On 3 June the UK Competition and Markets Authority (CMA) published an independent report it had commissioned by Lear (an economics consultancy) aimed at evaluating past merger decisions in the digital sector taken by the CMA’s predecessor competition authorities, the OFT and the Competition Commission: Ex-post Assessment of Merger Control Decisions in Digital Markets. Andrea Coscelli, the CMA’s Chief Executive also spoke at the OECD/G7 conference on competition and the digital economy to announce and reflect on the report and, in parallel, the CMA published a call for views on digital mergers, asking interested parties for their views on the issues raised by the report, with a view to updating its merger assessment guidelines.

The report was commissioned by the CMA in autumn last year and analyses particular digital merger cases that the OFT assessed (Facebook/Instagram, Google/Waze, Priceline/Kayak and Amazon/The Book Depository) as well as one merger which had not been subject to UK merger control review since it fell below the relevant thresholds (Expedia/Trivago). Many of the transactions that the OFT had reviewed were of the sort that are often alleged to be ‘missed opportunities’ by competition authorities, as they might not meet turnover thresholds under the EU Merger Regulation or similar merger regimes. While the UK merger control regime does have a turnover based threshold, it also applies a ‘share of supply’ test, whereby a transaction can be reviewed by the CMA (and could previously be reviewed by its predecessors) if the parties to a merger have a combined share of supply which exceeds 25% and the transaction brings about any increment in that share. The UK decisions therefore provide a unique opportunity to consider how such cases have been reviewed and should be reviewed in the future.

The report notes that digital companies often operate in two-sided markets supplying different products (sometimes free) to users but potentially competing with one another to raise advertising revenues and therefore competing to harvest users’ attention. In the mergers that this report analyses, the OFT had focussed on the users’ side of the relevant markets. This was particularly the case in the OFT’s reviews of Facebook/Instagram and Google/Waze, where the report observes that the OFT focussed on how substitutable the parties’ products / services were for users rather than how substitutable they were for advertisers. The authors of the report conclude that “[t]he decisions taken in Facebook/Instagram and Google/Waze may have represented missed opportunities for the emergence of challengers to the market incumbents but have also likely resulted in efficiencies. The decisions taken in Priceline/Kayak and Amazon/The Book Depository appear less controversial, as the level of competition in the markets concerned does not seem to have been substantially affected by the mergers.” The authors also caution that it should be “unavoidable” for the CMA to consider the current business models and monetisation strategies of digital companies when assessing a merger.

More generally, based on of the authors’ review of these OFT cases, as well as a wider review of economic literature and the facts of publicly disclosed transactions of Facebook, Amazon and Google from 2008 to 2018, the report recommends that:

  • The CMA should improve the information available to it in order to analyse and define the ‘counterfactual’ when looking at digital mergers. Based on the report’s analysis of past transactions, digital incumbents employ significant resources to acquire a large number of very young (four years or younger) firms which are often complementary to the business model of the acquirer. A competition authority considering a digital merger involving one party that is at an early stage of its development will need to predict the evolution of the firm to understand the ‘counterfactual’ to the merger and assess whether it will be detrimental to competition, which can be difficult. The report recommends:
    • Using dawn raids in the context of some mergers rather than relying on the parties to supply relevant internal documents in response to requests for information. The report claims that “internal documents supplied by the parties in response to requests for information … may in some instances be biased by the obvious incentives of the merging parties to have the merger cleared. [Competition authorities] face relevant information asymmetries compared to the merging parties and need a more reliable source of unbiased information”. So, the report recommends that it may be useful in some instances to use dawn raids in merger investigations “as this may uncover valuable evidence such as the future plans of the target and whether the incumbent perceived the target as a threat”. Authorities in Europe have already moved quite a long way in recent years in the use of internal documents and investigative techniques in this respect and have been shifting increasingly towards a system similar to the US. In the UK, for example, the CMA published detailed guidance on requests for internal documents in merger investigations in January. The use of dawn raids in the context of mergers seems excessively draconian when alternative investigative techniques could be developed first. In fact, when announcing the report, Andrea Coscelli said that there would be “questions around whether dawn raids of this type should ever be necessary” but that the report did underline the importance of parties’ internal documents and of taking strong enforcement action where merging parties provided incomplete or misleading information in response to the CMA’s requests.
    • Looking at a time frame longer than two years when assessing digital mergers. Currently, two years is the default timeframe for assessing some future market developments in UK merger investigations, but in digital markets, success can sometimes take longer than two years. The report gives the example of Snapchat, which was founded in 2011, but was still operating at a loss in 2018.
    • Using transaction value to screen the large number of transactions being undertaken by digital incumbents to help it to identify those which may warrant a more in-depth analysis. Although the report refers to ‘screening’, this is not a recommendation that the UK should change its jurisdictional thresholds to account for transaction value. Indeed, as Andrea Coscelli commented in his speech about the report on 3 June, the UK’s ‘share of supply test’, is “a flexible test which, in practice, has meant that the CMA has consistently been able to exert jurisdiction over transactions in digital markets, for example where the turnover of the target was limited, but the value of the deal was high”. Instead, the authors of the report advise that, when assessing a merger for its potential effects on competition, the CMA’s analysis should reflect that the value of a transaction should in part represent the magnitude of its anti-competitive effects.
    • Understanding the market for online advertising better, possibly through a comprehensive market study into the digital advertising sector. The report joins a long list of independent reports calling for a market study into this sector, including the Cairncross Review in February and the Furman report in March.
  • The CMA may also need to be more willing to accept uncertainty in the ‘counterfactual’ to a digital merger. Even if competition authorities reinforce the tools available to them, there will always be a degree of uncertainty as to the counterfactual. So, the report advises that competition authorities “would need to be willing to accept more uncertainty in their counterfactual”. The report does concede that taking an approach like this could cause legal difficulties for the CMA. Speaking about the report on 3 June Andrea Coscelli agreed that “[a]ny assessment of future developments, no matter how well informed, is likely to contain a significant degree of uncertainty. We should therefore be cautious in concluding that the absence of the same kind of compelling evidence we might have about near-term market developments should necessarily provide grounds for clearance.”

The issues covered in this report are being faced in every jurisdiction with a merger control regime and the report will certainly be reviewed with interest by a number of competition authorities. Announcing the report on 3 June, Andrea Coscelli was keen to emphasise that, from the CMA’s perspective, there should be “evolution not revolution” of merger assessment tools to deal with mergers in the digital economy and that “the majority of our focus continues to remain on taking effective action on substantive concerns in digital markets using our existing powers and tools”. This evolution includes the recent establishment of the CMA’s 15-person Data, Technology and Analytics Unit, which is now up and running, comprised mainly of data scientists and charged with strengthening the CMA’s ability to understand the use of big data, machine learning and algorithms.