Promoting innovation through competition

Mr Rod Sims, Chairman
RBB Economics Conference
5 November 2015

At the RBB Economics Conference in Sydney, ACCC Chairman Rod Sims discusses the current innovation debate. Mr Sims provides insights on media laws, intellectual property and recent ACCC competition activities.


Check against delivery


Thank you again to RBB for the invitation to speak today. I am always keen to speak at a conference held by economists, even though I suspect today there are more lawyers in the room.

While it is already public, I think it is appropriate to say again today that we will shortly be appointing a Chief Economist dealing with competition matters at the ACCC. This appointment is overdue.

Once an appointment is made I will have more to say concerning the role of the Chief Economist. Suffice to say that while sound economics already guides our decisions, this appointment will enhance and entrench the key role of economics at the ACCC.

Today I want to talk about innovation and competition.

The importance and need for innovation is now more often mentioned in Australia. Indeed, the Government is due to announce policies to enhance innovation shortly.

As someone with a long interest in this debate, I hope most focus will be on the “three Rs” of innovation: appropriate tax, industrial relations and competition policies.

Improving our tax, IR and competition polices will make the biggest contribution to promoting innovation in Australia.

The need for tax and IR reform is clear, and the Government is well advanced on both.

The focus, of course, is also on competition policy reform with the Harper Review.

Improving competition law and removing outdated and anti-competitive legislation will boost innovation. As Fred Hilmer has said, just because people have greater ability to innovate and be more productive, does not mean they will be.

To become more productive and innovative there must be incentives to do so; and competition is the key driver of this.

Virtually all the Harper recommendations will help to boost innovation. Many are difficult to implement because there are vested interests opposing change. This always occurs with polices to boost competition.

Today I will not be focusing on Section 46. The Harper changes to Section 46 will, of course, clearly boost innovation as they will prevent those with substantial market power excluding emerging competitors where this will substantially lessen competition.

Indeed, the Harper changes to Section 46 seem, more than most of the Panel’s recommendations, to be most clearly aimed at boosting innovation.

But much has already been said on Section 46.

Very little has been said, however, on two other areas of Harper focus. One is the need for all Governments to review regulations to remove unnecessary restrictions on competition, and the other is in relation to intellectual property.

Under the first heading, I think our media laws would be an excellent place to start. Flowing from our analysis of the media market in our assessment of the Foxtel/Ten transactions, the ACCC is well placed to have views on these issues, and I will mention them today.

I will then discuss the Harper recommendations in relation to intellectual property. Clearly this area goes to the heart of innovation.

Before going to both of these issues, however, I will outline briefly the huge array of competition issues we are now dealing with.

Touring the competition horizon

We have had a very busy year enforcing the competition law. Our portfolio of competition cases in Court is significant.

We are pleased to have achieved some recent notable successes.

  • We resolved an investigation into Cabcharge by accepting an enforceable undertaking which puts in place an access regime for competing payment processing businesses to be able to process Cabcharge cards, alongside other credit and debit cards.
  • In a case we took against VISA and subsidiaries the Federal Court ordered an $18M penalty for conduct by a VISA subsidiary which imposed a moratorium on direct currency conversion services being used in conjunction with VISA cards.
  • The Federal Court recently declared Little Company of Mary Health Care Ltd (LCMHC) and its Riverina subsidiary engaged in exclusive dealing conduct that was likely to have an anti-competitive effect in the supply of day surgery services in Wagga Wagga. LCMHC also gave an undertaking to the Court to delete the clauses of the bylaws of concern to the ACCC.

In each of these cases our action has opened markets to innovative businesses who are seeking to compete against established entrenched firms.

We are also looking forward to Court judgments in a number of cases that were vigorously contested.

They include the Cement Australia case where the Court has reserved its decision about an appropriate penalty following a finding of contravention. We have argued that the penalties imposed should be substantial reflecting the intention of Parliament in its amendments to the penalty law.

We are also waiting for the Full Court of the Federal Court to determine our appeal in the Garuda and Air New Zealand Air Cargo matters; and before the Federal Court we have a case against Yazaki relating to an alleged wire harness cartel, the alleged egg cartel case and the alleged Prysmian and Nexans cable cartel.

Coming up in the year ahead we have a number of significant matters listed for hearing in Court.

They include:

  • cartel proceedings against the Obeid brothers, Cascade and Loyal Coal
  • secondary boycott proceedings against the CFMEU,
  • proceedings against Informed Sources, which will have important implications for the competitiveness of the petrol market,
  • an application for special leave from the High Court in our case against Flight Centre, and
  • proceedings in relation to an alleged laundry detergent cartel.

Further, since the beginning of the year, the ACCC has experienced an increase in the number and complexity of mergers under review. An unusually high proportion of these are cross-border mergers with high transaction values which appear to be fuelled by pre GFC levels of liquidity and business confidence.

This has meant it has been a busy time for merger regulators all over the world and this has been evident in Australia, with the number of reviews in which the ACCC has released a Statement of Issues (SOIs) at an all-time high.

Since 2010, the ACCC has issued on average nine SOIs per financial year, with ten being the most we have released in any one year. We are not yet half way through the current financial year and the ACCC has already issued seven SOIs and a number of these have raised red light concerns.

Our merger reviews continue to provide challenging and complex issues.

On the domestic front the recently completed review of an acquisition of 15 per cent of Network Ten by Australia’s monopoly pay TV provider Foxtel required an assessment of both the incentives and motives of a number of key shareholders of Ten and their relationship with Foxtel, as well as assessing the impact of the acquisition in the context of the fast moving media industry.

The ACCC also looked at the proposed acquisition of Iona, a significant gas storage facility by APA, which owns the largest network of gas pipelines on the eastern seaboard. This matter in the end did not require a final decision as the APA was not the successful bidder.

In terms of mergers currently under consideration, Brookfield’s proposal to acquire Asciano is a transaction that has raised significant concerns in the market. These are in relation to vertical integration issues due to Brookfield’s ownership of the below rail network in WA, and the Dalrymple Bay Coal Terminal in Queensland, alongside Asciano’s Pacific National above rail business. There is, of course, the recent development of Qube injecting itself into the conversation by buying 19.9 per cent of Asciano, which adds a new dimension to our review.

The issues raised by the international mergers are no less challenging.

The Halliburton Baker Hughes transaction has raised significant concerns in the oil exploration sector not just here in Australia but also for regulators in other parts of the world including the US, Europe and China. The parties seem determined to ensure the deal is consummated having agreed to a break fee of 3.5 billion USD.

The Shell BG merger is another transaction which has presented challenging issues in Australia, with market concerns focussing on the effect of the transaction on the domestic gas market.

On the authorisation side of our work we have made a number of important decisions.

We have recently issued a draft decision proposing to deny authorisation in the ihail matter. The ihail app would have a significant impact on competition in the taxi industry, which could affect prices and quality of service, and the ACCC was not satisfied that the claimed benefits would outweigh this competitive detriment.

We estimate that the initial ihail shareholders represent more than half of all taxis in Australia, and a larger share in the metropolitan areas where the app would operate. There are a number of apps that already provide access to large fleets of taxis across multiple locations.

The growth in these existing apps is being driven by competition to attract drivers and customers. ihail will achieve a potentially dominant position from launch; not through competition, but because of the larger fleet of taxis its ownership structure delivers.

We also recently issued a draft decision proposing to deny authorisation to the major cotton merchants who were seeking authorisation to collectively refuse to contract with growers unless their cotton has been machine classed.

While there may be benefits in moving to full machine classing, it was not clear to the ACCC that there was a market failure justifying collective action. If, as the applicants claimed, moving to machine classing will be mutually beneficial to both merchants and growers, it is not clear why merchants need to impose machine classing on growers. The ACCC was not satisfied that the benefits claimed to result from the proposed conduct outweighed the competitive detriment.

Following the release of the draft decision this application was withdrawn.

In addition to our “business as usual” reviews we have Sea Swift’s application for merger authorisation to acquire Toll Shipping currently before the Australian Competition Tribunal following our recent decision to deny informal clearance. This is the third application to be filed before the ACT in as many years, and will be heard and determined in December.

In addition to all of the above, as I have said, we have the Harper Review.

In the case of mergers, for example, the Harper Report has recommended two key changes. The first involves combining the two current formal merger exemption processes, that is, the formal merger clearance process and the merger authorisation process, with the ACCC to be the first instance decision maker. Under this proposal the ACCC would be empowered to authorise a merger if it is satisfied that the merger does not substantially lessen competition or that the merger would result, or would be likely to result, in a benefit to the public that would outweigh any detriment.

The panel also recommended further consultation between the ACCC and business representatives, with the objective of developing an informal review process that delivers more timely and effective outcomes. The ACCC welcomes such engagement.

In addition to all of the above, of course, we have our important market studies into the East Coast Gas Market, and regional petrol prices.

Having pro-competitive media laws

As stated earlier, the ACCC’s current interest in media laws has arisen from our detailed analysis of the Foxtel/Ten transactions. This saw us receive numerous high quality submissions, with many differing perspectives.

Indeed, the recent FOXTEL-Ten transactions are an interesting study in the intersection of the Competition and Consumer Act (CCA) and media regulations under the Broadcasting Services Act (BSA).

Foxtel proposed to acquire up to 15 per cent of Ten; Ten proposed to acquire a 24.99 per cent stake in Foxtel’s advertising agency Multi-Channel Network; and Ten gained an option to acquire 10 per cent of Presto TV, a subscription video-on-demand service jointly owned by Foxtel and Seven.

The ACCC assessed whether the transactions would be likely to substantially lessen competition under section 50 of the CCA, while the Australian Communications and Media Authority considered control issues arising from the proposed acquisitions pursuant to the media diversity and control rules under the BSA. Ultimately, both regulators cleared the transaction.

The ACCC stated that while the acquisitions will lead to a greater alignment of Foxtel’s and Ten’s interests, and will increase the degree of influence Foxtel has over Ten, we considered that the proposed acquisitions were unlikely to result in a substantial lessening of competition.

We did not find sufficient evidence to establish a link between these minority acquisitions and the competition concerns raised by market participants.

We went on to say, however, that unlike most acquisitions reviewed by the ACCC, which result in the target becoming a subsidiary of the acquirer, these acquisitions do not result in the merger parties becoming related parties, and so any arrangements between them are subject to the competition provisions of the Act.

While noting the dynamic nature of this market, the ACCC will look closely at the effect of current and future arrangements between Foxtel and Ten which may raise competition concerns, including the MCN agreement.

This possibility did not lessen the strong negative reaction to our decision not to oppose the transactions from some quarters.

Some believe, for example, that through these transactions News Limited now has strong positions in Australia in print, subscription TV, radio and now free to air TV. It was argued that News Limited can operate through four forms of media, while others are restricted to two under the BSA.

This, of course, is a reference to the two out of three rule, which prevents anyone controlling a radio broadcasting licence, a television broadcasting licence and a newspaper in the same licence area. You can control two of these mediums but not all three.

As with the Foxtel/Ten transactions, of course, this raises the issue of what constitutes “control”.

The difficulty with this concept is one reason to question the 2 out of 3 rule.

A larger reason is the diversity of news sources we have today. This rule was introduced before the emergence of the internet. Now people can read overseas newspapers as easily as they can local ones, and they can stream or otherwise gain access to endless content.

Regulation that relies on particular platforms will always run the risk of being obsolete as technology and consumer preferences change.

Indeed, we need to ask whether the 2 out of 3 rule is preventing the efficient delivery of content over multiple platforms, and should be reviewed to see whether it is still relevant for the preservation of diversity.

Conversely, such a rule, may give some firms the impression that they can be protected from technological change.

Surely laws that restrict acquisitions need clear justification. Changing technology may have made the initial justification for the 2 out of 3 rule, from 30 years ago, redundant.

This also applies to the 75 per cent reach rule.

The ‘reach rule’ has been undermined by the ability of commercial free-to-air television operators to stream their content nationally via the internet. Indeed, Seven has commenced doing just this with the launch of its PLUS7! Live streaming app, which streams all of Seven’s channels on any device, anywhere in Australia. Nine has also recently announced that it will start streaming all of its channels – via its 9Now platform – in 2016.

The success of international streaming services such as Netflix, and the emergence of competitors such as Stan and Presto, is further indication of the consumer shift away from traditional TV viewing toward online streaming.

Further, the reach rule is potentially limiting competition and efficient investment in the industry. With regard to the recent Foxtel/Ten transactions, it could be observed that the reach rule may have limited the ability of existing shareholders of free-to-air networks and other broadcasters from investing, or increasing their investments, in Ten.

While there are, therefore, serious questions to be asked about the 2 out of 3 and the 75 per cent reach rules, we believe that, also for competition reasons, some form of anti-siphoning regime continues to be required.

We believe this to be the case because Australia has, in essence, a near monopoly pay TV provider in Foxtel.

The concern is that, without the anti-siphoning regime, Foxtel could acquire exclusively all premium sport and reduce competition in the television viewing market.

Access to this content drives viewers and so advertisers.

While the anti-siphoning regime seems procompetitive now, however, and should be kept in place, this may not always be the case.

One of my younger colleagues alerted me to the fact that last week more than 15m viewers tuned in to the first ever live online stream of an American football match. A partnership deal between Yahoo and the NFL saw a live stream of the game between the Jacksonville Jaguars and the Buffalo Bills. This audience figure was impressive for a number of reasons, not least that the game in question was fought out between two of the NFL’s least fashionable teams.

In addition to this NFL game, we’ve also seen YouTube secure live streaming rights for the Indian Premier League cricket, as well as select Major League Baseball and National Basketball Association games.

If this trend of streaming live sport is replicated in Australia, particularly via paid subscription models, the anti-siphoning regime may need revisiting, but we are not there yet.

That said, I note that Optus has acquired the rights to the English Premier League; while they are not on the anti-siphoning list, it will be interesting to see how these rights are used.

To conclude, with the rapid technological convergence in the media industry, I believe that policy makers and regulators should aim for a neutral treatment of different technologies. In this regard, this seems to require a shift away from regulation based on delivery platforms.

The points I have just made are a good example of where the ACCC can gain valuable insights from its work that should be widely shared. This is competition advocacy, akin to the Reserve Bank sharing its observations on the state of Australia’s economy.

Intellectual property and competition

An area of the Harper review that has not received as much attention as it might have is in relation to intellectual property. In the information age, the role IP plays in all facets of economic activity is profound.

The ACCC strongly supports the Harper panel’s recommendations in relation to IP, and the government’s early response in launching a more in-depth review by the Productivity Commission.

I have been somewhat taken aback, however, by the reactions of some commentators to what seem to be very sensible and considered recommendations. In particular, some claim the Harper recommendations are an attack on the concept of IP rights, which is clearly not so.

There are very sound economic reasons for creating such exclusive rights. In a general sense, rights creation ensures that firms have the incentive to innovate and invent, and that the rights-holder has incentives to develop their property and put it to good use. If any other party were able to come along and freely appropriate the fruits of those labours, then these incentives would be undermined.

In the specific case of IP, there is often a high one-off cost of creating or inventing new intellectual property and bringing it to market. By its nature, though, once invented there is often a close to zero marginal cost of using it.

As with other forms of property, therefore, giving the IP rights-holder the ability to exclude others from replicating and profiting from the original innovation that is creating a new way of doing things, a new technology, or new work of art, is designed to encourage continued investment in the development of intellectual property.

A lack of IP rights would lead to socially inefficient levels of investment in the original IP.

On the other hand, however, innovation also arises from the subsequent use of the original IP right, either by combining or extending previous creations/innovations. This ‘follow-on’ innovation can at times be just as powerful, or even more so, than the first.

IP rights should therefore be designed to balance incentives to invest in and create the initial intellectual property, with the incentives and ability to make maximum use of it once invented.

To illustrate the appropriateness of a Productivity Commission review into this difficult balancing act, it is appropriate with this audience that I quote from The Economist magazine.

“Patents are supposed to spread knowledge, by obliging holders to lay out their innovation for all to see; they often fail, because patent-lawyers are master of obfuscation. Instead, the system has created a parasitic ecology of trolls and defensive patent-holders, who aim to block innovation, or at least to stand in its way unless they can grab a share of the spoils.”

“Yet no property rights are absolute … Striking the balance between the claim of the individual and the interests of society is hard. But with ideas, the argument that the government should force the owners of intellectual property to share is especially strong.”

“Patents also last too long. Protection for 20 years might make sense in the pharmaceutical industry, because to test a drug and bring it to market can take more than a decade. But in industries like information technology, the time from brain wave to production line, or line of code, is much shorter. When patents lag behind the pace of innovation, firms end up with monopolies on the building-blocks of an industry.”

These are, of course, strong words.

One issue the Productivity Commission may look at is whether intellectual property should be outside the scope of the national access regime in Part IIIA of the CCA.

Indeed there could be advantages in bringing IP within the scope of Part IIIA.

First, by having a single regime for all IP, a more consistent approach to regulated access should be achieved.

Second, the criteria of Part IIIA would establish suitably high thresholds for intervention, and a clear focus on promoting competition and economic efficiency in the event access to IP is mandated.

Thirdly, it would bring the treatment of access to intellectual property into line with the treatment of other forms of property under competition law.

There are, however, many complex issues to be considered here.

Another, I think simpler, issue raised by the Harper Panel is that intellectual property currently receives preferential treatment under competition law. A complex exemption of certain IP-related activities is set out in s51(3), despite several reviews finding problems with it. The most recent two reviews, by the Australian Law Reform Commission and the Harper panel, have each recommended its straight repeal.

The ACCC agrees.

We do not expect that this will have a significant impact on IP rights holders. Just as all businesses have the general right to choose with whom, and on what terms, they are willing to sell goods or services subject to the competition provisions of the CCA, IP rights-holders would have the ability to decide to whom they provide a licence of their IP, and on what terms, provided their conduct does not amount to a cartel or substantially lessen competition. This would clearly be the case in the overwhelming majority of circumstances.

Section 51(3) has the effect of exempting the imposing of, or giving effect to, conditions of IP licences and assignments from the competition provisions of Part IV of the CCA (other than the misuse of market power and resale price maintenance provisions) to the extent that the condition relates to the subject matter of the IP.

There are a number of problems with a standing legislative exemption for conditions in IP licences or assignments and provisions in contracts relating to trade marks.

First, it can strongly be argued that the use of IP rights should not involve conduct which increases any market power conferred by IP rights by, for example, aggregating or leveraging those rights.

Indeed, there is potential for conflict between IP and competition policy where competing IP rights are aggregated by agreement, or through conduct that extends the scope of the right beyond that provided by the IP statute, or where the licence facilitates market sharing or forecloses access to an important input.

Second, the extent of the exemption provided by section 51(3) is uncertain, particularly in relation to the extent to which a condition “relates to” the relevant IP, and it is likely that it does not protect at least some of the conduct I have mentioned above.

Such uncertainty reduces the benefit of the exception, which has rarely been relied on in court proceedings in Australia, although most recently it was unsuccessfully used by Pfizer in the proceedings brought by the ACCC, with the court finding for Pfizer on other grounds.

It must be clearly stated that the ACCC does not suggest that the initial creation or registration of an IP right, which creates a monopoly right for a limited period, would conflict with competition law or policy. However, it is the ACCC’s view that agreements entered into by IP rights holders should be subject to the competition provisions of the CCA in the same way as other commercial agreements. It is for this reason that we support the repeal of section 51(3).

It is also worth emphasising that most other major jurisdictions do not exempt IP from competition laws. There is little evidence that efficiency enhancing and procompetitive IP licensing is harmed in those jurisdictions. Repealing section 51(3) would therefore bring Australia more in line with international practice.

This would particularly be the case in the event other Harper recommendations are adopted. For example, the proposed block exemption power is one mechanism that might be utilised in relation to IP, should the need arise.


From the above I hope you can see that there is much happening at the ACCC, and potentially with the Harper Panel’s recommendations.

Thank you for your time today.