On 10 May 2017, the European Commission (Commission) released the final report on its two-year inquiry into the e-commerce sector (the Report). This Report presents the Commission’s definitive findings, taking account of comments received on its preliminary report of September 2016 and its initial findings on geo-blocking .
The Report largely confirms the Commission’s earlier findings in relation to digital content. With regard to online selling, as expected, the Commission has identified a range of business practices – particularly online sales restrictions – that may warrant closer scrutiny. These largely align with the Commission’s preliminary findings. However, there are some subtle, but important updates contained in the detail of the Staff Working Document. The Commission has also set out its thoughts on current hot topics, such as the use of software to track rivals’ prices, which it cautions, may give rise to competition issues and in some cases, could even lead to “automated price coordination”.
In parallel, the Commission has published a mid-term review of its Digital Single Market (DSM) strategy. This indicates that, whilst the Commission will keep a close eye on platforms such as Google, Facebook and Amazon, it does not intend to propose extensive regulatory intervention at this stage.
The road ahead
The Commission has not recommended any legislative changes and has confirmed that it will not accelerate the review of the Vertical Block Exemption Regulation (VBER), due in 2022. However, it has made clear that the insight gained from the sector inquiry will lead to targeted antitrust enforcement in e-commerce markets, as has been the case in previous sector inquiries.
Enforcement action has already started, with the Commission opening three investigations in February of this year into potential restrictions of cross-border e-commerce for PC video games and hotel bookings as well as potential price-fixing for consumer electronics sold online. A number of suppliers have already adjusted their distribution arrangements during the course of the inquiry following warnings from the Commission that companies should review their distribution practices to ensure they are in line with EU competition rules.
Intensive scrutiny of restrictive practices is also expected to continue at national level given the strong interest in online platforms and e-commerce across national competition authorities (particularly in Germany and France). The Commission also intends to broaden its dialogue with these authorities to ensure more consistent enforcement across Europe.
The key findings
1. Selective distribution practices
The Report notes that the growth of e-commerce has increased the use of selective distribution by suppliers as a means to keep some control over the distribution of their products. Whilst selective distribution remains exempted under the VBER, the Commission warns that online restrictions which have the effect of excluding pure online players without justification (e.g. related to quality or brand image) are likely to be subject to scrutiny going forward.
- Brick and mortar requirements. Almost half of all suppliers with selective distribution systems require retailers to operate “brick and mortar” shops, which has the effect of excluding pure online players such as Amazon or eBay. The Report confirms that these requirements continue to enjoy protection under the VBER, but that further scrutiny may be needed – and the benefit of the VBER may be withdrawn – where they are not linked to justified brand image or distribution quality concerns.
- Marketplace restrictions. The Commission’s view is that absolute marketplace bans – often embedded in selective distribution agreements – should not be classified as “hardcore restrictions” and can still benefit from the protection of the VBER as they do not amount to a de facto prohibition on online selling. This is subject to a forthcoming judgment of the European Court of Justice , which is expected to provide clarity on the issue.
Separately, following concerns voiced by retailers about lack of transparency and objectivity of selective criteria, the Report suggests that, whilst there is no legal obligation on suppliers to publish selection criteria, retailers should be provided with a minimum level of information to allow them to identify reasons for refusal of admission to a distribution network.
2. Contractual restrictions on pricing and cross-border sales
The Report recognises the potential efficiencies relating to vertical restraints in distribution arrangements, but highlights particular restrictions which are often faced by online retailers and which, the Commission considers, may create competition issues, particularly where they restrict effective use of the internet.
- Price recommendations and monitoring. The Commission has found that pricing restrictions are the most widespread contractual restrictions reported by retailers. These include fixing the resale price or imposing a minimum resale price, which are “hardcore restrictions” under the VBER. The Report also highlights that the use of price monitoring software to detect deviations from pricing recommendations may give rise to concerns.
- Dual pricing arrangements. A number of respondents highlighted that charging different wholesale prices depending on sales channel can be an efficient way to address free riding. Whilst dual pricing for one and the same (hybrid) retailer is generally considered a “hardcore restriction” under the VBER, the Report notes that this may nonetheless be capable of individual exemption.
- Restrictions on cross-border sales. The Report states that cross-border online purchases are frequently not possible because retailers geo-block, re-route customers to websites targeting other Member States, or refuse to deliver cross-border or accept cross-border payments. The Commission makes clear that whilst companies are free unilaterally to decide not to sell cross border, contractual territorial restrictions may raise concerns under EU competition rules, particularly where they restrict “passive” (unsolicited) sales.
- Price comparison tools. The Commission acknowledges the tension between manufacturers’ rights to require quality standards in relation to the advertising and promotion of their products and the benefits that price comparison tools can bring in terms of promoting price competition and facilitating access to customers. It notes that outright bans on the use of price comparison tools, which are not linked to quality criteria, may operate to prevent effective use of the internet and as such, could be a “hard core restriction”.
- Parity clauses. Parity (or so-called “most favoured nation”) clauses can be necessary to prevent free riding but, the Commission finds, may also reduce incentives to compete and create barriers to entry for other marketplaces. As such they need to be assessed on a case-by-case basis.
3. Other findings
The Commission has taken the opportunity to set out its initial views on some current hot topics. It highlights that “big data” is increasingly a feature in e-commerce markets, and can be beneficial, but also cautions that it may impact competition. The Report notes that competition concerns could potentially arise where there is exchange of competitively sensitive data between marketplaces and third-party sellers, or between manufacturers and retailers, where these parties are also competitors at the retail level (e.g. where access to sellers' or distributors' competitively sensitive data is used by the marketplace or manufacturer to boost its own retail activities).
The question of whether the independent use of tools that automatically track rivals’ prices online may give rise to competition concerns is also currently the subject of intense debate in antitrust circles. Last year, the UK Competition and Markets Authority and the US Department of Justice fined two companies that agreed to use algorithms to fix prices. EU Competition Commissioner Vestager recently warned companies that “algorithms need to be built in a way that doesn't allow them to collude” . Without reaching any definitive conclusions, the Commission has suggested that at the retail level, where most retailers who use price monitoring software do so as a means to adjust their own prices to those of their competitors, the use of such software may “facilitate or strengthen collusion between retailers”.
4. e-commerce in digital content
The Report largely confirms the Commission’s initial views that: (i) the availability of licences from copyright holders is “essential” for competition in the market; and (ii) some business practices are said to be making it difficult for new entrants with innovative business models to compete effectively for the provisions of digital content services. These include: long-term licenses, bundling of technology rights, and minimum guarantees. However, the Report acknowledges that the impact of such practices needs to be assessed case-by-case.
An addition that may be welcomed by rights holders and providers of digital content services is the acknowledgment that certain licensing practices reflect a desire to offer attractive content, in line with consumer demand and reflecting cultural diversity within Europe. This supports the Commission’s preliminary conclusion that the competitive impact of the geo-blocking of digital content services must be assessed case-by-case. It is also consistent with the fact that proposed legislation restricting certain unilateral geo-blocking practices does not (as currently drafted) apply to digital audio-visual content services (though it does cover digital music, games and e-books).
The Commission’s legislative agenda and online platforms
This inquiry forms part of the Commission’s DSM strategy, one of the main goals of which is to ensure better access to goods and services online across the EEA.
On 10 May 2017, the Commission also published a mid-term review of its DSM strategy. Among other things, that report outlines further steps on online platforms, data economy and cybersecurity.
When the Commission launched its DSM strategy in May 2015, it promised to tackle the perceived market power of large online platforms, such as Amazon, eBay, Facebook and Google. Two years in, the Commission appears to have decided that a more limited approach is appropriate. It has now committed to publish – by 2018 – an initiative (potentially legislative) to address unfair contractual clauses and trading practices identified in platform-to-business relationships. This is likely a concession to feedback received from industry and competition officials not to move too quickly to regulate a fast-moving sector that offers numerous consumer benefits and is characterised by the threat of disruptive innovation.
The move towards a softer regulatory approach may also mean that intervention in relation to large platforms will remain the domain of the Commission’s antitrust enforcers, should such platforms be seen to be abusing their market power.