is benign.

The real issue is the combination of the other two changes. Together they weaken the link between market power and the anti-competitive objective of a business. At a minimum this will make businesses wary about engaging in pro-competitive actions that benefit consumers but harm competitors. At worst, it will force businesses to defend pro-competitive conduct before the Courts.

For a current state-of-play in the debate and a statement of the ACCC’s views, see the letter from the Chairman of the ACCC to the current Competition Policy Review.

Are we leading the world?

Coincidently, last Friday I heard a talk by one of the world’s leading experts on competition law, Professor Louis Kaplow from Harvard University. He outlined his new research on the failure of US and EU laws to link ‘market power’ and ‘anti-competitive conduct’. These laws look a lot like what the ACCC wants. Professor Kaplow noted that this had led the Courts to segment the analysis leading to poor decisions.

In contrast, Australia’s existing law links ‘market power’ and ‘conduct’.

A firm only ‘takes advantage’ of its market power if its behaviour is inconsistent with the behaviour of a business that doesn’t have market power. Any business can have a great idea, introduce a better product, or work hard to lower its costs. These actions raise its profits and usually harm its competitors. They do not depend on market power and are clearly not illegal in Australia under our current laws.

So our ‘take advantage’ test largely does what Professor Kaplow wants for the US and EU laws. The ACCC appears to agree.

“This means that the words “taking advantage” have had to do the heavy lifting in Section 46, distinguishing what is anti-competitive from what is pro-competitive.”

But the ACCC wants these words removed.

Why? Possibly because it makes the regulator’s job harder. It has to prove the link between ‘market power’ and the ‘anti-competitive conduct’. As The ACCC Chairman notes:

“[The] courts have been distracted into deliberations about what a hypothetical firm in a counterfactual world lacking substantial market power might do (for some other purpose).”

Sorry Mr Sims. These are not distractions. These are the key bits of the analysis. You cannot know if a business is abusing its market power unless you ask if its behaviour is inconsistent with a competitive business. Of course this bit of the law does the heavy lifting. It is the key economic test that ensures our competition laws promote, not prevent, competitive behaviour.

Throwing the baby out with the bathwater!

Don’t get me wrong. I am not saying that our laws are perfect. But our current law appears to be ahead of both the equivalent US and EU laws in making sure that competition, not competitors, is the focus.

Maybe the wording could be improved. But the ACCC suggestions clearly do not do this.

The US has partially overcome the problems that the ACCC wants to introduce through legal precedent. But their law is almost 100 years old. The ACCC amendments would throw out our own legal precedent and hope the Courts will ‘get it right’.

Why?

The Courts currently have guidance through the wording of the law and our legal precedent has become much clearer over the last two decades.

As for Professor Kaplow’s talk, I couldn’t help myself. I pointed out that the ‘missing link’ between power and conduct existed in Australia’s law. I am not sure that anyone else in the talk cared - it was in Europe and I think I was the only person from the Antipodes in the room.

It would, however, be ironic, if the ACCC got its way and had our law changed just as the rest of the world starts to catch up.

Let’s have a proper debate about the NBN to the bush

The cost-benefit analysis on the NBN has been released. While it “supports” the government’s multi-technology-mix (MTM) scenario over Fibre-to-the-Premises (FTTP), the best case is the ‘unsubsidised rollout’ scenario. So the real message of the report is that the NBN needs a complete rethink.

And, as noted in today’s Australian, this means we need an urgent debate about the future of the NBN.

The unsubsidised rollout scenario considers a single broadband provider that can charge a price up to 70 per cent of consumer value. It rolls out the network where it is profitable. Up to 93 per cent of premises get covered using a range of high-speed technologies. It is a proxy for the likely outcome if the former government had not dreamt up the NBN in the first place. The details are on pages 48 and 49 of Volume 2 of the report.

The 7 per cent that miss out under the unsubsidised rollout are outside the current fixed line footprint; about 700,000 premises in rural and regional Australia. Under the other NBN scenarios, these are premises that will be served by wireless or satellite broadband services.

It will cost about $4.8 billion, plus any tax ‘deadweight loss’ to bring broadband services to the last 7 per cent (table 3). This is about $7000 for each of the premises (p.12). The report calculates that this is well above the likely average willingness-to-pay for many households and businesses in these rural and regional areas. So any scenario that tries to bring broadband to the bush will literally burn a lot of money. The bush will get broadband but only at a price that it wouldn’t want to pay.

The willingness-to-pay figures will be disputed. But the cost-benefit analysis means that there are now a series of questions that the coalition government must answer before it continues the NBN folly.

First, is Australia happy to spend an extra $4.8b on the bush?

Second, if we are happy to spend this money, is it best spent on high-speed broadband? In particular, what would the residents of rural and regional Australia like, faster internet or something else?

Third, if the money is to be spent, how will it be funded?

There are no unambiguous right or wrong answers to these questions. But it is a debate that Australia needs to have.

I have no problem with spending an extra $4.8b in rural and regional areas if it creates valuable services. One of the principles that underpinned Australia’s federation was that rural and regional areas would not be left behind.

But the cost-benefit analysis shows that the current NBN proposal will channel $4.8b into services that cost more than the value they create. Better schools, hospitals, roads and community centres in rural Australia may provide better value for money.

But suppose the cost-benefit study is wrong?

Well, one way to find out is to ask the people in the bush. If, as a society, we want to spend an extra $4.8b on the bush, how would they like it spent? At its crudest, would each rural and regional household and business prefer the NBN to continue or to receive a once off payment of $7000 each from the federal government? It would be interesting to see what a vote would reveal! While some would prefer faster broadband, many, I suspect, could find better uses for the money.

If we do continue to build a rural and regional broadband network, how should it be funded? The present model involves an implicit tax on city broadband to fund rural and regional broadband services. The ‘tax’ operates through uniform national pricing. As I have discussed before, implicitly taxing city internet users to pay for rural and regional internet services is economic lunacy. We should raise the revenue in a transparent, least-cost way.

Table G1 of the cost-benefit study shows that having explicit government funding for internet in rural areas or incentives to back up private investment would bring Australia in line with a range of other countries, from Europe to the US to Asia.

The real message of the cost-benefit analysis is that we need to stop the current NBN process outside the existing fixed-line regions and have a real debate on how we best provide services to rural and regional Australia and how we fund those services. The National party should lead this debate and welcome it.

Uber may ‘do a Napster’, but ride-sharing is here to stay

Uber is a great innovation. It allows individuals to find better, more convenient ways to travel around our cities. It will reduce congestion, save people money, and create new jobs. So why is it illegal?

In case you have just emerged from a few years wandering around the desert, Uber is a company that uses a smartphone app to bring drivers and riders together. Broadly, in Australia, there are two products. Uber Black allows customers to book licensed hire cars through the app on an ‘immediate ride’ basis. UberX allows customers to contact (otherwise) private drivers who are registered with Uber in order to ride-share (for a price).

The losers from Uber are traditional taxi licence holders. And the taxi cartel is fighting back.

Uber Black is broadly legal. The cars are licensed hire cars. The innovation is that, rather than having to book the car in advance, Uber allows ‘as need’ bookings. This is a great benefit, but makes hire cars more like taxis.

The taxi industry has fought back to limit this legal competition – usually by trying to get the law changed in ways that hurt customers. For example, in Germany, the taxi industry was able to convince the courts to require Uber drivers to return to a depot after each job, preventing them from being conveniently located around the city. In France, the government tried to make Uber cars wait for 15 minutes between receiving a request for a pick-up and making the pick-up. This bizarre restriction was overturned by the courts.

The UberX ride-share service is more problematic.

Under current state laws, UberX is clearly illegal. The drivers do not have the legal licences, vehicle checks and insurance cover. But UberX is continuing to operate in Australia and in a range of other countries where it is illegal. It is doing this to force inflexible, out-of-date laws to change.

It is doing a Napster. And Napster went bankrupt!

Starting in June 1999, Napster was the original peer-to-peer file sharing service. It enabled internet users to share music, both legally and illegally. Needless to say, it quickly ran into legal problems. In late 1999 it was sued by the Recording Industry Association of America. This was followed by Metallica and Dr Dre who sued Napster in 2000 for piracy of their music. Napster lost its legal cases, was closed down in July 2001 and was in bankruptcy by 2002.

Napster didn’t change the law. But technology won anyway. Don’t believe me? Ask anyone under 20 how much they pay for the movies they watch and the music they listen to.

The parallels between Uber and Napster are strong. Napster fought the entrenched interests of the recording industry. Uber is fighting the entrenched interests of the taxi industry.

Both businesses used leading edge technology to tackle the entrenched interests.

Consumers loved both technologies and both technologies benefited from the publicity caused by their opponents. Recent UK protests against Uber led to an eight-fold increase in the number of people registering with the app. The court cases against Napster led to it becoming a household name.

But there are also differences. Despite some dubious practices (such as the infamous ‘mickey mouse’ amendment) recording companies and music artists are legitimately trying to protect their creative work. They deserve to be paid for it.

In contrast, the taxi industry is simply an outdated government-created cartel. Taxi plates are transferred for hundreds of thousands of dollars in many Australian states. The value of these plates reflects the loss to customers. Taxi plate numbers are restricted and fares are kept high. And you are stuffed if you want a taxi during peak periods.

The taxi drivers do not get the benefit of the cartel profits. Plate owners are investors, not drivers. The drivers lose out and are paid ridiculously low wages by the plate owners. Services like Uber would free up the drivers because they would be able to run their own cars.

Governments have two options when facing Uber. First, they can side with the vested interests of the taxi plate owners against the public. They can try to restrict the Uber services by vigorously enforcing the existing laws.

Alternatively, government can be proactive and change the laws to become more flexible and accommodate new forms of competition. This may mean that UberX drivers have to go through a police check and that their vehicles must meet minimum standards. Uber would claim that they already check drivers and vehicles but that is not the point. The new laws would apply to all ride-sharing apps, not just Uber.

The flexible approach would embrace Uber, Lyft and the many alternatives that copy them. It will benefit the public.

The rigid policy of enforcing current laws will inevitably fail. It will force ride-sharing services into the black economy. Just as file sharing continues today, ride-sharing will also continue. Just as Napster was the first of many peer-to-peer services, Uber is just the first of many ride-sharing services in Australia. The government can either adapt the laws so we gain by sensible regulation of these services. Or the government can fail. But even if Uber, like Napster, goes bankrupt, ride-sharing is not going to go away.