New regulations and laws may be needed to prevent global tech giants from acquiring early-stage start-ups and stifling competition, according to ACCC chair Rod Sims.
Addressing the 2019 Competition Law Conference in Sydney, the Australian Competition and Consumer Commission boss outlined how the regulator is approaching mergers and acquisitions, and hinted that it may recommend legislative changes to the government.
Sims said he was concerned about the increasingly common tactic from tech giants like Google and Facebook of acquiring early-stage startups that could evolve into significant competitors at some point in the future.
“In my view, merger law should focus on whether the acquisition interferes with the competitive process and recognise that the process of competition for the market is not the same as the process of competition within the market,” Sims said.
“If the prospect that the target will become an effective competitor is small, but the potential increase in competition and consumer welfare is larger, greater weight should be put on the potential for competition.”
Facebook and Google gobble start-ups
Between 2004 and 2014, Google acquired 145 companies for a total of $US23 billion, while just in the last year Facebook acquired 66 companies at a cost of $US23 billion.
Sims also pointed to Facebook’s acquisition of Instagram – a then profitless two-year-old photo sharing platform – for $US1 billion in 2012.
“Arguably, Facebook’s acquisition of Instagram eliminated the threat of a substantial potential competitor,” he said.
He also rejected concerns that changes to M&A laws could negatively impact local start-ups.
“Some have argued that preventing large digital platforms acquiring small start-ups interferes with the incentives to innovate in the first instance,” Sims said.
“This perspective appears to be based on a view that large digital platforms are uniquely placed to develop and monetise the innovations of small startups.”
The ACCC is actively considering whether the forward-looking test for mergers, which questions if the acquisition would substantially lessen competition, is now inadequate when looking at large tech companies.
Inquiry into platforms
The ACCC is currently conducting a “world-first” inquiry into digital platforms, and will hand its final report and recommendations to the federal government next month. In its preliminary report, released late last year, the competition watchdog recommended a series of changes to mergers and acquisition laws that would impact Australian startups.
These included changes to the Competition and Consumer Act to clarify that whether an acquisition was involved a “potential competitor” and how much data would be transferred.
Large tech firms would also have to give the ACCC enough notice of a potential deal so it can conduct a review into it.
“This recommendation is intended to signal the significance of these factors in relevant cases and remove any ambiguity as to their relevance,” the report said.
“In particular, articulating these factors in legislation is also intended to have the effect of signalling the importance of these factors to the courts of the Competition Tribunal, in assessing whether a merger or acquisition has the effect or likely effect of substantially lessening competition.”
In its report, the ACCC said strategic acquisitions by Facebook and Google have “contributed to the market power they currently hold” and are used to “entrench market power”.
“This highlights an inherent challenge for regulators reviewing potential acquisitions by digital platforms: the need to speculate about changing digital habits by consumers and the likelihood of firms to grow and develop to match those changing habits in the absence of a potential acquisition,” the report said.
In the speech, Sims also said he doesn’t think competition law should be broadened to include issues such as privacy, economic inequality and political influence.
“While the aims are admirable, indeed compelling, I do not believe that broadening the objectives of competition law is the best way to promote them,” he said.
“Widening the objectives of competition law is likely to reduce its effectiveness. If we try to get competition law to achieve everything it may end up achieving nothing.”