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

Court of Justice of the EU Upholds Exclusive Jurisdiction Clauses in B2B ‘Click-wrap’ Contracts

The Court of Justice of the EU (‘CJEU’) has held that an exclusive choice of forum clause can validly be imposed by so-called “click-wrap” contracts in online B2B transactions (see Case C‑322/14, El Majdoub v. CarsOnTheWeb.Deutschland GmbH).   The ruling will make it easier for online businesses in the EU to impose a favorable choice of forum in their online B2B contracts, ensuring that they can sue defendants in courts of their own choosing, rather than the defendants’ local courts.

The general EU-wide rule for B2B contractual disputes is that a defendant must be sued in its local courts only (see “Brussels I” Regulation (Regulation (EC) No 44/2001)).  However, parties can waive the default rule by agreement “in writing” (Article 23(1)).

To deal with contracts concluded electronically, Article 23(2) states – in the English version of the law – that any “electronic communication” that “provides” a durable record of the agreement is equivalent to “writing”; the French and German versions refer to the mere “possibility” of a durable record being formed.

There has been some uncertainty as to whether mere hyperlinking to terms and conditions is a “communication”.  The case before the Court focused on this point, with the claimant arguing that the relevant terms and conditions should at least have been displayed (automatically) before they placed their order.

Taking a pragmatic view, the CJEU stated that the requirements of Article 23 are met if it is possible to print and save the text of online terms and conditions before a contract is concluded – even if the contractual terms are never actually displayed to the person accepting them.  Providing a hyperlink to a printable version suffices.

Although the Brussels I Regulation has been phased out (as of January 10th, 2015, in favor of the ‘recast’ “Brussels Ia” Regulation (Regulation (EU) No 1215/2012)), it is likely that the CJEU’s ruling in El Majdoub will equally apply to the new law, given that the relevant provisions of the new law (now contained in Article 25) are in effect identical to those in Article 23 of the original.

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FCC Issues Public Notice Concerning Closed Captioning Reporting Procedures

In a Public Notice released this week, the FCC’s Consumer and Governmental Affairs Bureau provided details regarding the procedures by which video programming distributors (including broadcasters and MVPDs) must report video programmers who refuse to provide widely available closed captioning quality certifications.

The procedures described in the Public Notice are an outgrowth of the closed captioning quality rules, which require distributors to exercise best efforts to obtain certifications from each programmer stating that the programmer either (a) complies with the FCC’s new caption quality standards, (b) has adopted and follows the Video Programmer Best Practices set forth in the FCC’s rules, or (c) is exempt from the closed captioning rules (with reference to the specific exemption relied upon).  The rules permit distributors to meet their best efforts obligations by locating such certifications on programmers’ websites or other widely available locations.

If a distributor is unable to locate a programmer’s certification on the programmer’s website or other widely available location, the distributor must inform the programmer in writing that it must make its certification widely available within 30 days after receiving the written request.  If the programmer does not comply, the distributor is obligated to report the programmer to the FCC, which will be building a list of non-certifying programmers.

The Public Notice describes the procedures that distributors must follow to report non-certifying video programmers pursuant to these rules.  Importantly, the Public Notice specifies that such reports must be submitted either (a) within 40 days after the distributor provides written notice to the programmer or (b) by June 4, 2015, whichever is later.  The Public Notice also clarifies that it is the video programmer—and not, for example, the programmer’s captioning vendor—that must provide the required certification.

Less Than One Month Until May 29, 2015 Pre-Auction Licensing Deadline

The FCC Media Bureau’s designated May 29, 2015 “Pre-Auction Licensing Deadline” is rapidly approaching.  Full power and Class A facilities must be licensed by this deadline in order to be eligible for protection in the repacking process that will be part of the television incentive auction. For these purposes, facilities subject to a pending application for a license to cover the pertinent construction permit will be deemed to be “licensed.”

While Class A licensees may wait until the September 1, 2015 low power digital transition deadline to complete construction and license their digital facilities, those that do not have their digital facilities licensed by May 29, 2015 will be afforded protection in the repacking process based only on the coverage area and population served by their analog facilities.  (Class A stations that may be unable to complete construction of their digital facilities by September 1 must seek an extension of the digital construction deadline by tomorrow, Friday, May 1.)

Ad Blocking Declared Legal: German Court Dismisses Discrimination Claims Brought by Publishers, but AdBlock Plus Maker Eyeo is Not Home Free Yet

The Regional Court in Hamburg rejected complaints by newspapers Zeit Online and Handelsblatt seeking to have Eyeo GmbH prohibited from selling its AdBlock Plus software. The ruling establishes the important principle that ad-blocking is legal, however there are other cases pending against AdBlock Plus in Germany that suggest that there may be more to come on this issue.

The publishers sought injunctive relief, arguing that AdBlock Plus illegally interfered with their ad-based online business models. AdBlock Plus allows users to block ads by tracking software and malware using a browser plugin which permits some “acceptable ads” to pass through the software’s filter mechanism (the so-called “white-list”). This practice was criticized as being discriminatory by media firms, as Eyeo GmbH gets paid by certain companies to put their ads on the whitelist (i.e. Google, Microsoft and Users can modify the filter to block all ads.

The Court dismissed the action. The Court concluded that AdBlock Plus does not amount to an anti-competitive restriction of online offers financed through advertising. However, the full reasoning of the Court has not been published yet.

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