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The Android decision is out: the exciting legal stuff beneath the noise (by Pablo)

with 11 comments

Exciting stuff

To nobody’s surprise, the Commission has announced, today, the adoption of a decision concerning Android. The stakes in the case are so high that the outcome was known well in advance. The only open question related to the amount of the fine. But even then, it looked like a given that it would be the highest ever. Which turned out to be correct.

When the stakes are so high, corporate strategies tend to dominate the landscape and the discussions.

Some aspects of these strategies are beyond reproach. It makes sense for companies to hire the very best lawyers – a category that definitely includes Alfonso, who has always been open about his involvement in this case.

Alfonso, by the way, will not be blogging again on Android, no less because he is likely to have very little time in the coming months (bye bye summer holidays and bye bye paternity leave, I guess).

I regret other aspects of these corporate methods. Companies tend to make loads of noise when their interests are at stake. Big Food, for instance, has perfected a strategy of confusion that gives many people the impression that beef and cheese are perhaps healthy after all (they are not).

There has certainly been a lot of noise recently in the competition law community – coming from all over the place.

The ongoing cacophony is a real pity, since there is a lot of exciting legal stuff beneath the noise. And it is worth discussing it.

For those interested in the law bit of competition law and policy, here are some thoughts.

According to the press release, the Android decision finds that three main practices amount to an abuse of a dominant position:

  • The tying of Google Play to other applications: Google does not license its applications a la carte. In particular, the Commission takes issue with the fact that Google Play Store is not available as a stand-alone product. For a comparable practice, think of pay TV providers preventing users from cherry-picking the channels to which they subscribe.
  • Compensation for exclusive pre-installation: According to the press release, mobile phone manufacturers are given financial incentives for exclusively pre-installing Google Search. This arrangement makes me think of a supermarket chain receiving compensation as consideration for prime shelf space – or perhaps an online store receiving compensation for placing some products as default choices.
  • Android Forks: If mobile phone manufacturers choose to offer the Google version of Android, they may not offer rival versions of Android. It is like McDonald’s requiring its franchisees not to run their own burger joints (or a Burger King restaurant) in parallel.

The second of these practices is perhaps the least exciting one. The only intriguing question is perhaps whether the exclusive pre-installation amounts to an exclusivity obligation a la Hoffmann-La Roche (which is what the press release seems to imply) or to a practice falling elsewhere along the spectrum of schemes that can have a fidelity-building effect. Either way, the legal framework is firmly in place after Post Danmark II and Intel.

The two other practices, on the other hand, raise more fundamental issues. So much so, in fact, that this case may mark the evolution of EU competition law. Allow me to explain.

Tying: how products are sold vs how products are made

Some people will argue that the application of Article 102 TFEU in relation to the tying aspect of the decision cannot surprise anyone. And it is a reasonable point to make. After Microsoft I, any tie-in that gives a distribution advantage to the dominant firm’s tied product amounts to an abuse – which is another way of saying that tying is presumptively abusive under Article 102 TFEU.

What can be exciting around this case, then? Well, the fact that, in some respects, the setting is different from that found in traditional tying scenarios. Inevitably, the remedy is also different.

Traditional competition law in general, and tying in particular, typically interferes with how products are sold. By the same token, competition law is generally wary not to second-guess how products are made.

What do I mean by this distinction? I mean that, absent exceptional circumstances, competition law is not there to tell companies how to run their business. The point of competition law is to ensure that companies have the ability and the incentive to thrive in the marketplace using the strategies of their choosing.

Competition law is agnostic about whether companies vertically integrate or sell their products through third parties, whether they choose selective distribution over franchising or (more to the point) make money through advertising (like a free-to-air TV channel) or through subscriptions (like HBO). For the same reasons, authorities dislike telling firms what prices they should charge.

How is Android different from traditional tying cases?

It is obvious to everyone why Play is tied to Search (and why Search is given a distribution advantage). It is through this mechanism that a company like Google makes money. Thus, if the tying of content and advertising is made unlawful, Google will have to find new ways to make money – or perhaps reinvent Android as a non-profit entity.

The remedy in the case is likely to lead to a fundamental rethink of Android. This issue does not arise in traditional tying cases. If a firm like Coca-Cola is not allowed to engage in tying, it can carry on making money the same way it used to. Not even Microsoft had to change its business strategy – this said, the Media Player remedy failed, which is not an unimportant factor in this context.

To sum up: Android will inevitably lead to more intrusive intervention than usual. And the potential unintended consequences of second-guessing firms’ strategies are universally acknowledged in the competition law community (and have often informed legal analysis).

Against this background, the open question, I guess, is whether, and to what extent, this difference should be reflected in the law.

Is this factor irrelevant from a legal standpoint? If it is not irrelevant, how does (or should) the law adapt to the increased intrusiveness? What are the closest precedents at which the remedy hints?

The reach and scope of competition law intervention may vary significantly depending on how these questions are answered.

Android forks and the legal status of non-compete obligations

What I say above can also be extended to the issue of Android forks. As explained above, obligations relating to this matter are like the sort of non-compete obligations found in franchising agreements or in those seeking to protect the goodwill around a business (think of Remia). From this perspective, one could argue that they are reasonable.

Is it not sensible for a company to prevent free-riding and to make sure that it does not create competition to itself when licensing its products and services? One could point to the Guidelines on technology transfer agreements to suggest that, indeed, it is. In relation to these agreements, Valentine Korah consistently emphasised that competition cannot be examined from an ex post perspective alone.

One could also argue, equally reasonably, that dominant firms have a special responsibility. I agree that they do. This point, however, does not say anything about the relevant legal test. Under what conditions are dominant firms precluded from taking measures against free-riding? Can they avoid creating competition to themselves when licensing their products? How are these considerations integrated in the legal framework?

These are questions, again, for which there is no clear-cut answer in the case law – Article 102 TFEU case law, that is. In that sense, Android looks like a good opportunity to evaluate and clarify the status of these business strategies – and similar ones raising the same issues.

Conclusions

These are not the only questions in which I am interested. But it gives you an idea of the sort of major points to which I will jump when the decision is made available. The telecoms lawyer in me is also intrigued by some aspects of market definition mentioned in the press release (in particular the reference to indirect constraints). And I am curious to know how the notion of effects is defined.

If you are interested in making sense of the law (as opposed to making noise) too, I would very much welcome your thoughts.

Written by Pablo Ibanez Colomo

18 July 2018 at 6:59 pm

Posted in Uncategorized

11 Responses

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  1. Ooh, a focus on legal stuff is a good idea!

    As to the tying: I was expecting you to make a connection to the Microsoft case. But perhaps they are too different? I can think of making an argument that they are different, relating to the dominance of Google on both the Android-market (the market for licenable smart mobile operating systems) and the search engine market. it was the latter that was being protected, states the Commission. But one can also make an argument that it is very similar, actually, to the Microsoft case, in that consumer choice – I mean: actual consumer choice, in the sense that consumers actually would download and install a competing service – is limited by preinstalling Google Chrome and Google search. Your thoughts on that?

    At least one other interesting bit is the market definition, where Apple IOS is not in the same market as Android. Some of the arguments (in the press release) seem contradictory, at least at first glance.

    And the focus, in the press release, of the theory of harm on i) competition on the merits – is that ‘competition as a process’ in new words? – ii) innovation, but no mention of iii) consumer choice or consumer welfare (or I am misreading here). Also interesting.

    Anna

    18 July 2018 at 8:05 pm

  2. One interesting fact in this case is that Android is provided free of charge, although with all these restriction, which make the situation really different from Microsoft I. Android is given out for free so as to exchange the commercial benefits of the distribution advantage of its profit-making products. If the EC’s decision means the end of free Android of this kind of business model, that probably would be an direct story of ‘chilling effects’. After all, it seems leads to the question of efficiency justification.

    Liran Pang

    18 July 2018 at 8:19 pm

  3. Thanks, Anna and Liran for sharing your thoughts!

    You both mention Microsoft, which I discuss in the post.

    In some respects, the two cases are similar: a must-have product (Windows/Play Store) is tied to other products (Media Player/browsers/Search).

    In other respects, they are different: in Microsoft, intervention did not lead to a change in the way the company did business: it could carry on licensing for a fee. In this case, however, changes to the way monetisation happens seem inevitable (which is what Liran mentions). The open question is whether this difference has (or should have) an impact on the law.

    Anna: on market definition, I mention in the post that it made me think of telecoms regulation, where indirect constraints are evaluated all the time (do incumbent providers, which have access obligations, compete with cable, which does not?). In this sense, I look forward to reading beyond the meagre references in the press release.

    Pablo Ibanez Colomo

    19 July 2018 at 10:44 am

  4. Thanks for sharing your initial thoughts on this Pablo!

    Obviously, it is difficult to consider the merits of the Commission´s decision on the basis of the press release. Having said that I´m struggling to see how the tying of the Google Search app and the Google Chrome browser has reduced the incentives of manufacturers to pre-install competing search and browser apps. From what I understand, the tied products come at no costs for the manufacturers, so unless for some technical reason the pre-installation of additional search and browser apps would be unfeasible (from a technical or economical perspective), I do not see why the tying reduces the incentives of manufacturers to install competing search and browser apps. Where is the required causal link between the tying and the alleged foreclosure?

    Another issue is whether Google´s practice is objectively justified on the basis of its business model. It will be interesting to read the decision and see how the Commission has taken Google´s business model into account. Saying that “Google achieves billions of dollars in annual revenues with the Google Play Store alone” seems superficial to say the least.

    Charlotte Forno

    20 July 2018 at 11:12 am

    • Thanks, Charlotte! As always, great and thoughtful points!

      The second point you make is fascinating because it is so unusual in the practice of competition authorities. It is not frequent to see a competition authority say that a firm makes a lot of money anyway and should not be too concerned about the change in the business strategy. It is tantamount to claiming that a compulsory licence is unproblematic because the firm will make billions in royalties.

      Pablo Ibanez Colomo

      13 August 2018 at 9:38 am

  5. […] case, in which the European Commission fined Google to more than 4 billion euros, he placidly reports […]

  6. […] dust has settled, this blog post takes a closer look at what we know, unearthing – as has been suggested – ‘the exciting legal stuff beneath the […]

  7. Great post, Pablo!

    Some comments, without having read the decision:

    1) You refer to Professor Korah in support of the proposition that “competition cannot be examined from an ex post perspective alone”, with which I agree as a desideratum + you can also find it, e.g., at paragraph 18(1) of the Guidelines on Article 81(3). I suspect there is a lot of Professor Korah also in the statement according to which “Competition law is agnostic about whether companies vertically integrate or sell their products through third parties”. Some would say that should be the case. That said, as professor Korah pointed out repeatedly during her course, that proposition is hardly true as to the black letter of the law. It was not true in ‘Commercial Solvents’. Many restrictions which are prohibited if you have two entities, e.g., as unlawful vertical restraints, are lawful if acts of a single vertically integrated company: resale price maintenance for a start.

    2) Where in a ruling of the Court can we find the difference between tying of products sold v. tying of products produced? Unless I am missing something, this might be, again, more of a question as to where the law should head to than where the law is. And we probably want dominant companies to bear in mind where the law is. Also, I find the distinction somewhat artificial. When are we merely “selling” as oppose to “producing”?

    3). I am actually looking forward to reading how the EC applied Intel and PD. to exclusivity.

    These are not necessarily the views of my firm or its clients. It is going to sound a bit sophistic but I might change them, particularly after reading the decision.

    Very best

    Pablo (F).

    Pablo Figueroa

    12 August 2018 at 6:39 pm

    • Thanks, Pablo, for your kind words and for sharing your views!

      On 1): you miss the bit where I write ‘absent exceptional circumstances’. Commercial Solvents is one example of these exceptional circumstances (access to the input was deemed indispensable to compete downstream). But you had even better examples: how about Magill?

      A second point on 1): you are right to say that competition law interferes with practices that would be unproblematic if implemented within a group of companies. But this is not the point I make. The point is that, if you look at the case law, the choice of whether to go for vertical integration or distribution via third parties is (again, absent exceptional circumstances) left to the firms. For instance, a merger cannot be prohibited merely because there were less restrictive alternatives, such as a joint venture, to attain the goals sought by the parties.

      On 2): It is an open question which has never been addressed by the Court. Perhaps, as I write, you are right, but we do not know as of yet. The important point: a refusal to supply can also be construed as a tying case – but the legal conditions are different. If some alleged tie-ins raise issues that are similar to those found in refusal to deal cases, would it not make sense to apply the conditions of the latter?

      Is the distinction between how products are sold and how products are made artificial? I do not think so. I certainly see a difference between tying the sale of Coca-Cola to the sale of Fanta. on the one hand, and a smartphone, on the other. And yes, according to the case law, a smartphone is a tie-in.

      Pablo Ibanez Colomo

      13 August 2018 at 9:49 am

      • It is me who is grateful! Fascinating debate!

        Pray indulge me with a follow up.

        Re 1) I fail to see what is the relevance, let alone the relevance on the basis of case law: has the Court ever stated, or clearly suggested, that Comp law only exceptionally interferes with the choice of vertical integration v. distribution via third parties? I was only aware of Professor Korah defending this proposition (which, knowing her, perhaps will find support in authors in the US?), which could have major implications for vertical restraints (and is perhaps inconsistent with the black letter of the law on vertical restraints?).

        (Incidentally, all mergers which are prohibited are prohibited because there are not less restrictive circumstances (since efficiency defences fail, or are not even attempted: let’s assume firms merge to become more as opposed to less efficient))

        Re 2) I would be interested to know at which point a product is tied “only” when sold and when “where produced”. E.g., if a deck of cans comes from the factory together including both Fanta and Coca-Cola cans would that be tying-sold or tying produced? If the law of tying becomes less intrusive re production I can see a lot of tying being shifted to “production”. Moreover, I would welcome knowing (and so would your co-blogger, I suspect) if any court anywhere (the US has tying since the ’20s with Standard Fashion) has given any relevance to this distinction.

        All in all, I am left with the impression that we are in agreement as to where the (litigated you would call it) standard of tying (and of interference of Comp law with vertical integration) is, and we disagree (if at all, I am agnostic as to where the law should head to and do not believe in Article 102 or tying) on what it should be, only you think the law is (secretly) where you claim it is – and somehow this it emerge in this or other appeal.

        And, knowing you, it is hard to bet against you. However, that Court can be quite sttuborn…

        Very best

        Pablo (F)

        Pablo Figueroa

        13 August 2018 at 5:06 pm

      • 1) I write: ‘merely because there were less restrictive alternatives’ (with an emphasis on merely). The point is: a competition authority cannot block a merger solely on grounds that an agreement/joint venture could have served the same objectives (and there must be cases where this is true). The authority must show that anticompetitive effects are likely. This point is uncontroversial, and I am sure we agree.

        More examples (from the Court): as vertical restraints go, franchising is pretty restrictive. More importantly, it partially overlaps in nature with other vertical restraints that may achieve the same purpose, like selective distribution. Again: according to Pronuptia, the question of whether the same objectives could have been achieved via less restrictive means is wholly irrelevant when it comes to the assessment under Article 101(1) TFEU.

        2) DC Court of Appeals in Microsoft, for instance? The point was addressed explicitly and at length, and was deemed to justify a departure from the quasi-per se rule that applies to traditional ties – Coca-Cola and Fanta are not physically and/or technologically integrated (bar perhaps birthday parties of 5 year-old children when they get a bit wild).

        Thanks so much again!

        Pablo Ibanez Colomo

        13 August 2018 at 7:10 pm


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