Tech giants and disruptive market entrants have already transformed the way that we communicate and consume information – now they could be on the verge of fundamentally changing global competition standards. As regulators up the ante on enforcement, we consider the long-lasting effects on an industry that shows no sign of slowing down.
Markets under the microscope
Last month, the US Federal Trade Commission (FTC) Bureau of Competition announced that it will be creating a new taskforce specifically dedicated to monitoring competition in US technology markets. As well as examining practices and conducting enforcement investigations, the Technology Taskforce will centralise its expertise and attention on investigating “technology-related sectors of the economy”. Baker & Hostetler LLP has identified the action as part of a growing global trend to create tech-specific investigative teams that tackle the distinct antitrust challenges raised by the new breed of enormous tech companies and the rapidly evolving market. However, the FTC’s mandate is intentionally broad; while the taskforce thus has wide-reaching authority, it also raises the question of how extensive any examinations may be. Unsurprisingly, the Lexology Hub has been awash with discussion over what enforcement may – or may not – look like in practice.
The ongoing effect of the tech industry on competition is not limited to its biggest players. Disruptive market entrants are also causing a stir. As Slaughter and May points out, digital innovators such as Uber, Airbnb, Deliveroo and Netflix “have not only changed how we buy the same old goods or services but what we want to buy at all”. With their unique business models, these companies are making it difficult for regulators to predict the effects that innovation may have on competition, especially when it comes to merger clearance. While some companies – particularly those with strong branding and technological expertise – are more likely to be perceived as exerting competitive constraint, many others have successfully argued that their mergers are pro-competitive in this rapidly developing market.
An analogue system in a digital age
One authority assessing innovative business models from a consumer perspective is the UK Competition and Markets Authority (CMA). Stephenson Harwood LLP reports that the CMA has been busy investigating consumer protection law breaches in relation to ticket resale websites, social media influencers and, most recently, hotel booking websites, following concerns that common selling practices have misled customers and pressured them into making uninformed choices. Since the beginning of this investigation, six hotel booking sites have voluntarily agreed to:
Although the CMA’s involvement sends a clear message regarding the importance of transparency when selling goods or services online, Kingsley Napley suggests that a long-term overhaul of the CMA may also be on the way. According to CMA Chair Lord Tyrie, the growing digitalisation of the economy and doubts among consumers mean that it is “not a prudent option” for the CMA to continue in its current form. Instead, he suggests that a number of legislative and institutional reforms may be required to modernise what is otherwise “an analogue system of competition and consumer law in a digital age”.
Paving the way with such reforms is the Australian Competition and Consumer Commission (ACCC). Following an inquiry into the market power of Google and Facebook, the ACCC has proposed a number of key changes to both competition and consumer law as a means of regulating large digital platforms. Gilbert + Tobin explains that while Australian law does not prohibit companies from enjoying significant market power, the ACCC’s Digital Platforms Inquiry found that “the strong market position of digital platforms like Google and Facebook justifies a greater level of regulatory oversight” in order to prevent tech giants from acquiring emerging competitors or extending their dominance into other markets. According to Corrs Chambers Westgarth, the ACCC has expressed doubts over recent acquisitions of multinational digital platforms and is keen to ensure that it has the right tools to review and remedy potential issues arising from such mergers. One way of doing this is through further amendments to the Competition and Consumer Act. These amendments would include introducing two new mandatory factors to be considered when evaluating whether an acquisition substantially lessens competition, namely:
Although the firm goes on to argue that the ACCC already has the right tools for the job and should continue its current merger control practice under the recently amended Competition and Consumer Act, the proposed legislative changes highlight the pivotal role of data in competition analysis.
Where competition meets data protection
Australia is not the only jurisdiction holding Facebook to account. The German Federal Cartel Office (FCO) recently ruled that Facebook had abused its dominant position in the social networks market by requiring users to consent to link their Instagram and Whatsapp data to their Facebook account as a precondition of use and to consent to Facebook’s collection and use of data generated when visiting other websites. Jones Day reveals that the FCO found Facebook’s abuse of its dominant position to be characterised by the company’s data processing terms, which were “exploitative business terms” under German competition law. Although the FCO has not issued Facebook with a fine, its ruling requires the industry giant to take remedial action and is a rare finding of exploitative (rather than exclusionary) abuse of dominance.
Crowell & Moring LLP sees the decision as a response to the European Data Protection Supervisor’s call for competition authorities to break out of their “silos” and integrate the protection of citizens’ right to privacy into their enforcement priorities.
“The European Commission has so far, particularly in merger cases (including its assessment of the Facebook/WhatsApp decision, where it examined possible effects on the combination of WhatsApp data with Facebook data), consistently held the view that privacy-related concerns are outside the scope of competition law rules. However, recent statements from top Commission officials, including Commissioner Vestager, suggest that the Commission’s thinking may be evolving towards a greater willingness to take privacy-related concerns on board in competition law assessments.”
However, Hausfeld LLP is somewhat less convinced. The firm argues that while the FCO’s decision tries to establish an exploitative practice to the direct detriment of consumers, there was no indication that Facebook users were forced to accept any clauses that would genuinely exploit them, “let alone that competition law is the right tool to create more transparency”. Instead of focusing on Facebook’s relationship with private users, the FCO should have turned its attention to more genuine competition concerns by analysing the negative effects of the company’s conduct on publishers, app developers and potential competitors. Indeed, Hausfeld notes that despite Commissioner Vestager’s interest in the decision, she does not believe that “it can serve as a template”. Therefore, it is unlikely to lead to a branching out of the FCO’s concerns, let alone open the floodgates to similar investigations by other EU competition authorities.
Moreover, McGuireWoods LLP reports that Facebook has issued a detailed response to the decision, arguing as follows:
As such, the FCO’s decision is unlikely to be the final say in this dispute, and the long-lasting effect of Facebook’s data use on competition law remains entirely up in the air. While most practitioners agree that such use should be examined, many disagree as to whether this is a competition or antitrust issue.
In “Does America Have a Monopoly Problem?: Examining Concentration and Competition in the US Economy”, the US Senate Judiciary Sub-committee on Antitrust, Competition Policy and Consumer Rights debated how best to increase industry oversight, and whether this should involve regulatory authority and antitrust enforcement. McGuireWoods Consulting LLC chronicles the hearing, in which Former US Labour Secretary Robert Reich argued that dominant digital platforms continue to grow because users have no other choice but to interact on them and that the resulting data creates a considerable barrier to market entry for new competitors, as well as risks to consumer privacy. In Reich’s view, policymakers can either use antitrust law for its intended purpose to oversee industries or create new regulations. However, Former US Republican FTC Commissioner Joshua Wright argued that there is no persuasive evidence that market power is systematically increasing in ways that raise antitrust concerns and, while there could be some room for improvement in antitrust enforcement, proposals that regulators apply antitrust law more broadly should be avoided.
According to Paul, Weiss, Rifkind, Wharton & Garrison LLP, Assistant Attorney General Makan Delrahim has issued a similar warning, stating that – with regard to digital platforms – “concerns over privacy, inadequate notice, unauthorized use of data, and data protection, are legitimate policy issues that need to be discussed, but should not lead to distortions of our antitrust standards to address them”.
The effect of antitrust enforcement has also been up for discussion in the European Union. Skadden Arps Slate Meagher & Flom LLP reports that, in order to shape competition policy in the era of digitisation, the European Commission is increasing its focus on:
Further, the commission has taken a proactive approach in asking dominant market players such as Google and Qualcomm to comply with EU competition rules. Under the commission’s approach, if consumers value data protection and privacy as a critical component in the quality of an offered product, and if competition takes place based on that dimension, then data protection and privacy should be factored into a competition analysis. Large digital players that abuse their dominant position in the market may face significant fines, strong remedies and reputational damage.
However, traditional competition rules and theories do not adequately reflect the realities of the digital economy. Because many technology companies now support numerous digital platforms, companies can both compete against and be a customer of the same company within what is traditionally the same market. While there is growing support for changes in how EU competition rules address the collection and ownership of data and access to digital platforms, practitioners remain divided on the scope of such changes.
In the United Kingdom, the House of Lords’ Communications Committee has published a report entitled “Regulating in a Digital World”, in which the committee sets out what RPC describes as “a radical vision to govern the online space”. The report advocates a stricter competition law regime, which focuses on the impact of the accumulation of data with a new public interest test. The test would be applied to data-driven mergers and could encapsulate privacy, protection of democracy and media pluralism issues – which RPC suggests could even become conditional categories imposed on any approved merger.
Something’s got to give
Staying in the United Kingdom, on 13 March the Digital Competition Expert Panel published the so-called ‘Furman review’, which found that major digital platforms have become increasingly dominant while there has been little scrutiny or blocking of their acquisitions. As a result, the review recommends:
According to Bristows LLP, Chancellor Philip Hammond has welcomed the Furman review and confirmed that the UK government will respond to its calls to update the country’s competition rules, further requesting that the CMA carry out a market study of the digital advertising market.
However, Freshfields Bruckhaus Deringer LLP highlights a number of initial concerns. Although the review dismisses calls to reverse the burden of proof in merger transactions involving the acquisition of small start-up companies (so-called ‘killer’ acquisitions), the suggestion that there should be more acceptance of ‘false positives’ (ie, mergers that are blocked that should not have been) could be controversial and could see mergers requiring remedies (or even being blocked) on the basis of speculative issues. Likewise, the proposals for the DMU to require greater data sharing will need to balance other competing policy perspectives – in particular, the demand for a greater degree of privacy. Thankfully, most of the proposals will require primary legislation and therefore should not have an immediate impact. However, there are concerns that if all of the proposals are taken up, the CMA may create a climate that is unduly hostile to digital businesses following Brexit.
Similarly in the United States, Winston & Strawn LLP warns that while the initial focus of the FTC’s Technology Taskforce may be large tech companies, US antitrust agencies often engage in comprehensive reviews of entire industries and the FTC director has indicated that the taskforce will also review smaller transactions. Although the introduction of the taskforce highlights the FTC’s commitment to maintain fair competition, encourage innovation and protect US consumers, all tech companies – whether large or small – should be careful not to fall under newfound antitrust scrutiny.
Cohen & Gresser LLP reiterates the impact that the new taskforce could have on SMEs and start-ups, warning that “if the FTC is serious about a more rigorous approach to antitrust enforcement in the tech sector, its enforcement history suggests that it is more likely to police competition through stricter prospective merger review and conduct enforcement than through retrospective attempts to re-structure existing markets”. Further, the firm states that the decision to reassign current FTC attorneys, rather than hire additional employees, has led to scepticism that the new taskforce may be “more show than substance”:
“It remains to be seen whether the new task force reflects a significant change in course for the FTC as it combines its resources to reinvigorate and sharpen its focus on U.S. technology markets, or merely an effort to deflect criticism from some circles, as well as pressure from members of Congress, over the agency's response to technology industry consolidation.”
Whether the FTC will undertake the mammoth task of reversing historical mergers in order to break up overgrown players is up for debate. What is clear is that the authorities want to be seen to be adapting their efforts to combat anti-competitive behaviour in the innovative tech industry. Whether for show or substance, challenges to mergers and antitrust investigations are likely to increase – it may just be that although the giants grab the headlines, smaller companies are at equal risk.