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Commissioner Vestager’s Digital Legacy

EU Commissioner Vestager is nearing the culmination of an ambitious year-long plan to shape EU competition policy in the digital sector for the next five-year Commission term to 2024 and beyond. Experts Vestager appointed in March 2018 will deliver a report (the Report) on the future challenges of digitisation for competition policy by March 31, 2019. While not binding on Vestager or future Competition Commissioners, the Report will have a powerful influence on future EU policy. With the Report, the Commission will take its place at the head of European authorities considering similar issues, including Germany, the Netherlands and the UK.

What will the Report say, and what will the Commission’s Directorate-General for Competition (DG COMP) do with it? The Report will take account of well over 100 responses to the Commission’s call for contributions (the Consultation), including from Facebook and Microsoft (though not, at least directly, from Amazon, Apple or Google). Further strong hints came in a January 17, 2019 conference convened by Vestager (the Conference). The Report will likely advocate significant changes, including changes to the enforcement of existing competition laws and new regulatory initiatives to address perceived challenges arising from the digitization of the economy.

Since January, Vestager has commented frequently on the Consultation and Conference, including in speeches in Prague, Brussels, Cambridge, and Dublin. These remarks suggest areas where DG COMP is considering changes. Some of these would require new legislation, which will need to wait for the new Commission and European Parliament to take office later this year. Others could be implemented by DG COMP without legislation. Either way, the new Commissioner – whoever he or she is – will find the Report hard to ignore.

The U.S. Federal Trade Commission is also preparing a report following months of hearings on similar issues, but the U.S. seems likely to take a very different approach. Thus, the Report may also serve as a guide to potential areas of divergence in transatlantic antitrust policy for the next decade.

The Conference and Report

The experts preparing the Report are Professors Heike Schweitzer, who also participated in the German report on modernizing the law on abuse of market power, Jacques Crémer and Yves-Alexandre de Montjoye. The Report will address three main themes, which formed the titles for three main panel discussions at the Conference: competition, data and artificial intelligence; digital platforms' market power; and preserving digital innovation.

The Conference boasted prestigious panellists and keynote speeches by Commissioners Vestager and Gabriel and Nobel Prize winning economist Jean Tirole. The Conference line-up was notably weighted against major technology companies, including no “GAFAM” representatives, no private sector lawyers or economists and no academics generally associated with views supportive of major technology companies.

Commissioner Vestager’s and Director-General Laitenberger’s official comments at the Conference did not give much away. Vestager flagged several key concerns from the Consultation responses: access to data; the power of platforms and their ability to control access to digital resources; and big businesses blocking innovation by buying smaller innovators just to close them down. Laitenberger noted that the Commission will need to consider “whether to act now or later or not at all; whether to apply a broad ‘fix’ or a narrow ‘fix’; and whether to act through competition enforcement or regulation or both.”

Competition, data and artificial intelligence

The first panel, chaired by Prof. De Montjoye, featured Professors Ariel Ezrachi, Alessandro Acquisti, and Karen Yeung. Prof. Ezrachi focused on issues related to the accumulation of big data by large technology companies. He challenged the assumption that innovation is necessarily a good thing and noted that collecting more data on consumers could be an example of “negative innovation.”

Prof. Acquisti focused on the economic implications of privacy and the lack thereof, calling for more research in this area. He challenged the notion that increasing privacy protections necessarily impairs efficiency by reducing companies’ ability to make maximum use of big data. He acknowledged, however, that there are likely to be trade-offs and called for further work in this area.

Prof. Yeung agreed with Prof. Ezrachi that innovation can be socially harmful and argued that innovation is often double-edged. She further argued that regulation is not “technocratic” but reflects policy decisions. Rather than chilling innovation, regulation can create “safe spaces” and encourage trust. On the other hand, Prof. Yeung argued that delaying regulation can lead to lock-in or path dependency.

Prof. de Montjoye observed in closing that the moral of the discussion was that “we need more regulation.” This theme was echoed by Prof. Tirole, who queried in his keynote address why there is so much hostility to industrial policy, noting the many successful innovations that have stemmed from government initiatives.

Digital platforms' market power

The second panel was chaired by Prof. Crémer and featured Fiona Scott-Morton of Yale, Sandeep Vaheesan of the Open Markets Institute, and Monique Goyens of BEUC.

Prof. Scott-Morton raised a number of concerns also expressed by Prof. Tirole, whose keynote talk preceded this panel. She argued that the main concerns with online platforms’ market power are the means they use to discourage entry, including bundling, exclusivity obligations, “killer acquisitions”, and violations of privacy or other rules. The result, she claimed, include concentrated markets, higher prices and lower quality. Prof. Scott-Morton also called particular attention to most-favored-nation clauses (MFNs), criticised by Prof. Tirole as “clever tools for competitors to tax rivals.”

Without using the term, Prof. Tirole also expressed concerns about “killer acquisitions,” arguing that it is “too easy for incumbents to buy up future rivals because the burden is on the authorities.” Prof. Tirole said that he believed transactions like Facebook’s acquisition of WhatsApp and Instagram had been anti-competitive, though he acknowledged that he had no evidence for this view.

Prof. Scott-Morton called for more aggressive antitrust enforcement, but also for regulation because competition enforcement tools are too slow to keep up with platform evolution. She advocated formation of a “digital regulator” who could deal with issues such as requiring data to be kept in formats to allow interoperability.

Mr. Vanheesan likened the governance of platforms to the governance of a State, giving the example of Amazon, which has State-like powers over would-be sellers on the Amazon platform. He noted the possibility for platforms to discriminate among users as a result of vertical integration or by contract.

Mr. Vanheesan floated several policy options, ranging from a direct prohibition of vertical integration by platforms, breaking up the largest platforms or treating platforms like common carriers, prohibiting discrimination or regulating prices. Mr. Vanheesan suggested exemptions from antitrust rules to allow small competitors to cooperate to compete more successfully against large platforms.

Ms. Goyens echoed the concerns of Prof. Scott-Morton and Mr. Vanheesan, arguing that competition authorities should think and act “outside the box.” Beyond competition enforcement, however, Ms. Goyens argued that regulation is sometimes necessary, in particular to introduce a new “access to data regime” to lower data-related barriers to entry.

Preserving digital innovation

The final panel, on preserving digital innovation, was chaired by Prof. Schweitzer and featured Professors John Van Reenen, Rupprecht Podszun and Mariana Mazzucato. Prof. Schweitzer noted a number of differences between innovation in the digital sector and in other sectors. In the digital sector, she argued, innovation is shorter term, less asset-driven and less dependent on IP than in other sectors. On the other hand, innovation is more dependent on data pooling and sharing, areas where companies need more guidance on what they can do.

Prof. Schweitzer also argued for more focus on innovation-related harms, including abuses of dominant positions but also “killer acquisitions.” She argued that new tools are needed to assess potential competition to tell good deals from bad. One approach would be to look more closely at evidence of companies’ strategy; another could be to change the burden of proof.

Prof. Van Reenan discussed his work on concentration levels in U.S. business. His research has shown significant increases in concentration levels, as well as increased margins, though most of the margin increase has been captured by the largest firms. He argued that lax antitrust enforcement is not entirely to blame, since similar trends can be seen in Europe, where antitrust enforcement has been more aggressive. Prof. Van Reenan argued that the trend can be traced to logistics and supply chain developments (the “Wal-Mart Effect”), network effects and “killer acquisitions.” According to Prof. Van Reenan, “laissez-faire is clearly not the answer.”

Prof. Podszun echoed the call for better tools to assess innovation-related harms, noting the limitations of price-based economic tools. Prof. Podszun argued that competition authorities should themselves be more innovative, not shying away from bringing cutting-edge cases, potentially lowering sanctions while new rules are being developed.

Prof. Mazzucato echoed the call for competition authorities to be ambitious in thinking about ways to shape markets. Prof. Mazzucato argued that we should acknowledge the role of government in value creation and not “just wait for technology to come out of the private sector.”

Main takeaways

While the full Report won’t be published until late next month, a number of recurring themes from the Conference suggest directions the Report may take on key themes, including issues relating to merger review, big data, privacy, and the tradeoffs between antitrust enforcement and regulation. More specifically,

  • Merger review: Many speakers raised concerns about so-called “killer acquisitions,” in which large technology companies stifle innovation by buying small companies identified as future rivals to shut them down (although no speaker gave an example of such an acquisition). Proposed measures to address the presumed concern included a change in the burden of proof in certain types of mergers, a greater focus on buyers’ strategies and work on new tools to assess potential and innovation-related theories of harm.
  • Big data: Many speakers seemed to take for granted that large technology companies’ data accumulation raises antitrust issues that need to be addressed through enforcement or regulation. Counterarguments that data are non-rivalrous and widely available received short shrift, though Laitenberger did note that different types of data may raise different issues.
  • Privacy: There was considerable interest in antitrust and economic aspects of privacy issues. Compared to data access issues, however, there seemed to be less of a consensus on specific policy initiatives and more stress on the need for further research on how to assess privacy-related competition.
  • Regulation vs enforcement: A number of speakers argued for more aggressive antitrust enforcement, urging authorities to be more innovative in bringing cases based on new theories of harm. There was, however, also a widely shared openness to addressing some issues through regulation, including a proposed “digital regulator.”

Interestingly, the Conference participants did not focus to a large extent on the role that algorithms may play in anti-competitive conduct such as cartels, nor on the possibility that individualised pricing might be challenged as price discrimination under Article 102 TFEU.

The Commission’s Next Steps

Commissioner Vestager and Director-General Laitenberger understandably avoided making specific comments at the Conference, presumably to avoid prejudicing the Report’s conclusions. Nonetheless, the choice of topics and panelists signals the Commission’s openness to greater intervention to address perceived issues in the digital sector. Since the Conference, Vestager has commented on the Consultation and Conference in a number of speeches, signalling areas of possible change. These are consistent with the main Conference takeaways noted above.

Merger reform and “killer acquisitions”

At the Conference, many speakers raised concerns that current merger control rules may allow large digital companies to buy up smaller rivals only to shut them down, thereby stifling innovation. Vestager increasingly references such concerns. In Prague, for example, she noted that

“many experts – like the Nobel prize-winning economist, Jean Tirole – also worry about what could happen to innovation, when the companies that dominate our digital markets get into the habit of buying up startups that could compete with their own services. . . .That’s what our merger rules are there to prevent. But some experts think those rules might not be as effective as they could be, . . because it can be hard to tell, so early on, if a startup would have become a serious competitor [and] ... the Commission only gets to see the biggest mergers”.

Neither the Conference speakers nor Vestager have offered examples of large competitors buying smaller rivals to shut them down, and the cases Vestager did reference -- Novartis/GSK and Dow/DuPont – did not involve digital companies.

Platforms and data

Another recurring theme is the role of data, from at least two perspectives: access to data collected by large companies but needed by rivals to compete, and the risk that vertically integrated companies may misuse data they collect.

In Cambridge, Vestager echoed the concern about access to data, comparing the role of “a handful of platforms” to Danish kings controlling access to the Baltic Sea. Vestager argued that “data is becoming one of those vital resources[, and] . . . we need to make sure it’s not monopolised by a few.” In Prague, Vestager noted this concern especially in relation to artificial intelligence.   “Because,” she said,

“data is the raw material for artificial intelligence – the information which machine learning algorithms use to understand the world. And if just a few companies monopolise that raw material, it could be hard for anyone else to produce innovative AI.”

Vertically integrated platforms’ data usage raises distinct issues. Vestager noted that

“Amazon’s Marketplace is a platform that links sellers and buyers. But Amazon also sells products directly – often in competition with the very same sellers. That raises the question of how Amazon uses the data it collects about other sellers through the platform, and whether that leads to unfair competition. . . . We certainly can’t say today that Amazon has done anything wrong. But what matters is that we’re already looking very closely at whether companies are using their control of data to harm competition.”

On the other hand, Vestager has made a number of comments indicating greater awareness of the complexity of big-data related issues than was demonstrated by some Conference speakers.   Vestager acknowledged that “data isn’t that easy to monopolise. There’s no limit to the number of companies that can use the same data, at the same time. And some types of data are pretty easy for anyone to get hold of, by collecting it from users or buying it in.” As she noted,

“that word ‘data’ covers a vast range of different things. The way that companies in different sectors collect and use data can be so different that it might not even be possible to have one set of rules that works for them all. It might be better, instead, to adjust our approach to fit the way data is used in each sector of the economy separately. But whether we have one set of rules for everyone, or different approaches for different sectors, [any] solution . . . will have to give companies access to the data they need to compete. But it will also have to be fair to the companies that have put money and effort into building those sets of data; and it will have to respect the privacy rights of the people whose data it is.”

Privacy and competition

Compared to some national authorities, for instance the Bundeskartellamt in its recent Facebook decision, the European Commission has been cautious in addressing privacy issues in its antitrust enforcement. Vestager’s recent comments suggest that this may soon change. In Cambridge, Vestager noted that people

“need to know that, whoever uses [their] data, they’ll use it in our interests – and above all, that they won’t undermine our privacy. Competition enforcement can help with that. After all, the point of competition is to give consumers the power to insist on the kind of service they want. And if privacy is something that’s important to consumers, competition should drive companies to offer better protection.”

Regulation vs enforcement

Unsurprisingly, Vestager frequently cites the importance of antitrust enforcement in the digital sector, citing among others the Commission’s Google cases and its ongoing investigation of Amazon. Vestager also makes frequent reference to the positive role regulation can play. In Paris, Vestager noted that the

“competition rules can help to make sure platforms don’t misuse their power. . .[b]ut on their own, they won’t change the fact that big online platforms will still have a lot of power. . .We need to think about the rules we want to put in place – besides the competition rules – to make sure platforms behave in a way that’s good for society.”

In Prague, similarly, Vestager noted that “we need rules – to make sure that innovation is used in a way that’s good for our society,” referencing specifically privacy rules and forthcoming guidelines on artificial intelligence.

Echoing comments at the Conference about the double-edged nature of innovation, Vestager noted in Prague that

“we can’t be put off from applying . . . rules by the fear that it might hold back innovation. . . . Companies that want to use data . . will have to work harder to explain what they want to do, and why. And perhaps, in the end, some innovative ways to use data will never become a reality, if companies can’t persuade us that the benefits they offer are worth the cost to our privacy. But that’s not something to worry about. It’s something to welcome. Because innovation and disruption aren’t positive in themselves.”

However, Vestager has not expressly endorsed some more far-reaching steps proposed at the Conference, such as creating a “digital regulator,” a broad duty for companies to share data with competitors or prohibiting vertical integration by platforms.

Conclusion

In recent years, EU Member State authorities have appeared to take the lead in exploring cutting edge issues in the digital sector, such as big data, online platforms’ use of contractual tools such as MFNs, and applying antitrust tools to privacy issues. Commissioner Vestager has been comparatively slow to pursue such issues at the EU level, except where required to do so, as in merger reviews. This reticence is perhaps surprising, since Vestager has consistently shown a strong interest in the broader policy implications of antitrust enforcement and the connection between antitrust and other policy initiatives. For example, early in her term Vestager launched the ground-breaking e-commerce sector inquiry and expressly linked it to the Commission’s Digital Single Market initiative.

With her term ending this year, Vestager is running out of time to launch major new investigations or to make major changes in competition enforcement policy. But the Report will be an important legacy for Vestager and potential blueprint for her successor. Vestager’s energetic speaking schedule and frequent references to the consultation and conference seem designed to lay the groundwork for the Report and to signal potentially important changes. With her strong backing, the Report may lead to the Commission reclaiming the initiative in cutting edge competition developments.

What might these changes look like? Although (as Yogi Berra said) it’s tough to make predictions, especially about the future, here are several:

  • The Report is likely to raise alarms about “killer acquisitions” and to recommend tightening EU merger control to address the perceived risk. The most far-reaching proposal, reversing the burden of proof to require proposed purchasers to show that a transaction would not cause a significant impediment to effective competition, would require legislative changes and raise difficult technical issues. Even without such a change, however, DG COMP enjoys considerable flexibility to increase scrutiny of transactions it considers suspect, for instance by looking more closely at the strategic rationale advanced to justify notified transactions. For instance, the Commission could insist on in-depth internal document views even in some transactions that don’t appear to raise serious antitrust issues, in particular where large companies acquire start-ups. The Commission is also likely to continue focusing on transactions’ effect on innovation and potential competition, sharpening the tools they started to develop in Dow/DuPont. The Commission may also return to proposals – currently on hold -- to capture transactions currently too small to be caught by the EU Merger Regulation’s turnover-based tests. After several such efforts in recent years, however, strong support would be needed from the next Commissioner.
  • The Report will likely come out in support of a crackdown on the collection and use of big data by online platforms. We can expect increased scrutiny and enforcement in this area by DG COMP, but the Commission has shown a greater awareness than some commentators that different types of data raise different issues. The Commission has looked closely at big-data issues in several merger cases and has so far found no problems. Vestager has also expressed no support for relaxing the high hurdles to mandating data-sharing under EU “essential facility” precedents. Instead of major changes in enforcement policy, the real impact of the Report may be to provide support for a regulatory initiative to mandate data sharing in some circumstances. Any such initiative, however, will have to await appointment of the next Commission and go through the EU’s often lengthy legislative process.
  • The Report is likely to support the application of antitrust rules to privacy issues, an area pioneered by the German authority. DG COMP appears open to this and has the power to open such investigations without legislative changes. DG COMP is unlikely to do so lightly, however, and major initiatives in this area may await the next Commissioner.

In conclusion, the Report seems likely to advocate significant changes in antitrust enforcement and the imposition of new regulations in the digital sector. Vestager and DG COMP appear open to many of these ideas, but also conscious of the need to take account of the many complexities in the area. The Commission can be expected to adopt a somewhat cautious approach, implementing some suggestions for more aggressive enforcement, while leaving more sweeping regulatory choices for the next Commission. Even if the Commission does not adopt all of the Report’s recommendations, it will provide important intellectual backing for initiatives the Commission chooses to pursue.

 

Jay Modrall, Norton Rose Fulbright
James R. Modrall is an antitrust and competition lawyer based in Brussels.

He joined Norton Rose Fulbright LLP in September 2013 as partner, having been a resident partner in a major US law firm since 1986. A US-qualified lawyer by background, he is a member of the bar in New York, Washington, D.C. and Belgium.

With 27 years of experience, he is a leading advisor for EU and international competition work, in particular the review and clearance of international mergers and acquisitions. Mr Modrall also has extensive experience with EU financial regulatory reform, advising the world’s leading private equity groups in connection with the new EU directive on alternative investment fund managers and leading banks and investment firms on EU initiatives including EU regulation of derivatives, EU reforms in financial market regulation and the creation of a new EU framework for crisis management, among others.

Mr. Modrall’s native language is English, and he is fluent in Italian and proficient in Dutch and French.

 

 

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