On 4 April 2019 the European Commission ("EC") published an in-depth report on "Competition policy for the digital era" (the "Report"). Competition Commissioner Margrethe Vestager appointed a panel of three special advisers to prepare the Report (see EC press release here), which is intended to contribute to the EC's ongoing deliberations regarding how competition policy should develop to ensure pro-consumer innovation in digital markets (see the Report here). On the day of the Report, Commissioner Vestager remarked that authorities need to be vigilant to ensure that powerful companies "don't misuse their power to shut down opportunities for innovators to the detriment of consumers who will want the choice" (see speech here). This builds upon concerns previously expressed by the Commissioner (for example, during a January 2019 conference to inform the Report) that real competition may be hindered when a small number of companies control substantial volumes of data (see presentation here).

Key findings

The wide-ranging Report addresses, amongst other things:

  1. the way digital markets work and implications for competition law analysis;
  2. the aim of EU competition law in the context of digital markets;
  3. how competition law should be applied to digital platforms and data; and
  4. the possibility of revising the thresholds under the EU Merger Regulation ("EUMR") to capture "killer acquisitions" by dominant platforms of early-stage, low-revenue, high-value innovators.

How digital markets work and implications for competition law analysis

The Report starts by focusing on the key characteristics of the digital economy.

It finds that the way these digital markets function can make markets work in favour of incumbents whose position can become entrenched and difficult to dislodge. This is because of effects such as extreme returns to scale (i.e. that the cost of producing digital services is proportionally much less than the number of customers served); network externalities (i.e. that the number of users on a platform is a very important factor making it more difficult for smaller entrants to migrate); and data which can be a crucial input to many online services, production processes and logistics. All these characteristics can result in strong effects which can result in large incumbent players becoming very difficult to dislodge.

All these factors heavily influence competition law analysis in this sector.

Aim of EU competition law in the context of digital markets

The Report does not suggest a fundamental rethink to the goals of competition law in the context of digital markets, pointing out that the current rules, concepts and methodologies are sufficiently flexible to adapt to the specific challenges they pose and that "vigorous competition policy enforcement is still a powerful tool to serve the interests of consumers and the economy as a whole".

Nonetheless, the Report identifies "under-enforcement" as a problem in the digital world and proposes a re-think of the standard of proof. Where consumer harm cannot be measured, it suggests that platforms' strategies to reduce competition should be forbidden in the absence of clear benefits to consumers. Further, in highly concentrated markets with high barriers to entry, the Report suggests erring on the side of disallowing potentially anticompetitive conduct, with the burden of proof reversed and placed on the incumbent to demonstrate the pro-competitive effects of the behaviour. This may include presumptions in favour of a duty to ensure interoperability. This rethink of the standard/burden of proof could have important implications as it could make it easier for a regulator to find an infringement and adopt a decision prohibiting potentially abusive conduct.

Furthermore, the Report proposes reducing competition policy's emphasis on market definition. Due to the rapidly evolving nature of market boundaries in the digital sphere, it is suggested that more emphasis should be placed directly on theories of harm and identification of anticompetitive strategies rather than market definition.

With regard to the measurement of market power, the Report suggests analysing whether platforms are (1) unavoidable trading partners with "intermediation power" – even where a market may seemingly look fragmented and (2) possessors of data that is not available to market entrants.

Finally, the report addresses the interplay between competition law enforcement and regulation and notes that the two can go hand in hand, with competition law analysis informing the public and legislative debate.

How competition law should be applied to digital platforms and data

When it comes to platforms, the Report focusses on ensuring that both competition "for the market" (i.e. keeping the market contestable so that new entrants can come in) and competition "in the market" (i.e. on the dominant platform itself) remain vibrant.

To keep competition for the market vibrant, the Report sees the possibility of multi-homing and switching as well as interoperability and data portability as key to allowing market entrants to attract customers. It suggests that dominant platforms restricting these practices should be required to prove the efficiencies that their behaviour creates.

While the Report recognises the possibility of both pro- and anti-competitive effects of the use of most favoured nation ("MFN") clauses, the Report suggests that wide MFNs (restricting price competition between platforms) should be prohibited. Narrow MFNs (restricting price competition between the seller's own website and the platform provider) may be permitted, but only in circumstances of sufficiently strong competition between platforms.

When it comes to competition in the market/on the platform, the Report stresses that dominant platforms "have a responsibility to ensure that their rules do not impede free, undistorted, and vigorous competition without objective justification" and must ensure a "level-playing field" on competition taking place on the platform. The Report discusses specific issues such as leveraging and self-preferencing by a dominant platform to give preferential treatment to its own goods or services when they are in competition with goods or services provided by competing suppliers on the platform. The Report stresses that self-preferencing is not abusive per se but must be analysed under an effects test. Importantly the Report notes that intervention may be necessary not only where all the preconditions set out by the “essential facility” doctrine are met (access to the platform is essential to compete), but also wherever the conduct is likely to result in a leveraging of market power and is not justified by a pro-competitive rationale. Remedies in such situations can be stricter and include a restorative element to make sure competition is restored if it has been harmed already.

Regarding data, the Report discusses the interplay with the GDPR, access to personal data, data portability, data sharing and access to data for competitors.

As regards access to data under Article 102 TFEU, the Report is cautious and does not recommend lowering the threshold for mandating data sharing. On the contrary, the Report stresses that a thorough analysis will be required as to whether access to the data in question is truly indispensable and where it is not, authorities should not intervene. The Report also draws attention to other means of controlling data access, e.g., via sector-specific regulation and judicial or administrative measures.

While this falls short of recommending a data-focused overhaul of EU competition rules, following publication of the Report, Commissioner Vestager emphasised that, "as data becomes the key to success, the huge quantities of information that some big businesses have can give them an edge that rivals cannot match".

It is therefore clear that the increasingly data-driven nature of business in the digital sector continues to be under the EC's scrutiny and that the EC will be looking to intervene where it considers access to data as indispensable for competition to function in a particular market.

Review of EUMR thresholds

A growing concern for the EC in recent years has been acquisitions by dominant platforms of innovative start-ups with quickly growing user bases and significant competitive potential. These transactions may be carried out by larger players with the aim of early elimination of potential rivals (also known as "killer acquisitions").

Under the current EUMR thresholds, despite their competitive potential, the low turnover of such targets often means that these transactions fall outside the EC's jurisdiction.

While certain Member States (e.g. Austria and Germany) have already introduced alternative thresholds based on transaction value, the Report concludes that it is too early at this stage for similar amendments to be made to the EUMR. However, the authors display an openness to introducing appropriate amendments to the EUMR thresholds in the future depending on the performance of the transaction value-based thresholds at Member State level.

Changes to the substantive analysis of mergers under the EUMR

The Report notes that the current significant impediment to effective competition test (SIEC) is flexible enough to deal with mergers involving digital incumbents buying smaller rivals. However, it stresses that there is a need to revisit the substantive theories of harm to properly assess certain specific cases. Regulators can focus on whether the acquisition eliminates potential competition. The Report proposes a heightened degree of control of acquisitions of small start-ups by dominant platforms and/or ecosystems. The following questions will be important: (i) Does the acquirer benefit from barriers to entry linked to network effects or use of data? (ii) Is the target a potential or actual competitive constraint within the technological/users space or ecosystem? (iii) Does its elimination increase market power within this space notably through increased barriers to entry? (iv) If so, is the merger justified by efficiencies?

Concluding remarks

The Report contains a number of important (and controversial) points suggesting increased scrutiny of platforms, increased vetting of acquisitions by digital players and a focus on the use of data.

As tweeted by Chief Economist at DG COMP, Tommaso Valletti, the Report was written on a pro bono basis by independent academics and therefore does not reflect the EC's official position. Nevertheless, it is envisaged that this Report will be an important reference point for the EC as it continues to deliberate its approach to competition policy in the digital era. Commissioner Vestager has indicated that the EC will take some time to process the Report before presenting its own conclusions. HSF has put together a team of specialists to conduct a detailed analysis of what this Report means in practice for clients operating in digital markets going forward.