On Wednesday morning, the Commerce Commission officially declined to approve the merger between two of New Zealand’s largest media companies, NZME and Fairfax. This has colloquially been referred to as the “StuffME” decision.
You can read the Commission’s full reasons for declining the merger here, but if 350 pages is more competition law analysis than you can handle then the Executive Summary, available here, is very useful as well.
This was a high‑profile decision for the Commission, and it faced significant pressure from the StuffME parties including detailed submissions late in the piece. Understandably, the Commission has put a lot of effort into getting the decision rights, and its published reasons by and large reflect that. Of course, careful reasoning doesn’t remove all elements of controversy, but from what I have read from the decision so far I think this is a credible, defensible decision from the Commission.
What did the Commission actually decide?
The Commission was asked to consider two questions. First, it was asked to “clear” the merger because it would not result in a substantial lessening of competition. The Commission declined to grant clearance, because it considered that the merger would reduce competition in a number of readership and advertising markets. The Commission found that NZME and Fairfax were “close competitors”, which means that they are similar businesses that respond closely to each other’s moves in the market place. While the StuffME parties face some additional competition in vulnerable markets, none of their competitors influence the StuffME parties as much as each other.
Second, the Commission was asked to “authorise” the merger, meaning that even if the merger was found to reduce competition the benefits flowing from that merger would outweigh the detriment of reduced competition. NZME and Fairfax argued that they faced challenging market conditions, and that merging would allow them to realise cost efficiencies that could be reinvested in maintaining the quality of their news media products. The Commission rejected this argument, finding that the merger would create significant detriments.
What kind of detriments was the Commission concerned about?
The Commission found that there were two broad categories of detriment likely to result from the merger – a reduction in quality, and a reduction in plurality. Both have elements of controversy, but ultimately I think were handled well by the Commission.
Why would the merger reduce quality?
The StuffME parties argued hard in front of the Commission that the merger would increase the quality of their news media product. In basic terms, the argument was that cost savings from the merger would allow more resources to be put into journalism and editorial processes, resulting in a higher quality product. That makes sense on an intuitive level – more investment means higher quality. But the StuffME parties didn’t really make much of an effort to define what they thought quality was. Their approach was to leave ‘quality’ issues to the market. In other words, if more people view the content then it must be of a higher quality.
That was always going to be a hard argument to win, in my view. The Commission took a much more sophisticated view of quality, considering issues such as depth of coverage, speed of publication, range of views and accuracy. I think this is a pretty standard list of the measure of a quality news product, and probably much more relevant to the market than the simple ‘eyeball’ measure the StuffME parties put forward. The Commission went on to find that the strongest incentive to excel at these quality measures was strong competition, and the strongest competition possible in the market is that which currently exists between NZME and Fairfax. So the loss of competition from the merger would result in a significant loss of quality that is not made up for by extra spending.
This is a credible position for the Commission to take. However, it is possible to argue against that position. The StuffME parties would have it that there is sufficient competitive incentive from Google, Facebook and other online content providers to improve quality even with the merger going ahead. But as none of those big Internet businesses focus on the types of quality measures that a news media business would, I think the Commission’s argument is probably the better one.
What about plurality?
The Commission also considered that the merger would result in a material lessening of news media plurality. Plurality in this context refers to the presence of a number of voices and perspectives within the news media landscape. It is considered to be an essential part of a proper functioning democracy, because it ensures that the news is not captured by a single agenda.
The Commission took the view that NZME and Fairfax are key news sources, both in print and online. Essentially removing one of those businesses, as the merger would do, would take away a major news voice and leave one of the most concentrated news media sector in the developed world. This was, by itself, enough for the Commission to refuse to authorise the merger.
The StuffME parties had two types of responses to the Commission's argument. The first was that the increased investment the merger would allow would promote greater "internal" plurality. The merged business having incentives to appeal to as many readers as possible, and so would cater to those readers by publishing a range of diverse views. However, the Commission considered that this internal plurality would not be as effective as different media businesses competing to release different views.
The second response is more conceptual. It is that the Commission is not empowered to consider issues such as news media plurality. The Commission is an economic regulator, and so should focus on economic detriments only. Social or democratic issues such as plurality should be for other government departments to deal with.
There is some force in this response, and the Commission took the argument quite seriously. But the Commission decided that there was no legal rule preventing it from lolling outside of economic factors, and that it would be derelict in its duty if it did not consider such a significant issue once it had been identified.
This position is controversial, and there are good arguments on both sides. I tend to favour the Commission's view given how rarely these types of non-economic issues will be a significant factor. Plurality is closely related to issues of market concentration, which is well within the Commission's traditional area of expertise. On that basis, the Commission's position is defensible.
But it is not the only defensible view. If the Commission's decision is appealed, then look of the plurality issue to get a lot of attention. It's tricky, and I don't think any court would want to make the final call.
Why didn’t the Commission just recognise that these media businesses are struggling and let them merge?
Much of the initial criticism of the Commission’s decision seems to have been based on a perception that either one or both of Fairfax and NZME are in financial strife. Anyone with a passing interest in the sector will know that those two businesses are facing declining print revenues that are not being replaced by online revenues, and these changes are putting traditional business models under pressure. What the future looks like for these businesses is something that the Commission considered closely. It did recognise that Fairfax and Stuff are operating in a very challenging context.
The Commission has a special procedure for considering arguments where one or both of the businesses involved might go out of business if the merger doesn’t go ahead. However, the StuffME parties did not ask the Commission to consider that scenario. It was open to them to do so, but we have to assume that the factual evidence would not have supported this type of argument.
All that was really claimed was that the traditional media business models would survive for longer and that any transition would occur more smoothly if the merger went ahead. The Commission was not asked to save a failing business, and any criticism of the decision along those lines is misplaced.
It’s not the Commission’s role to rescue struggling businesses. Essentially, the choice the Commission is being asked to make is between the market leading the rationalisation of a changing media landscape, or whether two large businesses should be more insulated from market forces to manage that rationalisation themselves. The Commission has decided to go with the market‑led approach, and outside of exceptional circumstances that has to be the correct approach in a free market economy. So while there are some points of contention, ultimately I think the Commission probably got this one right.