The South African Competition Commission (SACC) has proposed changes to the nation’s digital-market regulation that could deal a significant blow to an already struggling South African economy. Ostensibly intended to protect online competition, the SACC’s plan to reshape the business models of “online intermediation platforms” like Google and Booking.com would entail a radical departure from traditional competition regulation.
This is a significant moment for South Africa—one that could galvanize the country’s digitization efforts, attract new investment, create jobs, and spur economic growth. But if the country miscalculates, the effects could be dire. And the stakes could not be higher: according to the latest Bloomberg survey of economists, South Africa’s economy is poised on the precipice of recession. Not getting it wrong is just as important as getting it right.
There is reason to be concerned that the SACC is getting it very wrong. In particular, the SACC’s final report—released late last month—draws heavily from an untested approach to competition policy pioneered by the European Union’s Digital Markets Act (DMA). Unlike traditional competition enforcement, the DMA imposes prescriptive business-model designs on so-called “digital gatekeepers,” requiring no investigation of anticompetitive effects and affording no opportunity for firms to demonstrate consumer benefits.
But, in some ways, the SACC’s report goes even further, explicitly requiring targeted companies to aid struggling competitors by redesigning their products and granting them free ad space and training.
It remains an open question whether the DMA will serve European consumers and small businesses. There are many reasons to think the entire approach is seriously flawed, and the DMA is so new that companies are not even expected to comply with it until next year. Whatever speculative promise it may appear to offer, the DMA is still in the experimental phase and its approach remains controversial.
But developing countries like South Africa should be especially wary of importing untested competition rules that impose government-mandated designs on the business models and user interfaces of innovative companies. It’s not trite to say that South Africa’s market is not the same as the EU’s. The consequences of unsound competition policy here may be to stymie foreign investment and domestic innovation exactly where they are needed most.
While competition is as important in developing markets as in developed ones, developing markets are especially dependent upon competition rules that encourage investment in infrastructure to facilitate economic growth and that offer a secure environment for ongoing innovation. Particularly for relatively young, rapidly evolving industries like digital markets, attracting consistent investment and industry know-how ensures that such markets can innovate and adapt to meet the needs of a maturing market. Accomplishing this demands an approach to competition policymaking that resists top-down design and intervenes only where conduct is shown to harm the competitive process.
This is a far cry from the untested, preemptive constraints contemplated by the SACC. Instead, the SACC sees large platforms as an inherent threat and contends that preemptive rules are needed, as SACC Commissioner Doris Tshepe put it in announcing the July 31 launch of the final Online Intermediation Platforms Market Inquiry Report, because of “the global and domestic concern that digital platforms are inexplicably concentrated already or prone to tipping in that direction, and that competition law has failed to adequately maintain competition in digital markets.”
There are, however, a few problems with this.
First, there is often a direct conflict between facilitating entry by competitors and serving consumers. For example, the report would flatly prohibit self-preferencing, on the theory that it impedes competition by independent providers of certain platform services. Self-preferencing is incredibly common throughout the economy (as when a supermarket puts its store-brand products at eye level) and especially in online markets (as when iPhones are offered with Safari pre-installed, or Google places a Google Map at the top of a search results page).
There is scant evidence self-preferencing is harmful, and much to suggest it is beneficial. While prohibiting Google from showing a Google Map ahead of links to other online maps might provide more traffic for competitors, it would also degrade the user experience, requiring users to click through to maps of potentially unknown quality, rather than seeing Google’s maps right at the top of relevant search results.
At the same time, firms often invest in areas outside their core business only because they can preferentially deploy them to improve their products. If they are prohibited from self-preferencing, the incentive to invest and innovate will be reduced. And a great number of these features have come from start-up acquisitions. It seems unlikely that platforms will continue to invest as vigorously in enhancing their online ecosystems in South Africa if they are prohibited from realizing the full return on such investments.
Second, a tipped market is one in which a single player is insulated from meaningful competition by rivals. But just because a firm is large, that doesn’t mean it faces no competitive threat. In fact, large platforms frequently challenge each other’s dominance in neighboring markets. Entry—or even just the threat of entry—by these platforms improves competition. It would be a sad irony if one of the first legacies of the SACC’s digital strategy—whose self-avowed goal is to prioritize access to the digital economy—were to discourage entry or increased investment in South Africa by these large competitors.
Relative to its European and North American peers, the South African economy remains underserved by the world’s most powerful consumer and business technologies. The government has a plan to spur economic growth, investment, and job creation. Foreign investment represents a key opportunity to bring new technologies to South Africa, create jobs, and develop infrastructure.
Global economic conditions, however, suggest that both the number of potential foreign investors in South Africa and the size of their potential investments is shrinking; competition between countries for foreign direct investment is becoming more intense. Rather than send the wrong message to investors at precisely the wrong time, South Africa’s priority should be to attract long-term investments in its digital infrastructure.