EU report recommends competition policy for the digital era: game changer or too early to tell?

On 4 April 2019, the European Commission ("Commission") published "Competition Policy for the digital era", a report commissioned in March 2018 by the Competition Commissioner Margrethe Vestager from three special advisers (Professor Heike Schweitzer, Professor Jacques Crémer and Assistant Professor Yves-Alexandre de Montjoye, on the future challenges of digitisation for competition policy) (the "Report"). The Report comes at a time when competition authorities around the world are grappling with similar issues.

The Report follows on from a conference organised by the European Commission on the same topic on 17 January 2019 (covered in the January edition of this newsletter).

The "key characteristics" of the digital economy 

The Report's authors were asked by the Commission to explore how competition policy should evolve to continue to promote pro-consumer innovation in the digital age.  Their recommendations have been made against the background of three key characteristics of the digital economy, all of which can result in significant competitive advantages for incumbents:

• extreme returns to scale: the cost of production of digital services is proportionally much less than the number of customers served;
• network externalities: the usefulness for each user of a particular technology or service increases with the number of users that adopt it, making it difficult for new entrants to persuade individual users to migrate to an alternative; and
• the role of data: the evolution of technology has made it possible for companies to collect, store and use ever-increasing amounts of data, and the ability to use data to develop new, innovative services and products has become a key competitive parameter whose relevance will continue to increase.

The Report concludes that the combination of these characteristics results in strong "economies of scope" in the digital economy, which favour the development of ecosystems and large incumbent digital players that are very difficult for new entrants to dislodge.

Recommendations in relation to antitrust enforcement

The Report concludes that the existing framework of EU competition law continues to provide a sound and sufficiently flexible basis for protecting competition in the digital era.  However, the authors suggest that a "rethinking" of the traditional tools of analysis and enforcement is required to adapt to the challenges posed by the digital economy. The Report focuses in this regard on the competition law concerns arising in two areas: dominant platforms, and use of/access to data.

Platforms

The Report recognises that as a consequence of the above-identified characteristics of the digital economy, there may only be room in the market for a limited number of platforms, – especially in the absence of multi-homing (i.e. users using more than one platform), protocol and data interoperability or differentiation.

This means that it is essential to protect competition "for" the market, and consider carefully how to respond to strategies that dominant platforms might use to limit the threat of market entry or expand their market power into neighbouring markets. Equally, it is important to protect competition "in" the market (i.e. competition on a dominant platform), with dominant platforms having a responsibility to ensure that competition on their platforms is fair, unbiased and pro-users.

Whilst emphasising that a case-by-case analysis will always be required, the Report suggests a number of interesting, and potentially controversial, adjustments to existing competition law concepts and methodologies to address these challenges:

• market definition vs theories of harm: competition authorities should place less emphasis on analysis of market definition in the digital world (due to the rapidly evolving and complex nature of market boundaries), and more emphasis on theories of harm and identification of anti-competitive strategies;
• "by object" abuses?: strategies employed by dominant platforms aimed at reducing the competitive pressure they face should be forbidden in the absence of clearly documented "consumer welfare" gains, even where consumer harm cannot be precisely measured due to uncertainties around analysis of effects (effectively treating such strategies as "by object" abuses);
• burden of proof: enforcement in digital markets should err on the side of disallowing potentially anti-competitive conducts, and the burden of proof should be lowered or even reversed in some circumstances, requiring incumbents to demonstrate the pro-competitiveness of their conduct. For example:
• any measure by which a dominant platform restricts multi-homing should be treated as suspect and the firm in question should bear the burden of providing a solid efficiency defence;
• a presumption in favour of a duty to ensure interoperability may be appropriate where dominant platforms try to expand into neighbouring markets (thereby growing into digital ecosystems which become ever more difficult for users to leave), or where dominant platforms control specific competitively relevant sets of user or aggregated data that competitors cannot reproduce;
• platforms' "regulatory power": dominant platforms, in particular marketplaces, have "regulatory power", in the sense that they set the rules through which their users interact. As such they have a responsibility to ensure that their rules do not impede free, undistorted and vigorous competition without objective justification, and must not use their rule-setting power to determine the outcome of competition; and
• "self-preferencing": intervention may be necessary wherever "self-preferencing" conduct by a dominant platform is likely to result in a leveraging of market power which is not justified by a pro-competitive rationale.

Data

The Report includes a detailed (and complex) discussion of the current legal framework relating to data, including the General Data Protection Regulation ("GDPR"), and the various challenges posed by different types of data in different contexts. It emphasises that data is increasingly a crucial input for the competitiveness of firms in the digital economy and their opportunities to innovate. However, data markets, data sharing and data pooling arrangements are not fully developed, and the wider legal framework is still in its infancy (for example, it is unclear how the right to data portability under the GDPR will be interpreted and implemented). 

The Report considers that competition law has an important background role to play in this context, but that further regulation/legislation (at times sector-specific) is also needed. In terms of the consequences of the economics of data for competition policy, the Report concludes that:

• significance of data and data access: the significance 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;
• assessment of market power: any discussion of market power should analyse, cases by case, the access to data available to the presumed dominant firm but not to competitors, and the sustainability of any such differential access to data;
• data sharing and data pooling: data sharing and data pooling arrangements can produce significant efficiencies, but may also raise important competition concerns. As experience with the assessment of such arrangements grows, the Commission may need to contemplate the adoption of a block exemption Regulation in this area;
• access to data under Article 102: as regards access to data under Article 102 TFEU (abuse of a dominant position), it should remain the case that this is appropriate only where access to the data in question is truly indispensable. As such the "essential facilities" doctrine is not the best tool to deal with data requests by claimants who pursue business purposes that are essentially unrelated to the market served by the dominant firm (such as access to data for the purpose of training AI algorithms for unrelated purposes);
• data access through sector-specific regulation: however, in some settings, such as data requests for the purpose of serving complementary markets or after markets, it may be appropriate to impose a duty to ensure data access, and possibly data interoperability, potentially by way of sector-specific regulation. (In this regard, whilst not in the context of anticompetitive conduct, access to data has already been used in the UK, through sectoral regulation, to help inert customers switch banks (see the Competition and Markets Authority's Open Banking remedy). But the conditions need to be right for this to work. See our article from 2018 for an insight into some of these conditions.)

Recommendations in relation to merger control

The Report focusses on concerns about acquisitions by dominant platforms of small start-ups with a quickly growing user base and significant competitive potential. Many such acquisitions currently fall outside the scope of EU merger control, as the start-ups in question do not yet generate sufficient turnover to meet the thresholds set out in the EU Merger Regulation. Some EU Member States, notably Austria and Germany, have attempted to tackle this issue by introducing alternative thresholds based on the value of the transaction, but the Report notes that the practical effects of such alternatives have yet to be verified. 

In summary, the Report concludes that:

• too early to change EUMR: it is too early to change the jurisdictional thresholds of the EU Merger Regulation to address challenges posed by acquisitions in the digital field, but this option should remain under review, whilst also monitoring the performance of the transaction value-based thresholds introduced by some EU Member States;
• SIC test: the "significant impediment to competition" test remains a generally sound basis for assessing mergers in the digital economy;
• new theories of harm?: there is however a need to revisit the substantive theories of harm to properly assess cases where a dominant platform and/or ecosystem acquires a target with a low turnover but a large and/or fast-growing user base and a high future market potential;
• burden of proof: in such cases, competition authorities should consider whether the acquisition is part of a possible strategy against partial user defection from the ecosystem ("killer acquisitions"), and if so, require the parties to bear the burden of showing that adverse effects on competition are offset by pro-competitive efficiencies (although this should not be seen as creating a presumption against the legality of such mergers).

Next steps

This Report comes at a time when competition authorities around the world are grappling with similar issues. The Report's authors have emphasised that "it certainly cannot be, and is not intended to be, the final word on how competition policy should adapt to the digital era". However, it is an important contribution to the ongoing debate, and should be read alongside other recent publications in this field such as the Furman Report in the UK  and the preliminary report of the Australian Competition and Consumer Commission's inquiry into digital platforms.

Much will depend on how the Commission chooses to take matters forward, and how it aligns with the approach taken by competition authorities in other jurisdictions. Commissioner Vestager has indicated that the Commission will now take some time to process the Report before presenting its own conclusions. In practice, this seems unlikely to happen before the appointment of a new Commission following European Parliament elections in May, but the wider debate around the various issues raised in the Report will no doubt continue in the meantime.