Is cross-ownership a competition problem in Australia?


First some context. I raised this issue a couple of years ago in a post here. It was motivated by new research in the US on the impact of cross-ownership by institutional investors on competition in US airlines.

So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.

In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that.

That research was recently updated but has also been extended to banks and also executive compensation consistent with a competition-reducing effect (compensation is based on absolute rather than relative performance).

In an op ed, Shadow Assistant Treasurer and my long-standing co-author, Andrew Leigh, took the US approach and applied it to Australia. He looked at cross-ownership patterns but he made a mistake looking at custodial firms (who don’t have voting or influence rights) rather than the core institutional investors that are the core of the theory. Peter Martin pointed out the error. Who knew that determining ownership could be so complicated?

This of course highlights how difficult it is for politicians to research and make arguments. One little error and it is as if the whole hypothesis doesn’t exist any more. But we academics in the real world don’t operate that way. What I wondered was: do the patterns we see in the US match occur in Australia.

Fortunately, for me, I didn’t have to do much heavy lifting to find out. Here are some summary stats provided on Twitter by Martin Schmalz who is a key player in the US studies. First, let’s check out energy retailing:

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The top three investors are the same across the two biggest competitors in Australia.

Let’s turn to grocery and other retailing:

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Wesfarmers (who owns Coles) and Woolworths have some similarities there.

Or petrol:


Or investing itself:

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For banking in general, I took a look and NAB’s top shareholders are (Vanguard 2.03% and BlackRock 1.43% and Capital Research and Management Company, 1.13%); Commonwealth Bank has (Vanguard 2.78%, BlackRock 1.46% and Govt Pension Fund of Norway, 0.88%), while Westpac appears to have little shareholder concentration.

Looking at telecommunications we have Telstra (Capital Research and Management Company, 1.13%; Vanguard 1.62%, BlackRock 0.63%) while Singtel is owned by the Singapore government.

This is, of course, far from a comprehensive concern but the pattern is interesting. The very funds — BlackRock and Vanguard — whose ownership changes were related to competition reductions in the US by research there have the same pattern of ‘diversified’ holdings in Australian oligopoly companies.

Now you might say that even so, the ownership of the largest shareholders is low. That is true. It is not like they themselves command a majority for voting purposes. However, as the largest shareholders they have power and their trading behaviour can impact on the returns of others. The very fact that we see cross-ownership patterns in Australia similar to the US where there are concerns that have been measured suggests that this is something we need to watch.

Australian Banks ask for permission to collude against Apple

This news caused me to make a spit-take on my morning coffee.

Several of the country’s big banks are seeking to join forces and negotiate as a bloc with technology giant Apple, which could lead to a collective boycott of Apple Pay, in a bid to offer “digital wallets” on the iPhone.

Commonwealth Bank, National Australia Bank, Westpac and Bendigo Bank have this week applied to the Australian Competition and Consumer Commission, asking permission to negotiate as one with Apple.

Their application also seeks permission to undertake a “limited form of collective boycott,” in which the banks will agree not to negotiate with Apple individually while the collective talks are occurring.

Let’s unpack this. Apple has an NFC solution on its iPhone (just as Google does) but in order for Australian consumers to use it, they need permission of their banks. The banks claim that because Apple controls the phones of some of its customers, they need to negotiate as a block on access to the NFC component on the iPhone.  Of course, not all banks. ANZ has already signed up to Apple Pay.

But here is what I don’t get. First, what does negotiating for access to the NFC component mean? Do the banks think that Apple will open it up to them when they haven’t opened it up to anyone else in the world? The reason Apple keep that close knit is because of security. It is unlikely there is anything else going on.

Second, the idea apparently is for the banks to agree not to sign up to Apple Pay until this is done. Then they will negotiate terms of access individually. In other words, a collective boycott.

The Australian law has provisions to allow this sort of thing if there are public benefits. But in this case, the public benefits only arise (potentially) if it is in the public interest for Apple to open up access to NFC. However, that decision would lie elsewhere with a much more detailed process. Also, because Apple is not a dominant handset maker — it has much less than 50% market share in Australia and elsewhere — opening up access through the usual route won’t happen. Put simply, Google have already developed this and so access to NFC is possible.

Instead, the idea here is to allow for something blantantly anti-competitive. One of the forces the drives banks to adopt new technologies that are provided by others is competitive pressure between them — that is, their customers want it. That is why AmEx and ANZ are already on board with Apple Pay. What the remaining banks want to do is ensure any one of them doesn’t break ranks and adopt Apple Pay and activate a competitive response.

In summary, the banks are using the wrong part of the law to deal with a public interest question precisely because Apple is not dominant in the Australian market. And they are doing it to protect what is likely a poor set of investments on their part and because they are unwilling to throw their weight behind Google alone. In other words, it is classic undermining of competition to benefit the interests of competitors and not the interests of consumers. Hopefully the ACCC will deal with it quickly because it is pretty clear that while the regulators deliberate, the same effect as a collective boycott is actually occuring.

The NBN needs emergency triage

Now that the election is done and sorted and there isn’t a hung parliament, it is time for Australia to get on to the job of urgent policy-making. There are lots of areas in need of help but I am going to focus here on one close to my heart: broadband.

By any measure, broadband policy in Australia has been an abject failure. Despite brief moments of hope, we moved from a regulatory morass dominated by a private monopoly to a set of deals and politics dominated by a government monopoly. No one advocated for this but in the reality of political mess that is what happened. As a result, broadband has not improved in almost a decade. Indeed, much of regular internet use by ordinary Australians has moved to wireless.

I know the Prime Minister agrees with me about this because he and I had a public conversation on it in 2011 before the Coalition was in government. You can read the transcript here. But I suspect that political truths have prevented progress. Thus, the first course of action is to cut out those political truths.

The first one is that one size cannot fit all in broadband. There is variation in demand. There is variation in the costs of supply. That means setting equal terms in urban and rural areas won’t cut it. It is far better to explicitly subsidise than cross-subsidise. Full stop. But because it takes time, a period of unequal pricing and quality is necessary. Any solution that tries to do otherwise will only continue the morass.

The second one is that the NBN’s active role needs to be diminished. It needs to retreat to the backbone. I am not sure what architectural requirements would be needed but taking any customer facing role of the NBN (they may not be any but it is hard to tell from the media reporting) and divesting it — and yes privatising it — is probably the right way to go. If you don’t want privatisation, then split it up into local areas and hand it over to local government. Broadband is not a national public good it is a local one. It shares more in common with garbage collection than defense. Treat it that way.

The third is that it then needs a clear open access regime. We need to encourage retail competition at the local level. Full stop.

The fourth thing is that we need to diminish any sort of exclusivity the NBN has. Any sort. Mobile should be able to compete with it fully. Other wired providers should be able to build over the top of it.

The fifth thing is that a temporary sacrifice in local environmental regulations on wires not in the ground needs to be nationally suspended. The idea is to allow these unsightly things for 5 years on the condition that they be then grounded. Sorry. That is what the rest of the world has done. If local governments want to pay to speed up grounding them then fine. It should not slow down any rollouts.

The final thing is a big one. After all these years we have learned that the biggest broadband use is video consumption mostly for private purposes. The wholesale pricing model and also retail ones will need to switch to something that ensures that those consumers using the most video have to pay more. That means no ‘under the count’ options. You will find them willing. The only thing is that means broadband caps as a default. That sucks — I know — I pay to have mine removed but the economics require it.

If it is wanted to make this more politically compatible then the basic free account is something that can be offered. That will open up the notion of broadband as a citizen right.

[Updated to reflect user comments and clarifications]

Finally, return to work tax rebates

I have been following the Australian election at a distance and it is amazing how much more policy-centered it is than elections taking place here in North America. There are so many policies it is easy to miss some. Thankfully an alert Twitter follower noticed something familiar about the ALP’s new policy with regard to employment by small businesses.

Top of the list was a new promise to give small businesses an additional $20,000 a year tax deduction for taking on a new employee who is under 25, over 55 or a parent returning to employment and parental leave.

There is alot here but the one that got my attention was the notion of giving small businesses a tax rebate for employing someone return from parental leave. I searched for details and couldn’t find any but I did want to say that this has the makings of the best parental leave policy ever, anywhere. Of course, I would say that as it is the same as the policy I have been advocating for almost a decade.

Anyhow, for those interested, here are some links to accessible articles about this:

And here is a set of videos I recorded explaining the scheme.

The bottom line is that rather than simply handing out dollars to parents on leave, this policy targets the real issue — discrimination in the workplace — and makes it easier for businesses to encourage parental leave and ensure parents return to work successfully. In other words, target the problem rather than the symptoms. While the policy announced is small scale relative to what I was proposing, I should note that is the sensible place to start so we can learn whether what is proposed in theory actually works in practice.

I already left Australia because of continual idiotic debates like parallel imports

Magda Szubanksi said she would consider leaving Australia if the Productivity Commission’s recommendations regarding parallel importing of books were to come into place. Leaving aside the notion that leaving Australia would make absolutely no positive difference to her income with or without Australia’s current laws — her core market is still Australians — this is just one in a continual douching of verbage that comes from Australian authors ever single time the parallel importing laws come up. This time around the most ridiculous bit of self-interested dribble came from Richard Flanagan.

His argument is that he is a writer, the things he and other writers are good. Actually not just good so bloody good that the government should pay for them because they can’t convince readers to shell out. Flanagan argues that look other interest groups get money so we should too. That last bit is not a bad argument — if ship is sinking let’s get more people lifeboats — but I am not in the multiple wrongs make a right mood.

The Productivity Commission’s crime is to suggest that Australians should not pay more for books than people overseas. That includes the fraction of those books that are authored by Australians. So the Flanagan argument is that all books in history should cost much much more so that the fraction of current Australian writers can get a little bit more. This is basically the same argument as big coal uses to stop climate change policy — we shouldn’t have to pay more even if it is going to help save every living thing on the planet.

I hate these continual interest group based arguments. Their on-going nature and my personal failure to do anything about it was defnitely on the ‘reasons to go’ side of the ledger when I left Australia six years ago.

But on this issue I have more moral authority. I am an author. Several of my books cannot be bought digitally by Australians because we have parallel import laws and their like. I can’t even give them away! But more critically, I am a co-author on Australia’s leading textbook on economics. That is one of the books that earns a shit-ton of money (mostly for publishers but also for its authors) by charging Australians ridiculous prices — sometimes a couple of hundred dollars. Parallel import laws may well crush those prices. And that is just fine by me. Why? Because it will lower the prices of all books.

My strong wish is that finally this time around the Government actually follows the Prouctivity Commission and stands up for Australian readers and Australian students and the culture of the world.

Why don’t Australian banks support Apple Pay?

Apple Pay is near ubiquitous in the US despite the relative lack of terminals to support them. But in Australia, those terminals are all over the place yet the only card accepted on Apple Pay is American Express; a card not issued by the major banks.


For those who don’t know, Apple Pay is as convenient as a tap and pay card but with the security that no one can use it other than you because of the finger print identification. It came to Australia and Canada last week but only with AmEx. I have used it this week and it works beautifully. As magically as Apple claim.

With iPhones capable of doing this the now largest set of iPhones out there, why is the use of Apple Pay so constrained in Australia but not in the US.

In this morning’s SMH, Ed Husic, a Labor politician, lays blame at the big banks and specifically at some sort of collusion or coordinated boycott by them of Apple.

Normally when politicians suggest the banks are colluding they are off base; tapping into our generic distrust of banks. But this time around, it is hard to come up with an alternative rationale.

The card issuing market is supposed to be relatively competitive and the banks pay a ton of money in terms of loyalty programs to get users to use them. As Apple Pay makes it easier to do just that, why isn’t competitive pressure driving adoption?

The banks appear to be claiming that Apple are negotiating for too high a fee. That may be true but two things run counter to it. First, Apple are providing a real cost saving in terms of radically decreasing the probability of card fraud through the touch ID system. Second, this hasn’t been a problem in the US and the UK. Why would Apple be different? I suspect they are offering exactly the same model to the banks as AmEx.

Now one possibility is that the banks actually earn margins over the fraud costs on transactions and so Apple eliminating those costs threatens their business.

But another that I am unable to readily dismiss is that there is some coordinated conduct going on. I am not saying that there is but, in my opinion, I am struggling to provide alternative explanations. Credit cards is one area where the banks cooperative in order to have a system and for that reason the Reserve Bank and ACCC have always paid closer attention to it. The question is: where are they now?

Australia after 3 years

I have been back in Australia this past week for the first time in over three years. Here are some brief impressions:

  • The airports are great. Even better than before, Security is no issue (I passed through in 30 seconds) and Canberra airport is now fantastic — world class as they say. Why airline lounges are still popular I have no idea as the terminal themselves are as good as lounges elsewhere in the world.
  • Broadband is terrible. If anything it appears to have deteriorated over the last 5 years (if such a thing is possible). People complain about it and they have legimate complaints. This is not about streaming video but just doing what is now normal business that has to be conducted from the home. For instance, relying on video conference calls is, for many, virtually impossible. Wireless, by contrast, is actually a better performance option. At the time, I liked the idea of the NBN as private investment had stagnated. Now I have to admit that I place some probability on the notion that Australia may have been better off letting Telstra run the show. In reality, the lack of vigilance on encouraging competition in this space is likely the big culprit. In Canada — no paragon for great broadband — I have 300Mpbs at home on cable from Rogers. The reason I have that is that there are three broadband cable competitors.
  • Nothing has changed with the Universities. Same issues, same challenges, same toying with the idea of spending $$$ on online education without any proven model existing anywhere. Oh yeah, they also throw money at startup incubators now.
  • Melbourne CBD is booming. Full of people and buildings. Large shopping malls. Indeed, it has to be the largest concentration of affluent people in the world not to have an Apple Store anywhere near them. What is the deal with that?
  • Coffee is wonderful. I mean really wonderful. Australia has that reputation and it is deserved. Virtually whereever you go you can get coffee that is equal to the best in the best cities elsewhere. The coffee you have to search for in other places is flowing in the streets. Why? I have no idea. It is not expensive but the barristas are competent and everywhere. Chains, by contrast, are far less prevalent. No Starbucks etc. Perhaps that tells us something.
  • People are the happiest with their government than I have ever seen. In my left leaning set, folks are talking about voting Liberal in the next election for the first time ever. Of course, that set prizes intelligence and the PM has that (especially in contrast to the previous one). But Australians tend to default to cynism. At this moment, that isn’t happening. It is nice to see.