HEATHER IRVINE: Inquiry into online platform competition: bridging the moat or raiding the castle?

Warren Buffett wrote in his 2005 Berkshire Hathaway annual letter to shareholders: “Every day, in countless ways, the competitive position of each of our businesses grows either weaker or stronger. If we are delighting customers, eliminating unnecessary costs and improving our products and services, we gain strength. But if we treat customers with indifference or tolerate bloat, our businesses will wither.  

“On a daily basis the effects of our actions are imperceptible; cumulatively though, their consequences are enormous. When our long-term competitive position improves as a result of these almost unnoticeable actions we describe the phenomenon as ‘widening the moat’. And doing that is essential if we are to have the kind of business we want a decade or two from now.”

I have pondered this advice from one of the greatest investors and business builders of our time in the context of the Competition Commission’s recently published provisional report on its online platforms market inquiry. The report identifies 10 online platforms — Google, Property24, Private Property, AutoTrader, Cars.co.za, Mr Delivery, Uber Eats, Booking.com, Takealot and Apple — which it says are “leading” platforms in the sense that they have positions that are unassailable in markets that have irreversibly tipped. It notes that some of these platforms have enjoyed “first-mover to scale advantages” and may employ “strategies to retain and extend leadership”.

It is difficult to see how any of this is inconsistent with what Buffett suggests companies must do to be successful, and remain so over time, particularly those in the rapidly evolving digital world. These online services have delivered unparalleled convenience and choice for consumers. In many cases they have dramatically lowered the cost of searching for, comparing and purchasing (or selling) products and services, and have offered SA firms the incredible benefits of selling into enormous global markets.

As a result they are frequently — and in some cases increasingly — used by both SA customers and the businesses that serve them. Yet, the Competition Commission report suggests that this hard-fought success should be a basis for applying “remedies”. In the case of Takealot, for example, this would entail a huge internal business restructure to separate its retail operation and marketplace, and in the case of Mr Delivery the implementation of a standardised rate card and restrictions on the ability of international and national restaurant chains to contract with it on a national basis, across the whole store network.

What’s missing, of course, is an analysis of how competition actually works in the relevant markets in which this proposed regulation is to be applied. In the context of retail, the report does not examine any evidence on the extent to which SA consumers switch between traditional brick-and-mortar stores and online marketplaces that sell third parties’ products (like Loot, Jumia and Takealot), or use omnichannel retailers like Mr Price and Checkers. (Makro’s new online offering, which launched after the publication of the report, is not mentioned at all.)

In the travel section the report does not apply the conventional SSNIP (small but significant and non-transitory increase in price) economic test to analyse the extent to which SA consumers and accommodation providers can and do switch between different channels — both online and offline — to advertise their travel services and attract bookings from customers. As a result, the boundaries of the relevant product markets remain unclear, so it is hard to assess whether these businesses really have built a moat, and if so how unassailable that moat will be over time. Or whether this really is the kind of moat that leaves the lords of these castles immune from future challengers, or at liberty to exploit the citizens within their walls.

Instead, the report focuses on small businesses, particularly those that purchase services from the online platforms, and asks whether these small businesses pay more for the online services they purchase than larger ones.  This is a fair question. The Competition Act recognises that substantial discounting by dominant sellers has the potential to distort competition between customers, and as a consequence of the amendments to the Competition Act in 2019 that this kind of discounting should also be prohibited where it leads to small businesses being unable to sustain themselves in their markets.

However, the report does not identify those platforms that are “dominant” firms, which have market power and hence are restricted from engaging in price discrimination. The report also does not suggest that the inquiry has analysed the nature of competition in these markets, and whether or how the fees paid to online platforms by small hotels, product sellers, restaurants or software developers render these smaller competitors unable to participate — to widen their own moats.

The report does not examine whether the use of online platforms by these smaller firms has lowered their costs over time or generated substantial cost-saving efficiencies. Nor does it examine the extent to which discounting by the platforms happens as a result of competitive pressure from rivals, or is reflective of the economic imperatives of attracting and keeping large customers — the cut and thrust of the bargaining process that lies at the very heart of competitive markets. To address the perceived “unfairness” to small business, the report suggests significant interference with current contracts (e-commerce, online classifieds, food delivery and travel) and even price regulation (software application stores).

Finally, the report concludes that all “leading” platforms “attract some obligation to offset the cumulative disadvantages” faced by businesses owned by “historically disadvantaged persons”, and accordingly they should all be required to “institute an HDP programme targeted at overcoming barriers to participation”.

The report does not consider whether this action falls within the scope of the powers of the commission under the Competition Act, whether this form of discrimination in favour of businesses owned by particular kinds of people (not small business generally) passes constitutional muster, or whether regulating these benefits only for local companies is consistent with SA’s international trade obligations.

Costs

Most importantly, however, the report does not consider the two imperatives that Buffett identifies for any successful business, large or small: whether applying these “remedies” will enable them to better delight customers, and just as importantly whether this will raise their costs.

All companies operating in SA need to recognise and support the public interest goals of the Competition Act and related legislation, like the Broad-Based BEE Act, particularly in relation to the development of small businesses and transformation. At the same time, they have to strive to remain competitive and build their moats, particularly in the digital realm. Both are part of building a sustainable and competitive SA business. There is considerable scope for innovation.

The application of extensive regulation that is insufficiently attuned to the realities of doing business and insensitive to the unintended consequences of one-size-fits-all regulation in highly dynamic digital markets risks harming this process.

One hopes that in the months that remain before the inquiry publishes its final report in November, more careful analysis and nuanced balancing of these concerns will take place.

• Irvine is a partner at Bowmans SA.