Why is competition law important? - NZME and Fairfax media merger case

Competition law promotes or seeks to maintain competition in marketplaces. It does this by restricting anti-competitive trade practices, mergers and business acquisitions, and economic regulation.

The Ministry of Business, Innovation and Employment’s (“MBIE”) Report titled “Competition in New Zealand Industries: Measurement and Evidence” (the “Report”) submits that competition in the market can create a positive relationship between profits and productivity for businesses. An increase in competition stimulates managerial efforts and promotes businesses to be more innovative which increases productivity over time. As competition increases, the less efficient businesses tend to exit the market, encouraging quality products within the market. In contrast, a lack of competition arguably results in an average performing economy due to the absence of competition as a driver towards productivity and quality.

The Report addresses the possibility of high levels of competition decreasing the productivity and quality of the market place. However, studies of the relationship between competition and innovation often show that a majority of markets would perform better with the competition. The Report records that New Zealand markets are small and isolated due to New Zealand’s geographical position. Therefore, increased competition is likely to stimulate rather than curtail innovation.

New Zealand Commerce Commission

The Commerce Commission (“the Commission”) operates under the Commerce Commission Act 1986 and monitors and governs competition in the markets. The Commission examines anti-competitive practices such as agreements between businesses that have the potential to increase prices or reduce the choice of goods or services. A relevant case study is the application for a merger between the two largest news companies in New Zealand, New Zealand Media and Entertainment (“NZME”) and Fairfax New Zealand (“Fairfax”).

Merger between NZME and Fairfax

In late 2016, NZME and Fairfax proposed a merger between the two companies which would see NZME paying Fairfax Australia $55 million if the merger was allowed.

Allegedly, the merger was proposed due to Fairfax’s falling revenue. Fairfax Australia reported that for the New Zealand Branch revenue fell 8 percent for the last six months of 2016 and its operating profit dropped 10 percent due to a consumer shift from traditional media sources to online media sources. Greg Hywood, the Chief Executive of Fairfax Australia, said that they had plans to restructure Fairfax into a more sustainable business model if the merger was not approved.

Despite Fairfax explaining their market challenges to the Commission, the Commission gave a preliminary “no” to the merger on 8 November 2016. They then rejected the merger completely on 2 May 2017. The decision released by the Commission stated that if the merger were allowed to proceed it would result in “an unprecedented level of media concentration for a well-established democracy.” Due to the extent of the two organisations' investments, the Commission’s decision reports that the merger would be likely to lessen competition by increasing prices and/or decreasing quality for the readers and/or advertisers in advertising and reader markets and, as a result, the merger should not be approved.

Fairfax has now appealed the decision of the Commission to the High Court on the basis that the Commission exceeded its authority by considering social and political considerations. The companies also reported that the Commission had breached procedure due to the anonymity and confidentiality afforded to the parties that made submissions against the merger. The companies allege that the Commission had breached the principles of natural justice and procedural fairness. The High Court process began at the end of May; there have been no further updates.

Conclusion

competition law regulating mergers, the merger between NZME and Fairfax would not have been questioned and the possible consequences would not have been explored. The NZME and Fairfax case study demonstrates that competition law can assist in protecting consumers and citizens alike and, therefore, is very important to the development of our economy and society at large.