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Competition for the digital age

Author: Anna Mitchell, Counsel, Linklaters LLP

Based on a speech given at the W@ Spotlight Sessions event in London, July 2019. The views expressed are strictly personal

The digital sector is top of mind for competition authorities globally and the CMA in particular sees itself as playing a critical role in regulating digital companies. Recent developments in the sector include the publication of the Furman report in March, the EU Commission’s report into competition for the digital era in April, the Lear report evaluating merger decisions in the tech space in May, and the publication by the CMA of its Digital Strategy and announcement that it will conduct a market study into digital advertising in July.

Based on these developments, it is fair to say that digital markets are well and truly under the spotlight and they will likely face intense scrutiny, both in the near future and going forward in the longer term.

The Furman report

The various reports in the sector have proposed some radical reforms, particularly the Furman report which concludes that, whilst the digital sector has created substantial benefits, this has come at the cost of increasing the dominance of a few companies, which is limiting competition, consumer choice and innovation. It therefore makes a series of recommendations, the two most significant (and arguably controversial) of which are:

  • the establishment of a digital markets unit tasked with securing competition, innovation and beneficial outcomes for consumers and businesses, which would include developing a code of conduct for powerful companies; and

  • introducing a new ‘balance of harms’ test for mergers.

Code of conduct

In relation to the digital markets unit, one of its functions would be to develop a code of conduct to be applied to “particularly powerful companies” that have “strategic market status”. This introduces developed, ex-ante regulation alongside competition policy and has some serious risks, notably the following:

  • codes of conduct can have a chilling effect – they often limit the scope of what can be done, sometimes to an unnecessarily strict degree, as they can be difficult to interpret (with the default position being to err on the side of caution). They create an impression that any conduct not included within the code is not permitted and the result is likely to be a detrimental effect on the digital sector (known for its innovation and dynamism), leading to a stifling of the fast-paced and novel nature of the industry;

  • a strict ex-ante regulatory regime is incompatible with the dynamic essence of the technology sector;

  • the intention is to involve companies in the framing of the code but it is not clear how this will work in practice. For example, will it be a case of the company with the loudest voice and/or deepest pockets to lobby will have its views heard whilst others will not?; and

  • the concept of “strategic market status” is opaque. This is likely purposefully so in order to avoid protracted debates around market definition and dominance but the vague concept of what constitutes strategic market status is likely in itself to cause debate.

Balance of harms test for mergers

The balance of harms test proposed in the Furman report for mergers is equally, or perhaps even more, controversial than the code of conduct.

According to the Furman report, merger control assessment in digital markets “needs a reset” since, during the last ten years, the five largest digital companies have made over 400 acquisitions, none of which have been blocked and many of which have avoided merger scrutiny altogether. The report infers that some of these are “killer acquisitions”, i.e. large companies acquiring smaller, disruptive targets solely to ensure the target’s innovation is discontinued and to eliminate potential future competition. The report therefore advocates for a new ‘balance of harms’ test taking into account the “scale” as well as the “likelihood of harm” in cases involving potential harm to innovation.

However, there are a number of issues with this proposal, including the following:

  • antitrust assessment is often not sufficiently precise to make a balance of harms test operational, and it is not possible to speculate on what the counterfactual may look like, or what the substantive harm will be;

  • the balance of harms test seemingly gives authorities a free pass to speculate on what might happen, based on highly speculative and largely unsubstantiated theories of harm; and

  • the test would decrease legal certainty and business confidence in the merger process.

The CMA agrees that the balance of harms test is potentially problematic and that it has a number of practical challenges. In its response to the Furman report dated 21 March 2019, the CMA noted that the balance of harms test may not be able to be applied in a robust and transparent way, and that there is a risk that it will lead to unintended consequences. The CMA also noted that fundamental changes to the existing merger regime are not needed. This was echoed in the CMA’s Digital Strategy that was published on 3 July 2019.

Other notable points in the Furman report

In addition to the above two key recommendations, the Furman report recommends that a market study into digital advertising is undertaken. This was announced by the CMA at the same time it launched its Digital Strategy in July.

The report also recommends proposed changes to the appeal standards which are strikingly similar to the proposals recommended by Lord Tyrie in his proposals forreform of the competition and consumer protection regimes of the CMA, sent to Greg Clark (then Secretary of State for Business, Energy and Industrial Strategy) in February 2019.

More broadly (and also similarly to the Lord Tyrie proposals), the report emphasises that there should be a general focus on consumer welfare and protection of consumer interests. It is concerning that there currently seems to be a focus on detaching consumer harm from competition harm, making it a general policy to intervene whenever there is consumer harm, even if there is no harm to competition.

It remains to be seen which of the Furman recommendations will be taken on board but given the CMA’s comments in relation to the balance of harms test, this may be one of the recommendations that is not adopted by the Government. However, if implemented, the other proposed measures would lead to expansive changes which introduce full-scale regulation alongside competition policy and widen the scope of the regulators’ powers while simultaneously reducing accountability.

The CMA’s Digital Strategy

The CMA released its Digital Strategy and announced the launch of its market investigation into online platforms and digital advertising in July.

There are five strategic aims to the CMA’s strategy, these being: (i) to use existing tools effectively; (ii) to build knowledge and capability; (iii) to adapt tools to the digital economy; (iv) to consider cases and options for regulation; and (v) to consider potential remedies.

Whilst, as noted above, the strategy re-iterates that the existing legal framework for mergers is fit for purpose, it does flag concerns around under-enforcement in the digital space and around killer acquisitions.

The market study launched alongside the CMA’s Digital Strategy will focus on whether consumers are willing and able to control their data, and whether competition in digital advertising is distorted by market power. The CMA views this study as being core to its strategy and it expects it to play a major part in informing policy and addressing some of the issues raised in the Furman report.

EU Commission report into the digital landscape

The digital expert report that was commissioned by the EU Commission was published on 4 April 2019. This report also contributes an important voice to the ongoing debate about whether the competition law tool box available to enforcers is adequate to deal with digital business models.

It recommends more aggressive enforcement against tech giants, with dominant firms bearing the burden of proof for consumer welfare gains, and more flexibility in relation to market definition with the ability to define narrower markets.

It also notes that regulation may be prudent in some cases, for example in relation to dominant firms providing data access, and it promotes greater scrutiny of dominant firms and their acquisitions of start-ups. However, unlike the Furman report, it does not go as far as proposing amendments to the merger control test.

Practical implications for businesses

The various reports and heightened interest in the digital economy give rise to potential heavy-handed ex-ante regulation (for example, via the code of conduct recommended by the Furman report and the fact that the report also recommends that companies with strategic market status notify the CMA of intended acquisitions), and to the potential for increased legal uncertainty.

They also undoubtedly signify increased scrutiny for digital and tech companies, and companies in the sector should be prepared for more in-depth focus on their actions, including, for example, more focus on transaction values in the case of merger reviews as the focus on killer acquisitions intensifies and more intervention by way of market studies and ex-ante regulation.

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