EU Commission Publishes Preliminary Report on Consumer Internet of Things Competition Sector Inquiry

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On 9th June 2021, the European Commission has published the preliminary results of its competition sector inquiry into markets for Consumer Internet of Things (IoT) related products and services in the European Union. The Report will give the Commission invaluable insight into this rapidly growing market and highlight those areas needing possible regulatory/competition law enforcement.

The Consumer IoT sector inquiry was launched on 16 July 2020 as part of the Commission's digital strategy. During the inquiry, the Commission gathered information from over 200 companies of different sizes, operating in Consumer IoT product and services markets and based across Europe, Asia and the United States. The Commission also reviewed over 1000 agreements entered into companies involved in the sector. Their review of this information forms the basis of the Preliminary Report.

The Preliminary Report confirms that while the consumer IoT is a relatively new area, it is growing rapidly and becoming more and more a part of our everyday lives. There is also a trend towards increasing availability and proliferation of voice assistants as user interfaces enabling interaction with different smart devices and consumer IoT services.

The Preliminary Report indicates that the cost of technology investment and the competitive situation as the main barriers to entry or expansion in the sector. According to the respondents ot the consumer IoT enquiry technology investment costs are particularly high in the market for voice assistants. In addition, a large number of respondents has reported difficulties in competing with vertically integrated companies that have built their own ecosystems within and beyond the consumer IoT sector (e.g., Google, or Apple). As these players provide the most common smart and mobile device operating systems as well as the leading voice assistants, they determine the processes for integrating smart devices and services in a consumer IoT system.

The report identifies a number of potential competition law concerns raised by this expansion.

Exclusivity & Tying: Respondents raised concerns regarding exclusivity and tying practices in relation to voice assistants, as well as practices limiting the possibility to use different voice assistants on the same smart device. A number of potential concerns were voiced about the position of voice assistants and smart device operating systems as intermediaries between users, on one side, and smart devices or consumer IoT services on the other side. The Report concluded that this position, combined with their key role in the generation and collection of data, would allow them to control user relationships.

Leveraging of Data: Providers of smart device operating systems and voice assistants seem to have extensive access to data, including information on user interactions with third-party smart devices and consumer IoT services. Respondents to the sector inquiry considered that this access to and accumulation of large amounts of data would not only give voice assistant providers advantages in relation to the improvement and market position of their general-purpose voice assistants, but also allow them to leverage more easily into adjacent markets.

Foreclosure Effect of Proprietary Technology: The Report highlights how the prevalence of proprietary technology can lead to the creation of “de facto standards”, together with technology fragmentation and lack of common standards. This raises concerns as to the lack of interoperability in the Consumer IoT sector and the potential foreclosure effect on other potential competitors. For example, the Report states a few providers of voice assistants and operating systems are said to unilaterally control interoperability and integration processes and to be capable of limiting functionalities of third-party smart devices and consumer IoT services, compared to their own.

What Next?

The Preliminary Report gives the Commission an invaluable market insight into this rapidly growing sector and will provide guidance to the Commission's future enforcement and regulatory activity. However, any use of the Commission’s competition enforcement powers would be based on a case-by-case assessment. The findings of this sector inquiry can also contribute to the ongoing legislative debate on the Commission's proposal for the Digital Markets Act.

The Preliminary Report on the findings of the sector inquiry will now be open to public consultation for a period of twelve weeks, until 1 September 2021. All interested parties will be able to comment on the findings of the sector inquiry, submit additional information or raise further areas of concern. The Commission aims to publish the Final Report in the first half of 2022.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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