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.

Rules on Net Neutrality and Roaming Charges Finally Adopted

On 27 October 2015, the European Parliament adopted the new Telecoms Single Market legislation without a number of proposed amendments relating to net neutrality.  As a result, while the Regulation requires Internet service providers (“ISPs”) to “treat all traffic equally, without discrimination, restriction or interference, independently of its sender or receiver, content, application or service, or terminal equipment,” it provides for the following exceptions to this principle:

  1. ISPs may offer “specialised services” (e.g., IPTV, high-definition videoconferencing and healthcare services) to the extent that this does not have an impact on the general Internet quality.
  2. ISPs may decide not to count capacity used in connection with certain sites or applications towards a consumer’s capacity usage (“zero rating”), subject to a non-discrimination obligation.
  3. ISPs may implement reasonable traffic management measures based on the “different technical quality of service requirements of specific categories of traffic.”  These measures should not be based on commercial considerations.
  4. ISPs will be able to impose traffic management measures to prevent “impending network congestion”.

The four rejected amendments related to these exceptions: network discrimination, equal treatment of all Internet traffic, the potential role of ISPs as gatekeepers, and the use of traffic management other than in connection with congestion.

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UK CMA Publishes its Report on Commercial Use of Consumer Data

On 17 June, the UK Competition & Markets Authority (“CMA”) published its report on the commercial use of consumer data collected by companies.  The CMA began its review of the issue with a call for information in January.

In short, the CMA concludes that, while consumer data presents some characteristics that sets it apart from other data, these characteristics are not unique to consumer data and the markets in which it is collected and used.  As a result, existing competition and market tools are effective to tackle conduct that may give rise to competition concerns in these markets.  The German Monopolies Commission reached a similar conclusion in its digital markets report published on 6 June.

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German Monopolies Commission Publishes its Report on Digital Markets

Digital markets are currently the focus of much attention in the European Union (“EU”).  The European Commission recently unveiled its Digital Single Market Strategy, which incorporates DG COMP’s e-commerce sector inquiry.

The issue of the regulation of digital markets, potentially beyond the application of competition law, is also being discussed at national level.  On 1 June 2015, the German Monopolies Commission (“MC”) published its report on digital markets (“Competition Policy: The challenge of digital markets”), with a summary in English.  Generally, the MC takes the position that there is no need for a significant modification of the current legal framework, but suggests increased enforcement of the rules.  In an interesting coincidence of timing, Commissioner Vestager recently expressed caution about adopting new regulation of online platforms that might be overtaken by market developments.  This post provides an overview of the key elements of the MC report. Continue Reading