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25 July, 2017
The nature of regulations, enforcement authorities and their ability to enforce regulations has been known to have a profound effect on innovation.
As the internet transforms industrial processes, regulators across sectors and geographies are trying to achieve the right balance on regulating innovation – enough so that it is under effective control yet not stifled from growing.
In a recent policy brief on behalf of the Penn Wharton Public Policy Initiative, Kevin Werbach, a professor at the Wharton School of the University of Pennsylvania, advises policy makers and regulators that the next stage of digital advancement will lead to a phenomenon that he calls “Internet of the World” – an intersection of the on-demand/sharing economy, the Internet of Things and Big Data. He suggests that this stage would represent “the final destruction of artificial divisions between real and virtual”.
As we approach this stage at a rapid pace, law-making and regulation needs to evolve accordingly. Laws need to reflect the rapidly blurring boundaries between the physical and digital so that regulators are suitably equipped to accomplish their tasks across all mediums and sectors.
Antitrust and Innovation
The history of innovation suggests that competition laws and competition law authorities have consistently had an important role to play in its regulation. There are various examples from across the globe that reflect the important role antitrust has played, and continues to play, in regulating innovation. The antitrust scrutiny into personal computing giants, smartphone technologies, e-books and internet platforms are just few of the prime examples that exemplify this trend.
Significantly, the approach of the Competition Commission of India (CCI) is also consistent with the above trend. The CCI has had to deal with various cases across sectors dealing with innovation and it has consistently had to decide the most appropriate response, by intervening or not intervening, so as to enhance the competitive landscape of the sector.
Most recently, the CCI has dealt with a case filed against the alleged anti-competitive conduct of Whatsapp – a popular instant communication app. CCI relied on publically available information and various market studies to conclude that WhatsApp holds a dominant position in the relevant market. However, it did not find enough merit in the allegations to order an investigation. CCI’s approach (especially the relevant market determination) highlights its confidence, and an independent, indigenous approach, in dealing with innovative technologies.
Interestingly, at around the same time, the changes adopted by another antitrust authority in another continent indicated their recognition of the evolution of factors that signify market power. We now take a look at this example to examine potential implications for global trends and, indeed, developments in India.
Recent Developments
On 8 June, 2017, competition law in Germany, the Act against Restraints of Competition (ARC), was substantively amended to account for the continuing digitisation of the economy. The German Parliament, Bundestag, seems to have realised that it is possible to have a company that deals in ‘free’ goods or services and thus has little or no revenue. Even so, the lack of substantial revenue is not determinative of its extent of market power.
Therefore, Germany decided to codify changes in its competition laws so as to ensure that it is adept at examining this evolving market power paradigm. The extent of changes is likely to impact the decision making of the Bundeskartellamt(Federal Cartel Office)[1] significantly.
Significance of the Changes
Although the effects of the announced changes will only be felt when they are applied in cases, their significance can be inferred from the potential implications for the digital economy.
Firstly, the changes seek to ensure that an enterprise cannot claim immunity or exclusion from antitrust laws merely because it is giving away products or services for ‘free’. There are platforms and services – search engines, price comparison sites, social networks etc.– which seem to be discovering innovative methods of monetising their venture despite charging the customer nothing. The amendments codify the interpretation that merely because a good or a service is being offered for free does not mean that the company offering it does not operate in a market.
Secondly, the amendments indicate that antitrust’s almost singular focus on market share as a determinant of market power may not be suitable to examine the market power of platforms and other such services. There may be a situation where two platforms are neck-and-neck when it comes to market shares. However, the said fact, by itself, is not enough to determine that both have equivalent market power. In order to address this, Germany has codified several other factors that are targeted at determining the market power of digital platforms and services. These are:
- Direct and indirect network effects
- Parallel use of multiple services
- Opportunities to switch and switching costs for users
- Economies of scale in the context of network effects
- Extent of access to user data
- Innovation-driven competitive pressure
Thirdly, the German amendments have realised that as the norms of market power determination change, the norms to regulate inorganic expansion of such power also needs to evolve. Accordingly, Germany has introduced a new merger filing threshold based on the value of the proposed transaction. The amendment aims to capture transactions whereby certain large, well-established companies gain control over small, but innovatively significant, companies that might have little or no revenue (such as the Facebook/Whatsapp transaction), which, without such notification requirements would escape regulatory scrutiny.
In addition to the above, the ninth amendment to the ARC also brings about changes to rules regarding antitrust damages claims (in light of the EU damages directive), increased scope for corporate liability (enabling the Federal Cartel Office to impose fines on the parent company of the undertaking found to be in contravention, as well as its legal or economic successors, if required) and exemptions for the press sector.
Key Takeaways
With a few exceptions, several laws that were conceived and conceptualised for a different time in the economy have undergone transition. Competition laws, as indispensable now as then, have continually been suitably modified to keep up with the times.
The changes in the ARC reflect Germany’s commitment to ensure that its competition authority’s efforts to monitor the digital economy are not scuttled for want of legislative back-up.
Interestingly, these amendments are not the only indication Germany has given regarding its attention to growing digitisation.
Recently, the Federal Cartel Office has also published a paper on ‘Market Power of Platforms and Networks’[2]. The Federal Cartel Office, in cooperation with the French Competition Authority, has also published a joint paper[3] on data and its implications for competition law. Significantly, the Federal Cartel Office has also initiated an investigation against Facebook regarding its provisions of data collection and usage.
It will be interesting to observe if the trend initiated by Germany is followed in other jurisdictions, in Europe and elsewhere. Additionally, the impact (if any) of these changes on stakeholders and authorities in ‘majority nations’, such as India, also remains an open question.
[1] Germany’s primary antitrust authority performing behavioral as well as merger control functions.
[2] Press Release, Bundeskartellamt publishes working paper on “Market Power of Platforms and Networks” (9 June 2016) available at https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/
Pressemitteilungen/2016/09_06_2016_ThinkTank.html(Last accessed on 28 June 2017).
[3] Press Release, The French Autorité de la concurrence and the German Bundeskartellamt publish joint paper on data and its implications for Competition Law (10 May 2016) available at http://www.bundeskartellamt.de/SharedDocs/Meldung/EN/
Pressemitteilungen/2016/10_05_2016_Big%20Data%20Papier.html
(Last accessed on 28 June 2017).
For further information, please contact:
Rahul Goel, Partner, Cyril Amarchand Mangaldas
rahul.goel@cyrilshroff.com
