“When the fridge is locked out of the smart home”

These days, there’s so much technology inside household device that some of them, like smart fridges, can communicate with other devices and even take care of your shopping for you.

There are also lots of new legal questions hiding inside those devices, including privacy, data protection and cybersecurity issues. And competition law is set to play a growing role in regulating the complex pattern of interactions between the players involved in their production and distribution.

How smart can a fridge be?

Connected products are collectors of big data. For instance, the use of smart meters or thermostats allows manufacturers to collect and process large amounts of data about usage habits over time. Such data is invaluable to manufacturers in order to optimise their products with subsequent generations or altogether new products. What’s more, in an IoT ecosystem, consumer information can be exchanged across the web of interconnected objects. The data harvested by one product, such as a smart thermostat which learns what time the consumer is likely to be at home, can be used to increase the performance of another connected device, e.g. a smart fridge. The fridge in turn is then able to “talk” to the local supermarket and order food, and by doing so gathers even more data.

Data generated by IoT devices can also be used to generate new business opportunities for manufacturers and online platforms through individualised marketing and pricing. Smart advertising and smart pricing, employ algorithm-based, pattern recognition, online marketing, data mining, data trade, demand estimation and price optimisation to meet individual customer demand at the best achievable price.

Can the IoT create a database which is too powerful? 

As a result, antitrust agencies are increasingly looking at big data collected by smart devices and its potential impact on market power. The crucial question: When does such knowledge lead to anti-competitive concerns, e.g. by creating or strengthening a dominant market position?
The European Commission recently assessed the issue of market power based on data ownership as part of the Facebook/WhatsApp merger, where it considered whether non-portable data (such as message history) could lock users into a mobile application. The Commission did not find that barriers of this nature gave rise to competitive concerns in the particular context of that case. However, the question of data ownership and data portability is clearly on the European regulator’s radar. Data portability is also regulated in the new draft EU General Data Protection Regulation, granting consumers the right to transmit personal data to another controller.

While the EU regulator is gearing up, the issue of data monopolies is also being discussed on the other side of the Atlantic. An example is Google’s acquisition of Nest Labs, a smart device maker known for its learning thermostats. When the Federal Trade Commission (FTC) unconditionally cleared the merger, some observers pointed to the risk that access to data gathered through Nest’s IoT solutions strengthened Google’s dominant position in the search advertising market.

The Google/Nest merger shows that even in the absence of a horizontal overlap, anti-competitive concerns may arise from the market power held in an upstream or related market. In this respect, one interesting question is whether big data forms a separate market of its own. Another pertinent question is whether such data may amount to a so-called ‘essential facility’. The application of the essential facility doctrine to big data generated by IoT devices would imply that, depending on the circumstances of the case, unjustified refusal to grant access to such data to competitors could amount to a breach of competition law.

Says the toaster to the fridge: “Sorry, I don’t understand your language” 

Another antitrust aspect of the IoT regards standardisation and platform interoperability. For the time being, many IoT products are based on proprietary platforms, i.e. with only limited ability to talk to smart products of different suppliers. Examples of different standards include the AllJoyn platform developed by the Qualcomm-supported Allseen Alliance, the Thread network supported by Google and Samsung, as well as the Wink platform supported by Philips, GE and Honeywell.

From a competition law perspective, the development of diverging standards might result in a risk of device inter-connectivity being frustrated. When a fridge, a toaster and other smart products from different manufacturers are not able to effectively “talk to each other”, this results in one or more products being locked out of the smart house.

The European Commission has identified these matters as priorities in its strategy for a Digital Single Market (DSM). In particular, it emphasised that a European push is needed to define standards in the area of the IoT, cybersecurity, big data and cloud computing.

Holding up the internet of things?

The lack of inclusive standardisation processes also gives rise to technology hold-up concerns. Recently, the European Commission has been focusing its attention on potentially abusive behaviour by holders of standard essential patents (SEPs). There has been particularly intense discussion of whether a company that exercises its rights as the holder of intellectual property by applying for an injunction against a user of one of its patents may in so doing be abusing a position of dominance.

The respective answers given by the Commission and the European Courts in recent decisions are also of importance in the IoT context. Smart products are based on a large number of patents, including patents on technology which regulates when and how a given smart product can communicate with other smart devices. Therefore, potential hold-up strategies, such as breaches of commitments to license IoT-related SEPs on fair, reasonable and non-discriminatory (FRAND) terms, could amount anti-competitive conduct.

Not all fridges are equal! 

It is likely that IoT hold-up cases will draw the attention of regulators and courts. The question whether certain patents are essential to make smart products and whether an entity actually abuses its dominance will have to be addressed on a case-by-case basis.

The same case-by-case approach must be taken to the other categories of potential IoT antitrust cases discussed above (big data capture, portability and interoperability).

So ultimately, regulators’ treatment of competition law concerns in the IoT space will have to depend on the specifics of the smart product concerned.

In any event, IoT companies need to be aware that these issues have appeared on the radar of competition law agencies. Questions such as “Can the fridge talk to the thermostat? Or is it locked out of the smart house?” might soon be read in official Requests for Information issued by antitrust authorities. So market participants need a strategy which balances competitive advantage through leveraging advanced technology with awareness of the competition law issues which that technological edge can generate.