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Articles Competition 4th Nov 2019

Competition Alert: Spotlight on Digital Competition Issues – A Digital Legacy

Developments in digital competition issues continue apace. Competition authorities are intensifying their scrutiny of online markets and calls for significant legislative reform have become stronger than ever.  As the new European Commission takes office shortly, the current Commission has been reflecting back on its ‘digital legacy’.

Background

It used to be a common refrain that digital competition concerns were simply ‘old wine in new bottles’ and could be addressed using existing competition law tools (even if such tools had been designed in an analogue age). After all, multi-sided markets were hardly novel. Concerns of hampering innovation in fast-paced digital markets and the perceived adequacy of the ‘ex-post’ toolbox appeared to favour a ‘wait-and-see’ approach on the part of competition enforcement authorities. However, that approach has been changing.

In its Digital Legacy speech, the Commission has reflected back on its digital work over the last 5 years, before the new Commission takes the reins. In taking stock, there is a recognition that acting too late and the risk of under-enforcement can be just as harmful to innovation and competition as the risk of over-enforcement. It acknowledged that it was ‘too naïve to believe that competition is always a click away’. At October’s Digital Summit, Commissioner Vestager referred to the difficulty of bringing competition back to a tipped market, comparing it to a thoroughly polluted ecosystem not able to recover on its own.

As the regulatory spotlight continues to focus on the digital giants, there now appears to be a growing consensus that a conventional application of existing competition law tools has been inadequate in tackling many of the concerns arising in online markets. Increasingly, significant regulatory reform is being called for.

We take a brief look at a few key digital themes currently in the spotlight:

Value of data in online marketplaces

  • Considered the ‘oil’ in online markets, data is at the heart of many online business models and can create significant barriers to entry given data-driven economies of scale and network effects. Among the digital giants, Facebook and Google have been identified as having in common a ‘hunger for data’. They are the leaders in online advertising and digital advertising accounts for the majority of their revenues.
  • In particular, data aggregation and data mining practices are often highly opaque and complex. How data is being used and monetised within the advertising value chain is currently under significant scrutiny. The CMA’s market study on online platforms and digital advertising is underway (the statement of scope for the study was published in the summer and the CMA will be deciding whether to make a market investigation reference by 2 January 2020).
  • There are also various ongoing proposals in relation to data interoperability, including APIs, standardisation and data mobility. This includes suggestions of consumers being able to use their social graph on another social media platform. For example, the data transfer project set up by Google and others in 2018 to create an open source service-to-service data portability platform to enable individuals to move data between online service providers.

Increasing interplay between competition and other policy areas

  • There has been a blurring of boundaries in online markets between the application of competition law and other areas of policy, particularly consumer protection and privacy. This reflects some of the features of digital markets.

Zero-price services

  • In particular, as many online markets are structured around users benefitting from ‘zero-price’ services, the usual price parameters of competition analysis are arguably less relevant. With many online services – and as referred to in the Commission’s Google Shopping decision – users do not pay a monetary consideration but ‘contribute to the monetisation of the service by providing data with each query’. Those data points enable platforms to build personal profiles which are then often monetised for targeted advertising purposes.
  • Consequently, in online markets we are starting to see greater significance in competition analysis being placed on non-price related parameters such as quality, consumer choice and innovation. As an example, for zero-price services the usual market definition approach reliant on the application of the ‘small but significant non-transitory increase in price’ (SSNIP) test is less relevant. The SSNIP test considers whether, if the price of A were to increase by 5 to 10%, consumers would switch to B, in which case B belongs in the same relevant market as A. In response to the problem of using the SSNIP test for zero-price services, it has been suggested that competition authorities could use the ‘small but significant non-transitory decrease in quality’ (SSNDQ) test instead. For example, SSNDQ was part of the conceptual framework used for the assessment of dominance in the Commission’s Google Android decision.

Privacy

  • There is also growing discussion around privacy as a parameter of competition. For example, in its Facebook/WhatsApp merger decision, the Commission considered privacy as an element of quality of mobile communications apps. The greater privacy protection of WhatsApp was one of the elements the Commission referred to in concluding that the parties were not close competitors. The importance of privacy was a factor in finding that Facebook was unlikely to retract WhatsApp’s plans regarding end-to-end encryption and introduce targeted advertising on WhatsApp.
  • Additionally, some competition enforcement decisions have relied on privacy aspects as part of the competition analysis, considering data collection and processing practices under competition law. For instance this year’s Bundeskartellamt Facebook decision prohibiting Facebook in Germany from combining user data from different sources.

Consumer control

  • Consumers’ lack of knowledge and control over both the use of their data and how it is monetised by digital platforms continues to be a key area of concern. There is a significant information asymmetry in online markets and consumers are not generally aware how their personal data are being used. Neither does the market appear to be working well to self-correct. For example, in the CMA’s report on the commercial use of consumer data, it did not find that consumers were driving competition over privacy through their preferred choices on levels of privacy.
  • From a regulatory perspective, the novel interplay and blurring of boundaries between consumer, privacy, data ownership and competition issues are tricky to navigate using existing enforcement tools. Increasingly broader legislative solutions are being called for in order to ensure greater consumer control over various online practices and a levelling of the playing field.

Calls for institutional and legislative reform

  • Competition authorities around the world have been investing significant resources in better understanding online competition issues and bolstering their internal technological capabilities, as was called for in the Commission’s Competition Policy for the Digital Era report. This includes the setting up last year of the CMA’s internal DaTA (Data Technology and Analytics) Unit.
  • However, there now appears to be growing consensus that a new regulatory framework for online markets is needed in order to bring about significant reform. In the UK, the recent Furman report on the state of competition in digital markets recommended that a new dedicated Digital Markets Unit (DMU) is set up. Whether or not this proposal will be taken forward – and whether a DMU would form part of the CMA – is still to be determined.
  • In addition to likely institutional reform, there is a growing shift towards increasing the regulation applicable to digital markets. In her recent speech on Security and Trust in a Digital World, Commissioner Vestager observed that regulation, rather than more competition enforcement, would be needed in order to define the market and set out what is and is not acceptable in terms of standards. The need for rules was also echoed in last week’s Digital Summit speech, recognising competition is only one part of the puzzle.
  • Some of the proposed regulation is already underway. For example, the Commission is taking forward its proposals for a Digital Services Act and its recommendations for legislation on artificial intelligence committed to within 100 days of the new Commission taking office (which is now likely to be delayed until 1 December 2019).

Conclusion

Alongside ongoing competition enforcement cases, we anticipate wide-ranging legislative measures will begin to take shape as further evidence of competition concerns continue to emerge from the current scrutiny of online markets by regulatory authorities. While a concerted international effort would be required to address global digital markets, there is a regulatory intention to knock the digital giants down to size.

The Digital Legacy speech concluded that authorities must be able to take action before the damage to competition is irreparable. The recognition that fundamental legislative change is now required to better regulate digital markets appears to be stronger than ever.

If you would like further information or advice regarding digital competition issues, please contact Leonia Chesterfield or another member of the Competition department.


The content of this page is a summary of the law in force at the present time and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.

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