We reported last year on the European Commission’s preliminary report into the e-commerce sector. The Commission has now released its final report, which will be of particular interest to any businesses involved in online retail or digital content.

In mid-2015, the Commission sent out questionnaires to retailers, online marketplaces, price comparison tool operators, payment system providers and others involved in e-commerce. This included 1,051 retailers and 248 digital content providers.

In response to these questionnaires, the Commission received a great deal of data and other information on how the e-commerce sector functions, from retail of goods to the licensing of digital content. The report primarily deals with the trade of consumer goods (i.e. retail of everything from clothes to computers) and the provision of digital content.

Consumer goods

The Commission has found that the retail of goods has changed a great deal as the internet has developed and become more pervasive. In particular, the Commission has identified the following trends and features of the market:

  • Price transparency has greatly increased: Consumers can compare prices from hundreds of retailers easily and quickly. This puts downward pressure on prices, but also increases the risk of freeriding; as any high-street retailer knows (remember the Dixons ad anyone?). Price transparency between retailers has also increased, with most retailers now using pricing software that lets them see (and adapt to) competitors’ pricing strategies. This could lead to retailers coordinating prices; why cut your prices when you know your competitors will cut theirs to match in a fraction of a second? Brands may also be using this technology to monitor how closely their retailers are sticking to RRPs, which could make it easier for them to unlawfully prevent retailers cutting prices. As Artificial Intelligence (or “AI”) develops, so does the risk that this software could get its human masters in trouble by coordinating price increases between competing retailers.
  • Retailers are increasingly adopting selective distribution systems: Such systems usually involve a limit on the number of and means by which retailers are permitted to sell a particular product. They are usually thought to produce more benefits than down-sides provided brands stick within the strict rules. However, the evidence collected by the Commission suggests that some brands are going too far in restricting their outlets.
  • Dual pricing: The Commission has identified that some brands might be charging different prices depending on whether their partner retailers are selling online or not, or whether they are selling into other EU member states or not. Both of these restrictions can be unlawful.
  • Sales via marketplaces: Some other European competition authorities consider that restrictions on selling via marketplaces such as eBay or Amazon are anticompetitive and therefore unlawful. There is a case on this point currently awaiting judgment from the EU courts, but the Commission considers that bans on sales via marketplaces (such as eBay, Amazon and Alibaba, for example) are not automatically unlawful.
  • Geo-blocking and geo-filtering: While brands can decide unilaterally whether or not they want to sell into other territories, they cannot agree complete bans on third party distributors / retailers from doing so. The Commission found evidence that some brands are restricting sales between EU member states, which can be unlawful.
  • Adwords: The Commission considers that restrictions on retailers bidding on the brand’s trade marks as AdWords would be an issue if the restriction on search term advertising restricted the effective use of the internet as a sales outlet.

Digital Content

  • Geo-blocking: Content producers and large content distributors will be relieved that the Commission has not gone as far as to say that exclusive licensing of rights according to territories is unlawful in itself. However, the Commission is concerned at the lack of inter-state trade of content.
  • Length of licences: The Commission is wary of the length of some content licences, as they undermine the ability of other potential licensees to compete with the incumbent. ‘Most favoured nation’ and ‘right of first refusal’ clauses are being looked at (and Amazon recently agreed to undertake not to enforce its MFN and related clauses).
  • Payment structures: Anyone that has tried to licence content for a new business will be all too aware of the barriers to entry. The Commission considers that minimum guarantees, advance payments and other practices might be making it harder for new market entrants to break through.

What next?

The Commission has already announced that it has launched three investigations in relation to alleged resale price maintenance in consumer electronics, geo-blocking of video game sales and price discrimination in hotel booking.

Given the vast amount of information collected by the Commission, the Commission is likely to launch further investigations. Businesses involved in e-commerce should sense-check their agreements and practices.

The final report very much includes the UK, which is leading country when it comes to e-commerce. While we do not know what shape the final Brexit deal (if any) will take, it is likely that the UK authorities will continue to cooperate with their EU counterparts. Further, UK competition law is very much based on EU competition law, so it will be some time before the two diverge even if the UK were to go its own way entirely. Even if UK competition law changed significantly, any businesses operating in the remaining EU member states would (as many pointed out during the EU Referendum campaign in 2016) still need to comply with the EU’s rules.

One interesting point is that if the UK leaves the EU and the EEA, and does not agree to match EU competition law through some other bilateral agreement, the UK will become a ‘third country’ from the perspective of the EU. This means that restrictions on cross-border sales and licensing of digital content will no longer be prohibited; possibly meaning greater differentials between the prices paid by UK and EU consumers.

The European Commission has released its long-anticipated preliminary report as part of the inquiry into e-commerce launched in May 2015. The report will be of interest to any businesses involved in e-commerce, and particularly those involved in online retail and distribution of digital content. This note focuses on the implications for those involved in the manufacture, distribution and retail of consumer goods.