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Data Aggregation and the Effectiveness of Antitrust, Merger Control and Regulatory Tools

16.01.2020
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Introduction

There are many lists of famously bad predictions about digital innovation – most of them are under-predictions. William Webb recalls some of them in his latest book entitled Our Digital Future. For example, Thomas Watson, Chairman of IBM, said in 1943: “I think there is a world market for maybe five computers”. Quite an under-prediction!

By now, we know that the digital revolution has sent the demand for computers spiralling well above just five computers worldwide… and with this digital revolution comes the promise of more competition and innovation through new digital services enabled by the internet and data. However, as Ariel Ezrachi and Maurice Stucke argue in their book entitled Virtual Competition, with this promise also come new “potential perils” to competition. One of the “potential perils” that has attracted attention by EU enforcement agencies, practitioners and academics in recent times is data aggregation.

Against this backdrop comes the recent announcement by the UK Government of the decision to introduce a new Digital Markets Unit, following one of the key recommendations of the report of the Digital Competition Expert Panel on “Unlocking digital competition” (“the Furman report”).

Furman Report

One of the co-authors of the Furman report, Professor Philip Marsden, describes it as a “quintessentially British” contribution to the global debate on whether we need adjustments to the law and/or regulation to deal with the competition challenges posed by power in digital markets. This debate is often polarized between those demanding the break-up of platforms and those saying that the existing tools are sufficient to deal with any instance of anti-competitive behaviour. The Furman report offers a third way.

The three main propositions of the Furman report may be categorised as follows:

  • The network effects of data aggregation make digital markets subject to tipping in which a winner will take most of the market, and this risks choking competition and innovation;
  • The creation of a Digital Markets Unit empowered to develop codes of conduct for digital players with strategic market status, to pursue personal data mobility and systems with open standards where these will deliver greater competition and innovation;
  • The introduction of a new test for the assessment of digital mergers, based on the “balance of harms”.

Let’s tackle each of these propositions in turn.

Data aggregation

There are many forms of data aggregation. Not all of them confer a competitive advantage. However, some may do.

In the recent report commissioned by the European Commissioner for Competition, entitled “Competition Policy for the digital era” (the “EU report”), the authors distinguish between personal and non-personal data; individual and aggregate data; public and private sector data; and between volunteered, observed and inferred data.

Datasets are non-rivalrous, meaning that opening them up to additional users does not deplete the volume of data available for the original users or owners. Unlike a physical asset, data are easily duplicated so can be accessible and useful to multiple users simultaneously. However, they are excludable by contract, technical barriers, or regulation, meaning those that gather or acquire valuable consumer data do not need, or may not be able, to share it with others.

Exclusive possession of data, combined with a lack of engagement by consumers, can lead to a lack of competitive pressure within digital markets. In turn, this could prevent the benefits from feedback loops from being fully realised or shared with consumers. The extent to which data are of central importance to the offer but inaccessible to competitors, in terms of volume, velocity or variety, may confer a form of unmatchable advantage on the incumbent business, making successful rivalry less likely.

To resolve the persistence of digital market bottlenecks, the Furman report advocates in favour of a new ex ante approach enforced by the Digital Markets Unit.

Digital Markets Unit

The Digital Markets Unit will have jurisdiction over companies designated as holding strategic market status, i.e. those in a position to exercise market power over a gateway or bottleneck in a digital market, where they control others’ market access. The concept of strategic market status is different from dominance and significant market power (“SMP”), and it is arguably closer to the concept of economic dependency that exists in other jurisdictions (such as Germany, France, and Italy, for example).

The Furman report is silent on the process for the designation of companies with strategic market status. The Digital Markets Unit will presumably need to perform a periodic market analysis and designate individual companies as holding strategic market status, similarly to the SMP regime under EU telecoms regulation.

The Digital Markets Unit will have three main functions:

  • Setting a code of conduct for companies with strategic market status: agreeing across the sector acceptable norms of competitive conduct on how firms with strategic market status should act with respect to smaller firms and consumers. This has a similar aim and motivation to antitrust enforcement. But given the challenges to antitrust enforcement in fast-moving yet highly complex markets where cases are always likely to take years to conclude and issues may be specific to a given case, the pro-market entry approach is to agree rules upfront, providing clarity to businesses in the market about the rules of the game.
  • Data mobility and open standards between services: overcoming network effects which cause markets to tip by requiring systems to talk to each other using open, standardised formats. This will mean consumers can port their data between networks, interact with users on other, similar networks, and smaller firms can plug their services into those of bigger ones. New business opportunities will open up that use, manage, and combine data made available. Consumers in turn will have new choices of digital services, with switching made much easier.
  • Secure access to non-personal and anonymised data: tackling the data barrier to entry for smaller and newer firms, while protecting privacy. The power of bulk data driving economies of scale and scope is a key reason new firms struggle to compete and bring innovative services to consumers. Overcoming this barrier will allow the digital economy to remain dynamic.

The Furman and EU reports remind us that sharing data between competitors – whether voluntary or mandated by a code of conduct – will also need to comply with Articles 101 and 102 of the Treaty on the Functioning of the European Union (“TFEU”) or their national equivalents, and other sector specific regulation (such as the General Data Protection Regulation (“GDPR”) and the EU Electronic Communications Code).

Article 102 TFEU

The refusal by a dominant company to grant a competitor access to data on reasonable, fair and non-discriminatory terms, for the purpose of data aggregation could amount to an abuse of a dominant position if the stringent criteria of the essential facilities doctrine are met. So a company with a dominant position in the provision of a facility, product or service which is indispensable to compete in a downstream market abuses its dominant position where, without objective justification, it refuses to grant access to this facility, product or service, with the effect that all effective competition in a downstream market is eliminated. The test has been extended to refusals to license intellectual property rights. In those cases, the CJEU has established, as an additional ingredient, that the access seeker is in need of a license in order to offer a “new product”.

However, in the Microsoft case, the General Court (upheld by the CJEU) clarified that the prevention of a “new product” is but one case in which a refusal to license can be found to limit production, markets or technical development to the prejudice of consumers. “Exceptional circumstances” that justify the imposition of a duty to license may likewise exist where a refusal to deal would eliminate competition for innovation or quality to the detriment of consumers.

Moreover, in the Slovak Telecom case, the General Court found that granting access to a product or service, which is required under sector specific regulation (e.g. regulated local loop access), on unfair, unreasonably complicated or delayed terms amounts to constructive refusal to supply, without the need to demonstrate that the regulated access product or service is an indispensable input.

The Furman report highlights the shortcomings of the application of the essential facilities doctrine in digital markets. It remains to be seen whether an obligation on a company with strategic market status to grant its competitors with access to certain data could in turn make the application of the essential facilities doctrine easier, by waiving the need to demonstrate that the data is an indispensable input (by analogy with the Slovak Telecom case). This could be so, for example, where the same company holds a dominant position and it grants access to the data required by the code of conduct, but only on unfair, unreasonably complicated or delayed terms.

Interplay with sector specific regulation

The Furman report recommends to pursue data sharing/portability and interoperability to resolve competition concerns related to data aggregation. Similar tools are also available under the GDPR and the EU Electronic Communications Code:

  • Under the GDPR, Article 20 requires that personal data must be provided in a structured, commonly used and machine-readable format. However, there is no explicit requirement for parties to develop technical standards to facilitate the transmission of personal data across suppliers and on a continuous basis.
  • Under the Code, Article 61(2)(c) allows the extension of interoperability requirements to providers of data-rich services, such as “number-independent interpersonal communications services” (or more commonly known as OTTs), where they reach a significant level of coverage and user uptake.

The Furman report acknowledges the potential overlap between these regulatory tools and the code of conduct, and it recommends that these tools should be used in a complementary way, having a pro-competitive objective in mind.

Merger control

There are two main ways in which data may come into play in the competition law assessment of mergers in the digital economy; that is to say, either as a competitive advantage of the merged entity, or in the context of privacy, as a non-price parameter of competition in the market.

For example, in the recent Apple/Shazam case, the European Commission concluded that the integration of Shazam’s and Apple’s datasets on user data would not confer a unique advantage to the merged entity in the markets on which it operates. Any concerns in that respect were dismissed because Shazam’s data is not unique and Apple’s competitors would still have the opportunity to access and use similar databases.

In the Microsoft/LinkedIn case, the Commission analysed potential data concentration as a result of the merger with regard to its potential impact on competition in the Single Market. Privacy related concerns as such do not fall within the scope of EU competition law but can be taken into account in the competition assessment to the extent that consumers see it as a significant factor of quality, and the merging parties compete with each other on this factor. In this instance, the Commission concluded that data privacy was an important parameter of competition between professional social networks on the market, which could have been negatively affected by the transaction. To resolve these concerns, the merger was cleared subject to a commitment to an interoperability requirement.

The Furman report notes that, at present, merger assessment only considers how likely a merger is to reduce competition. If a substantial lessening of competition is more likely than not to result, a merger may be blocked. Although in many situations this is a reasonable approach, it does not adequately allow the scale of any harm (or benefits) to be accounted for alongside their likelihood as they would be in economically sound cost-benefit analysis. For digital mergers, this can be a crucial gap, according to the report. For example, take a large platform seeking to acquire a smaller tech company based on an attractive innovation that gives it a real chance of competing for consumers (so-called “killer acquisitions”). Therefore, the report recommends that assessment should be able to test whether a merger is expected to be on balance beneficial or harmful, taking into account the scale of impacts as well as their likelihood. This change would move these merger decisions to a more economically rational basis, and allow big impacts with a credible and plausible prospect of occurring – critical in digital markets – to be taken properly into account.

Final remarks on international cooperation

The Furman report offers a fresh and unique perspective on competition in digital markets. Nonetheless, there are some significant commonalities with other reports, such as the EU report, including a preference for over- rather than under-enforcement and corresponding proposals to shift the burden onto companies to justify their conduct or transactions, and shared concerns around access to data and acquisitions of emerging digital players that could eliminate future competition. Meanwhile, outside Europe, the Australian Competition and Consumer Commission has been conducting an inquiry into digital platforms and published its final report in July last year.

The cross-border nature of many digital platforms and the global scope of modern technology means the competition challenges facing the UK are not unique: competition authorities and governments around the world are grappling with similar questions of how to ensure that consumers continue to benefit from new opportunities in digital markets whilst at the same time promoting innovation and protecting consumers’ rights.

As the OECD has noted, “governments may need to enhance co-operation across national competition agencies to address competition issues that are increasingly transnational in scope or involve global firms.” (OECD, Going Digital in a Multilateral World: An Interim Report to Ministers, 2018). National regulatory authorities for telecommunications have established fora for this type of coordination, such as the International Institute of Communications. Similarly, national competition law authorities have formal cooperation frameworks, such as the International Competition Network. It remains to be seen what international cooperation mechanisms will be available to a newly established Digital Markets Unit.

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Francesco Liberatore writes, the Financial Times recently reported that the UK Government will create a new regulator, the Digital Markets Unit, to police companies such as Facebook and Google after Brexit. The regulator will be given powers to implement a range of new rules, including an enforceable code of conduct for the biggest groups and greater data accessibility for consumers.

Theme:
Innovation and Content
Region:
Europe
Chapter:
Europe
Francesco Liberatore Francesco Liberatore Partner, Squire Patton Boggs (UK) LLP; Chair, IIC Brussels Chapter
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