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Is it an abuse for Apple to embed a camera in its iPhones? What is special and different about digital cases

with 12 comments

While drafting my latest paper, I asked myself how I could convey what is special and different about cases in digital markets. I do not believe these are ordinary investigations involving a straightforward application of well-known principles. Illustrating the point, however, is not easy.

Once again, I was drawn to the example that I often use with my students. It is even more pertinent following the Android decision and the investigations involving Apple’s practices (see here and here).

This example revolves around a simple question: is it abusive for Apple to embed a camera in its smartphones?

Some of you may have thought ‘certainly not’ and/or that ‘it would make no sense’ to say so. However, if one follows the logic of cases like Microsoft I or Android the inevitable conclusion is that, indeed, embedding a camera in a smartphone is abusive under Article 102 TFEU.

Smartphones, cameras and tying under Article 102 TFEU

I will make my point following the Commission’s interpretation of the conditions that are deemed canonical to show that tying amounts to an abuse.

Dominance

The Android decision and the ongoing investigations involving Apple seem to be based on the idea that the two ecosystems do not compete with one another (I discussed these points here and here). Accordingly, one could conclude, in light of this prevailing interpretation, that Apple is dominant.

Two products

For tying to exist, it is necessary to show that there are at least two separate products – a tying product and a tied product. Can one say that a smartphone and a camera are separate products? Yes, at least following Microsoft I. The interpretation of the ‘two product condition’ given by the Commission survived scrutiny by the General Court.

According to Microsoft I, the question is whether the tied product (in this case, the cameras) is produced independently of the tying product.

Typing ‘digital camera’ on, say, Google will show that the two product condition is indeed fulfilled under this interpretation (take a look at the pic below). There are certainly manufacturers specialised in the production of stand-alone digital cameras sold independently of smartphones.

Coercion

For tying to amount to an abuse, there must be an element of coercion. And there is probably no more effective coercion than physically embedding one product in another one.

Anticompetitive effects

Whether or not anticompetitive effects are an element of the legal test is a matter for debate. If one assumes that they are, the pic below suggests that smartphones have had a substantial impact on the sales of stand-alone cameras.

One could also try and make an argument about the potential dynamic effects of the exclusion of competing camera producers. Such arguments were already made in Microsoft I (harm on follow-on innovation) and have also been advanced in more recent investigations.

Objective justification

It is not difficult to think of the pro-competitive benefits resulting from integrating cameras with smartphones. These arguments, however, have so far not fared very well in proceedings before the Commission.

It is sufficient to take a look at cases like Microsoft I (Windows Media Player), Google Shopping and Android.

It is true that combining complements (for instance, an operating system and an application, or organic and vertical search results) typically makes end-users’ life easier and/or better. However, the Commission has also noted that they come with restrictions: namely, they prevent mixing and matching.

The same arguments could be make in relation to smartphones and cameras. End-users would not have the ability to use the camera of their choice, as Apple’s own choice (perhaps not even the best camera around, or not the one best suited to their needs) is forced upon them.

Implications

As you can see, the mechanical application of traditional tying doctrines, as interpreted by the Commission, inevitably leads to the conclusion that the embedding a camera in a smartphone is abusive.

If you still think that it makes no sense, I agree.

Some of you may think that the above is a purely theoretical discussion, as no competition authority would ever bring such a case.

Is it enough to say that competition authorities would exercise their prosecutorial discretion wisely? I do not believe so. As I have mentioned many times, competition policy is implemented through law, not discretion.

In a decentralised system like the EU one, moreover, one cannot exclude that a national court will be asked to rule in a similar dispute. And national courts cannot hide behind their policy priorities: they have to decide on cases brought before them.

If a national court were confronted with a case like this one, it would inevitably realise the main implication of the above: the legal test conceived for traditional instances of tying is not ideally suited for product design cases.

What is special and different about digital cases

If we agree that the legal test applying to traditional instances of tying is not appropriate, the next question is why. What is the difference between contractually tying the sales of one soft drink to the acquisition of another soft drink, on the one hand; and embedding cameras in smartphones, on the other?

The key is that intervention in the latter case is far more ambitious. A traditional instance of tying involving soft drinks relates to how products are sold. Questioning the integration of complements questions how products are made. In other words, the latter interferes with the heart of a firm’s business model and/or the design of products.

In order to understand the difference between the two cases (and what they involve), it is typically useful to think of the remedy. How can the infringement in a case concerning the contractual tying of soft drinks be brought to an end? A one-off negative obligation would be enough.

What would the remedy be if integrating cameras into smartphones were deemed abusive?

Perhaps, a Microsoft I-style remedy: asking Apple to produce a version of its smartphone without a camera. One could also imagine a Google Shopping-style remedy: several versions of the smartphone, each with a different camera. An auction could be organised to decide which cameras go into the various devices.

Irrespective of the particularities: the remedy would be infinitely more convoluted, and could perhaps fail (as in Microsoft I). This crucial difference is not (and cannot be treated as) an afterthought that is irrelevant to the determination of the appropriate legal test.

In all digital cases, including pending ones, the Commission is venturing more often than in the past with how products are made. It is questioning monetisation strategies (the ongoing investigations into Amazon are a good example) and the appropriate degree of modularity within an ecosystem (investigations appear to question whether integrated firms should keep some activities for themselves, which is what the Apple Pay case seems to be about).

It makes sense to look closely into these matters. But I fail to see how one can pretend that cases in which intervention would interfere with the heart of a business model and/or the design of a product are just like old-fashioned contractual tying cases and do not raise far more complex issues.

For the same reasons, one should not avoid the hard questions about the appropriate legal test to deal with these cases and about the institutional implications of making it easier to interfere more often with how products are made. This is the key message I tried to convey in my paper.

I look forward to your comments. I have repeatedly clarified, and this time is not an exception, that I have nothing to disclose.

Written by Pablo Ibanez Colomo

21 July 2020 at 7:26 pm

Posted in Uncategorized

12 Responses

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  1. Dear Pablo,

    Thank you for your post. I agree with your key premise that there is nothing “straightforward” in applying the principles of the tying case law to digital, or other, cases. I have two comments:

    First, you seem to be attacking the straw man of mechanical rule-application. Inside and outside of competition law, no sensible person has ever claimed that legal reasoning, even in “easy” cases (which these, as you rightly say, are not even), is “mechanical” or that a certain result is “inevitable” by way of deduction. Such view assumes legal reasoning to be analytic, which it is not.

    Secondly, and in substance, I think you’re a bit quick on foreclosure/anti-competitive effects. You say that “If one assumes that they are, the pic below suggests that smartphones have had a substantial impact on the sales of stand-alone cameras”. You then conclude that “the mechanical application of traditional tying doctrines inevitably leads to the conclusion that the embedding a camera in a smartphone is abusive.” But there is nothing “inevitable” about that conclusion. This “substantial impact on sales” might well be considered competition on the merits. And sure, it is neither inevitable that Microsoft’s tying of WMP to Windows OS constitutes “abuse” instead of “competition on the merits”. I’m not entirely sure whether the analogy between the cases — in terms of their anti-competitive effects — is entirely sound, as the psychology of consumers’ preference formation might be different. But regardless, the point is that the principles of the case law do not establish anything which forces any court of competition authority to inevitably conclude, in substance, that the effects of such tying would constitute anti-competitive foreclosure instead of competition on the merits.

    Best wishes,
    Justin

    Justin Lindeboom

    21 July 2020 at 8:17 pm

    • Thanks, Justin!

      Your thoughtful insights are always most welcome.

      I fully agree with you at a high level. I would have follow-up questions on how some of your claims are made operational. You say that the decline in sales may be an expression of competition on the merits, with which I agree. The question is then what this means in concrete terms and whether the legal test can appropriately account for such a factor.

      A second question relates to the institutional setting in which the law is applied. While I agree with your comments in principle, the one piece that is missing is the strategic behaviour of the various stakeholders and whether this factor might impact on the pretence or belief that the law can apply mechanically.

      These are tough questions for which an event might be more appropriate!

      Thanks a lot again

      Pablo Ibanez Colomo

      22 July 2020 at 9:12 am

  2. Sometimes simplifying examples may seem attractive to make a point. However, without having undertaken research on DGComp market definition in this field, Smartphones with a camera are presumably the (one) market, thus making it not a tying case (it is only one product). Your other case law examples differ in this regard, showing also the critical point of differentiation, which is from my point of view not the legal test of abusive conduct in terms of tying/bundling.

    Christian E.

    21 July 2020 at 10:19 pm

    • Thanks a lot, Christian!

      Your comment is sensible and proposes an approach to the ‘two product test’ that is more than reasonable (as well as the one that makes sense, from my perspective).

      However, yours is not the approach embraced in Microsoft I and II. If your approach had been followed, there would have been no Media Player case, and certainly no Internet Explorer case.

      Pablo Ibanez Colomo

      22 July 2020 at 9:14 am

  3. Hello Pablo,

    thank you for your post! Having conducted a lot of research on the topic, I feel that your hypothetical smartphone-camera case was not devolped in line with the current case-law on tying and bundling. Just 2 points I want to raise:

    (i) Quote:
    Coercion

    For tying to amount to an abuse, there must be an element of coercion. And there is probably no more effective coercion than physically embedding one product in another one.

    At recital 970, the ECFI states that:
    [N]either Article 82 (d) EC nor the case-law on bundling requires that consumers must be forced to use the tied product or prevented from using the same product supplied by a competitor of the dominant undertaking in order for the condition that the conclusion of contracts is made subject to acceptance of supplementary obligations to be capable of being regarded as satisfied.

    Therefore, coercion is not a MUST, but nice to have.

    (ii) Quote:
    For tying to exist, it is necessary to show that there are at least two separate products – a tying product and a tied product. Can one say that a smartphone and a camera are separate products? Yes, at least following Microsoft I. The interpretation of the ‘two product condition’ given by the Commission survived scrutiny by the General Court.

    The crucial question in your case is whether there is an independant demand for smartphone cameras being sold on a stand alone-basis (which in my view is not the case). In the Microsoft Case, it was held that there was an indepedant demand (recitals 918 et seq). I thus find it highly questionable whether there are two separate products in your case – I feel that smartphone and camera can rather be compared to shoes and shoelaces – they are usually tied, since there is assumably no demand for shoes without shoelaces.

    By the way, I find that from an economic point of view, tying cases are pretty much different in the digital environment than in the analogue world, since the double marginalisation argument will most likely not hold.

    If anyone is interested, you can find my paper open access at the European Competition Journal page (I don’t know whether linking is tolerated here).

    Looking forward to an interesting discussion,
    Stefan

    Stefan

    22 July 2020 at 5:31 pm

    • Thanks, Stefan, for contributing to the discussion!

      The first point on coercion seems by and large semantic, as I do not believe we disagree.

      The second point is far more interesting. You appear to suggest that there would be a single product if the tying product (in your example, the phone or the shoe) were usually sold together with the tied product (the digital camera or the shoelace).

      Yours is indeed a sensible interpretation, from a normative standpoint, of the two product condition. As I mentioned in the previous comment, it is the most reasonable one from my perspective.

      For better or worse, this interpretation of yours was not accepted by the General Court. Microsoft made essentially the same argument, but it did not carry the day.

      The Commission’s interpretation prevailed. Accordingly, what matters is whether the tied product (that is, the digital cameras, or the shoelaces) are sold independently by other providers. And searching for ‘digital camaras’ on Amazon dissipates any doubts in this regard. As the law stands, these are separate products (I should add that, as the law stands, the ‘two product condition’ is fulfilled pretty much always and everywhere, with the implications that follow).

      Pablo Ibanez Colomo

      22 July 2020 at 7:54 pm

      • Thank you both for the vivid discussion.

        One thing should be emphazised as regards the initial post and Pablo´s understanding of market definition in the Microsoft I case:

        The Commission did not define the separate (tied) market in Microsoft I by pointing merely out that the tied product (Media Player) is produced independently of the tying product and the Court did not decide solely on the basis of this argument.

        The overall assessment of the Commission, as summarized by the Court in paras. 872-884 of the Microsoft I judgement, consists in sum of ten arguments brought forward by the Commission.

        One of those ten arguments is the “produced independently” argument, which “indicates a separate consumer demand” (see para 873). For that, independent developers “indicate” (wording already softens the conclusio) only that there is separate consumer demand. The General Court emphazises by this formulation explicitly that the assessment of separate consumer demand is the decisive aspect, not the existence of independent producers (see also Stephan´s post citing para. 918 et seq., the Court´s view).

        On this point Microsoft I and the Apple camera example posted differ fundamentally:

        Consumers buying MS Windows, install MS Windows and maybe afterwards decide to download a different media player (e.g. Realplayer) and install it to use it complementary with MS Windows and instead of MS Media Player. There is separate customer demand for Media Players to be used with MS Windows.

        Consumers buying an IPhone do not buy to-be integrated non-standalone smartphone cameras via Amazon to replace the original IPhone camera by eracting the old camera and putting in the new camera. There is no separate customer demand.

        By focusing on separate consumer demand the “two products condition” is not fulfilled in almost every case – and the General Court focused on separate consumer demand in Microsoft I, as described above.

        Christian

        23 July 2020 at 10:04 am

  4. Thanks everybody for the wonderful exchange. Certainly the best part of blogging.

    It makes sense to take stock of the discussion and identify some general themes.

    Some key questions revolve around the ‘two product condition’.

    In particular: can one say that there are two products even when the tying product (the smartphone) is only available together with the tied product (the camera)?

    Of course, the General Court concluded in Microsoft I. This position is in line with the Court of Justice’s rulings in Hilti and Tetra Pak II.

    Therefore, the fact that pretty much all smartphones seem to have a camera these days does not preclude the finding that smartphones and digital cameras are two products. The views expressed certainly make sense de lege ferenda, but this is where the law stands in the EU.

    Whether there are two products ultimately depends on demand for the tied product as a stand-alone one.

    Showing that there are independent manufacturers offering the tied product as a stand-alone one and arguing that there is consumer demand for it amounts, in practice, to saying one and the same thing. If there are producers of stand-alone tied products, one can safely presume there is demand for it (Microsoft I, para 927). Absent demand, why would there be supply?

    Thus, the fact that there are independent manufacturers of digital cameras sold on a stand-alone basis provides at least ‘serious evidence’ (to use the General Court’s expression) that smartphones and cameras are two products. Agree or disagree (again, good reasons to do so), this is where we are as a matter of law.

    A second important point: the General Court in Microsoft did not conclude that the tied product was a ‘media player for Windows’. The ruling always refers to ‘client PC operating systems’ and ‘streaming media players’.

    Finally, Christian mentions that there was multi-homing in Microsoft I (and II). That is true, but this does not say anything conclusive about the ‘two product condition’. In fact, the Commission conceded that the case was unusual in this regard: a typical instance of tying is one where there is no multi-homing.

    Pablo Ibanez Colomo

    23 July 2020 at 5:41 pm

  5. Fascinating discussion, and a great thought experiment Pablo, bravo!

    Two thoughts/questions:
    1) what is the relevance of the fact that a smartphone camera cannot physically (even with reasonable adaptation) be sold separately from the phone, and the fact that a standalone camera cannot physically be integrated with a standalone phone? It seems critical to me, as it means camera competition from phones is all-or-nothing – there is no less restrictive counterfactual approach to smartphone competition in cameras. In the end does that have to enter as objective justification/efficiency defence?
    2) What is the role of history? One could imagine the thought experiment would feel quite different if smartphones predated the digital camera market, and integration of the camera was a response to innovative new digital camera startups having great success (rather than smartphone cameras being the challenger to the existing standalone market). So does history matter – and how so?

    David Foster

    30 July 2020 at 10:20 am

    • Thanks so much, David! Great thoughts, as usual!

      Under the prevailing interpretation (ie the Commission’s) that I described in the post, I fail to see how the first point you make would have an impact on the analysis. In essence, you seem to claim that the tying and the tied products are designed so that they only work with each other. It is, in a sense, a more effective way of tying. In its Guidance Paper, the Commission suggested that this form of (technical) tying is even more problematic.

      The bottomline, again, is that the legal test that applies to traditional instances of tying is not really appropriate for product design cases. This is a matter that is yet to be addressed by the EU Courts.

      On the efficiency defence: the defence has not fared very well before the Commission so far. The little that we know about it suggests it is probably not an effective means to filter out cases.

      On the role of history: again, given how the ‘two product’ condition is interpreted, I fail to see how it makes a difference. One could conceive some sort of ‘meeting competition defence’, but cases like Wanadoo convey the impression that this defence, insofar as it exists, would only be relevant in a narrow set of circumstances.

      As I suggest in the paper, it would be important to think long and hard about legal tests and not simply apply mechanically legal tests and labels to practice.

      Thanks a lot again!

      Pablo Ibanez Colomo

      30 July 2020 at 2:36 pm

  6. I agree wholeheartedly with the thrust of this, as well as the specific points on flawed past remedies. I would expect prosecutorial discretion to continue to play a significant role, however, and wouldn’t view this as necessarily such a bad thing. Indeed, while we indeed talking about law enforcement here, a degree of subjectivity seems inherent in the underlying structure of Article 102. Maybe the OFT was a bit too relaxed at times but a general reluctance to run Article 102/Chapter II CA98 cases (except in medicines cases…) probably avoided a lot of unhelpful/unproductive enforcement in response to self-interested complaints. Of course, the opposite could also apply, ie an excessively trigger-happy authority could exercise its discretion to bring lots of speculative abuse cases, at which point we’d have to rely on the courts to do their job.

    Becket McGrath

    13 August 2020 at 1:35 pm

  7. […] two of my latest posts – a though experiment on smartphones and cameras, and an update on Slovak Telekom[1]– some of you […]


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