German Competition law and digital markets

Written on 6 Jun 2016

As the European Commission seeks to set the legal framework for digital markets, Germany too is considering the challenges of applying competition law in an online world.  This has been a key aspect as Germany amends its competition law regime in 2016.  While practitioners mainly await the implementation of the EU Damages Directive into German national law (http://www.osborneclarke.com/connected-insights/blog/cartel-damages-germany/), this second focus of the proposed amendments is receiving less attention than it should.

Currently discussions are that the upcoming changes to Germany’s Act against Restrictions of Competition (ARC) shall also address challenges that digital markets imply when it comes to their assessment under competition law. When discussing digital markets, it comes as no surprise that online platforms play an important role. A wide variety of business models can be described as online platforms, ranging from search engines such as Google, to shopping platforms like Amazon and social networks such as Facebook. The question of whether the established toolkit of competition law is capable of providing an appropriate framework for the digital economy, or whether new instruments are desirable, is a source of intense debate.

The draft proposal is expected in June 2016 and it is expected that the suggested amendments will focus on the traditional instruments, rather than involving radical changes. They will provide for several clarifications and cautiously balanced adjustments to the current regime, acknowledging that digital markets cannot always be adequately assessed based on traditional parameters.

Merger control

Recent transactions concerning digital markets have fallen outside the scope of merger control in Germany. The most prominent example is the acquisition of WhatsApp by Facebook. Merger filing is mandatory in Germany if certain turnover thresholds are met, i.e. joint worldwide turnover exceeds EUR 500 million, and domestic turnover of the two undertakings concerned exceeds EUR 25 million and EUR 5 million, respectively. The transaction was not subject to German merger control as the parties did not meet these thresholds (although it was finally reviewed and approved by the European Commission after referral).

In digital markets, traditional parameters such as sales figures or turnover information do not always adequately reflect the economic relevance of a transaction. Whilst purchasers would instead look at the number of registered users, advertising opportunities, or the user data they would get access to after the acquisition, the German Federal Cartel Office (Bundeskartellamt) is prevented from a pre-merger assessment of a transaction’s impact on market structure by turnover figures of the companies which are too low (although it is fair to say that Germany’s turnover thresholds are already relatively low).

The proposed amendments include an additional threshold that would trigger filing obligations based on the purchase price paid by the buyer. This will align the Bundeskartellamt’s competence to review transactions based on the structural changes to the competitive landscape it is likely to have, which is reflected more correctly by the purchase price than by accumulation of the parties’ turnover. While the new threshold will close a gap in review competence, a threshold of EUR 500 million will ensure that only important transactions are caught.

Dominance

Business models in digital markets also raise questions of what constitutes market power in these markets, and how to assess dominance. This assessment requires the definition of what constitutes the relevant market, and whether the traditional approach to market definition is capable of adequately reflecting the balances of power among digital market players.

Markets are currently defined as places where supply and demand converge at a price. Many platform providers realise their profit through advertisements and the collection and analysis of data. The services that are relevant for customers (or users) are often provided free of charge – at least at first sight. Data becomes more and more important in various contexts, and in particular with tech, media and comms models. Customers in fact pay for services of online platforms, but in a currency whose value is not always present to users.

In order to reflect this replacement of money by data, the draft proposal is expected to extend the traditional competition law definition of what constitutes a market. Whilst this includes that goods or services are traded for money, the proposal will clarify that a market can also exist where services are provided on a free-of-charge basis, including business models in which services are provided in exchange for customer data. As a consequence, the Bundeskartellamt would be able to establish market dominance and apply the provisions on abusive behaviour to situations where the company or platform does not receive payment for its services.

Another aspect in the assessment of market dominance is concentration and network effects of two-sided markets such as platforms. Those offers that have reached a certain number of users are often self-propelling. Successful offers attract more and more users, simply because of their sheer number of customers. Popular platforms might potentially misuse their power or erect barriers to market entry for new players, for example by exclusivity agreements. The possibility of multi-homing is therefore essential, allowing the user to register at different platforms that provide competing offers. This aspect, however, is left to a case-by-case assessment by the Bundeskartellamt and will not be dealt with in the proposal.

In addition, providers might try to use their strong position in one market (e.g. search engines) to extend their strong position to other markets, which is one of the issues in the on-going investigation by the European Commission into the business practices of Google. Despite this concern and the fact that potentially abusive behaviour in digital markets does not always fit the traditional boxes, the draft proposal is unlikely to restrict the possibility of undertakings favouring their own offers over those of their competitors. That means that even though a platform might hold a very strong position in one market, it might as well continue to present its own offers more privileged than third-party offers that are also available through the platform. This applies at least where such favoured presentation does not imply a transfer of market power from one market to another.

Outlook

A first draft of the amendments to the ARC is expected in June 2016.  The changes will not provide for a completely new toolbox, as the German Bundeskartellamt has already dealt with several cases involving digital markets on the basis of the current regime. These ranged from antitrust proceedings against Amazon and Booking.com to merger cases such as the acquisition of dating platform Elitepartner.

Digital markets are dynamic and fast-moving. A “first-mover” might have an advantage over its competitors and hold high market shares for a certain period. New offers, however, can replace previously famous networks very quickly, as can be seen in the examples of Myspace and Facebook, or Yahoo and Google. As a consequence, high market shares alone might not be sufficient to indicate market dominance.

The amended ARC will clarify certain aspects of how to assess market dominance. The extension of the market definition to those cases where users do not pay money for services implies more legal security in cases where the Bundeskartellamt uses its toolkit of abuse-control to domesticate tech, media and comms businesses for the benefit of competition and consumers.

Where market dominance can be established, subsequent questions as to the scope of abusive behaviour can arise. The on-going investigation into Facebook’s terms and conditions is of particular relevance. The Bundeskartellamt examines whether consumers are sufficiently informed about the scope of data collection, thereby interconnecting data protection and competition law. The outcome of these proceedings will create further legal certainty as to the competitive assessment in digital markets; other competition authorities across Europe will no doubt be watching closely.