In this bulletin, we consider some of the complexities of the code, and the challenges in finding the kind of bargains the Government is hunting for.
The mandatory code follows from a lengthy, detailed ACCC Digital Platforms Inquiry and from the follow-on consultation processes by Government (Figure 1). The code’s bargaining framework is on track to become operational in March 2021.
See further details on the progress of the Government's Bill (Code).
The code is built around bargaining and compulsory arbitration provisions, but also provides for contracting “around” the code through individual negotiations and standard agreements.
The ACCC in its Inquiry recommended a code (initially voluntary) to address bargaining power imbalances between major digital platforms and media businesses. The imbalance is said to stem from these platforms being “unavoidable trading partners” for news publishers.
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Digital platforms use news content by linking (or allowing links) to news items on their services, including previews or snippets. This allows digital platforms to maintain the attention of their users, and so increases their ability to sell “eyeballs” to advertisers. Historically, the digital platforms had not paid the content generators in Australia (i.e. the Australian news media) for the use of these links.
The ACCC’s interpretation was that news media lacked the bargaining power to seek payment. The lack of power comes from the different consequences from news media withholding supply of news. Withholding hurts both parties, because it makes the digital platforms less useful and reduces click-throughs to news media sites. However, the argument is that withholding makes individual news media entities relatively worse off than the larger digital platforms because those platforms have a wide variety of sources for news links.
The argument then goes that this inability to seek payment has reduced news media’s ability to fund the production of news. The Government has supported the ACCC’s position - and identified it as a particular problem - because news has special public interest characteristics in a democracy.
The responsible Minister will designate digital platforms and services to which the mandatory code applies. The stated intention is to designate Google’s search services and Facebook’s news feed service. Apple, through its News platform, is the next most obvious candidate.
The designation provisions have two main points of interest.
The first point of interest is that there is only one criterion against which platforms are to be assessed. This is whether the Minister considers there to be a significant bargaining power imbalance between Australian news businesses and the digital platform.
Because the bargaining code imposes compulsory participation for platforms, the bargaining code is quite different from the hotly-contested Part IIIA access regime process for the declaration of nationally-significant infrastructure services. The criteria in the Part IIA access regime (Figure 2) are challenging to satisfy, facilitating compulsory access only where declared services use a natural monopoly facility and access would promote competition in a dependent market.
The second point of interest is that there are no substantive rights of appeal on application of the provisions. Again, this is at odds with other forms of economic regulation such as Part IIIA. However, this lack of rights to appeal is – unfortunately – becoming an all too common feature of economic regulation in Australia.
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The designation provisions also take a different approach to that which is to be applied in regulation of digital platforms in Europe and the United Kingdom. These proposals – which are not directed at bargaining with the news media specifically – focus on designating platforms through either quantitative criteria relating to business size (EC) and/or the presence of entrenched market power (UK).
The proposed bargaining code requires bargaining over the supply of news content to a digital platform. The code does not require any particular payment, but provides a framework for negotiation for payments.
If parties cannot agree on a payment, it is backed by access to "final offer" arbitration. The arbitral panel must accept one of the two offers, unless it considers that the final offers are not in the public interest, in which case the arbitral panel may amend the more reasonable of the two offers.
The economic issue of suitable compensation is a particularly thorny one.
Economics tells us that voluntary exchanges create value to the buyer and seller. How the value is divided between the parties that create it is a function of their bargaining power. The price that is agreed determines how this division of value occurs.
The current system effectively has a zero price - that is, the platforms use links to news content at no charge. That sounds like the digital platforms have all the bargaining power.
However, there is no fundamental rule that the price agreed in the absence of bargaining power would always be positive. That is, a publisher might pay a platform to host a link if the platform is highly valued – publishers pay so that consumers can click through the link to the publisher's website which is then monetised via advertising, subscription or other commercial purposes.[i] It is also conceivable that platforms and news both create value for each other (Figure 3) – which leaves an arbitral panel to determine the “net” flow of value between the parties.
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The code guides the arbitral panel “to consider the outcome of a hypothetical scenario where commercial negotiations take place in the absence of the bargaining power imbalance.” Modelling hypothetical scenarios is very complex, and in similar circumstances, price-setters typically look for benchmarks for prices.[ii] But are there any benchmarks where prices have been agreed without (a strong degree of) bargaining power?
Google and Facebook’s arguments against the code vary. Google has stated that it supports the principle of a code and has deployed its own news contribution model outside of the code which has signed up publishers in Australia and overseas[iii], but has three key issues with the current proposals:
Facebook has stated that the code compels it to pay for news content in a way that is not connected to commercial reality, including encouraging ambit claims. Facebook suggests it is effectively compelled to acquire all news content at whatever price is determined.
It is difficult to predict how the bargaining code is likely to perform in practice, and, in particular, how well it will achieve its main goal of encouraging commercial negotiations to increase the flow of funds to Australian news media.
There are certainly significant penalties for not bargaining in good faith – as much as 10% of annual turnover. However, as with any new law of this kind, significant uncertainties remain. For example, it appears that the code allows for compulsory price determination without actually requiring digital platforms to provide access to their platforms at all. This has raised the spectre of Google removing search functions and Facebook removing news links posted on its platforms.
The Government has remained unmoved by such possibilities, maintaining faith that bargains will be struck, and has made significant provision for those bargains to occur outside of the code itself.
In our experience, firms do not like the risks associated with (highly) uncertain arbitration outcomes. This would favour settling. On the other hand, the uncertainty in the law may favour one side thinking it can get a bargain in arbitration.
At the time of publication, the situation is by no means settled. The forthcoming weeks and months will be closely watched by digital platforms, news media and policy makers alike.
Google’s and Facebook’s activities in the last few days have revealed very different approaches to the forthcoming parliamentary assent of the mandatory news code.
Google has settled payments with most of the larger Australian news media organisations, including a global deal with News Corporation. These deals are not subject to the mandatory code, but have been struck with knowledge of the major provisions as drafted.
Facebook has elected to prevent users including news media from sharing local and international news content on its website. Facebook has again reiterated its key concerns with the code, and identified the difference between itself and Google: that Google Search is inextricably intertwined with news and publishers do not voluntarily provide their content. Facebook suggests that publishers willingly choose to post news on Facebook, as it allows them to sell more subscriptions, grow their audiences and increase advertising revenue.
In terms of Figure 3, Google appears to be accepting that it is closer to the left end– that content keeps the user on Google’s services and helps it sell advertising (platform pays publisher). Facebook sees itself as more to the right, in that it helps publishers at least as much as Facebook benefits (meaning no payment, or publisher pays platform).
The early signs are that the code has delivered on its promise of a significant shake up in the funding of news in Australia – but not necessarily delivered all of the bargains the Government was hunting.
The Government has now moved amendments that address some of Facebook’s concerns with the code. This includes that the Minister’s designation decision should take account of whether the platform has made a significant contribution to the sustainability of the Australian news industry; that there be a compulsory mediation process prior to arbitration; and that more notice be given of a platform designation.
In exchange for the changes to the code, Facebook will restore links to Australian news content. Facebook has committed to entering into good faith negotiations with Australian news media businesses and seeking to reach agreements to pay for content. Seven West Media became the first Australian media group to agree to a commercial arrangement with Facebook.
The effect of the changes to designation makes it more difficult for the Minister to designate a platform service. Potentially, a platform could use the existence of a number of agreements with news businesses to argue against designation where a platform is in dispute with a single news business. However, the additional designation criterion offers little in the form of a clear or quantitative threshold.
[i] For example, ad-based content recommendation platforms Taboola and Outbrain work in this fashion.
[ii] At least in concept, similar issues of value have arisen in disputes around copyright and in retransmission of free-to-air broadcasting signals that benefit both television networks and pay TV providers. In Australia, the Australian Copyright Tribunal has made a number of determinations on the equitable remuneration that pay TV supplier Foxtel should pay to free-to-air networks for retransmission of broadcasts. The Tribunal adopts the hypothetical bargain approach but this has not led to simple or agreed methods of price determination. See Audio-Visual Copyright Society Limited v Foxtel Management Pty Limited [2012] ACopyT 1.
[iii] Google has struck agreements with smaller publishers including the Conversation and Crikey, and has announced agreement with Seven West Media on 15 February 2021. Google also recently announced an agreement with French publishers.
DOWNLOAD FULL PUBLICATIONThe Competition and Consumer Commission of Singapore (“CCCS”) has issued its findings and recommendations for its market study on e-commerce platforms. The market study focused on gaining an in-depth understanding of e-commerce platforms that compete (or potentially compete) across multiple market segments offering distinct products and/or services.
The study also analysed potential competition and consumer issues which may arise from the proliferation of such e-commerce platforms.
Frontier Economics (Asia Pacific) was appointed to undertake a consultancy study for the CCCS. This study formed a key input for the CCCS’s findings and conclusions. Our work consisted of a consumer survey, focused interviews and an economic analysis of the emerging literature on digital platforms and its application to e-commerce activities.
While no specific competition problems were identified in the course of the market study, further analysis of theories of competitive harm relating to competition in multiple markets was undertaken. The CCCS consequently elected to update some of its key guidance documents, including competition guidelines relating to market definition, mergers and abuse of a dominant position.
With respect to consumer protections, our analysis highlighted that many e-commerce platforms had developed consumer trust, as this was a critical part of platform success. However, the Frontier Economics consumer survey did highlight concerns with unfair consumer practices in online markets, and the CCCS has proposed further information dissemination and commitments from key e-commerce platforms to better inform sellers on their platforms.
The full report is available at: https://www.cccs.gov.sg/resources/publications/market-studies
The GCR Live Interactive 2020 conference was held in Singapore and virtually on 4-5 September, 2020.
Philip Williams participated in a panel discussion, "When antitrust, consumer protection and data protection laws collide” and these notes were presented as part of the session.
The Australian Competition and Consumer Commission (ACCC) today published its final report on its inquiry into digital platforms with a particular focus on the impact of the platforms on media and advertising.
The ACCC’s inquiry has extended beyond competition issues, as it addresses concerns regarding privacy and the provision of certain kinds of content which promote the public interest (particularly news journalism). The ACCC does, however, identify certain competition concerns in markets where digital platforms and traditional media compete, particularly that current regulations do not facilitate “competition on the merits”.
The report includes 23 far-reaching recommendations, although it has avoided recommendations that seek structural reforms of digital platforms. The report includes a recommendation to set-up a dedicated tech regulator, which would provide ongoing monitoring of whether digital platforms are engaging in any anti-competitive conduct and would have the power to enforce any necessary remedial actions.
A recommendation relating to merger law is likely to prove particularly contentious. The ACCC proposes that Section 50(3) of the Competition and Consumer Act 2010 (CCA) be amended to incorporate the following additional merger factors to the non-exhaustive list:
(j) the likelihood that the acquisition would result in the removal from the market of a potential competitor;
(k) the nature and significance of assets, including data and technology, being acquired directly or through the body corporate.
Frontier Economics does not support this recommendation. We consider that Australia’s merger law is deliberately drafted broadly and is capable of addressing issues relating to digital platforms. Past mergers have often included the impact of removal of potential competitors (for example, this was a key consideration in mergers between the Australian Stock Exchange and Sydney Futures Exchange, and between Foxtel and Austar). Considerations relating to barriers to entry created by control of data and technology are very similar to other kinds of barriers to entry. In our view, adding further to lists of extensive lists of non-exhaustive factors is unlikely to assist the courts in making better decisions regarding mergers or acquisitions by digital platforms.
The ACCC has also flagged that it may lobby government for amendments to merger laws to make it more difficult for mergers or acquisitions in certain circumstances, reflecting its dissatisfaction with the resolution of past cases. Frontier Economics does share some of the ACCC’s concerns regarding the treatment of evidence from parties to transactions (see our bulletin Is that a fact?) and the acceptance of behavioural undertakings.
Frontier Economics regularly advises clients in the media and communications sector on a range of matters, including competition. We advised a client in regard to the digital platforms inquiry.
Telenor Group and Frontier Economics have released a regional study that quantifies the impact of the telecommunications sector within the five Asian markets where Telenor operates. Our research found that the telecommunications sector contributed more than one percent of the GDPs in Bangladesh, Pakistan, Myanmar, Thailand and Malaysia, while the sectors enabled by telecommunications contributed almost three quarters of overall gross value added across these markets. Further, the findings show the direct contribution that Telenor has on these economies in creating, producing and supplying telecommunications services.
“As an important enabler of economic activity, telecommunications has substantially improved business efficiency, accelerated innovation and led to the establishment of markets for new products and services. Our analysis shows that sectors which use telecommunications services more intensively contribute between 65 to 75% of total economic value to the markets across Telenor’s Asian footprint, and that these sectors have been growing strongly at between 6 to 12% per year. This shows the impact of Telenor Group’s investments in Asia in supporting and enabling growth in the countries where it operates,” said Clive Kenny, Senior Economic Consultant (Telecommunications) from the research team at Frontier Economics.
A summary of key results and the report can be accessed here.
This report was jointly produced by Frontier Economics teams in Singapore and London.
Recent conversations about NBN pricing, write-downs, value and privatisation indicate that there is confusion about the links between these concepts. Here, we explain what matters in relation to write-downs and pricing, and why both sides to the debate have a point.
The NBN has faced a slew of criticisms in recent months. Retail service providers (RSPs), the latest Telstra , have criticised NBN Co’s pricing, suggesting that wholesale services are simply too expensive. Aussie Broadband plans to remove cheaper services, suggesting that customers may be better served by mobile broadband. And Amaysim has exited its fixed line business, citing poor NBN economics.
There are also ongoing calls for an asset write-down, sparked somewhat by a claim by ratings agency S&P Global Ratings that a write-down of assets is “inevitable”. The implication is that a write-down of NBN assets might then afford NBN Co the headroom to lower prices. More recently, JP Morgan said that the NBN needed a $20 billion write-down to allow low prices to provide Australians with low cost internet and improve telcos' margins, while Aussie Broadband MD Phil Britt stated that a write-down is the only way to make 100Mbps more affordable. Would this work in reality?
According to the Department of Communications, things are more complicated. Secretary Mr Mike Mrdak stated that:
“[A potential] asset write-down would reflect the value of the entity, whereas the pricing strategy is actually quite a different business decision in relation to the revenue and the rollout of the network. I think people are somewhat confused that there is a direct relationship between the asset valuation and the pricing strategy and the revenue of the company. That's not the case.”
This correctly makes the distinction between pricing and the accounting recording of asset values (book values). NBN’s accounts record the value of assets, but the relationship is one way between asset values and prices – writing down the value of assets can be a result of price and revenue falls, but not a cause of them.
If that was the end, this would indeed be a short bulletin. However, asset values do actually matter to pricing of regulated firms like NBN Co – because regulation relies on determining an asset value which feeds into prices.
NBN Co’s regulatory constraints include an overall revenue constraint that reflects NBN Co’s costs incurred. This is the connection between recorded asset values and the prices NBN Co can charge.
Under the Long Term Revenue Constraint Methodology the revenues of NBN Co are constrained in a typical “building block” manner. Revenue allowances provide for NBN Co to recover cost building blocks including a rate of return on its regulatory asset base (RAB), operating expenses, and depreciation.
In this way, NBN Co’s costs incurred do include a return on the value of assets , and therefore asset values may matter to regulatory pricing constraints.
NBN Co’s RAB has two components – one reflecting normal unrecovered capital costs and another reflecting its large accumulated losses (Initial Cost Recovery Account, or ICRA). As of June 2018, the sum of the two components had reached close to $40 billion. To reduce the ICRA, NBN Co needs enough revenue to cover its annual revenue allowance and the interest that accrues on the ICRA. Until the ICRA is depleted, the building block allowance won’t constrain the revenue NBN Co can earn.
In fact, according to NBN Co’s analysis, recovery of the ICRA won’t happen. NBN Co’s accumulated losses are growing at a rate that outstrips its current and future ability to recover them. Our indicative modelling suggests that the ICRA alone will reach around $70 billion by 2039-40.
While NBN Co CEO Mr Stephen Rue considers the term ‘write down’ to have a very special meaning, it can have two meanings: an accounting write-down reflecting a reduction in future cashflows, or a regulatory write-down, which may be proposed for various reasons.
NBN Co’s own forecasts say that a write-down of the regulatory value of assets is coming. Market constraints - customers’ willingness to pay for broadband, and the (fixed or wireless) options those customers can switch to - mean that while past losses are being rolled forward at the risk free rate plus 3.5% (around 6% at present), even NBN Co’s forecasts only produce a rate of return of 3.2%. If undertaken in 2022 (rollout completion), a $25 billion write-down would facilitate NBN Co earning a 6% return (the kind of rate of return that would be demanded by a commercial investor on this sort of asset).
NBN’s large (and growing) allowed regulatory value (the RAB including ICRA already discussed) means there is little regulatory constraint on NBN’s current pricing. In fact, it is market constraints that are the primary concern in pricing.
Since NBN Co is not constrained by revenue allowances, even a write-down of regulatory asset value may not reduce allowable revenues and prices. However, there most certainly will be a direct relationship if a write-down of the regulatory value (the RAB plus ICRA) is large enough. In turn, this will cause a write-down of the accounting value.
And, in this, the critics are right; write-downs are no red herring. If one accepts that the current regulatory arrangements provide insufficient pricing certainty, and are not reflective of commercial reality which jeopardises the long-term take up of its fixed broadband services, then a regulatory write-down could:
The difficult decision is how to calculate the size of the write-down. The most obvious benchmark is that the residual value needs to (be low enough to) support a long-term price that is consistent with avoiding inefficient bypass of the NBN by mobile operators or new wireless entrants. This requires more than a little skill. Ultimately, however, it is worth pursuing to provide a solid foundation to maximise the NBN’s economic and social value.
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