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Knock-and-drop case is big news

It’s a case that has seen the Reserve Bank deputy governor and a wide range of economists and former staff members take the stand, and it still has a way to go after the Competition Tribunal provided more time for evidence to be presented.

Apart from allowing some insight into the little-known market of community newspapers, which is showing growth while other print titles decline, the outcome of South Africa’s first underpricing case involving Media24 is being eagerly awaited by competition experts.

Lawyers and advisers are hoping that a ruling by the tribunal will provide some clarity on how to define underpricing, which falls under predatory pricing in the Competition Act, particularly as there is little international jurisprudence on the matter. This case was presented to the Competition Tribunal in 2011.

Section 8(d) of the Act prohibits the “selling [of] goods or services below their marginal or average variable cost”, but there is no clarity on how this should be calculated.

The Competition Commission alleges that Media24’s community newspaper the Goudveld Forum was a loss-making publication that was used as a “fighting brand”, pricing its advertising below cost to undermine Free State Goldfields competitor Gold-Net News, which eventually closed.

Former commission head and Corruption Watch executive David Lewis said the importance of a hearing into the loss of a relatively small Free State knock-and-drop should not be underestimated. “This is an extremely significant case and the impact of underpricing on the market should not be dismissed.”

Last week, former chief executive of Media24’s newspaper division, Francois Groepe, told the tribunal that he was not aware of any co-ordinated effort to undermine Gold-Net News, and that he shut down the Forum in 2010 after it had made a loss the previous year. Gold-Net News closed in 2009. Groepe is now the Reserve Bank’s deputy governor.

His view has been countered by former Media24 manager Wian Bonthuyzen, who spoke of a clandestine meeting between him and the Volksblad’s general manager, Naas du Preez, in a lapa in Welkom were discussions were held about how to undercut Gold-Net News.

Bonthuyzen added that the Forum had been losing money since 1999.

Chris Charter, the director of corruption practice at the Cliffe Dekker Hofmeyr law firm, said that one of the things the commission would have been looking at in this case is evidence of intention to do harm.

“The commission is suspicious that as soon as Gold-Net News disappeared the Forum brand was closed down, seemingly after it had eliminated the competition,” he said.

Media24 already had a star performer in that market, called Vista.

When Groepe was asked why he had closed down the newspaper in 2010 rather than earlier, he said the Forum had still contributed to Media24’s common or shared costs and that there are a number of factors that are considered when evaluating a newspaper’s performance.

Augnischa van Eck, the regional sales manager for community newspapers at Media24 in the Goldfields area at the time, also denied that there had been a co-ordinated effort to undermine Gold-Net News.

She said that some deviations from the Forum’s approved advertising tariffs to meet the Gold-Net News tariff were an exception to the rule.

When asked about two documents titled “GNN Project”, Van Eck said the title was not relevant and that GNN was mentioned merely because it was the only opposition in the area.

Charter said the case is important because South Africa has a market with several dominant players, many of which, such as Telkom, Sasol and South African Airways, were set up by the government rather than being built up from the ground.

“The commission’s pursuance of this case is a definite tactic to develop jurisprudence around issues of dominance,” he said. “Predatory pricing raises barriers to entry for new entrants and the commission has a soft spot for making the market conducive to new entrants.”

But, Charter said, care has to be taken that predatory pricing is not confused with “below cost” or even low pricing, which could be bad for competition.

“In this case, I will be interested to see how the commission goes about proving the marginal or average variable costs of advertising in printed media, given the double-sided nature of the media market, where price is not always predicated on actual publishing costs but is equally dependent on readership,” he said.

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