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.

Increased enforcement of existing laws

First, the MC proposes that the merger control framework be reviewed, taking the view that the current framework does not enable competition authorities to review transactions involving companies holding commercially valuable data or that have a considerable market potential for other reasons.  The MC proposes that notification requirements based on transaction volumes be added to the existing turnover thresholds.

Second, the MC notes that the importance of access to data in digital markets has become a key factor in development and innovation, potentially warranting further investigation.  The MC notes that, at this stage, concerns expressed focus on (i) foreclosure of access and (ii) potential leveraging (e.g., favouring of own services, exploitation of third-party content and data, and impeding customer churn), before going on to observe that exploitative conduct is also possible, if third-party content and/or data are exploited or customers are disadvantaged when switching suppliers.

While the MC takes the position that there is no need for statutory action currently, it recommends increased enforcement of competition law, including the following:

• The European Commission should adopt interim measures more often, where material changes in the market can be expected within two years.

• A commitment procedure should, automatically or on reasonable third-party request and after reasonable time frames, become an infringement procedure.

• Enforcement of the individual rights of content providers and users – such that illegal exploitation of third-party content and data may constitute an abuse of market power.

A summary of the more detailed views expressed by the MC on particular issues follows:

Data

The MC takes the view that control over, and ability to analyse, large volumes of data can provide a crucial competitive advantage.  In the event that consumers do not explicitly consent to the collection and use of their data (e.g., when companies use tracking technologies), the use of such data may therefore have negative effects for consumers (e.g., price differentiation).  Nevertheless, it does not take a view as to whether (and to what extent) individuals have the right to control the use and exploitation of such data, beyond the protection afforded by data protection law.

The MC proposes that the asymmetry of information distribution between companies and consumers be addressed, e.g., through a system requiring user consent to collection and commercialisation of user data (an opt-in system).

Finally, the MC suggests that the importance of data for companies’ business models be considered in competition proceedings, especially in relation to merger control (e.g., acquisition of entities with low turnover but potentially valuable data).

Online Advertising

The MC notes that the market for online advertising is very dynamic, and proposes reconsideration of the markets defined by the European Commission (i.e., online vs. offline advertising, search-based vs. non-search based advertising) to take into account the following:

• Increasingly targeted ads is reducing the distinction between search and non-search advertising, such that whether they constitute separate markets should be considered in each case.

• A case-by-case analysis is also required to determine whether online advertising and specific types of offline advertising fall within the same market(s).

• Narrow market definitions that have led to the prohibition of cooperation between content providers that would have enabled them to compete with international service providers should be reviewed.

• High shares in advertising markets are not in and of themselves determinative of competitive positions.

The MC identifies the following competition concerns:

• Companies with “disproportionately strong market position in the online advertising market” could negotiate exclusive contracts, bundle ads and services, and artificially limit ad space.

• In view of the increasing importance of data for targeted ads, it is possible that data might become concentrated at individual steps in the value chain.

• The strict application of data protection rules may impact on the efficiency and structure of ad markets.

• Different rules for different media can distort competition (currently in favour of Internet-based media).

Search Engines

The MC identifies competition issues flowing from search engines preferring their own vertical search services when displaying search results, refusing to index sites and scraping content.  However, it opposes regulation for the following reasons:

• Enforcement of regulation would be expensive and it is not clear that it would be effective.

• Obligations to disclose search algorithms or web indexes would not be adequate solutions since that would not necessarily lead to relevance-based search results, and might reduce incentives to create and update web indexes.

• Separation of horizontal and vertical search services is appropriate, unless the relevant search engine has “irreversible market power”.

Finally, the MC suggests strengthened enforcement of the rights of other market participants, the review of regulations requiring providers of online services to make technical pre-adjustments to avoid violation of other market participants’ rights (e.g., copyright or privacy rights) and the introduction of technical standards to enable users to select horizontal and vertical search providers via apps or a browser.

Social Networks

While different social networks may present different features, the MC notes that a significant amount of user interaction occurs on Facebook.  It goes on to consider the impact of network effects, interoperability and (contrary to search engines) high switching costs on market concentration.  The MC notes that the potential lock-in of users can be used to extract consent for more collection and exploitation of personal data than would be the case if there were effective competition.  The MC also notes the potential for abuse:

• Exclusionary abuse: Potentially through foreclosing competitors from providing services to users by extending their services in an anticompetitive manner.

• Exploitative abuse: Excessive data collection (and restraining the ability of users to limit data collection) could potentially be exploitative.

The MC suggests that the potential for such abuse could be reduced by requiring service providers to inform users as to the scope of their consent, e.g., through the creation of a statutory “right of choice” for consumers, entitling them to refuse to consent to the use of their data for advertising.

E-Commerce

The MC takes the position that, when defining markets, competition authorities should take into account the fact that online dealers may compete with brick-and-mortar dealers.  Further, definition of the markets into which trading platforms fall must take into account multi-sided models (e.g., trading platforms may compete (on the consumer- and dealer-side) with price comparison sites).

The MC found evidence of increased market concentration in some areas of e-commerce, especially trading platforms, potentially reflecting strong indirect network and scale effects and the restriction of multi-homing flowing from reputational effects on the seller’s side.  The competition concerns identified by the MC include, inter alia:

• Dealers with buyer power may be able to obtain better prices and conditions from their suppliers (i) than other dealers or (ii) than they would have obtained in competitive markets.

• Competition issues may arise when companies are vertically integrated, e., the platform operator also sells on the platform. The platform operator may advertise its products more prominently, monitor other dealers’ transactions (and react by adding products to its own portfolio) or foreclose customer access to others.

• While the effects of price-parity clauses may not have been sufficiently explored, a per-se prohibition may not be appropriate.

• Prohibitions on the use of third-party platforms require case-by-case analysis, considering the extent of interbrand competition and efficiencies related to the protection of brand image.  In addition, the case-law of the European courts regarding trademarks should be considered.