[SCMP Column] The Need for Legal Rethink

June 19, 2017

Peter Thiel, the US tech investor and improbable Trump supporter, has a knack of being controversial: “Competition is for losers,” he claims.

Europe’s competition authority may not agree with him, as it has slapped a Euro 110m fine on Facebook for competition abuses, and is pondering fines on Google for abuse of its search engine powers to skew business to its online retailers.

But Peter Thiel makes a fascinating point, and cuts to the heart of a dilemma facing the world’s anti-monopoly regulators as the digital age reshapes our lives. As the five US digital behemoths – Facebook, Apple, Amazon, Netflix and Google – build market powers that more than match those of Standard Oil in 1910 or Microsoft in 1999 – do regulators stand back and simply acknowledge that these giants have grown so dominant because they are really good at what they do? Or do they move to constrain the extraordinary market domination that has emerged?

Even if they decide they have to act, the challenge is how. How does one create competition when a company like Google offers online shoppers its search services for free? How does a regulator prove anti-competitive intent when the offender is an algorithm? As a recent OECD report asked: “Finding ways to prevent collusion between self-learning algorithms might be one of the biggest challenges that competition law enforcers have ever faced.” Understanding how digital dominance works, and how to regulate it, is at present an unanswered challenge.

There nevertheless seems to be agreement, at least among European regulators, that something needs to be done, and urgently. The US’s “big five” today have a combined stock market valuation of around US$2.4 trillion – bigger than the aggregate value of France’s CAC40, or the companies listed in Germany’s Dax.

And if the US’s “big five” are creating systemic problems, what about the challenge in China? As Tencent and Alibaba join the world’s top 10 companies by market value, and could soon be valued at US$500bn or more, what prospect for monopolistic capture in the Mainland?

As one Financial Times journalist noted last week: “Facebook chief executive Mark Zuckerberg has to compete in different ways with Netflix, Amazon and Hollywood. By contrast, Tencent owns a major movie, music streaming and online payment platform.” She added that “if Tesla was in China, it would not just try to pioneer electric cars. It would offer everything from car insurance and consumer finance to sound systems and social networks.”

Such behemoths are now so awesomely big that market entry to compete with them is a massive challenge for even the smartest of upstarts. And if someone emerges that has the potential to create a meaningful challenge, the next best response is simply to buy them out – as Facebook did with WhatsApp for a sobering US$19bn.

And then you have Amazon’s provocative purchase last week of Whole Foods for US$13.7bn – a clear assault on the mainstream bricks and mortar retail foods business long dominated by Walmart, and a good example of the power now being marshalled by the digital giants to challenge even the most gigantic of traditional retailers. Walmart has long recognized the e-commerce threat being championed by Amazon, and has faced the challenge head on. It is a measure of the precocious power of the digital giants that they feel confident to tackle a behemoth like Walmart, for whom groceries account for 60 per cent of their business, and where they control 20 per cent of the US’s US$800bn groceries market.

If the predatory power of giants like Google or Tencent is a cause for concern for competition authorities focused on market dominance and potential abuse of power, spare a thought for the systemic challenge that comes from pesky algorithms. As the OECD notes: “It may be very difficult, if not impossible, to prove an intention to coordinate prices …There is no legal basis to attribute liability to a computer engineer for having programmed a machine that eventually ‘self learned’ to coordinate prices with other machines.”

In short, algorithms have made obsolete any need for face-to-face plotting by price fixers. Take Uber’s “surge pricing” algorithm, which automatically lifts charges at times of peak demand in a context where taxi drivers would otherwise compete against one another on price.

As Prof Michael Eisen at the University of California notes: “What is fascinating about all this is the seemingly endless possibilities for both chaos and mischief.”

Here in the Lilliputian Hong Kong market, such mind-bending anti-trust challenges seem light years away. Our infant Competition Commission, which this month celebrates its fifth anniversary, has so far ruled on few controversial issues, and seems remote from the anti-trust challenges being created by the digital behemoths. Just a month ago, it completed one of its most ambitious investigations – exploring anti-competitive behavior in Hong Kong’s petrol filling station market. There could be no better example of how distant we are from the anti-competitive challenges of the day.

Allegations of monopoly practices and price fixing between Hong Kong’s five auto-fuel retailers have for more than a decade been an obsession among original advocates of a Hong Kong Competition Law. But their obsession is preposterous. How can one possibly generate a robust competitive market in a city that has just 181 petrol stations, where 65 per cent of the price of a litre of petrol is accounted for by government duty and the fuel import cost, and where the next main cost is colossal premiums paid for filling station leases? How can there be robust competition in a market of such monumental insignificance when two of the players – Sinopec and PetroChina – are on the Mainland competing across 95,000 petrol filling stations.

How can our Competition Commission pursue its mission to “prohibit mergers that substantially lessen competition in Hong Kong” when in telecoms, for example, providers like China Mobile can lean on a Mainland market of 860m customers? What possible merger in Hong Kong’s market of 16.7m subscribers could alter the competitive might of such a behemoth?

We have colossal new challenges emerging in the digital era which pose a pervasive danger of concentrated monopoly power. We have people like Peter Thiel who appear not to mind. We have a Competition Commission fussing with little local issues. Surely we must make sure that competition is NOT for losers.
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