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‘Big Tech’ and competition law explained

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Herbert Smith Freehills trainee solicitor Patrick Todd looks at some of the key issues

The European Commission (“EC”) and other European competition authorities have, in recent times, announced investigations into Google, Apple, Facebook and Amazon (“GAFA”) for various business practices in digital markets. In the past three years alone the EC has fined Google over €8 billion (£7 billion) for three separate breaches of competition law (each of which Google has appealed to the European courts). Indeed, there is a growing belief on the part of regulators that competition may not be working effectively in these markets and that consumers may be suffering as a result. In the UK, the Competition and Markets Authority (“CMA”) has launched a “digital markets strategy” and is conducting a market study into digital platforms. This came in response to the publication of a report by an expert panel set up by HM Treasury, which made a series of recommendations to adapt competition law to the issues posed by digital markets. This article explains two issues affecting “Big Tech” and competition law: platforms as referees and players and platforms as data harvesters.

Article 102 of the Treaty on the Functioning of the European Union (“TFEU”) prohibits dominant companies from acting in ways that unjustifiably restrict competition (a similar law applies nationally in the UK and will continue to do so after Brexit). In contrast to Article 101 TFEU, which is aimed at agreements between different companies, Article 102 tackles unilateral actions by firms that, by themselves, have sufficient power in the market to prejudice the natural course of competition. It is this notion that lies at the heart of past and present cases against GAFA.

Platforms as referees and players

The first issue concerns platform owners that act as both “players” and “referees”. As Margrethe Vestager, the EC’s competition commissioner, has explained: “[O]ne of the biggest issues we face is with platform businesses that also compete in other markets, with companies that depend on the platform. That means that the very same business becomes both player and referee, competing with others that rely on the platform, but also setting the rules that govern that competition.” The concern is that platform owners can leverage the popularity of their platforms to privilege their own products that “sit on top” of the platform itself, thus suppressing competition in those downstream markets.

This issue lay at the heart of the €2.4 billion (£2.2 billion) fine that the EC levied on Google in 2017. Google operates both its general search platform and a number of specific search services, such as shopping comparison, job listings, and mapping services. The EC concluded that Google’s preferential placement of its comparison shopping results in a special box on the Google search page constituted an abuse of a dominant position under Article 102 because it had the effect of driving traffic to the Google shopping site and deprived rival price comparison websites from traffic to their competitive detriment. Google is strongly denying both the facts and theory underpinning this decision in its appeal. (Herbert Smith Freehills is representing Google in its appeal of this decision and in follow-on actions for damages in various jurisdictions).

Similarly, the player/referee paradigm underlies the EC’s investigations into Apple and Amazon. Amazon runs its popular marketplace platform, which connects consumers with third-party merchants. However, Amazon also sells its own private-label products through its platform, and the EC is investigating whether Amazon inhibits competition by collecting data on third-party merchant sales and leveraging the data to unjustifiably promote sales of its own products. Apple, on the other hand, has been accused of leveraging its control over its mobile operating system platform, iOS, to increase usage of its downstream apps, such as Apple Music, to the detriment of its rivals in those markets, such as Spotify.

While European authorities investigate these companies under the existing regime, others have suggested that competition law is in need of radical overhaul. Some have suggested breaking platform businesses (iOS; Google Search; Amazon Marketplace) apart from downstream businesses (Apple Music; Google Shopping; private-label products). Others have argued that platform owners should be under a regulatory duty to refrain from discriminating against rival downstream products within the platform infrastructure.

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However, competition law has recognised for decades that consumers often benefit from the efficiencies that stem from both dual-market entry and the marketing of multiple products together in a bundle (think pencils/rubbers, or shoes/laces). This is why ‘vertical’ mergers are subject to much less scrutiny than ‘horizontal’ mergers, and why dominant firms are afforded the opportunity to justify potentially anticompetitive conduct under Article 102(3). To demonstrate, take the English case of Streetmap, where an online mapping service provider complained that Google breached Article 102 by showing only its own mapping results (Google Maps) at the top of search results pages in response to geographic queries. The High Court held that this conduct was justified from the consumer’s perspective because users saw value in the incorporation of maps at the top search results pages, and Google Maps offered advanced features that rival services did not. The notion that even dominant firms must be allowed to compete “on the merits” is a crucial aspect of competition law. The blanket proposals mentioned above would abrogate this so-called “consumer welfare” standard in favour of laws that would favour the welfare of less efficient businesses above that of consumers — a sea change for competition policy as we know it. Going forward, it’s important that policymakers and authorities bear in mind that consumers often benefit from platform owners entering and competing in markets that are adjacent to their core platforms.

Moreover, it’s not obvious that the player/referee paradigm raises issues that are not dealt with by existing competition law doctrine. As early as 2004, the EC deployed Article 102 against the tech giant of the day — Microsoft — finding that it unlawfully tied Windows Media Player to its Windows operating system, thus leveraging from the platform market to a downstream market. In 2009, the Commission made a similar finding against Microsoft regarding Internet Explorer. The existing antitrust toolbox has therefore proved itself capable of remedying instances where platform owners leverage their market power to unjustifiably restrict competition. A detailed analysis based on facts is however key in such situations.

Platforms as data harvesters

A second issue concerns platform owners’ collection of user data. Article 102 prohibits not only ‘exclusionary’ abuses, but also ‘exploitative’ abuses in the form of “unfair purchase or selling prices or unfair trading conditions”. One example is charging excessive prices. This type of case is relatively rare, however, due to the consensus in competition law that the ability to exploit market power and consequently charge higher prices is what attracts business acumen and innovation in the first place (think, for example, of the large mark-ups applied to patented drugs).

Nonetheless, in February 2019 the German competition authority issued a decision against Facebook, finding that the “extent to which Facebook collects, merges and uses data in user accounts constitutes an abuse of a dominant position”. This is a bit like an excessive pricing case, but, instead of prices going up, the quality of the product, in the form of respect for users’ privacy, goes down. The authority effectively held that Facebook harmed users by not giving them a choice over the amount of data they handed over in exchange for access to Facebook’s services, something that Facebook could only do thanks to its dominant position in the social networks market.

Concerns around data-collection are abundant, especially in the wake of the Cambridge Analytica scandal, and European regulators are increasingly seeking to dissolve the boundary between privacy, consumer protection and competition law. The Facebook case is tricky, however, because it involves the competition authority stepping into the shoes of a privacy regulator and asking what the right level of data collection should be in the market. As the Competition Appeal Tribunal noted in quashing the CMA’s excessive pricing decision against Pfizer and Flynn Pharma: “Authorities find [excessive pricing cases] difficult to bring and are, rightly, wary of casting themselves in the role of price regulators. Generally, price control is better left to sectoral regulators, where they exist, and operated prospectively.”

If excessive pricing cases should be rare, then “insufficient quality” cases should be scarcer still. It would be difficult to advise clients with any certainty as to the legality of their conduct if, by building a popular product and achieving dominance as a result, companies could then be fined for not making their products good enough. This is especially the case when there is a concurrent regulatory regime in force to protect consumers from exploitation (for example, under the General Data Protection Regulation). If in the UK we thought that a social media company was exploiting consumers by concealing the full extent of its data collection policy, this should be a consumer protection issue. The CMA has exhibited its aptitude for protecting consumers from harm stemming from asymmetrical information or bargaining power through its 2016 Open Banking initiative and its guidance to social media “influencers”.

Interestingly, this month a German appeals court overturned the Facebook decision, holding, among other things, that the German authority had failed to show that Facebook would not have imposed equivalent terms on users if it faced more competition. Nonetheless, this debate can be expected to continue as issues of competition and data protection law increasingly overlap.

The future of competition law in digital markets

This article has sought to explain two issues posed by competition law in digital markets. With Margrethe Vestager having been appointed as the EC’s competition commissioner for another term, we can expect to see continued enforcement in digital markets at a European level. In the UK, it will be interesting to see the enforcement priorities of the CMA after Brexit, given that it will have full jurisdiction over cases previously brought by the EC. The recommendations of the UK expert panel are not as radical as the “break ups” and other proposals emerging elsewhere, but nonetheless take as given that action needs to be taken to tame the “tech giants”. One example is the proposal to set up a “Digital Markets Unit” to “sustain and promote effective competition in digital markets”, which ex-Prime Minister Theresa May agreed to implement. Whatever happens, there will be an ample supply of thought-provoking work for competition lawyers in the years ahead.

Patrick is a trainee solicitor at Herbert Smith Freehills, where he has sat in the competition, regulation & trade team in London and Brussels.

The views expressed in this article are the author’s personal views and are not necessarily those of Herbert Smith Freehills or its partners or clients. The author alone is responsible for any errors or omissions.

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6 Comments

Jane

A good article. Well done ( I am a much older competition lawyer).

Patrick

Thank you!

anon

interesting article. An interesting book on the economics of big tech is “Information Rules” by Shapiro and Varian…

Patrick

Agreed – that book pre-empted a lot of theoretical issues that are reflected in reality today.

Arun Allen

Really insightful article on using Competition Law in practice in digital markets, thank you! I didn’t take Advanced EU Law as a 3rd Year module, which encompasses CL, so this is very useful in case the topic comes up at interview.

I support the creation of the Digital Markets Unit because of the argument that data privacy infringements lie outside the regulatory ambit of the CMA, and the difficulty proving causality between it and restricting competition. Will the DMU have a dual role, of dealing with data privacy issues for Big Tech, as well as assessing M&As within Big Tech? Or for the latter role, will it act in a supporting role to the CMA, due to its expertise? The Furman Report leaves its model of integration open to suggestions.

As you say, it will be interesting to follow developments in the US, particularly with the rise of Elizabeth Warren in her bid to lead the Democrats. Her proposals are extremely radical to the extent of “undoing” mergers! In my opinion, I don’t think this is necessary and I support the CMA’s approach which sees “nothing inherently wrong” with monopolies, such as Amazon, as long as they do not sacrifice on quality. Also, although they do perhaps have an unfair advantage in promoting their own-label products, these products do tend to be high-quality and highly-rated. As such, I see nothing wrong with its merger with Whole Foods; nuts have long shelf lives so the main concern for customers (assuming quality is there), is fast delivery, in which Amazon is a specialist.

Thanks again, Patrick, for this excellent article from which I’ve made plenty of notes!

Arun

Woops, Whole Foods clearly encompasses more product ranges than nuts; it caters for all groceries but ‘fresh’ produce only delivers to certain areas in the UK.

It’ll be interesting to see whether these natural grocery stores remain profitable in light of the high street decline, and in light of increasing online shopping, including on Amazon itself. If they do, and increase their market share (as Lidl and Aldi are doing), it will probably be more likely for a reproposal of Sainsburys and Asda’s merger to go through? Even if market share tilts more toward online shopping, I don’t see how the CMA can logically distinguish between bricks-and-mortar shopping and online shopping.

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