European Union: EU Competition In The Digital Age: European Commission Publishes Report Of Special Advisers

Last Updated: 20 May 2019
Article by Salomé Cisnal De Ugarte, Raphaël Fleischer and Matt Giles

On 4 April 2019, the European Commission published the much anticipated Report Competition Policy for the digital era (hereinafter referred to as the "Report"). Authored by a panel of special advisers (all academics) appointed by Competition Commissioner, Margrethe Vestager, the Report explores how competition policy should evolve so as to promote pro-consumer innovation in the digital age – in particular, arguing that EU competition enforcement needs to be "adapted and refined" to account for the challenges posed by digitisation. According to the Report, such adjustments might include (amongst other things) developing new theories of harm for evaluating conglomerate mergers, interoperability or data-sharing requirements for dominant companies and the provision of guidance on the definition of dominance in digital markets (and/or on the duties of conduct for dominant platforms).

The Report represents the latest development in the Commission's ongoing review as to how EU competition policy might better harness the benefits of digitisation whilst, at the same time, looking to address competition concerns (some of which appear peculiar to digital markets). It also follows the publication in March in the UK of an independent report on the state of competition in digital markets (Professor Jason Furman's Unlocking digital competition: Report of the Digital Competition Expert Panel).

Arguably not as far-reaching as the findings set out by Furman, the Report does put forward some proposals that are likely to be controversial and potentially influential in the Commission's thinking going forward.

Outline of the report

In terms of its structure, the Report focuses on the following issues:

  • digitisation and its impact on competition law analysis;
  • the goals of EU competition law in a digital context;
  • the role of data and platforms in digital markets and how competition law should be applied given their prominence; and
  • whether current EU merger control rules (and substantive theories of harm) need to be updated to enable scrutiny of acquisitions of innovative start-ups by dominant platforms.

Digitisation and competition

The Report notes that there are three key features characterising the digital economy:

  • Extreme returns to scale – the cost of production for digital services is proportionally much less than the number of customers served – a feature considered to be much more pronounced in digital markets and which the authors consider significantly to reinforce the position of incumbent players;
  • Network externalities – regardless of whether new entrants can produce better quality and/or offer lower prices, the convenience of using existing technology or services due to significant user numbers is considered to constitute an additional barrier to new market entrants (the Report noting this "incumbency advantage" depends on a number of factors including the possibility of data portability, data interoperability and multi-homing); and
  • Importance of data – companies now have the ability collect and use large amounts of data which is a crucial input for many online services processes and logistics. In this respect, the use of data to develop and innovate is a competitive parameter whose relevance will continue to increase.

Taken together these factors are believed to create strong 'economies of scope' – favouring the development of ecosystems in which incumbent platforms derive significant competitive advantage, secure positions that appear increasingly unassailable and in which they may develop strong incentives for engaging in anti-competitive conduct.

According to the Report, dealing with these issues not only requires vigorous competition enforcement but also justifies making adjustments to the way in which competition law is applied.

Goals and methodologies of EU competition law

Despite the challenges presented by greater digitisation, the Report suggests there is no need to rethink the fundamental goals of EU competition law, confirming that the basic competition framework (as governed by Articles 101 and 102 TFEU) continues to serve as a "sound and sufficiently flexible basis" for protecting competition.

The Report argues, however, that the specific characteristics and workings of digital markets do create concerns about under-enforcement and, in this respect, the efficacy of certain established doctrines, concepts and methodologies which underpin current competition analysis. In particular, the Report argues that it may be necessary to revisit orthodox views on, amongst other things, the 'consumer welfare' standard, approaches to 'market definition' and the measurement of 'market power'. Taking these points in turn, the Report argues as follows:

  • Consumer welfare – given the unprecedented pace of change, the difficulty in establishing the "expected" impact on consumers and the stickiness of market power in digital markets identified by the authors, the Report suggests that both the relevant time-frame and the standard of proof may need to be revisited. It argues that even in circumstances where the extent of consumer harm cannot be established, strategies employed by dominant platforms aimed at reducing competition should be prohibited in the absence of clearly documented consumer welfare enhancement.
  • Market definition – less emphasis should be put on market definition as boundaries in digital markets are often vague and may change quickly. Instead the Report advocates placing greater emphasis on the identification of workable theories of harm and anti-competitive strategies pursued by dominant incumbents.
  • Measuring market power – the assessment of market power should consider whether a platform, even in a fragmented market, has 'intermediation power' (and is therefore an 'unavoidable trading partner'). Such an assessment should also gauge, on a case by case basis, a platform's access to data (which is not available to market entrants) and the sustainability of any such differential access to data insofar as such access provides a strong competitive advantage potentially leading to market dominance.

The Report also argues, controversially, that the specific features of digital markets has changed the balance of error and implementation costs such that it might be necessary to make changes to established tests (including allocation of the burden of proof and definition of the standard of proof). The authors argue that, given highly concentrated markets characterised by strong network effects and high barriers to entry, it may be prudent to err on the side of prohibiting certain conduct and, as part of this, imposing on incumbent players the burden of proof for demonstrating the pro-competitiveness of their conduct.

The role of platforms and data in digital markets

Platforms

The Report notes that in markets where returns to scale and network externalities are strong (and particularly where there is a lack of multi-homing, protocol and interoperability), the number of platforms active will often be very limited. In such circumstances, it will be necessary to ensure competition both "for the market" (such that the market remains contestable and accessible to new entrants) and "in the market" (ie on the platform in question).

To protect competition "for the market", conduct by dominant platforms that hinders potential rival platforms and/or suppliers or raises their costs by means that cannot be considered as "competing on the merits" should be treated with suspicion. To this end, the Report cites the use of most favoured national (MFN) clauses and restrictions focused on limiting multi-homing and switching as examples of means that could raise questions as to their compatibility with free and undistorted competition.

In terms of MFNs, whilst it is accepted that such provisions can have both pro- and anti-competitive effects, the Report suggests it would be prudent to prohibit dominant platforms from imposing clauses preventing sellers on their platforms from price differentiating between platforms (ie restricting price competition between platforms).

Similarly, ensuring multi-homing and switching means authorities should view sceptically any measure by which a dominant player impedes multi-homing and switching unless it can raise a credible efficiency defence. Finally, the Report notes that data regulation in relation to 'interoperability' (ie facilitating the seamless exchange of data between companies) and 'data portability' (facilitating the transfer of data between platforms) also play an important role in facilitating multi-homing and the offering of complementary services.

As for ensuring "competition in the market" (ie on the (dominant) platform), the Report notes that dominant platforms act as regulators of their own markets and suggests that they have, as such, a responsibility to ensure that their rule-setting power does not determine the outcome of the competition. In short, they must not impede free and undistorted competition (without objective justification) on account of their privileged positions.

According to the Report, particular attention should be paid to dominant platforms that engage in leveraging market power (ie using its dominant position in one market to extend it into a neighbouring market) and/or self-preferencing (ie giving preferential treatment to its own products or services where they are in competition with products and services provided by other entities active on the platform). The Report underscores that not all instances of self-preferencing by dominant companies will be abusive; regard should be given to the restrictive effects of such self-preferencing in order for it to be considered abusive. Nevertheless, the Report controversially argues that self-preferencing by a vertically integrated dominant platform should be presumed abusive, even outside an 'essential facility' context, where it is likely to result in the leveraging of market power and is not otherwise supported by a pro-competitive rationale.

Data

Noting that data is often an important input for (amongst other things) online services and production processes, the Report submits that a company's competitiveness may increasingly depend on its timely access to relevant data. On this basis, a broad (or broader) dissemination of data could be desirable for promoting/protecting competition in digital markets. This might, however, prove difficult in light of the rights of data subjects with respect to their personal data (and, in particular, the requirements of the General Data Protection Regulation (GDPR)), business secrets and the risks it might create in terms of collusive data sharing.

It is also not clear that an obligation to share data would be warranted where access is not indispensable for a competing in the market. To this end, the Report notes that the importance of data and data access for competition will "always depend on an analysis of the specificities of a given market, the type of data and data usage in a given case".

However, where data access is actually shown to be indispensable for competing in a given market, the Report suggests that access to data should be considered. The Report discusses, among others, the following topics in this context:

  • Access to personal data a key issue in this regard relates to the portability of personal data – something which the Report acknowledges is now in part regulated by the GDPR. The Report suggests, however, that in line with the GDPR a more stringent data portability regime could be imposed on dominant undertakings in an effort to overcome so-called 'lock-in' effects.
  • Data sharing – the Report underscores that data-sharing (and data-pooling) arrangements are often pro-competitive. Nevertheless, the Report provides some examples of where such activities may become anti-competitive: (i) when certain competitors are denied access to data and others not; (ii) where data-sharing amounts to anti-competitive information exchange between competitors; and (iii) where data-sharing acts as a barrier to innovation. The Report notes that issues regarding data sharing are relatively new and, as such, suggests that a "scoping exercise" of the different types of data pooling may be necessary in order to generate more insights and, in turn, provide guidance (for example, by way of "guidance letters", incorporated into the next review of the Guidelines on Horizontal Cooperation and/or, in due course, as part of a possible block exemption regulation focused on data sharing and pooling).
  • Refusing access as potential abusive behaviour (Article 102 TFEU) – whether refusing access to data is abusive will, in many respects depend on the 'indispensable' nature of said data. This in turn is a function of the nature of data involved and the purpose for which access is sought. The Report questions whether Article 102 TFEU is always the best tool to remedy such refusals to access, in particular where such access is sought in the so-called 'data aftermarket'. The Report suggests there may be more efficiency to be gained from regulatory intervention for dealing with these issues.

Mergers and acquisitions in the digital field

The Report addresses the much discussed issue of 'killer acquisitions' – the term used to describe the process by which large digital incumbents purchase potential competitors at an early stage, allegedly to kill off their potentially disruptive (future) offerings (ie in order to avoid a replacement effect for their own existing products/services). By doing so, it is said, the incumbent pre-empts competition from firms that potentially threaten their own market position.

Given this concern, the Report proposes a detailed discussion as to whether the current EU merger control regime needs amending or updating to address better the issue of the early elimination of potential competition. The Report breaks its analysis of this issue into the jurisdictional and substantive assessment considerations.

Jurisdictional thresholds

There has been concern that some acquisitions by platforms in the digital sector "escape" the Commission's scrutiny as they occur before start-up targets have generated significant revenues. Despite the argument that these transactions can be of potential competitive significance, the level of turnover generated means they can fall below the jurisdictional thresholds set out in the EU Merger Regulation (EUMR).

Some Member States (notably, Austria and Germany) have introduced "transaction value" thresholds to address, in part, this issue. Nevertheless, the Report concludes that it is too early to change the EUMR's jurisdictional thresholds. Instead, it recommends that the Commission monitor developments at the Member State level to assess how the new transaction value thresholds play out in practice as well to determine whether the existing referral system ensures that transactions of EU-wide relevance are ultimately analysed by the Commission. Only where enforcement gaps persist should the Commission consider making necessary amendments to the EU merger control regime.

Substantive assessment

The Report proposes that substantive theories of harm be revisited where a dominant platform, with strong network effects and (proprietary) data access (the latter acting as a significant barrier to entry), acquires a target which, despite low turnover, has a fast-growing user base and evident future market potential. In such circumstances, competition law should be particularly concerned, the Report argues, with protecting such entities so that they might otherwise enter and contest the incumbents' markets.

The Report sets out that the competitive risk from such acquisitions is not limited to the foreclosure of rivals' access to inputs but also to the perpetuation/preservation of the incumbent's dominance by:

  • intensifying the loyalty of users that consider the new services as complements to existing services; and
  • retaining other users for which the new services might constitute partial substitutes for the ones already available.

On this basis, it is argued that the best way to assess such acquisitions is to inject some 'horizontal' merger elements into 'conglomerate' theories of harm by posing the following questions:

  • Does the acquirer benefit from barriers to entry linked to network effects or use of data?
  • Is the target a potential or actual competitive constraint within the technological/users space or ecosystem?
  • Does its elimination increase market power within this space, notably through increased barriers to entry?
  • If so, is the proposed acquisition justified by efficiencies?

The approach advocated here would provide the Commission with a "heightened degree of control" over acquisitions of innovative start-ups by dominant platforms. In particular, where the scrutinised acquisition is plausibly part of a strategy employed by the dominant platform to deter users from migrating from its ecosystem, the acquiring party should, the Report argues, bear the burden of showing that adverse effects on competition are offset by merger-specific efficiencies. This would not, however, amount to a presumption about the illegality of such acquisitions. Rather, the authors suggest, it merely involves taking specific account of such acquisition strategies in recognition of the competitive risks they may give rise to in a digital market context.

What's next?

The January 2019 conference and the Report are meant to provide input to the Commission's ongoing reflection process about how competition policy can best serve European consumers in the fast-changing digital world. Commissioner Vestager has welcomed the report and indicated it is now time to take a step back and process the contents of the Report.

The Report underscores that "[it] is not intended to be the final word on how competition policy should adapt to the digital era". We therefore do not expect any imminent changes to the main European competition rules in the short term. In fact, it will be for the next European Commission and Competition Commissioner to consider whether any change in competition policy or law will be required. In doing so, the Commission will not only take into account the recommendations and findings set out in this Report, but also how other competition agencies plan to deal with these markets as more and more reports and studies into digital competition policy are published. Looking forward, it will be interesting to see what changes are actually made in practice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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