There have been a number of high profile cases relating to the IT industry under Article 102 Treaty of the Functioning of the European Union and national equivalents, of which Google is the latest. This provides the focus for our article. Article 102 broadly prohibits a ‘dominant’ business in a market from ‘abusing’ that dominance in the market or (particularly relevant to IT) a related market.
The case against Google: room for two views?
John Fingleton is Chief Executive of the Office of Fair Trading. On 24 November 2009 he gave evidence in a session of the Culture, Media and Sport Committee of the House of Commons. In the course of that session, Dr Fingleton was asked about complaints received in relation to the dominant position of Google. His response was:
‘Where a company achieves that position through superior innovation, foresight or better targeting of its customers we would be very wary about intervening…while lots of people have come and talked to us about harm to competitors, nobody has articulated to us harm to the customer around this or related companies in this market.. We are certainly alive to the issue, interested in it, we talk to stakeholders about it on a regular basis but nobody has brought us a good, convincing case around these types of issues and we see a lot of customer benefit and benefit to the economy from what is happening in this marketplace and from a very high pace of innovation that is good for the British economy at a general level. We would not want to send a negative signal about that.’
Dr Fingleton’s response suggested that, from an OFT perspective, Google might be dominant, but that an investigation of Google was neither imminent nor likely.
One year later the European Commission has announced what appears to be a relatively widespread investigation into Google’s online search practices. As with many press releases from regulators there is a Delphic quality to it, but the substance of the investigation appears to be similar to the issues raised in the United States District Court for Southern New York in TradeComet.com v Google Inc. (see for example the Complaint dated 17 February 2009). The investigation of the EC appears to centre on whether Google abused its dominant position by:
- lowering Google search rankings of competitors to Google vertical search services (e.g. price comparison sites)
- lowering the quality score of sponsored links that are sponsored by competitors (and thereby potentially increasing the price paid by them)
- imposing exclusivity obligations on ‘advertising partners’ so that they do not use engines that compete with Google Site Search
- restricting advertisers’ ability to use data generated by searches on Google in order to prevent management and analysis of search campaigns by advertisers.
One of the many interesting features of the investigation into Google is that it emphasises the divergent views that may be taken by regulators in relation to competition law interventions in the IT sector. The OFT did not consider it was appropriate to pursue any case against Google. This is understandable given that Google operates with substantially the same business model throughout Europe and even worldwide, which make it a more likely candidate for the European Commission as a pan-European investigator. However Dr Fingleton’s comments to the select committee, and particular concerns about sending ‘negative signals’, appear to suggest wider concerns about the effect any intervention could have in chilling innovation in this sector.
Inconsistency, innovation and the appropriateness of competition law intervention
As with Google, apparent inconsistencies may be seen between the treatment of Rambus by the European Commission, where commitments were accepted in relation to alleged abuses of dominance, and in the United States, where antitrust actions by the Federal Trade Commission were dismissed.
In relation to network broadband cases (which admittedly differ from Google and Rambus in that they involved different facts as between the jurisdictions), one might contrast the infringement decisions in Deutsche Telekom and Telefonica, with the non-infringement decision of Ofcom in relation to BT. Particularly relevant is Ofcom’s citing of the ‘fast moving and dynamic’ nature of the market as a reason not to intervene.
The potential for negative effects as a result of competition law intervention has historically been a key concern of regulators (see for example the OFT’s Economic discussion paper from September 2006, prepared by economic consultants Lear, entitled ‘The cost of inappropriate interventions/non-interventions under Article 82’).
Put simply, there are two principal arguments that competition law enforcement may not be appropriate in sectors characterised by technological innovation:
- market power in such sectors may be fleeting as new technologies bring new players to the market
- innovation requires additional investment and such investment may only be funded or recouped through monopoly rents.
However, the investigation of Google, together with European interventions in the IT sector since the European Commission’s Microsoft decision in 2004, suggest that, far from being a rarity, competition law and arguments of abuse of a dominant position have been employed on numerous occasions. Indeed, IT cases have proved to be some of the most high profile investigations under Article 102 and have resulted on numerous occasions in record fines.
There are a number of reasons why competition enforcement under Article 102 may have been such a prevalent feature in the IT industry:
- Innovation can create large market shares and illusory or real market power in a relatively short period of time as compared to non-innovative markets, and therefore create obvious targets for antitrust investigation (Microsoft and Google’s meteoric rises being good examples).
- As a cutting edge sector deemed to be at the forefront of business developments, the IT industry is likely to be an administrative priority for regulators.
- A dearth of competitors in new technology markets may make new entrants more obvious targets for anti-competitive actions by the incumbent (see by way of example the European Commission case against Intel).
- The products and practices involved are novel and may be difficult to understand. This may lead to a tendency for regulators to intervene where a retrospective analysis would show that intervention was not justified.
- The international nature of IT markets, as well as the rise of competition law internationally, increases the chance of simultaneous action in multiple jurisdictions, potentially leading to divergent results, or making the outcome in one investigation dependent on the results in others.
- As the case summaries show, competitor complaints to regulators in the IT sector are widespread. A culture of complaining in an industry will undoubtedly lead to a greater level of enforcement action (and will in turn result in more complaints).
Future developments
So what can be expected in the future?
We expect competition law challenges and enforcement activities in the IT sector to continue, and (subject to budgetary constraints) for such actions to continue to proliferate.
It appears Google will continue to be subject to investigation, both on this and the other side of the Atlantic. Nonetheless the tone of Google’s response to the European Commission’s announcement: ‘we respect [the European Commission’s] process and will continue to work closely with the Commission to answer their questions’ suggests that, at least initially, Google will adopt a more conciliatory stance than that adopted by certain IT businesses in the past.
It is too early for any conclusive analysis of the outcome of the case, but one might make the following speculative observations:
- The Google market share of the online search advertising market in the United States has been cited at 70% and one might not expect market shares to diverge greatly from that internationally. Market shares of 70% are above those at which dominance is usually presumed.
- Intuitively however, barriers to entry in any search advertising market are likely to be lower than in previous markets investigated in related sectors. Unlike in the case of operating systems (Microsoft/IBM) or chips (Intel), it is not obvious that there are interoperability issues, scale efficiencies, network effects or other related factors that would appear to prevent competitors from providing a viable competing service to Google even from a fairly modest customer base.
- Manipulating search results in order to extract from customer-competitors greater advertising revenues appears to have the potential characteristics of exploitative abusive conduct (although it is not entirely clear that this is what is being alleged).
- However there is clearly a limit on the extent to which even dominant companies (with the special responsibilities such dominance entails) are under a duty to advertise and/or prioritise the advertisement of competing services.
- Without evidence of a transparent and explicit policy of distorting results, we consider that the issues investigated by the European Commission may be difficult to prove (for example given the complicated and secret nature of the Google algorithm).
Noting the increased tendency for IT investigations to settle, the increased reliance on settlement procedures at EU level, and the conciliatory nature of Google’s response to the announcement, one might speculate that this investigation will not proceed to an infringement decision.
Tips for practitioners
The issues identified above provide a unique set of opportunities and challenges for practitioners in the IT sector when considering competition law.
Advisors of innovating companies have to pay close attention to the impact of innovation on market dynamics. Considerations will change as start ups become established players and as market power increases competition law risks. Particular risks would appear to arise if using perceived market strength in one market to promote products in another.
There is undoubtedly an appetite for regulators to take on cases in this sector so a heightened awareness of competition law risks is required.
As a practitioner you need an appreciation of developments globally. An approach that focuses solely on developments in your principal jurisdiction risks missing highly significant developments in other jurisdictions.
Customers and competitors of market leading companies should be aware of the opportunities that competition law presents to address competitive or commercial disadvantages.
Gustaf Duhs is Head of Competition at Stevens & Bolton LLP specialising in EU, competition and commercial law: Gustaf.Duhs@stevens-bolton.com. Jowanna Conboye is a trainee at Stevens & Bolton LLP.
ABUSE OF DOMINANCE CASES IN EUROPE FROM MICROSOFT ONWARDS
Operating systems
Microsoft – decision dated 24 May 2004
Following a complaint by Sun Microsystems, the European Commission decided that Microsoft’s Windows operating system (OS) was dominant in the market for PC OS. It held that Microsoft had abused its dominance in two ways:
- by refusing to supply interoperability information in relation to Windows OS – this was found to have the effect of preventing competitors from developing and distributing non-Microsoft work group server products for use with the Windows OS
- by tying Windows Media Player (WMP) to the Windows OS – this tying was seen as giving Microsoft ‘unmatched ubiquity’ for its media player on PCs worldwide.
The Commission ordered Microsoft to supply interoperability information to competitors and to offer a fully functioning version of Windows without WMP. In deciding on the interoperability remedy, the Commission noted that an order to supply the relevant information could not lead to the cloning of Microsoft’s product and that the disclosure of information of the kind refused by Microsoft was commonplace in the industry.
Microsoft was fined €497million, the highest ever fine imposed on an individual company for breach of EC competition rules, but less than 2% of Microsoft’s revenue in 2004. The Commission’s ruling was upheld on appeal to the CFI.
In February 2008 the European Commission imposed a penalty payment of €899 million on Microsoft for failing to supply the relevant interoperability information to competitors on reasonable terms, having decided that Microsoft charged unreasonably high prices for access to the information.
Microsoft – decision dated 16 December 2009
Again the European Commission considered that Microsoft Windows held a dominant position in the market for OS. Again the investigation centred on tying, this time of Internet Explorer (IE), to its Windows OS.
The Commission found that, through Windows OS, IE enjoyed a distribution advantage that other web browsers were unable to match and that Windows contained barriers to downloading rival web browsers from the Internet. This tying also created incentives for web developers and software designers to optimise their products primarily for IE which would not necessarily benefit the consumer.
Microsoft proposed commitments to enable IE to be turned on and off, to ensure that manufacturers would be free to pre-install any web browser on PCs they ship with no subsequent action by Microsoft, and to use an update to Windows to give users a choice of default browser. The Commission accepted these commitments and made them binding on Microsoft for five years from the decision.
IBM – decision to investigate dated 26 July 2010
The European Commission is investigating IBM’s alleged dominant position in the market for mainframe computers OS, which are powerful computers used by large businesses and governments to store and process critical business information.
The Commission announced that it has initiated a formal investigation against IBM in two cases of suspected abuse:
- following complaints from emulator software vendors T3 and Turbo Hercules, it is looking at IBM’s alleged tying of mainframe hardware to its mainframe OS, and
- it has launched an investigation on its own initiative into IBM’s alleged discriminatory behaviour towards competing suppliers of mainframe maintenance services, in particular by restricting or delaying access to spare parts for which IBM is the only source.
Exclusionary payments
Intel – decision dated 13 May 2009
The European Commission decided that Intel held a dominant position in the market for x86 central processing units (CPUs) on the basis of both their high market share and the barriers to entry and expansion in the market.
On a complaint from rival manufacturer AMD, the European Commission decided that Intel had infringed competition law in two ways:
- they had given loyalty payments to major computer manufacturers and retailers, including Dell, HP, NEC, Lenovo and Media Saturn Holding, on the condition that they bought all, or almost all, of their x86 CPUs from Intel
- they had made direct payments to manufacturers, including HP, Acer and Lenovo, unrelated to any particular purchases, and made on the condition that the manufacturers postponed or cancelled the launch of specific AMD-based products.
A fine of €1.06 billion, representing the highest fine ever imposed by the Commission, was imposed on Intel. This fine represented 4.15% of Intel’s total turnover in 2008. Intel has appealed the decision.
Excessive pricing
Qualcomm – decision to close investigation dated 24 November 2009
The European Commission investigated whether the royalties that Qualcomm, a chipset manufacturer, had been charging since its patented technology became part of Europe’s 3G mobile network standard were excessive, after receiving complaints from European, US and Japanese mobile telephone and chipset manufacturers. Before a formal conclusion was reached, all complaints were withdrawn and so the Commission decided to close its investigation.
Rambus – decision dated 9 December 2009
Rambus were suspected of charging unreasonable royalties for use of certain patents for technologies needed to produce Dynamic Random Access Memory chips (DRAMs). The Joint Electron Device Engineering Council (JEDEC) has set industry-wide standards for DRAMs. Only after the standard had been set did Rambus disclose that it had patents that related to the technology needed to comply with the JEDEC standards. The European Commission decided that Rambus had intentionally deceived manufacturers and engaged in a ‘patent ambush’. Without this ‘patent ambush’, Rambus would not have been able to charge such high royalty rates.
Rambus offered the following commitments, which were accepted by the Commission and made binding on Rambus for five years:
- to grant a worldwide licence for future DRAM products for all its patents for the length of the commitment
- not to charge for the DRAM licence where they relate to standards adopted by JEDEC during the time in which Rambus was a member and engaged in its alleged deceptive conduct
- to charge a maximum royalty rate of 1.5% for later generations of standards adopted by JEDEC
- to offer this maximum rate to all market participants and guarantee the industry will not have to pay more.
This action should be contrasted with proceedings in the United States, where antitrust enforcement action by the Federal Trade Commission in relation to the alleged ‘patent ambush’ was ultimately rejected by the Supreme Court.
Broadband network cases
Deutsche Telekom – decision dated 30 May 2003
In 2003 the European Commission decided that Deutsche Telekom (DT) enjoyed a dominant position in the German markets in access to local fixed networks, including the retail broadband market. Having received complaints from various German companies, the Commission held that DT had abused their dominant position by charging a higher price to its competitors for accessing the ‘local loop’ (the last mile connecting the network to people’s homes) than that paid by DT retail customers. The European Commission considered that this made it impossible for competitors that were as efficient as DT to compete in the retail broadband market (so called ‘margin squeeze’).
The Commission fined DT €12.6 million for having charged unfair prices for access to its local network. On 14 October 2010 the Decision was upheld by the ECJ, which found that the Commission was entitled to rely on DT’s costs and prices to assess whether there was a margin squeeze.
Wanadoo Interactive – decision dated 16 July 2003
At the time of this case in July 2003, Wanadoo Interactive was a subsidiary of France Telecom (FT). The European Commission found that Wanadoo Interactive held a dominant position in the French market for high-speed internet access for residential customers and had abused its dominant position in the following ways:
- charging below cost retail prices
- developing a plan to pre-empt the strategic market for high-speed Internet access at the expense of competitors.
The losses were incurred deliberately and at a time when FT was expecting considerable profits in relation to the sale of its high-speed Internet products.
The Commission fined Wanadoo €10.35 million for abusing its position by predatory pricing. On 2 April 2009 the Commission’s decision was upheld. The CFI confirmed the orthodoxy that prices below average variable costs will always be abusive, and prices below total costs but above average variable costs will be considered abusive if coupled with an intention to eliminate competitors.
Telefonica – decision dated 4 July 2007
The European Commission considered Telefonica to be dominant in both the national and the regional wholesale broadband access market. Following complaints from Wanadoo Espana, the Commission found that Telefonica had imposed an illegal margin squeeze on competitors. It was the Commission’s opinion that Telefonica’s actions prevented competitors being able to operate profitably in the retail market.
The Commission imposed a fine of €151 million, which was then the second highest fine imposed by the Commission for breach of competition rules. Telefonica has appealed to the General Court.
BT- non-infringement decision of OFCOM dated 2 November 2010
The UK telecommunications regulator Ofcom had considered that BT held a position of dominance in the residential broadband services market to the extent that its pricing decisions were capable of influencing the conditions of competition downstream.
In order to determine whether BT’s pricing led to a margin squeeze, Ofcom assessed BT’s pricing policies based on a series of net present value (NPV) calculations. These calculations determine whether the losses incurred by BT during the alleged margin squeeze are recoverable from related future profits under competitive conditions. Although Ofcom initially concluded that BT had infringed competition rules, on the submission of new financial information from BT regarding ‘additional relevant costs’, it adjusted its NPV calculations and concluded that BT had not abused its dominant position.
In reaching this conclusion, Ofcom noted that:
- the period of the investigation into BT’s alleged margin squeeze was a fast-moving and dynamic early stage of the broadband market
- the analyses of the case involved looking at financial forecasts which are by their nature uncertain
- this analysis involves complex assumptions and calculations in which the smallest change in those assumptions may change the outcome of the NPV.
