Complexities Affecting Transactions in Digital Markets in Light of Heightened Antitrust Enforcement Across Africa

There is an appreciation that digital markets are characterised by, among other things, multi-sided platforms, large returns to scale and complex network effects. As a result, regulators are increasingly presenting novel theories of anticompetitive harm that, unlike those in more traditional markets, have yet to be tested.

Regulators in Africa have identified the dynamic evolution of digital markets as a potential opportunity to drive structural transformation and development and are increasingly signalling their intention to prioritise antitrust enforcement in these markets.

In February 2022, a joint statement was released by the heads of the competition authorities of South Africa, Kenya, Nigeria, Mauritius and Egypt, committing to expanding and deepening the dialogue on digital markets amongst them. These authorities undertook, amongst other things, to scope conduct in digital markets that has been the subject of investigations around the world, assess its impact on African markets, and co-operate and share information regarding their assessment of conduct as well as transactions involving digital firms. In February 2023, these regulators reaffirmed this intention and were joined by the competition authorities of COMESA, Gambia, Morocco and Zambia in emphasising the need for a stronger and more collaborative approach to the regulation of digital markets. The South African authority recently completed a two-year market inquiry into online intermediation platforms, recommending robust intervention, and has launched a market inquiry into the media and digital platforms market.

Merger control is an effective tool used by competition regulators to advance competition policy objectives. At its core, merger control is a forward-looking exercise that aims to predict the likely effects of a transaction on the competitive dynamics of a particular market as well as, in some countries, on the “public interest”.

However, transactions in digital markets raise the question of whether the traditional analytical framework for merger control is appropriate or whether a tailored, novel approach is required. Given the complexities, the challenge of regulating mergers in digital markets is still being discussed and debated globally. There is uncertainty as to whether regulators are adequately equipped and appropriately resourced to consider mergers in digital markets, and if not, what solutions can be implemented to address any existing constraints.

Certain aspects of market definition, which is a crucial aspect in the substantive examination of a merger, and merger thresholds, which serve as a gateway to merger control analysis, illustrate some of the considerations and complexities that arise in the context of digital market transactions.

Market definition is becoming more intricate in the evolving digital era, especially in relation to so-called zero-price markets. These markets are characterised as those where users of products or services do not pay money for their use (eg, social networks where users do not pay for using the social networks, such as Facebook, Twitter, or Instagram). Complexity also arises in the case of two-sided platforms (which provide the platform for e-commerce marketplaces and bring together two different but interdependent user groups). The competition authority of Kenya has published guidelines in which it acknowledges that the traditional aspects of market definition that make reference to a product market and a geographic market may not be sufficient when dealing with complex markets like digital or multi-sided platforms, and provides guidance on how the authority will approach virtual, one-sided and multi-sided platform markets.

In relation to merger thresholds, an unexpected consequence of using financial thresholds is that mergers with significant effects in digital markets may, in certain circumstances, fall well below the prescribed monetary thresholds, allowing market-altering transactions to escape scrutiny by competition authorities. This would happen if a new digital firm does not yet have a significant turnover or sufficient assets to meet the relevant notifiability thresholds. Compounding this concern is the threat of “merger creep”, in which numerous small start-ups are acquired in transactions that may appear insignificant on an individual basis but, when considered collectively, may have significant market competition implications.

In light of the dynamics of digital markets, competition authorities argue that the traditional financial threshold-based approach to merger notifiability should be reconsidered and, possibly, replaced. This has prompted regulators to speculate on the most appropriate metric for thresholds when it comes to mergers in digital markets. The South African authority, for example, has published revised guidelines on the notifiability of “small” mergers that incorporate a combination of deal value and asset/technology valuation metrics in the preliminary assessment of whether the transaction should be notified for merger clearance and has expressed plans to codify rules relating to the valuation of assets for digital companies.

The complexities facing merger control as well as broader competition law enforcement in digital markets are not unique to Africa. What is clear, however, is that across Africa, regulators are increasingly prioritising and co-ordinating their enforcement activities in these markets. The most immediate manifestation of this will be in the form of increased scrutiny of digital mergers.