EU report on Competition Policy for digital era

Allen & Overy LLP

Allen & Overy LLP

On 4 April the European Commission published an expert report on how competition policy should evolve in the digital era.

The report, titled “Competition Policy for the Digital Era”, has been prepared by a panel of three expert “Special Advisers” from outside the Commission, appointed by Commissioner for Competition Margrethe Vestager, as an input to the Commission’s on-going reflection process about how competition policy can best serve European consumers. While the report may not result in action until after the European Parliament elections have taken place in May and a new Commission has been appointed to take office in November, it is likely to be influential in shaping the Commission’s legislative and enforcement agenda in the longer term.

Some key findings and proposals from the report are summarised below:

The report finds that digital markets require vigorous competition policy enforcement, arguing that large incumbent digital players are very difficult to dislodge and may have strong incentives to engage in anti-competitive behaviour, in particular because of the combined role of extreme returns to scale, network effects and data in the digital economy. It concludes that these factors require adjustments to the way in which competition law is applied.

A key area of concern in the report is the hotly-debated topic of “killer acquisitions”, whereby dominant firms acquire small start-ups with quickly growing user bases that might otherwise have developed into important rivals. (For more detail on this debate, see our recent “Global trends in merger control enforcement” report here.) 

o The report notes that some countries (such as Germany and Austria) have revised their jurisdictional thresholds for merger control to allow scrutiny of such acquisitions (e.g. by catching high-value transactions even where the target’s turnover is small). While the report concludes that it is too early for changes to the jurisdictional thresholds under the EU Merger Regulation, it recommends monitoring the situation and notes that if systematic gaps arise in the future, amendments may be justified. This approach also contrasts with proposals in the UK and Australia, which, rather than reforming their general approach to jurisdiction, envisage requiring specific firms to inform the authorities of all acquisitions they intend to make. 

o More immediately, it recommends changes to the substantive assessment of these transactions, arguing for a degree of scrutiny closer to “horizontal” mergers between competitors. In particular, it argues that where an acquisition can plausibly be seen as part of a strategy against users defecting from a dominant platform’s ecosystem, the parties should bear the burden of showing that the adverse effects on competition are offset by pro-competitive efficiencies. This has some echoes, in attenuated form, of a proposal by the Commission’s Chief Economist Tommaso Valletti to reverse the burden of proof in “killer acquisition” cases. However, the report is clear that while the reform “would imply a heightened degree of control of acquisitions of small start-ups by dominant platforms and/or ecosystems”, it “does not create a presumption against the legality of such mergers”.

More generally, the report recommends changes to the standard and burden of proof in competition enforcement, because of the high costs of “under-enforcement” in the digital era. A theme running throughout the report is that it is preferable for competition policy in digital markets instead to risk “over-enforcement” and “err on the side of disallowing potentially anti-competitive conducts”. Consistent with this, the report argues that even where consumer harm cannot be precisely measured, 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; and that in highly concentrated markets characterised by strong network effects and high barriers to entry, it may be appropriate to require incumbent firms to show that their conduct is pro-competitive.

The report argues that in assessing whether firms hold market power, regulators must take account of insights from behavioural economics about consumer biases towards default options and short-term gain, and of all the ways in which incumbents can be protected from competition (for example, by large holdings of data that is not available to market entrants). The implication is that competition concerns can arise even in an apparently fragmented marketplace.

The report discusses how competition enforcement should respond to the challenges posed by digital platforms. It makes recommendations as to how regulators should address the use of “most favoured nation” / “MFN” clauses by digital platforms, and argues that regulation to encourage data portability and interoperability is important to encourage competition between platforms, by making it easier for consumers to switch between, or use more than one, platform. The report also observes that platforms – in particular marketplaces – effectively act as “regulators”, setting up the rules for their users to interact, and argues that dominant platforms that set up marketplaces must ensure a level playing field and must not use their rule-setting power to determine the outcome of competition on their platform.

The report includes a detailed discussion of the implications of data and data access for competition law. 

o It explores the potential need for more demanding regimes for data access in certain circumstances. In some cases, the report suggests that it will be appropriate to use competition law to mandate dominant firms to disclose data needed by other companies to offer competing or complementary services, and it discusses at some length the appropriate legal tests in this area. Interestingly, though, the report envisages that sector-specific regulation rather than competition law will be the appropriate solution in most cases.

o It recommends further guidance should be provided on the conditions in which it is pro-competitive for companies to share or pool data (especially in aggregated form), and floats the idea of a future block exemption regulation in this area. 

The report comes at a time when governments and regulators around the world are grappling with these issues. Three weeks ago, a similar expert report was published in the UK, led by Jason Furman (you can read our summary of the UK report here). The focus of the two reports differs in various respects, and the Furman Report’s suggested changes are arguably more ambitious (for example, one of its headline proposals involves institutional reform to create a “Digital Markets Unit” empowered to develop codes of conduct for digital players with “strategic market status”). Nonetheless, there are some significant commonalities, including a preference for over- rather than under-enforcement and corresponding proposals to shift the burden onto companies to justify their conduct or transactions, and shared concerns around access to data and acquisitions of emerging digital players that could eliminate future competition. Meanwhile, outside Europe, the Australian Competition and Consumer Commission has been conducting an inquiry into digital platforms and published its preliminary report in December last year. 

More generally, the possibility of reform to EU competition law has been driven up the agenda by political controversy surrounding the Commission’s prohibition of the Alstom / Siemens transaction. Following that decision, the French and German governments (who had advocated for the merger as a means of creating a “European champion”) have published a joint “manifesto” envisaging, conversely to the digital area, a potential softening of some aspects of the Commission’s economics-based substantive approach to merger assessment and, radically, the possibility of European political leaders being empowered to override Commission decisions. The conclusions adopted by the European Council on 22 March contemplate reform to competition rules, stating that “[w]e will continue to update our European competition framework to new technological and global market developments”.

Looking forward, as more and more reports and studies into digital competition policy are published, all with recommendations that converge and diverge in varying degrees, it will be interesting to see what changes are actually made in practice. Will regulators and legislatures settle on relatively consistent approaches, or will the result be a real patchwork that will be difficult to navigate for digital firms engaged in cross-border activities?

If you would like to discuss any of the above then please get in touch with your usual antitrust contact or any of the ones listed on this page.

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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