Archive for the ‘Market News (and AT Implications)’ Category
In a recent post on the diluted legality of competition law I voiced out the view that our discipline could partly be losing its last name, a development for which I blamed a number of factors. However, some developments in the past few weeks have led me to think that perhaps I missed a critical feature: the increasing involvement of politics in the application of the competition rules.
To be sure, since its inception and all along its development, antitrust law –as a public policy tool at the core of the economic Constitution of any State- has had as much of a tight link with politics as it has with economics. But whereas economics not only provides a justification for the existence of the rules but also plays an important role in the development of legal rules and in individual cases, politics had traditionally exerted its influence in the exercise of enforcement discretion, and arguably not so much in the development of the rules and the outcome of cases.
The link between politics and competition enforcement might have been more obvious at the national level, where national competition authorities often are attached (organically or otherwise) to the Government at issue, which often appoints its members in the light of political considerations. It’s against this backdrop that one has to interpret the European Commission’s recurrent calls for independence of national competition authorities (most recently on a Staff working paper issued last Wednesday).
I think it’s fair to say that the influence of politics on the European Commission’s application of the competition rules has been more tenuous. For the most part, EU competition law has developed under the auspices of a firm political view on the advantages of competition in a system of social market economy, but in isolation from short-sighted political interests/small politics. This is largely explained by the theoretical legal status of the Commission as a body independent from Member States, and by the practical status DG Comp as a quasi-specialized agency within the Commission that one was not to second-guess. However, there are signs that this might be changing. In recent times national politicians have increasingly given their views on how competition law should be applied (here is one very recent example), and so have members of the European Parliament and a number of EU Commissioners. Moreover, they are doing so not only when their national interests are at stake (political solutions have been and are all the more common in State aid cases and in some high-stakes mergers), but also concerning investigations of potential infringements.
There are several examples of this evolution. Most recently we have seen politicians –mainly Chancellor Merkel- vouching for the approval of the Telefónica/E-Plus deal (see here). But perhaps the best illustration of the trend can be found in the Google case, on which we have written extensively on this blog.
This is a case in which DG Comp has extracted (arguably using the commitment procedure and its impressive record in judicial review of 102 decisions to stretch the boundaries of current legal standards) a set of significant commitments on the part of Google (see my comments here), going beyond what US authorities did. This could be regretted by people interested in the clarity of the law, but would normally have been seen as a practical enforcement success on the part of the Commission. However, a number of motivated and well-funded complainants –led by some smart lawyers who know how to play with the system and who deserve credit for getting near what I would’ve thought was impossible- now start to seem capable of derailing the commitment procedure by politicizing it. First, the German and French ministers for economics wrote a most unusual joint letter to Vice-President Almunia asking for a tougher stance on Google. And now, a widely extended rumor has it that a few EU Commissioners are being persuaded not to approve any Article 9 decision during Mr. Almunia’s tenure. As you can imagine, not all Commissioners are persuaded with sophisticated legal arguments related to evidence on foreclosure and the such, some being more receptive to political lines alien to antitrust analysis, mainly “don’t let these guys off the hook because they don’t pay taxes in Europe and because the US spies on us”. Obviously, this has nothing to do with the law, or at least with competition law.
It’s difficult to guess how this will turn out. As recently explained in the FT (Alex Barkers’s coverage of EU competition issues is, by the way, excellent) “[s]ome people involved think the pressures make it more likely Mr Almunia will decide to launch a formal probe of Android”. And indeed, the Android investigation may be the second leg of this political game, and once again the Commission might be under enormous pressure to take a hardline. [By the way, if you’re interested in reading about the competition issues involved in the Android investigation, I would very much suggest you read the insightful pieces recommended by Kevin Coates here ;) as well as this interesting brand new piece on the matter (particularly enjoyed footnotes 26 and 127…) (thanks to Jorge Marcos –ULg- for drawing our attention to it)]
Much more could be said about the politicization –and possible transformation- of antitrust and I look forward to your comments, but I’ll close it off now (mainly because the Word Cup final is already on). Some of you will recall my piece on Antitrust and the Political Center, in which I outlined some views on how antitrust embodies a centrist political ideology and can contribute to the expansion of sensible political views internationally. Well, in my view, the same is not true the other way around; infusing minor, short-sighted, political goals into the application of competition law can only contribute to disfigure even more a branch of the law which –let’s not forget- is, on its sanctioning dimension, quasi criminal in nature.
The political agreement in having technical competition rules applied by independent agencies is now an established idea, heralded internationally by the European Commission. And it makes sense because in spite of its unquestionable benefits, competition law’s constituency is diffuse and unable to mobilize politicians in the right direction. If you ask me, competition law can better serve its goals when dissociated from small politics.
To be frank, I didn’t have anything to post today. I’m halfway writing lengthy posts on the Uber controversy (which I’m a bit hesitant to publish), on AG Wahl’s Opinion in Cartes Bancaires, on the French Nespresso case and on the new Damages Directive, but haven’t found the time to finish any. I also had an idea for a possible lame joke to post, but I think it’s way too lame even for this blog’s standards. On top of that, I’m asked (ordered) to go to IKEA later, and having to take care of the blog is no longer a valid excuse chez moi…
Fortunately, Aoife White (Bloomberg) just saved my blogging day:
She tells me that credible sources anticipate that Motorola won’t be fined in the decision that the European Commission will apparently be adopting next Wednesday. Aoife explained that some people find this exceptional, and asked for my views to include a quote in her piece, available here: http://www.bloomberg.com/news/2014-04-25/motorola-mobility-said-likely-to-escape-eu-fine-in-patent-case.html
Here’s the text of the email I’ve just sent Aoife (who has no objection to me recycling it into a post):
“If the news were confirmed, I would view this as a very sensible decision on the part of the Commission.
The law on abuse of dominance is often nebulous, even more so in a novel context such as the one involving SEPs, which the Commission has moreover distinguished from precedents on “sham litigation” (ITT/Promedia). In these circumstances, the imposition of substantial fines could have raised issues as to its compatibility with general principles that require certainty in the law if a penalty is to be imposed.
A declaratory decision with no fines would enable the Commission to clarify the law and set a precedent without punishing actions that took place against an unclear legal background.
This would not at all be a first; the Commission has in the past imposed no fines, or only symbolic fines, in cases where at the time when the conduct took place the law wasn’t clear on whether it could constitute an infringement. In abuse of dominance cases, this has happened, for instance, in relation to the discriminatory sale of tickets for the 1998 Football World Cup case (2000), regarding Deutsche Post’s interception of cross-border mail (2001) and, more recently, in the Clearstream case (2009).
This may be only for geeks, but the explanatory memorandum accompanying the draft of Regulation 1/2003 also explained that the mere clarification in the public interest of new legal questions could justify the adoption of purely declaratory decisions.
Interestingly, however, EU Courts have nevertheless consistently rejected the argument that the novelty of an abuse could be invoked as a ground to seek a reduction of a fine imposed by the Commission (e.g. in Irish Sugar or Deutsche Bahn)”.
Vice-President Almunia has just made it clear that the Commission will accept the third version of Google’s proposed commitments. In his words, “the new proposal obtained from Google after long and difficult talks can now address the Commission’s concerns. Without preventing Google from improving its own services, it provides users with real choice between competing services presented in a comparable way; it is then up to them to choose the best alternative. This way, both Google and its rivals will be able and encouraged to innovate and improve their offerings. Turning this proposal into a legally binding obligation for Google would ensure that competitive conditions are both restored quickly and maintained over the next years.”
The Commission’s press release is available here.
What happens now is that the Commission will send complainants a letter (pursuant to Article 7(1) of Regulation 773/2004 informing them that the Commission has obtained what it considers adequate commitments and that in its view there are no longer grounds to pursue the case. They will then have a chance to complain again. The Commission will then adopt a number of decisions: one under Art. 9 of Regulation 1/2003 in order to make those commitments binding, and a number of decisions rejecting all complaints received. I suppose that Google’s very active and well funded rivals will want to appeal those decisions before the General Court (with, I believe, arguable chances of success after the Court’s recent ruling in Microsoft/Skype, which was extremely favorable to Google for reasons that I might explain in a later post). This is, by the way, the outcome we always predicted.
In my personal opinion, this is a wise move on the part of the European Commission. However, it’s unlikely that the Institution will receive much praise: some will say that it demanded too much from Google (particularly given the US precedent), many others will say it’s been too lenient, some will say the investigation took too long, others will claim that it was incomplete. The fact that they will be criticized from both sides may actually suggest that perhaps the Commission has done something right.
As you know, I was never a big fan of the case (see here, here or here among others), but I always saw the proposed commitments (even in their first version) as a balanced attempt at putting and end to it getting the Commission what it wanted without introding too much in Google’s innovative business model. For my analysis of those commitments (as forecasted, despite some improvements the essence doesn’t appear to have varied since then) see here and here.
It will be interesting to discuss this development in the course of the upcoming AIJA conference on antitrust and technology in Bruges this weekend.
[Note by Alfonso: A few weeks ago I wrote a brief post regarding one particular aspect of the Commission’s press release about the Microsoft/Nokia decision that caught my attention. Before posting it, I discussed the matter with two of my
bosses’ colleagues: Luis Ortiz Blanco and Marcos Araujo, both with significantly more merger experience than myself, and both of whom initially agreed with the point I was trying to make. A few days ago this question came up again, and I managed to extract from Luis the commitment that he would write his views on a guest post here (all previous attempts to get him to do that and a Friday Slot interview were unsuccessful…). Luis needs no introduction; he’s an exceptional person, professor, lawyer, and was even also one of the best men at my wedding... He’s also the reason why I work in competition law, but that's a long story. I leave you with him].
Readers of this blog may by now be familiarized with Alfonso’s and Nicolas’ well-known “persistence”. I admit to be and old-school guy, more prone to do my writings with time, pen and paper rather than swiftly and informally on blogs, but this time they caught me off guard and suggested an interesting topic, so here I am, giving blogging a try.
Despite the title of this blog entry, my intention is not to comment on the Microsoft/Nokia decision specifically, not the least because the decision is not yet available and I have not directly or indirectly worked on the case. My intention is to discuss an interesting theoretical point that appears to have arisen in that case and that prompts very relevant legal question for practitioners, academics and competition authorities which go beyond the facts of a given matter: do or should merger control rules and remedies apply also to impediments to competition that a transaction may generate on the seller’s side?
Alfonso already touched on this issue in a previous post. In my view, he rightly identified what I also see as an erred reasoning in the European Commission’s press release, according to which:
- “The Commission considers that any possible competition concerns, which might arise from the conduct of Nokia, following the transaction, in the licensing of the patent portfolio for smart mobile devices which it has retained falls outside the scope of the EU Merger Regulation. The Commission cannot take account of such concerns in the assessment of the current transaction. Indeed, Nokia is the seller whereas the Commission’s investigation relates to the merged entity.
Now, do really merger control rules really relate only to the merged entity, to the exclusion of the seller?
Prior to providing you with my answer to this question, I would remark that, in my experience, it is most unusual to see the European Commission (or any other competition authority for that matter) self-limiting its own powers. Competition enforcers often tend to do the contrary, that is, to explore the powers they have, even if at the risk of perhaps going beyond them at times.
If among the readers of this blog is the one person that bought my book Market Power in EU Antitrust Law, she or he might recall the criticism I directed (pp. 77-78) at a few cases (ExxonMobil, and particularly at Grupo Villar Mir/EnBW/Hidroelectrica del Cantábrico and EnBW/EDP/Cajastur/Hidrocantábrico in relation to the ‘third-party dominance theory”) in which the Commission had intervened aggressively on the market in order to address effects unrelated to the transaction. In those cases the Commission extended and arguably exceeded its powers because of its will to address what it saw as a competitive problem. In its Microsoft/Nokia press release, however, the Commission does the contrary: it appears to restrain or limit the powers it has in order to justify not evaluating what many saw as a competitive problem.
This stance is all the more surprising if one recalls that in the past the Commission has accepted/required some “soft commitments” in Oracle/Sun and, in a more similar setting, on the part of Google at the time it acquired Motorola Mobility. The theory of harm in both the latter case and Microsoft/Nokia related to the alleged possible anticompetitive use of patent portfolios. If anything, Microsoft/Nokia would seem to give rise to increased suspicion [the deal was structured in a way that has resulted in an unusual situation: Microsoft buys Nokia’s mobile device business but not valuable mobile device patents, which it will only license. Nokia, in turn, will be under pressure to assert its patents aggressively, may possibly also act under the influence of Microsoft, and would be immune from possible retaliatory strategies because it will not manufacture smartphones anymore. The move is smart, but, in my personal view, maybe also a bit obvious too].
The sole argument seemingly adduced by the Commission to justify its different treatment of the two deals seems to be the precisely the one we are discussing in this post. But, think for a second, would it make sense to endorse an interpretation of the merger regulation that would enable parties to avoid scrutiny by carefully tailoring the structure of a deal?
Now, and more importantly, why do I say that the Commission must have the power to assess the effects of a merger on the selling party?
First of all, because it makes sense. If a merger does affect the incentives of the players in a given market in such a way that competition may be significantly impeded, there would seem to be no valid reasons for competition authorities not to look at the problem and, where necessary, accept (i.e. demand) commitments The contrary would undermine the effectiveness of the merger control system. Why could not the Commission condition the authorization of a transaction to a commitment from one of the parties to it (the seller)?
Secondly, because as Alfonso pointed out in his previous post, the letter of the Merger Regulation supports this idea. He referred to recital 25 of the Horizontal Merger Guidelines; I would also argue that the references in articles 6(2) and 8(2) to “modifications [of the concentration] by the undertakings concerned” shall logically encompass the parties to the transaction (the only ones that can modify it), which obviously would include the seller.
Thirdly, because the Commission’s practice reveals that in the past remedies have been required from the selling party. Think of cases such as E.ON/MOL, where the commitments accepted by the Commission concerned the seller (interestingly, the commitment was drafted in a way such that E.ON would “undertake to procure MOL to dispose of [certain shares in the transferred companies]’. Think also of Alcatel/Telettra, where assurances by a third-party (Telefonica) were relied on by the Commission in accepting commitments. This is not to mention the cases in which the Commission relied on Member State’s (i.e. third parties) assertions and declarations of intentions in support of certain commitments.
Perhaps the Commission would benefit from a third party appeal (not that these have been successful lately) prompting the Courts to rule that the Institution has more powers than it now purports to have. Once again –just like it happened in Camera Care regarding interim measures (a story that I always like to tell my students about)- the Commission could experience the serendipity of obtaining increased powers without even seeking them.
As you know, a few days ago the European Commission unconditionally authorized the Microsoft/Nokia deal. I’m looking forward to reading the decision, which isn’t yet public. Whereas I expect to see nothing odd in there, a doubt did spring to mind when reading the press release last week.
When explaining its approach to the concern that Nokia could become a troll-like entity, the Commission’s Press Release says the following:
“The Commission considers that any possible competition concerns, which might arise from the conduct of Nokia, following the transaction, in the licensing of the patent portfolio for smart mobile devices which it has retained falls outside the scope of the EU Merger Regulation. The Commission cannot take account of such concerns in the assessment of the current transaction. Indeed, Nokia is the seller whereas the Commission’s investigation relates to the merged entity. However, the Commission will remain vigilant and closely monitor Nokia’s post-merger licensing practices under EU antitrust rules, in particular Article 102 (…)”. (Emphasis added).
Please correct me if I’m wrong, but isn’t that a wrong/arguable over-simplification? (although, to be sure, it wouldn’t be a crime for a press release to over-simplify). Does merger control really relate solely to the merged entity to the exclusion of other actors in the market? Isn’t it rather about the effect that the transaction may have on the structure of the market? I mean, can’t the Commission assess the effects that a concentration would cause on the market power of parties to the transaction as well as on that of third parties? Perhaps the press release only intended to refer to the Commission’s remedial powers, and not to its assessment powers, but even assuming that, the short explanation may be incorrect. Although infrequent, third party post-merger conduct may be potentially relevant in deciding a case.
Look, for instance, at recital 25 of the horizontal merger guidelines “under certain circumstances, concentrations involving the elimination of important competitive constraints that the merging parties had exerted upon each other, as well as a reduction of competitive pressure on the remaining competitors, may even in the absence of a likelihood of coordination (…) result in a significant impediment to effective competition”.
Don’t get me wrong: I’m not challenging the outcome of the Decision (it seems prima facie reasonable for the theory of harm at issue in that case to be monitored ex post), but, in my view, the explanation would have had to do with “causality” (à la Tetra Laval or GE/Honeywell), not with the scope of merger control. Perhaps this would seem to make no practical difference in principle
(as we’ve learnt recently, in real life ends justify means, and reasonings aren’t really worth paying attention to), but inconsistencies in the formulation of policy positions might eventually come at a cost.
P.S. Following the advice of some of you, last night I created a Twitter account: @LamadridAlfonso; it’d now be nice to know how to use it and what for!
[Image possibly subject to copyright]
[Guest post by Pablo Ibañez Colomo]
It would seem that the Spanish super-quango is more active than one would have assumed (in particular given what is currently going on within the tax authority of the country). The newly-created CNMC has fined four football teams (including Real Madrid and Barcelona) and the broadcaster Mediapro EUR 15 million for concluding exclusive licensing agreements for a period exceeding three years. Such terms contravened a previous decision adopted by the – then – CNC in 2010.
The case is interesting, first, because the Spanish government passed (in 2010, at pretty much the same time that the original decision was adopted) legislation that set a four-year term for exclusive licensing agreements between teams and broadcasters. One could claim that, insofar as the contentious agreements complied with the relevant sector-specific legislation, they were concluded in good faith. Accordingly, the fine would be unjustified. In light (pun intended) of Consorzio Industrie Fiammiferi (pun intended, I’m on fire!), it is clear, however, that this is not a valid defence. Legislation did not preclude undertakings from concluding agreements for a shorter period and thus from complying with Article 101 TFEU (which was clearly applicable in this case).
A second reason why the case is interesting is because it shows that the three-year limit for exclusive licensing agreements is now set in stone. There is no reason why this should be the case. A three-year term is not necessarily pro-competitive. It all depends on the context in which the licensing agreement is concluded. If the goal of this bright-line rule is (as I assume) to preserve the contestability of markets for the acquisition of television rights, then it may sometimes be too short. A new entrant (as BSkyB was back in the early 1990s) may need a longer period to reduce uncertainty and recoup its investments. By ruling out any flexibility, a rigid interpretation of Article 101(1) TFEU can very well have the perverse effect of protecting the incumbent. These are the problems of applying competition law as regulation, which I highlighted elsewhere, and of assuming that UEFA Champions League, Bundesliga and Premier League were rightly decided, in spite of the overwhelming evidence suggesting the opposite.
Even though the allegations over the free distribution of Android have predominantly caught the public’s eye, the complaint also appears to argue that Android is a “Trojan Horse” (a non-innovative yet effective metaphor…) used to pre-load Google apps. According to FairSearch’s press release, “Android phone makers who want to include must-have Google apps such as Maps, YouTube or Play are required to pre-load an entire suite of Google mobile services and to give them prominent default placement on the phone”.
This is, at least at first sight, more interesting than the allegations about predatory pricing. Tying/bundling issues in the smartphone industry have so far received some attention from enforcers -remember the investigation involving Apple and Flash?- and academics, but not so much. And yet they raise antitrust questions that take the discipline outside of its comfort zone.
One of the problems with this leg of the complaint is that publicly available info is scarce and that some issues are fairly technical. So don’t take what we say for granted. This is no more than an exercise for me to brag about Enrique’s industry/technical knowledge to discuss a case in detail on the basis of knowledge that not everybody has (at least I didn’t), and that I thought was worth publishing here. At the very least it has helped me learn about the industry (for some odd reason I only reflect properly about things when I write about them…). As always, happy to discuss. Btw, the post is again lenghty because I haven’t had time to write a shorter one.
1) In search of the bundle
Our understanding is that Google does not preload its apps in Android (like Microsoft actually does, for instance, with Skype and SkyDrive in Windows). This means that OEMs are free to take the Android OS without having to pre-install any of Google’s Apps (for example, Amazon has done so with the Kindle, and so has Barnes&Noble with Nook; a number of other examples are mentioned here). Android’s code is publicly available here and all OEMs can do what they please with it.
If our understanding is correct, it’s only when OEMs wish to pre-load the Google Mobile Services suite (“GMS”) that they need to pre-install its “core-apps”. In sum, if OEMs want a non-Google Android experience they can have that. If they want a sort-of-Google experience on Android (i.e. if they want the GMS) then Google asks them to preload (on a non-exclusive basis: they can preload any others) a minimum set of apps. Accordingly, it’s difficult to argue that there is a bundle of Android+Apps; at most there could be only a bundle of apps.
[Intermission 1: It’s not easy to find out exactly what’s included in the GMS/ “core apps”. The references that we’ve found (page 12) seem outdated as, for instance, they refer to Android Market (now Google Play), Google Talk (now Hangouts) and call “apps” things that we understand are rather non-user facing services (like the service that synchronizes contacts or the calendar with the cloud)].
But is there really a bundle of apps? In order for “pure bundling” to exist it would be required that the components of the bundle are not also available outside of the bundle, but that doesn’t seem to be the case either. Most of the apps in the GMS can be obtained separately from the bundle and for free (that’s the case of Youtube or Google Maps).We may be wrong here, but we think that Google Play may be the only exception, or at least the only relevant one (on this, see our point number 2 below).
Finally, since OEMs’ decision will not be affected by any financial incentive on the part of Google (because the “core apps” in the GMS are all free of charge apps), there’s no mixed-bundling either.
[Intermission 2: in my view, and in contrast to this case, mixed bundling of proprietary non-free software by certain dominant firms can actually pose serious competition problems (due to the existence of market power, the ability to toy with monopoly prices, resale prohibitions, switching costs and higher barriers to entry) and nevertheless remains mostly unaddressed by enforcers, but that’s another story].
That said, the complainants may have a point in that most OEMs will in practice want to have the GMS (see below).
2) It’s all about Play
If any of the complainants were to read the reasoning above, they would probably respond: “sure, the choice for OEMs is theoretically there, but OEMs that choose Android would always want to have the GMS, because otherwise they wouldn’t have Google Play, which means that they’d be renouncing to the very large number of apps written for Android (indirect network effects, etc)”
[A bit of background: Google Play is an application clearinghouse, an Appstore or app marketplace. These apps are a repository of other apps that you can download with a simple click. This avoids users having to obtain software from every developer; instead, there’s an intermediary that facilitates finding/acquiring/installing software. The intermediary (Google in the case of Play, Apple in the case of Appstore, etc) obtains a percentage of sales of non-free apps and facilitates the sale of free ones].
We don’t know whether the complainants have focused on that point of not. If not, they should hire us to give them more ideas ;) . If they have –as we’d assume- then that’s a fair point.
And so what? On the other hand, however:
This is the second post in a series; click here for Post 1 (on background and dominance)
According to FairSearch (see here) “Google’s predatory distribution of Android at below-cost makes it difficult for other providers of operating systems to recoup investments in competing with Google’s dominant mobile platform“.
Unsurprisingly, this claim has spurred very strong reactions from the FOSS community, which regards it as a direct attack to the Open Source/FreeSoftware development model (see notably here, here and here). Android is indeed FreeSoftware, meaning not only that it is distributed for free, but also that it adheres to the so-called 4 freedoms: (i) the freedom to run the program, for any purpose; (ii) the freedom to study how the program works, and to adapt it to the user’s needs; (iii) the freedom to redistribute copies; and (iv) the freedom to improve the program and release the improvement to the public. This means that asking Google to start charging for Android would be akin to force it to stop supporting FreeSoftware.
A quick look, however, would reveal that this is a non-issue. It is undisputable that given Android’s FreeSoftware/public good nature Google doesn’t have the ability to set a price. The price is 0.
There are certainly interesting pricing issues to be discussed in the software industry, but, in our view, they arise with respect to proprietary software, not free software.
This should be enough to end the discussion, but if this interests you, click on the hyperlink below for more developed thoughts (if you’re lazy you can just stick to the arguments in bold to get the general idea):
At Chillin’Competition we have paid considerable attention to a number of IT-related competition developments, and –like most other followers of these matters in Europe and elsewhere- we have shown predilection to comment on the pending EC investigation over Google’s search practices. Nicolas, Pablo Ibañez-Colomo and myself have devoted tenths of posts to offering our –often conflicting- views on a number of issues raised in that case.
We –or at least I- had until now not really paid attention to the more recent FairSearch complaint regarding Android, and this despite the repeated warnings of Enrique Colmenero (our new associate and a geek who knows a bit about Android (he says not sufficiently well, I say it’s unbelievable), who was also the real author of my Google ppt), and who kept on telling me that the allegations in this complaint merited some public discussion. I first looked into it last week while writing the post about Skype’s integration with Windows, and realized that he’s right.
Given that all things Google raise the number of visits to the blog and spur more debate than other topics, we’re decided to comment on this yet non-case. We devoted a weekend to writing our preliminary views, and since the result is fairly lengthy we’ll be breaking the discussion into three separate posts: Today we will provide some background and deal briefly with market definition issues. Tomorrow we’ll discuss the predation claims. And Monday we’ll address the bundling allegations.
Before getting into substance, four disclaimers are necessary. The first is that by myself I wouldn’t have had the required technical knowledge to comment about this, so I’m borrowing Enrique’s (any errors, however, are only mine). The second is that we are not working for any party interested in this case and therefore comment on the basis of publicly available info (for fuller disclosure, some time ago I had two chats with someone on the complainants side as well as with someone working for Google; in both cases they let me know their views on the complaint). The third is that since we don’t want this blog to be a place to discuss cases in a seemingly one-sided way (much less when they are ongoing, like this one), we’ll be happy to open this platform to anyone willing to reason any disagreement with the opinions provided below. We don’t intend to defend a given position, but to reflect on issues that interest the antitrust community, and we are more than open to be persuaded that what we say is wrong. The fourth is that even if now criticize a complaint lodged by Microsoft FairSearch in the past we’ve also heavily critized complaints targeting Microsoft, like this one.
Bored already? If you’re stil reading I guess not, so let’s get started:
Some background to the complaint
Back in April the anti-Google alliance FairSearch (in this case only two of its members Microsoft and Nokia [Note: after I was done writing this post I learnt the news that Microsoft is acquiring Nokia’s mobile business] seem to have a real interest in the case) lodged a complaint with DG Comp alleging: (a) that by giving Android to device-makers for “free” Google engages in predatory conduct (making it difficult for rivals to recoup the investments made in developing competing mobile operating systems; and (b) that “phone makers who want to include must-have Google apps such as Maps, Youtube or Play are required to pre-load an entire suite of Google mobile services, and to give them prominent default placement on the phone”. Click here for FairSearch’s Press Release.
Rumor has it that the Commission recently sent out requests for information in relation to this complaint.
A business problem model?
In our view, this complaint can only be properly understood once one is aware about the existence of essentially 3 different business models for mobile operating systems (OSs). One is Apple’s vertically integrated model (iPhones run on Apple’s own iOS), another is Microsoft’s licensing model (OEM’s wishing to have smartphones running on Windows have to pay for a license), and the third is Android’s free software model (Android is distributed for free under a an open source license which enables licensees to do whatever they wish with the code), which has also been the model adopted by all new market entrants (Ubuntu, Firefox OS, Jolla’s Sailfish or Tizen –backed among others by Samsung and Intel-); Nokia’s Symbian (the market leader until 2011, now maintained by Accenture) was always and is also open source.
Manufacturers that are not vertically integrated at the OS level like Apple or Blackberry had to find a competitive OS, there being, until now, essentially two reliable options: Microsoft’s Windows (which they had to pay for), and Android (which OEMs obtain on a free-license basis; even if they have to pay some royalties….to Microsoft! ; some even say that Microsoft makes more money from Android than from the Windows mobile OS). Not surprisingly, the market tends to favor the open source model and, quite logically, Microsoft doesn’t like that (you’ll recall that it also “had issues” with open source OS for PCs). It’s against this background that the complaint comes, in what some see as an attempt to reverse the course of the business model that is proving most successful.
On market power/dominance as a pre-requisite.
Every press-clip citing FairSearch’s allegations refer to the claim that Android enjoys a market share of 70%. This is a bit equivocal. In reality, the fact appears to be that 70% of smartphones (leaving tablets, led by Apple, aside on the assumption that they belong to a different market) shipped in the last quarter of 2012 had Android. And in reality, usage market shares appear to show a duopoly of iPhones and Android phones (see here or here) rather than an Android monopoly; moreover, revenue-baded market shares clearly tilt the balance in Apple’s favor (as explained here) [As to the future trend: Android is certainly doing spectacularly well lately, but we bet iPhone sales will increase once Apple abandons its (rather Steve Job’s) exclusive-good marketing strategy, which is very profitable (see previous hyperlink) but has costs in terms of market share. Android phones sell very well, among other reasons, because they are often subsidized by operators; iPhones on the other hand have traditionally been quite costly. The moment iPhones are cheaper Apple's share should increase significantly] So, in reality, Android seems to face rather intense competition from Apple’s iOS, Windows, Blackberry; even its main customer (Samsung) has also developed its own OS Bada/Tizen (it also “multi-homes” by licensing Windows for some devices).
Against the background of what would appear to be a competitive smartphone market, the way to come up with a monopoly-like share would require 1) to distinguish separate markets for tablets (where Apple is the leader) and smartphones; and 2) to also take Apple and Blackberry out from the smartphone-only calculation by defining a relevant market for licensable mobile OSs, which intuitively seems a bit of a Procrustean move.
More importantly, forget about market shares for a second. The truly relevant question is: does Android enjoy significant market power? Can it profitably raise prices or decrease output or innovation? Because Android is OpenSource/FreeSoftware (obtainable for free, its source code is entirely disclosed, it can be freely modified/”forked” [see here for “what the fork is forking”?] and appropriated by third parties: just look at Replicant, CyanogenMod, MIUI or at Amazons’ Kindle) we don’t see how Google would be able to exert market power in any way. Even Microsoft and Nokia could take Android and do what they please with it (they could even try to fork/improve it and compete with Google).
Actually, could we even say for sure that there is a “market” for licenseable OSs when all licenses (except Microsoft’s) are FreeSoftware licenses?
Moreover, and as regards innovation, there are very few markets with innovation cycles as fast as the one for smartphones’ OSs having featured a number of leaders in recent years: Palm, Symbian, iPhone, Blackberry and now Android. And this is because given the prevalence of FreeSoftware barriers to entry are extremely low. The moment someone comes up with a more innovative (better) product (including an improved version of Android unrelated to Google), Google would also lose its current lead.
But, for the sake of discussion, let’s assume that Android is dominant and look at the theories of harm, which bring up some interesting issues In our second post we’ll discuss the predatory pricing claims, and in our third post we’ll deal with the bundling aspects of the case.