Price comparison websites: the UK’s CMA weighs in on the competition law, data protection and consumer protection requirements

The UK’s competition regulator, the Competition and Markets Authority (CMA), has published a 349 page Final Report (combined with 5 Background Papers and a glossary) on its Market Study into what it refers to as Digital Comparison Tools (DCTs) – a term which includes price comparison websites, best buy tables, and other more automated services like matching services which analyse complex usage patterns, voice-based comparison tools, and reverse auction platforms. The CMA concluded that consumer experiences of these services were mostly positive, although there were concerns over:

  • Competition law implications of exclusive or preferential arrangements;
  • Data protection law and the use of personal data;
  • Consumer protection law and the transparency of arrangements between these sites and the services that they are comparing.

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Welcome clarifications by the EU Court on the concept of excessive pricing

On 14 September, the Court of Justice of the European Union provided detailed guidance on the concept of excessive pricing under Article 102 TFEU, in response to questions posed by the Latvian Supreme Court.

In Case C-177/16, the Latvian Supreme Court referred a number of questions to the Court of Justice of the European Union (CJEU) regarding the concept of excessive pricing.

This resulted from a series of appeals relating to a decision that the Latvian Competition Council (LCC) took over conduct of the Consulting agency on copyright and communications / Latvian authors’ association (AKKA/LAA), the Latvian collective management organisation handling copyright licences for (Latvian and foreign) musical works in Latvia. The 2013 infringement decision found that the AKKA/LAA had abused its dominant position by imposing excessive music licence fees for music played in Latvian retailers and service providers.

Under EU law, the imposition of ‘excessive pricing’ by a dominant entity amounts to an ‘exploitative abuse’ of dominance under Article 102 TFEU – a concept not recognized under US law. Until now, the EU Courts had applied a basic two prong test for excessive pricing – namely whether the difference between the costs incurred and the price actually charged is excessive, and thereafter, whether the price could be considered to be excessive in itself – or when compared with competing products.

  1. An appropriate and sufficient comparator

First, the CJEU looked in detail at the concept of what an appropriate and sufficient comparator should mean. It found that:

(i) The LLC’s methodology of comparing AKKA/LAA’s royalties with those in a limited number of Member States was acceptable – where those Member States were chosen using objective, appropriate and verifiable criteria. Such criteria may include consumption habits, and other economic and sociocultural factors such as gross domestic product per capita and cultural and historical heritage.

The Court took the view that there can be no minimum number of markets to compare, and the choice of appropriate comparator markets depends on the circumstances specific to each case.

 (ii) The LLC’s methodology of comparing AKKA/LAA’s royalties with those in a wider number of Member States (in this case twenty) was also acceptable where those Member States were chosen using objective, appropriate and verifiable criteria, and were adjusted in accordance with the PPP index – so that the comparisons were made on a consistent basis.

The Court also confirmed that it was permissible to make a comparison within one or several specific segments, where there were indications of excessive fees in those segments.

The Court observed that such a comparison with a wider number of Member States may serve to verify the results of a comparison with a limited number of Member States.

  1. The threshold for an excessive price

The Court then considered what would be needed for a dominant undertaking’s prices to be abusive and excessive. In doing so, it considered previous cases in which the difference in prices applied in one Member State in comparison to others was significantly higher than in the present case. However, it observed that the existence of such precedent could not lead to the conclusion that the differences in the present case could never be ‘appreciable’.

The Court then went on to confirm that there is “no minimum threshold above which a rate must be regarded as ‘appreciably’ higher”, since the circumstances specific to each case are decisive in that regard. The Court concluded that for a difference between rates to be appreciable, it must be both significant and persistent on the facts, with respect to the particular market in question. Advocate General Wahl’s observation that the difference must be significant for the rates concerned to be regarded as abusive was emphasized on this point. Furthermore, the Court highlighted that any such difference must persist for a certain length of time, and should not be temporary or episodic.

  1. Analysis of objective justification

As a final step in its analysis of excessive pricing, the Court observed that the above factors were merely indicative of abuse of a dominant position, and that it may still be possible for the AKKA/LAA to justify any difference by relying on objective dissimilarities between the situation of the Member State concerned and the comparator Member States. It acknowledged that factors that may justify such a difference include the relative level of the fee, and the proportion which is actually handed over to the rights holders.

The Court went on to explain that, where the proportion of fees taken up by collection, administration and distribution expenses was considerably higher, it might be that it is precisely the lack of competition in the market that accounts for the heavy burden of administration, and therefore the higher level of fees.

Accordingly, in examining the facts of this case, the Court concluded that, if:

(i) The AKKA/LAA only retained 20% of the fees collected – as was argued during the hearing, such expenses did not appear to be unreasonable or to evidence inefficient management. Is was further observed that, even where this level of expenses was higher than in the comparator Member States, this may be explained by objective factors including costs, such as regulations which impose a heavier administrative burden than in other markets.

(ii) The fees retained by the AKKA/LAA were established to be higher, and the difference could be regarded as appreciable – it was for the AKKA/LAA to justify them. The Court observed that, in such a case, the existence of a national law on fair remuneration, different from the laws applicable in the comparator Member State(s) could provide an objective justification.

This guidance provides both regulators, and dominant companies and their legal advisors, with invaluable insight into assessing whether conduct amounts to an exploitative abuse of dominance – involving excessive pricing – and whether it can be objectively justified under Article 102. This will be of significant value in ongoing probes involving allegations of excessive pricing.

The European Court of Justice’s Judgment in Intel

Today the Court of Justice of the EU (CJEU) issued its long-awaited judgment in Intel Corporation Inc. v European Commission. It sets aside the judgment of the General Court (GC) on the basis that the judges failed to assess the effects of the loyalty rebate schemes implemented by Intel on competition in the EEA. The CJEU refers the case back to the GC.

Background

The Intel case concerns the supply of central processing units (CPUs) to original equipment manufacturers (OEMs). Following a complaint lodged in 2000 by Advanced Micro Devices (AMD), the European Commission (Commission) investigated two types of conduct by Intel:

  • Intel offered rebate schemes to four OEMs – Dell, Lenovo, HP and NEC – conditioned on them obtaining all or almost all of their requirements for x86 CPUs from Intel. In addition, Intel granted payments to one of its retailers, Media-Saturn-Holding (MSH), on the condition that it only sold computers containing Intel’s chips.
  • Intel made payments to HP, Acer and Lenovo on the condition that these OEMs postponed, cancelled or limited distribution of products using CPUs from AMD.

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The European Commission takes stock on the Digital Single Market

The European Commission launched its Digital Single Market strategy in May 2015 and with their term to finish in October 2019, the Commission is now taking stock on the progress made with this initiative so far. On May 10, the Commission released the mid-term review of its Digital Single Market strategy, see press release here and full communication here.

Since 2015, the Commission has already brought forward 35 legislative and policy proposals related to the Digital Single Market and much of the review focuses on the need for quick adoption and effective implementation of these initiatives. The Commission will need to secure political agreement with the European Parliament and Council in order to ensure that these proposals are adopted. However, the Commission also identified three main areas for further legislative action: (1) developing the European Data Economy, (2) tackling cybersecurity challenges in the EU, and (3) promoting online platforms as “responsible players of a fair internet ecosystem”. Continue Reading

The DSM mid-term Platform Proposals

The Commission published the mid-term review of its Digital Single Market strategy today. The report reviews the development of the strategy over the last two years, and announces a number of new initiatives, including initiatives relating to important areas where action is needed to address digitization, including: (i) the free flow and accessibility of data, (ii) alignment and strengthening of cybersecurity strategy and standards, and (iii) online platform practices and co-ordination.

Of particular note are the proposals to regulate online platforms in connection with unfair clauses and practices in platform-to-business relationships. The Commission notes that, while online platforms drive innovation and growth in the digital economy across the board, they are especially important for SMEs (citing Eurobarometer survey results showing that almost half of SMEs use online marketplaces to sell their products and services). However, the preliminary results of the Commission’s fact-finding on platform-to-business trading practices identify certain “unfair trading practices” (including delisting of products or services without due notice or possibility to appeal, platforms favoring their own products or services, and discrimination between suppliers). Lack of transparency in terms of ranking or search results was also identified as a key issue. Moreover, it was noted that a significant proportion of disagreements arising with online platform operators remain unresolved.

In its efforts to ensure a fair and innovation-friendly platform economy, the Commission has proposed to address the issues of potentially unfair contractual clauses and trading practices by the end of this year, considering dispute resolution, fair practices criteria and transparency.  This could lead to the proposal of legislative instruments, following an Impact Assessment and Member State and industry structured dialogues. Whether legislative action will be taken is unclear, however, with today’s Commission’s Communication and official Q&As taking apparently slightly different positions on the issue, (the former saying the Commission “could” propose legislation, the latter that it “will”, subject to the usual Impact Assessment and other procedures referred to above).

The proposals put forward today are likely to lead to changes in dispute resolution mechanisms and contract terms, and increase transparency. Whether additional obligations are added later in the year remains to be seen.

German Ministry for Economy Publishes a White Paper on Digital Platforms

On 20 March 2017, the German Federal Ministry for Economic Affairs and Energy (the “Ministry”) published its Digital Platforms White Paper (the “White Paper” and launched a dedicated web portal), reflecting at least in part the results of its consultation on its Green Paper on Digital Platforms. The White Paper sets out several proposals for digital policy to facilitate growth of digital platforms on the basis of fair competition while guaranteeing individuals’ fundamental rights and data sovereignty. The Ministry appears to start from the premise that digital platforms sometimes fall outside the scope of German competition, consumer protection and commercial laws, such that the White Paper seeks to address this perceived enforcement gap.

The White Paper and other related German initiatives come as the European Commission (“EC”) pursues its 2015 Digital Single Market (“DSM”) Strategy for the European Union (including several legislative proposals, a Communication on Online Platforms and a Communication on Data Economy) and a number of other Member States also focus on regulatory issues related to online platforms (e.g., the French investigation of non-search online advertising).

This post summarises some of the key elements of the White Paper. Continue Reading

The European Commission’s Legislative Proposal on Audiovisual Media Services

In the context of its Digital Single Market (“DSM”) Strategy for the European Union (“EU”), the European Commission (“Commission”) published a proposal for an updated Audiovisual Media Services Directive (“AVMSD” or the “Directive”) on 25 May 2016 (the “Proposal”).  In its Communication on the DSM Strategy, the Commission indicated it would review the AVMSD “with a focus on its scope and on the nature of the rules applicable to all market players, in particular measures for the promotion of European works, and the rules on protection of minors and advertising rules.”

Despite a few novelties, the Proposal is generally less far-reaching than expected.  Vice President Ansip explained that, to offer the legal certainty companies need in the audiovisual sector, it is necessary to maintain “existing rules that work” while “deregulating where necessary for traditional sectors like broadcasting […] to improve user protection and to reach a level-playing field.”

The Proposal continues to seek to achieve minimum harmonisation, such that Member States may impose stricter rules (e.g., on advertising).  Therefore, there is no guarantee that the Commission’s aim to align the regimes applicable to all audiovisual media services and provide more flexibility to TV broadcasters will be fulfilled.

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The European Commission’s Approach to Online Platforms and the Collaborative Economy

In the context of its Digital Single Market (“DSM”) Strategy for the European Union (“EU”), the European Commission (“Commission”) published a Communication on Online Platforms and the Digital Single Market – Opportunities and Challenges for Europe (the “Communication”) on 25 May 2016.  The Communication sets out the Commission’s conclusions and proposals based on the Commission’s Consultation on the regulatory environment for platforms, online intermediaries, data and cloud computing and the collaborative economy (“Consultation”) of 24 September 2015 and a series of workshops and studies.  This note also addresses the Commission’s Communication relating to the collaborative economy published on 2 June 2016.

The Communication makes clear that the Commission will not make broad regulatory proposals encompassing all allegedly potentially problematic aspects of online platforms.  Instead, the Commission proposes a problem-driven approach, such that intervention is only triggered in specific circumstances.  As a result, the Communication provides a road map and some general principles that should guide future intervention.

This more cautious approach may reflect concerns raised by the Commission’s competition directorate, and others, about over-broad regulation in the absence of a clear problem.

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The European Commission’s Legislative Proposal on Unjustified Geo-Blocking

On 25 May 2016, the European Commission (“Commission”) unveiled a package of measures in the context of its Digital Single Market (“DSM”) Strategy for the European Union (“EU”) that included four legislative proposals designed to boost e-commerce in the EU by tackling unjustified geo-blocking, cross-border parcel delivery, consumer protection and EU audiovisual rules.  The package also includes a communication on online platforms, commented here.

Overall the package is more cautious than might have been expected given some of the rhetoric a year or so ago.  The Commission appears to be concerned about interfering unduly with existing market structures and practices, and possibly also about the perpetually difficult interaction between intellectual property and competition law.

One consequence of the package may be that ongoing competition investigations and sector inquiries could have more impact on markets in the short-term than legislation.

Certain aspects of this package will be discussed in three separate notes.  This note focuses on the Commission’s legislative proposals on geo-blocking and other forms of discrimination based on customers’ nationality, place of residence or place of establishment within the internal market (the “Proposed Regulation”).  The second note addresses the Commission’s proposals relating to online platforms, and the third the Commission’s proposed revisions to the Audiovidual Media Services Directive (“AVMS”).

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German Competition Authority Publishes a Working Paper on “Market Power of Platforms and Networks”

By Miranda Cole, Jennifer Boudet and Jérôme de Ponsay

With the European Commission’s recent Digital Single Market (“DSM”) Strategy for the European Union (“EU”) announcements (including several legislative proposals and a Communication on Online Platforms and the Digital Market), a number of the Member States are also very active on the issues.

Since the German Monopolies Commission’s 2015 report on digital markets (see, our analysis here), the German Federal Cartel Office (“FCO”) launched an internal “Internet Platform Think Tank”.  The think tank’s initial work led to the publication, on 9 June 2016, of a Working Paper on “The Market Power of Platforms and Networks” (the “Working Paper”, a summary in English, and a presentation of its findings and recommendations).

This post summarises the key elements of the Working Paper.

Scope of the Working Paper

The Working Paper presents the factors that the FCO believes are relevant for assessing the market position of platforms and networks.  The Working Paper focuses on online platforms and networks, specifically multi-sided businesses.

The FCO explicitly set out to assess whether competition law tools are sufficient to deal with the digital sector, to develop existing analytical models and, if necessary, to propose modifications.  In that context, the FCO has concluded that the usual tools for assessing market dominance are sufficient for one-sided markets, but that additional factors should be taken into account in analysing multi-sided markets.

The FCO proposes definitions of “platforms” and “networks”, essentially distinguishing between the two on the basis of the types of network effects they produce and of the type of interaction they offer to their users:

  • Platforms “provide intermediation services which allow for direct interaction between two or more distinct groups of users that are connected by indirect network effects.
  • Networks “provide intermediation services which allow for interaction between users of the same group, which results in direct network effects.

Certain products (e.g., computer operating systems) display characteristics of both platforms and networks.

Market Definition

  • Should there be one or two markets?

While traditional market definition tools (such as demand-side and supply-side substitutability) are applicable to platforms and networks, the central market definitional question is often whether the different sides of a platform constitute one or multiple markets.  Noting that this assessment must be carried out on a case-by-case basis, the FCO provides some guiding principles.  It starts from the premise that the two sides of a platform should generally be treated as falling into one market because of the existence of indirect network effects (e.g., dating platforms where the product offered is the connection between two user groups).  However, it notes that where one side of the platform does not depend on a successful match, it would be inappropriate to define only one market.

  • Services provided for free

While the FCO takes the position that competition rules should apply to platforms which provide services for free, it does so cautiously: “the use of online platforms for free can under certain circumstances still constitute a market under competition law” (emphasis added).  A user group that uses a platform service for free should “at least” be a relevant market “if it is connected to a paying user group.”

The FCO points to other competition parameters which currently do not receive due consideration: “[p]rice competition [being] given a higher priority over innovation and quality competition.

Not surprisingly, given its announced investigation of Facebook, the FCO also noted that a market can exist when the user provides data in exchange for a service.

As a result, the FCO calls for a change of the current practice in Germany regarding the definition of such markets, since the current approach (i) is not appropriate for the digital economy and fails to take into account the interdependencies of the multiple sides of platforms; and (ii) is not in line with the European Commission’s decisional practice (e.g., Microsoft/Skype, Facebook/WhatsApp, and the ongoing Google Search investigation).

Methodology for the Assessment of Market Power of Platforms and Networks

The FCO takes the view that the dynamic nature of digital markets does not necessarily mean that large online companies face competitive pressure.  However, the traditional criteria used for the assessment of market dominance should be considered alongside innovation competition.  As the European Commission’s decisions make clear, market shares should not be the most relevant factor in assessing market power of networks and platforms.  The FCO proposes that, beyond the traditional criteria used in assessing market dominance, specific additional criteria should be taken into account when assessing the market power of multi-sided platforms or networks.

  • Network effects

Indirect network effects – Indirect network effects exist when “the value of a service or product for a specific group of users increases or decreases with the number of users of another group” (e.g., online dating platforms and advertising platforms).

The FCO notes that indirect network effects should not be assumed to be anti-competitive.  Depending on the type of platform and market structure, they may have a self-reinforcing tendency that eventually leads to ”tipping”.  However, they may also lead to more innovation and growth of smaller or new players.  While there is currently no exact method for measuring the impact of indirect network effects, the FCO notes the utility of “unique visitor” data in assessing network effects.  It is currently a “standard index […] that is most likely to be able to show how often a platform has been used.”

Direct network effects – Direct network effects occur when “the users of one product directly benefit if more or less people use the same product” (e.g., telecommunication and social networks).  There are a number of elements that the FCO identifies as warranting consideration in assessing direct network effects.  Switching costs are generally high for users, in terms of both the cost of connection to a different network and the opportunity cost resulting from the loss of the network effects.  In addition, the extent to which a platform/network is interoperable with competing platforms/networks should be taken into account, as interoperability may prevent the market from tipping and may lower barriers to entry.

  • Returns on scale

Returns on scale are traditionally assessed in the context of barriers to entry.  The FCO suggests that they can further strengthen the positive feedback loop created by such platforms.  Returns on scale for platforms often flow from specialisation and machine learning.

  • Single-homing, multi-homing and the degree of differentiation

Multi-homing occurs when users use several (competing) platforms or networks simultaneously.  This practice reduces the risks of lock-in effects and lowers barriers to entry.  However, as the FCO notes, this is only the case when multi-homing takes place in the same market (rather than on platforms or networks that are “complementary”).  The risk of “tipping” is greater in cases of single-homing (i.e., users only use one platform or network at the time).

The FCO also emphasises the importance of analysing the degree of differentiation of platforms or networks, since the differentiation often reflects decisions to target specific user groups.  While the FCO considers that increased differentiation may lead to tipping, it acknowledges that it is “unlikely that all or at least almost all users will use only one platform or network”.

  • Data sources

The joint paper published by the FCO and the French Competition Authority on “Competition Law and Data” of 10 May 2016 addresses the extent to which access to data may be a source of market power.  In the Working Paper, while the FCO states that control over data is not “per se” an indication of market power, it notes that exclusive control over specific data may create barriers to entry.  The FCO therefore concludes that it is necessary to take into account the nature of the collected data, its relevance for competition on the relevant market, whether it can be replicated and the alternative sources available.  In other words, the FCO proposes to apply the Bronner test to data as an input.

  • Innovation potential of digital markets

The FCO clarifies that the rapid innovation does not mean that there is no market power.  However, it stresses the importance of ensuring that incentives to innovate are protected.  The FCO takes the view that innovation competition “is at least equally important as price competition” in digital markets.

The FCO proposes to take innovation into account in assessing market power in the following manner.  First, existing innovation competition (the innovation-driven competitive pressure between players currently active in the relevant market) should be assessed.  Second, potential competition from innovative businesses, covering both potential new entries and elimination of potential players should be considered.  In this regard, the FCO provides guidance regarding the assessment of potential competition:

  1. Likelihood of market entry – It cannot be assumed that entry barriers on digital markets are low. Significant investments may be necessary in terms of marketing or technology.
  2. Extent and effectiveness of market entry – Free services should be taken into account even if some companies merely enter the market with the aim of being acquired. It is also necessary to consider the entry of companies active in neighbouring markets, in which case, the main question is “whether the business can actually transfer the reach of its platform/network to the new market.”

Concluding Remarks

The FCO concludes that competition instruments for assessing market definition and market power of platforms and networks are generally appropriate.  However, it is necessary to consider the characteristics of each platform/network to carry out this assessment.

The FCO recommends that the five criteria detailed above be included in German law.  The Green Paper on Digital Platforms published by the Federal Ministry for Economic Affairs and Energy on 30 May 2016 provides a potential route to modifying German law.

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