Advice to the European Commission: sharpen your competition law enforcement tools for digital markets!
On 4 April 2019, the European Commission published a long-awaited report on Competition Policy for the Digital Era, prepared by three academic experts. “Big tech” firms have been on the receiving end of the Commission’s most hotly contested antitrust fines, and this report calls for even tougher enforcement in future. It is an important contribution to the debate on the role of competition policy as a stimulant of innovation in digital markets.
The main conclusion of the 127-page report1 (available here) is that innovation in digital industries can be promoted by swifter and tougher enforcement of antitrust and merger control rules, supplemented by regulation in some sectors. The report proposes that the European Commission’s antitrust enforcement toolkit should be broadened by (i) expanding the notion of “dominance” or of the duties placed on dominant firms in digital markets; (ii) introducing new conglomerate theories of competitive harm in merger control; and (iii) introducing data sharing, data pooling, as well as data access and interoperability requirements on a case-by-case basis.
In contrast with other voices heard in the debate on digital platforms, the report does not advocate the break-up of large tech companies to remedy excessive market power. The range of remedies proposed includes instead data interoperability and access remedies (imposed by antitrust rules or regulation) as more attractive and efficient alternatives that preserve the integration benefits of digital platforms. The report also does not consider “public utility” type regulation to be suitable for dominant platforms, given that these markets are characterised by rapid technological innovation.
The report is published as “end of term” approaches for the current EC and European Parliament. This means that any new policy or legislative initiatives catalysed by this report will be introduced by Commissioner Vestager’s successor, once the new EC has assumed office later this year. In this respect, the report analyses several key topics that will inform the coming years’ policy debate and the enforcement agenda for digital markets.
Competition enforcement in the digital sector has been a key enforcement priority for the current EC, in which Commissioner Vestager is responsible for competition policy. During her term as Commissioner, the EC has imposed more than €8 billion of fines on Google alone (the sum of the fines imposed in the Comparison Shopping, Android and AdSense cases) and ~€1 billion on Qualcomm for exclusive rebates. The EC has also extracted commitments from Amazon on the e-books investigation, and has reviewed several mergers in the tech sector, including Microsoft/LinkedIn and Qualcomm/NXP. The EC has also carried out a sector inquiry into e-commerce, which prompted several enforcement actions against cross-border sales restrictions within the EU.
Against this background, in March 2018, Commissioner Vestager commissioned an external report from three academics with complementary backgrounds in the digital sector: Heike Schweitzer (Professor of Law in Berlin), Jacques Cremer (Professor of Economics in Toulouse) and Yves-Alexandre de Montjoye (Assistant Professor of Data Science in London).
The EC is not the only authority that focuses on tech giants. Many other enforcers have been and are pursuing ongoing cases/investigations in the areas of digitisation (France, Germany, the UK, Japan, Australia, India and South Korea). In the UK, the independent Furman report was recently published which concludes that, whilst the digital sector has created substantial benefits, it has also strengthened the dominance of a handful of tech giants, and recommends amendments to the existing merger control and antitrust enforcement regimes (See here).
Key topics and findings
The report notes at the outset that the digital sector is characterised by three main features: (i) extreme returns to scale; (ii) network externalities/network effects; and (iii) the role of data as a key input for new products and services. These three features favour the creation of digital ecosystems with very strong economies of scope and incumbency advantages. These ecosystems exist in most of the established tech giants, such as Google, Amazon, Facebook and Apple. The report also notes that, given the difficulties in measuring consumer harm in digital markets, and the stickiness of market power gained by digital platforms, it is important that the EC’s enforcement is more aggressive (in other words: over-enforcement is preferred to under-enforcement). The report then focuses on four key areas:
1. Goals and Methodologies of EU Competition Law in the Digital Era
The report recommends that the EC makes certain adjustments to allow for a more aggressive enforcement of EC competition rules against tech giants. More specifically:
- Dominant firms should bear the burden of proof for any consumer welfare gains generated by any conduct that reduces competitive pressure from third parties. This is a departure from the current framework, in which most conduct by dominant firms is deemed legal absent proof of anti-competitive harm.
- The EC should have flexibility on market definition and focus more on theories of harm. The report calls for a more flexible approach on market definition (for example in defining narrower markets such as ecosystem-specific aftermarkets), and more emphasis on theories of harm and proof of anti-competitive strategies.
- Broader definition of market power. The concept of market power should be more flexible and extend at least to situations where the platform is an unavoidable trading partner or the platform has access to a unique dataset that gives it a strong competitive advantage.
- Creation of anti-competitive presumptions for certain types of conduct. The report suggests the use of presumptions of anti-competitive conduct, shifting the burden of proof for pro-competitive benefits to platforms, particularly when dominant platforms expand into neighbouring markets or where dominant platforms control unique datasets that the competitors cannot replicate.
- Competition can be supplemented by regulation in some instances. The report notes competition can in some instances be complemented by regulation (for example in instances where long term interoperability and access requirements are necessary).
The report notes that in markets where network externalities and returns to scale are strong, there will be room for only a limited number of platforms. In that case, it is essential to preserve not only competition “in the market” but also competition “for the market”.
In relation to competition “for the market”, the report identifies (i) Most Favoured Nation clauses (“MFNs”) and (ii) bans on multi-homing/switching as the two key types of conduct used by dominant firms to entrench their dominant position. The report advocates a strict treatment of MFNs, consisting in only accepting “narrow” MFNs (i.e. prohibition on the seller on offering lower prices on its own website) in instances where there is significant inter-platform competition, while “wide” MFNs should be banned2. As for multi-homing/switching, the report emphasises that any restrictions on multi-homing and switching should be banned, noting data portability and interoperability (which can also be imposed through regulation) are very important to achieve effective multi-homing and switching.
As to competition “in the market”, the report finds that many platforms, and in particular marketplaces, act as regulators which set the rules for their users. Whilst the authors do not see this is as a problem in itself, the report flags leveraging and self-preferencing as two types of practices that restrict competition “in the market”. Leveraging can be offensive (extend dominance in adjacent markets) or defensive (protect dominance in a given market), and is the type of conduct that Google was charged with in the Android case. Self-preferencing is viewed as a specific type of leveraging (essentially the conduct that Google was charged with in Comparison Shopping).
The report advocates that the very strict conditions of the “essential facilities” doctrine is not suitable for leveraging or self-preferencing. The report proposes instead that every time that a dominant firm engages in such practices, there should be a presumption of anti-competitive leveraging, with the burden of proof on the dominant firm to show that the self-preferencing is justified by a pro-competitive rationale.
The report notes that data are not always indispensable to compete. Their competitive significance depends on a case-by-case assessment. For those cases where access to the data is indispensable to compete, the report identifies several ways to establish a level playing field:
- Data interoperability and full data portability through regulation of enforcement actions, which would facilitate multi-homing and switching. This would go beyond the current GDPR framework.
- Data sharing and data pooling agreements. The report notes that such arrangements can be both pro- and anti-competitive, which is why the EC should carry out an assessment of the different types of data pooling arrangements and provide more guidance in that respect.
- Data access under Article 102 TFEU or regulation, when access to data held by the dominant platform is essential to compete in the broader ecosystem of the data controllers. Regulation might be more suitable where continuous access requirements or monitoring are required.
- Last, the report recommends updating the traditional competition law analysis of aftermarkets, which in its current form does not take into account the specificities of data (e.g. where machine producers do not let users have access to the data collected by the machines).
4. M&A in the digital field
In relation to M&A in digital markets, the report does not consider it necessary, at this time, to change the rules which give the EC jurisdiction to review M&A deals under the EU Merger regulation.
In terms of the substantive test used in the EU Merger Regulation, the report acknowledges that the current test, under which enforcement action requires the EC to demonstrate a “significant impediment to effective competition” (“SIEC”), remains a sound basis for merger enforcement. However, the report also notes that new theories of harm need to be considered when determining whether a SIEC arises in digital markets, especially in the context of deals involving (i) an acquiring dominant platform and/or ecosystem with strong positive network effects or data access, and (ii) a target with a currently low turnover but a large and/or fast growing user base and a high future market potential. Where such an acquisition is “plausibly” part of a defensive strategy against partial user defection from the dominant firm’s ecosystem, the dominant firm should have the burden of showing that adverse effects on competition are offset by merger specific efficiencies. However, the report does not consider the use of innovation markets or innovation spaces as necessary to preserve innovation in the digital economy, given that innovation is already an integral part of competition in the digital field.