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Online markets constitute a special focus of competition law. To be appropriately applied, regulation requires a thorough analysis beyond market shares and demand-side substitutability.
Rapid growth and change in the global technology sector and the evolution of digital economies have created new challenges for competition authorities. To keep pace with developments, the European Commission conducted a so-called sector inquiry in the field of e-commerce and published its findings in 2017. Currently, the EU is holding far-reaching discussions that could lead to the possible regulation of internet platforms and form part of a broader EU strategy for a digital single market.
National authorities are also starting to take action. Over the past five years, the German Federal Cartel Office (FCO —Bundeskartellamt), the main body responsible for German merger control rules, has made various interventions against agreements and practices in the online distribution field. In particular, the question of how to treat bans on sales via third-party internet platforms in selective distribution systems has been on the FCO's agenda for some time. In 2015, the FCO concluded that ASICS Deutschland had restricted online sales of running shoes in an anti-competitive manner.
The FCO has also launched an investigation into discrimination by retailers against online sales compared with offline sales. In June 2017, the FCO was handed additional investigative powers covering consumer protection, under which it has already launched a sector inquiry into online price comparison websites.
Another important aspect of competition law in the technology sector is merger control. Probably one of the most frequently discussed cases has been the US$19 billion acquisition of WhatsApp by Facebook in 2014. Despite the deal's large value and the fact that WhatsApp was already widely used in Europe, the transaction did not meet the turnover thresholds of any merger control regime in the EU. Politicians and competition authorities in Europe therefore discussed additional instruments in order to review and control these market developments. As early movers, Austria and Germany amended their competition laws in order to react to such new developments in the digital economy.
Among the changes, it has been clarified that services that are rendered free of charge to consumers may nevertheless constitute a market in terms of competition law. This is particularly relevant for multilateral online platforms such as search engines, comparison websites, hotel booking portals or social networks, which offer their services for no fee.
Under new laws, merger control will be required if the value of the consideration for a transaction exceeds €400 million in Germany (€200 million in Austria) even if the companies involved do not meet the domestic revenue thresholds
The acquisition of WhatsApp by Facebook in 2014, fell below EU merger control thresholds despite its hefty price tag.
Another interesting aspect is the criteria for the assessment of the market power of companies on platform markets. The new law in Germany introduces specific criteria to be taken into account, such as: direct and indirect network effects; parallel use of multiple services and switching costs for users; economies of scale in the context of network effects; access to competitively sensitive data; and innovation-driven competitive pressure. These criteria or some of them have been applied before by other competition authorities. These legislative developments also prove that online markets constitute a special focus of competition law. To be appropriately applied, regulation in this field requires a thorough analysis beyond market shares and demand-side substitutability.
The new laws on merger control take into account that many companies in the digital economy, especially when they are new, may offer their services without generating significant revenues but become relevant when other considerations such as personal data are taken into account. However, investors are ready to pay high prices for successful or promising digital companies. Thus, amendments include an additional merger-filing threshold based on the transaction value.
Under the new laws, merger control will also be required if the value of the consideration for the transaction exceeds €400 million in Germany and €200 million in Austria, even if the companies involved do not meet the domestic revenue thresholds. The consideration includes all assets and other monetary values or services the seller receives from the acquirer in the context of the transaction (purchase price) as well as the value of any obligations to be taken domestic operations. More jurisdictions are likely to follow in implementing these kinds of merger tests.
Given the dynamics of the technology and internet markets, one of the key challenges for competition regulation is to properly control M&A transactions without distorting incentives for competition for potential startups. From a company's perspective, merger control means additional bureaucratic hurdles, increased costs and time-consuming legal tasks. Hence, during the legislative discussions in Germany, startup companies raised concerns that an extensive merger control that included a standstill obligation until clearance may create a competitive disadvantage compared with other jurisdictions in the EU. As a result, investors might be deterred from investing in Germany. Against this background, the German national association of startups called for a European solution instead—this initiative could, however, not avoid the legislative changes.
The challenge is to strike the right balance between potential overenforcement and laxity. Predictions and projections on market development are particularly hard to make in this field. Even if a transaction falls under a broader value-based filing test, competition authorities must be careful in determining potential threats to competitors. A premature conclusion might, in fact, preclude a competitive offer to the market.
Instead of regulatory intervention, competition itself might sometimes be the solution. The next challenge for current incumbents might be waiting in the 'incubator', ready to be released for the next innovative, if not disruptive, service that will quickly change the current market shape—and welcoming competition as a discovery process.
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