Incumbency
256 The ACCC's position is based on the proposition that an incumbent enjoys a significant competitive advantage as it is difficult for new entrants to win customers because few contracts are large enough to cover the high fixed costs of providing the service and customers are often reluctant to switch suppliers due to the essential nature of the service and the reputation obtained through their experience of the incumbent's service.
257 Despite the intuitive attraction of the ACCC's proposition, the Tribunal does not accept that incumbency is a material factor in this matter so that it is unnecessary to consider whether or not that factor rises so high as to constitute a "barrier to entry".
258 First, the proposition that it is "easier … to retain a customer as opposed to win a customer" can readily be accepted but only so long as the incumbent maintains the level of service demanded by a customer and does not raise prices unreasonably.
259 However, until Sea Swift has been operating under the Transferred Contracts for some time, Sea Swift will not enjoy the trust implied by the word "incumbency"; it takes time for the customer's experience of reliable service to build that trust. Sea Swift is not an "incumbent" under the Transferred Contracts, except in relation to those contracts where it is currently providing services as a subcontractor (for instance, IBIS in FNQ and Port Keats deliveries under the PUMA contract) and that is a form of incumbency it will have without the Proposed Acquisition. Otherwise, at the time the Transferred Contracts are transferred to it, Sea Swift will only have such reputation as may have been derived from the market or from customer experiences of employing Sea Swift's scheduled or charter services while TML was in the market. It will therefore be on the same reputational footing as its competitors. That is not, in any relevant sense, incumbency such as might create a barrier to entry, even if reputation should be treated as a barrier to entry, which is doubtful. That is the force of Mr Meyrick's evidence, which the Tribunal accepts.
260 Second, the Transferred Contracts Condition obliges Sea Swift not to enforce any provisions in the Transferred Contracts relating to minimum volume, exclusivity or rights of first refusal. Although the ACCC suggested that this benefit is illusory, it is the Tribunal's view that this makes the Transferred Contracts contestable now and during the term of those contracts.
261 While it is true that some of the Transferred Contracts do not contain exclusivity or minimum price conditions, most of TML's Largest Contracts do contain exclusivity provisions and contracts which were not exclusive did contain rights of first refusal to match a competitor's bid. With the Transferred Contracts Condition, TML's former customers and Sea Swift's competitors will know that the Transferred Contracts will be contestable as a result of authorisation. They will know, aside from other reasons, because officers of the customers and competitors were told that during the hearing, if not before. Sea Swift must also ensure that its obligations under the Transferred Contracts Condition are published on Sea Swift's website and communicated to customers within 30 days of the Completion Date under the ARASSA.
262 Officers of TML's Largest Customers said that operational capability, regularity, reliability and price are key considerations for customers in choosing a scheduled service provider. However, none of them said that incumbency of a service provider on a particular route is a key consideration; all are prepared to consider non-incumbent service providers on the customers' routes when a contract expires.
263 It is true that the officers of two of the Largest Customers gave evidence that they generally do not seek scheduled services from operators other than those with whom those organisations have contracts during a contract's term. Mr Hamilton gave evidence that customers would be reluctant to change again once the contracts had been transferred to Sea Swift. The ACCC relied on the fact that Sea Swift budgeted on retaining the revenue to be derived from the Transferred Contracts and Mr Readdy said that a "higher level of certainty" of achieving this was one of his reasons why Sea Swift entered into the Deed of Amendment on 17 March 2016.
264 However, the officers of TML's Largest Customers also gave evidence that they do use other scheduled service providers when it is convenient, for instance, when it is necessary to consign freight urgently, after the regular provider's service had sailed or for charter services. These are opportunities for those other operators to become known to these customers and to build a reputation for reliability so that they can compete for the Transferred Contracts.
265 Further, officers of TML's Largest Customers also gave evidence of how they will behave in the knowledge of the Proposed Conditions. They clearly thought this situation was different from the normal circumstance where they have chosen a service provider and entered into a contract with them. Mr King from ALPA explained that if the Proposed Acquisition was authorised, he will be able try out Sea Swift, and switch to another operator if Sea Swift does not meet his requirements. Rio Tinto has already sought alternatives by way of tender in case the Proposed Acquisition was not authorised, XXXX XXXX XXXXX XXXX XXX XXX XX XXXXX. Mr Copeland of IBIS confirmed that, if it was not happy with Sea Swift's service under the contract after it is transferred by TML, then he would have no hesitation in speaking with other providers with a view to obtaining some or all of his requirements from another provider. All of this points to the fact that Sea Swift does not enjoy the benefits of "incumbency" yet.
266 Third, as submitted by Toll, customers can and have switched from an incumbent provider. Examples of this include:
(1) TML, as incumbent, lost the Caltex contract; the Woolworths Gove contract; the Woolworths Weipa contract; the Rio Tinto Weipa contract; and Rio Tinto Gove charter work, all to Sea Swift. TML also lost work relating to Port Keats, including Caltex's work, to Shorebarge;
(2) Sea Swift, as incumbent, lost the IBIS contract to TML and was only reappointed as one of two preferred suppliers under the TSIRC contract;
(3) Teras, as incumbent, lost the Northline work to Shorebarge, however it is not clear which of Teras or Shorebarge is currently operating that service; and
(4) Shorebarge, as incumbent, lost Caltex's work for Port Keats to Sea Swift.
267 Mr Conlon does not perceive any true advantage to incumbency.
268 As mentioned above it has not always been the incumbent which has survived in a price war. It is difficult to see the prospect of a price war as a barrier to entry since it may be the entrant which instigates it by undercutting the incumbent.
269 Fourth, TML's Largest Customers have and will continue to have countervailing power. The evidence is that these customers are sophisticated and understand that they control critical volumes and conditions of supply. These customers have the ability to undertake competitive tender processes to award work and otherwise test the market (and generally do so), either formally or informally. They have the ability to threaten other options to constrain their service providers and they can and do talk to other operators as a back-up or as a "stalking horse". They can and have sponsored, supported or encouraged new entry in a range of ways that do not involve financial investment in a service provider. For example, Caltex encouraged Sea Swift's entry and expansion into the NT market by entering into a base load contract with it.
270 Fifth, the ACCC submitted that the Transferred Contracts Condition does not address the ways in which an incumbent may provide an incentive to its customers to ship all of their freight with the incumbent, such as volume discounts. As mentioned above, the ACCC suggested that the Transferred Contracts Condition should be amended to deal with volume discounts. However, the Tribunal considers that volume discounts are a normal and appropriate incident of competition which can also be offered by competitors. In any event, the Condition is not required to address any substantial lessening of competition which would not exist but for the Proposed Acquisition because the Tribunal has already accepted that the outcome of TML's exit is that Sea Swift will become the provider to TML's Largest Customers for reasons given elsewhere.
271 Finally, the Tribunal accepts that economies of scale derived from having a number of customer contracts enhances incumbency and the staggering of the time contracts coming up for renewal may contribute to that enhancement. In the Tribunal's view, Sea Swift's likely position in the without scenario will inhibit competition in both the short run and the long run compared to the position if the Proposed Acquisition is authorised subject to the Transferred Contracts Condition (as revised by the Tribunal). This is because the Transferred Contracts will be contestable during their term (including extensions at the option of the customer) which will give other operators time to calibrate a competitive proposition that they are currently either not able or (in the case of Barge Express) not willing to make to the TML's Largest Customers on terms likely to be acceptable to those customers.
272 The customers party to the Transferred Contracts will benefit because they will experience little disruption from TML's exit while being freed from restrictive contractual provisions such as exclusivity, rights of first refusal or minimum volume provisions; they will be able to "try before you buy" not only Sea Swift's services, but also services provided by other operators, albeit that in the short term it is likely that most client relationships will be built by Sea Swift's competitors through the provision of charter services. This encourages incremental entry which imposes a competitive discipline on Sea Swift which is unlikely to exist in the counterfactual. That is so even though in the meantime, Sea Swift will have been put in a position to build a relationship with the customer that it does not currently have.