In the week before Christmas, Amazon is reportedly using a closed-door hearing as an opportunity to turn coal into clementine by convincing the European Commission (EC) and national regulators that its acquisition of iRobot, the robot vacuum cleaner maker, fails to raise competition concerns. Just over three weeks ago, entering the final weekend of November, the $1.4 billion deal appeared to be charting a steady course. On rumours that the EC was set to follow the UK Competition and Markets Authority (CMA) in clearing the deal, shares in iRobot skyrocketed. The news on Monday 27th November that the EC had, instead, sent a Statement of Objections (SO) to Amazon tugged firmly on at least one corner of the proverbial rug and sent shares in the acquiree tumbling by more than 17%. Emblematic of the present state of flux in merger analysis, this is a deal that should challenge the EC to consider its competition law and new digital market regulation in the round.
For nearly a decade, iRobot has deployed Amazon Web Services as the foundational layer underpinning its ‘smart home’ product and cited the cloud service as a key factor in enabling it to scale. Specifically, by reducing technical and financial barriers to expansion, investment in Amazon’s advanced infrastructure has allowed the firm to focus on the development of new product innovations, while significantly increasing the speed of product testing to deliver an improved customer experience. Indeed, this is a relationship that exemplifies how the tech giant’s decision to license-out its propriety IT infrastructure has increased the size of the economic pie: a firm such as iRobot simply could not have developed comparable internal capabilities within a realistic time frame. Despite instances in which that well-worn phrase “standing on the shoulder of giants” may act as a veil for inter alia inequality of bargaining power and market dominance, it may be entirely appropriate in this instance.
While iRobot has been honing its niche product offering, Amazon has been building-up strategic positions across the nascent ‘smart home’ sector and placed Alexa squarely at the heart of a broader variety of – predominantly third-party – devices. Given iRobot’s strong market position and brand value and Amazon’s unparalleled capacity to increase ongoing technical efficiency, scale and diffusion, it appears likely that customers would reap some additional benefits from the consecration of this corporate marriage. These benefits stand to extend far beyond the narrow robot vacuum cleaner market, given that Amazon currently offers a diverse portfolio of products from the well-known Echo and Halo Rise to a flying Ring camera and Astro robot. Whether the ‘smart home’ embodies welfare enhancing sci-fi come true or, as cynics prefer to portray it, a voyage into the dystopian is ultimately a question that consumers must collectively answer. Setting aside the lively discussion over how data protection and privacy law should be optimised to protect those consumers who actively invite myriad connected devices equipped with cameras, microphones and other sensors into their homes, two primary competition law questions arise.
The first question is whether Amazon would have the ability to foreclose rivals to iRobot. In its SO, the EC has stated that Amazon may have such ability since its online marketplace represents a “particularly important channel” for the sales of robot vacuum cleaners in France, Germany, Italy and Spain and that customers in those member states “particularly rely on Amazon both in terms of product discovery as well as for their final purchasing decision.” Foreclosure, it is claimed, could manifest in the delisting or reduction in availability of rival robot vacuum cleaners, with the latter possible in both organic and paid results. Moreover, Amazon could limit access to product recommendation “widgets” or “commercially-attractive product labels” such as “Works with Alexa”. Finally, the EC finds that Amazon may have the ability to directly or indirectly raise rivals’ cost to advertise and sell on its marketplace. Notably, this part of the story accords with the conclusion of the CMA over the summer, which found that Amazon has the ability to “use its position as a major retailer to disadvantage rival robot vacuum cleaner manufacturers”.
Of course, ability is nothing without incentive, and the second question is whether Amazon would find such foreclosure economically profitable. According to the CMA, the benefits of a foreclosure strategy to Amazon would be limited, taking into consideration both the small size and low expected growth of the UK robot vacuum cleaner market. The keynote is that any such strategy would necessarily involve significant losses for the acquiring firm, not least in the shape of lost sales commission and diminished advertising revenues. Moreover, the CMA found that the market for robot vacuum cleaners holds “limited strategic importance” and concluded that the acquisition would not disadvantage ‘smart home’ platforms that rival Amazon since robot vacuum cleaners – and the data gathered thereby – are “generally not considered to be an important input to the emerging ‘smart home’ market in the UK.” For sake of completeness, the CMA noted that rival ‘smart home’ offerings could benefit from integrating iRobot rivals with “similar capabilities”, of which several already exist. On this point, significant divergence between the authorities emerges: apparently, the story across the channel in continental Europe is rather different.
According to the EC’s SO, losses from fewer sales of rival and related products on Amazon’s marketplace would be outweighed by the potential gains from additional iRobot sales. Such gains would not be limited to the financial value of transactions and include data-driven benefits given the additional data gathered by Amazon from iRobot users. The tentative theory of harm articulated by the EU has strong echoes of Google Shopping and pivots about the fulcrum of ‘self-preferencing’. While the hotly anticipated judgment of the CJEU in Google Shopping is set to draw the final curtain on a saga whose origins are nearly 15 years old, the case has led not only to the evolution of ‘self-preferencing’ into a stand-alone abuse under Article 102 TFEU but crucially spawned Article 6 (5) of Europe’s recently enacted Digital Markets Act (DMA). This ex ante obligation prohibits ‘gatekeeper’ firms from treating their own products and services more favourably in ranking than similar third-party products and services and mandates those ‘gatekeepers’ to apply transparency, fair and non-discriminatory conditions to such ranking. The SO also clearly echoes recent investigations of both the EC and the CMA into Amazon’s marketplace practices, which added to ‘self-preferencing’ the concern that Amazon had been harnessing non-public seller data derived from its marketplace to calibrate its own retail offering to the detriment of other marketplace sellers. The saliency of such concerns can be seen in the construction of Article 6 (2) of the DMA, which prohibits ‘gatekeepers’ from engaging in precisely this form of anticompetitive data-driven conduct.
Significantly, both the EC and the CMA’s investigations have concluded with the acceptance of similar sets of commitments tabled by Amazon. Indeed, in stark contrast to Google, it would appear that iRobot’s acquirer is prepared for compliance with the DMA and, presumably, any similar ex ante rules that emerge from the UK Digital Markets, Competition and Consumers Bill. Moreover, the DMA obliges ‘gatekeepers’ under Article 6 (10) to provide business users with free of charge, real-time access to and use of data, including end user data, that is provided for or generated through the use of its platform. Sculpted, seemingly, in response to concerns raised by Spotify in relation to Apple’s App Store practices, this ex ante obligation would be applicable to an apparently compliance-ready Amazon.
Against this backdrop, a final and crucial question arises: how can the EC credibly challenge Amazon’s acquisition of iRobot on the basis of concerns that Amazon may have the ability and incentive to engage in certain potentially harmful conduct that is already, to a not insignificant extent, prohibited ex ante under its flagship DMA? While in some quarters there is an increasing sense in which allowing Amazon to continue to attain strategic market positions through acquisitions such as iRobot is tantamount to the resignation of competition in digital markets to a ‘death by a thousand cuts’, a clear theory of harm may be some way off. The emergence of ecosystem theory, which seeks to sift the focus away from narrowly defined markets and towards the broader network of complementary products and services offered by a firm, could provide some answers. Ultimately, if the EC is to transform its SO into a meaningful obstacle to Amazon/iRobot, it will need to undertake substantial additional legwork and overcome its apparent ‘echo’ problem by clearly reasoning why competition law and new digital market regulation are insufficient to prohibit or deter any potentially anticompetitive conduct.
At the end of those long, tiring days of entertaining and feasting – and for many a little light family mediation – it seems entirely reasonable to allow the consumer to choose between picking up the dustpan and brush and uttering the command: ‘Alexa, vacuum those pesky Christmas tree needles!’ Now just imagine the potential post-merger benefits.
Ben Evans is a Postgraduate Researcher at the School of Law and Centre for Competition Policy, University of East Anglia.
