Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Apple’s App Store: a microcosm capturing what digital cases are all about

with 5 comments

Developers using Apple’s App Store have been voicing their grievances for a while. These complaints reached a whole new level last week, when a high-profile developer (or so the younger generations say) very publicly defied Apple’s rules. As expected, the firm – Epic – was expelled from the app store and the confrontation made the headlines (see here).

Reading about this sensational story made me realise it captures effectively what is new and distinctive about disputes in digital markets. There are some patterns that cut across pretty much every case against Big Tech. The point underpinning the complaints – what these seek to achieve – is identical.

The rise of the powerful complainant

Epic is a large and successful firm that offers the most popular videogame these days. It shows. The video accompanying its confrontation with Apple deserves to be watched (here, via, ahem, another platform). It is a play on Apple’s iconic 1984 ad and an astute way of pitching Epic as the outsider siding with ordinary folks against the (fruit-shaped) establishment.

Epic exemplifies the rise of the powerful complainant. This development is perhaps the single most relevant change in the competition law ecosystem over the past decade. Until relatively recently, firms – in particular large and successful ones – were wary of proactive, far-reaching competition law intervention. They all sang to the same cautious tune.

Not anymore. In fact, a few large multinationals keep urging authorities to take risks and, if necessary, depart from the case law and/or introduce new ad hoc rules. ‘Act fast, deal with the unintended consequences later’ is the mantra on the rise. Just like Epic, these players seek to persuade the wider public that these changes do not just suit their agenda but are good for society at large.

The above can hardly be criticised. It would be surprising if firms did not attempt to advance their interests on all fronts, including the legal one. The point is that the changing ecosystem introduces new, fascinating and to some extent unprecedented dynamics [note: if you happen to be a political scientist reading this post, drop me a line!).

It is all about access and rents: the fight for a larger slice of the pie

If one looks at the past and ongoing investigations involving large online platforms, it becomes apparent that there is an overarching theme cutting across all cases. In essence, complainants seek to secure access on improved terms and conditions. More precisely, they intend to capture a larger share of the rents generated by the platform.

This conclusion is obvious to draw from disputes around the App Store. Complainants in these investigations have been candid about the thrust of their claim: they consider that the 30% commission charged is excessive and thus should be entitled to a larger slice of the (apple) pie.

The rest of cases are no different, whether they are said to concern exploitative or exclusionary behaviour.

The interim measures adopted by the French competition authority – and concerning press publishers – are an obvious example (see here). The struggle for ‘equal treatment’ in Google Shopping was in essence a struggle for the traffic (and thus the rents) generated via the search engine.

Even investigations on Amazon’s marketplace are, at their heart, about rents: the data shared by retailers using the marketplace is just part of the price they pay to access the platform. It is, in other words, a fraction of the commission charged by Amazon (and should be analysed as such).

How these cases may change competition law

EU competition law occasionally ventures into the allocation of rents within a value chain. It has never been disputed that Article 102 TFEU applies to exploitative conduct by dominant firms. It is not a secret, on the other hand, that the Commission has always been careful about opening exploitation cases, for very good reasons.

It will never be never easy to determine the appropriate remuneration for a firm developing an input or infrastructure, let alone the optimal allocation of rents across the value chain. The unintended consequences of intervention along these lines are also well known.

These questions – this is not a secret either – are considerably harder when it comes to online platforms. This is so for two reasons. One relates to the dynamic and fast-moving nature of digital markets, which makes the task more prone to errors than, say, getting the access price to the telecoms network right.

The second reason is not always acknowledged. Re-allocating rents across digital markets typically goes much further than tweaking the the price of a medicine or the tariffs of a copyright collecting society. It often involves changing a firm’s product, business models and/or degree of integration.

Just think of the aftermath of Google Shopping (the design of the search engine was modified) and Android (the business model was altered) or of the implications of ruling that Apple may not impose an in-app purchase system (intervention would add an additional layer of modularity).

As already explained (see here), EU competition law is even more careful about imposing remedies leading to such outcomes (which, in turn, is the reason the indispensability condition has traditionally acted as a legal filter to limit the instances in which the system is exposed to them).

As the ‘act fast, deal with the unintended consequences later’ mantra gains traction, the exception comes closer to becoming the rule, and the system closer to dealing, on a routine basis, with the very issues it has avoided for decades. Fascinating times indeed.

Written by Pablo Ibanez Colomo

21 August 2020 at 3:34 pm

Posted in Uncategorized

5 Responses

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  1. Dear Mr. Ibañez,

    I fully agree with the statements that “Apple’s App Store is capturing what digital cases are all about” and that “it is all about access and rents” (rents being also data shared by retailers using Amazon).

    I think there is also a vast consensus on the challenges associated with “exploitative cases”, “acting fast” and antitrust authorities “influencing business models” pointed out in the article.

    However, I tend to disagree on the assumption that it is (only) “the fight for a larger slice of the pie” started by greedy “powerful complainants”.

    In fact, those in a gatekeeper position may have two possibilities to extract the maximum from such relevant position (i.e. an exploitative abuse or self-preferencing their own products/services).

    In my opinion, these behaviours not only damage (directly) and unfairly their rivals but also final users (indirectly) as they distort competition.

    The key aspect is that a significant percentage of potential demand is stacked with such gatekeeper (either because there are switching costs -if you just bought an Iphone it may not be that easy change to android for a single videogame- or because there is information asymmetry – it is nearly impossible for an average user to assess Google search quality-). So it is not to be expected that most apple users will directly get rid of their mobile phones just because Fortnite will no longer be available, in the same vein that Google Search users are not to abandon such search engine because is implementing a self-preferential treatment to its own ads.

    Consequently it may be foreseeable that in the long term those services that receive a preferential treatment (either by being favoured or by exploiting or demoting rivals) have a greater (and unfair) shot at winning the market and so damaging consumers/users welfare since it may not be due to its own merits.

    At least in my view as antitrust authority employee I don’t automatically perceive such actions as just a fight for a slice of the pie but a need to reassure that fair competition in the market is well preserved.

    As per the claimants, I think it must be taken into account that it may not be easy for a company to start a complaint against any of such gatekeepers. The action starts by backfiring. In the Fortnite issue, one relevant door gets immediately closed.

    So, even though such gatekeepers are not essential facilities (users can play Fortnite through other channels as well as users may buy products directly to sellers websites – i.e. without using amazon or Google -, etc) they play a significant role as they are a relevant “door” to access the market.

    In view of the above, there may be some “adverse selection” in the sense that only relevant undertakings may afford such actions. They must be sure that the door guarded by such gatekeeper is not crucial for them. Besides, they must invest heavily on the action since it is not easy to have evidences (see Foundem’s effort on the Google search case).

    All in all, I find the post particularly insightful. Thank you!

    Xavi Puig

    Xavi Puig

    25 August 2020 at 10:45 am

    • Thanks so much, Xavi, for the thoughtful comment. I very much appreciate it.

      I do not believe we disagree in any fundamental way. These are certainly no easy questions and it is wonderful to have a nuanced debate. Your insights very much help in this regard.

      Deciding the appropriate remuneration for a platform is far from an easy task. Platform opeators create and restrict competition at the same time; sometimes the very behaviour that is pro-competitive also has an anticompetitive potential.

      The only question I would ask you relates to the idea, implicit in your comment, that it is somehow unfair, or contrary to competition on the merits, for a platform operator to favour its affiliate. I have explored the idea in my papers and I have a more nuanced view on the question.

      Thanks again so much!

      Pablo Ibanez Colomo

      26 August 2020 at 7:58 am

  2. Thanks to you, Pablo, for you kind reply.

    I fully agree that it is a nuanced debate and that most probably we do not disagree in any fundamental way.

    I also share your opinion that platforms are capable of both creating and restricting competition. I do not tend to minimize the (relevant) fact that such platforms are making it easy for other undertakings to access the market and, consequently, do benefit competition. At least in T1. But once the platform becomes quite relevant (I admit that it is not easy to set a threshold), I think some other behaviours may take place that may not be so positive in terms of competition. What is the behaviour that you consider that it is “at the same time” pro and anticompetitive?

    I could not agree more on how difficult it is to set the appropriate remuneration for a platform. In fact, I just assumed that it is very much controversial when we are before a platform that should be deemed as a “gatekeeper” and also to determine the remedy should there be evidence of an infringing conduct. However, I think that the question of whether the intervention by antitrust authorities is needed should be answered regardless of the difficulties of such reaction.

    Your question points precisely to the key question: should antitrust authorities intervene (for example, on self-preferential behaviours)? If we are before a “gatekeeper” (relevant platform) I think that it is quite necessary to make sure that it is neutral towards all undertakings operating through it. Otherwise competition between the products of such undertakings would not be on the merits but would be distorted by an external factor (one of such products receiving a preferential treatment by the gatekeeper). It should also be taken into account that such distortion is frequently disguised so that final consumers are not aware that the gatekeeper behaviour is not neutral. This is my current approach to this question, but I would very much appreciate if you could share with me your view on this question.

    Thanks to you Pablo! It’s a privilege to be able to exchange views with you!

    Xavier Puig Soler

    26 August 2020 at 5:18 pm

    • Thanks again, Xavi! A real pleasure to discuss these matters with you. It would be amazing to get your thoughts on this paper, where I address these ideas at length: https://ssrn.com/abstract=3654083

      Pablo Ibanez Colomo

      26 August 2020 at 7:22 pm

      • Thank you Pablo for the link provided.

        Undoubtedly, your paper sets a reference for this topic. It touches upon different aspects, being all relevant and interesting.

        In the framework of a comment to this post, I think that I must be concise. So, I am going to focus only on what is, IMHO, more essential. And I think we also agree on this:

        “The decisive question is not whether the firm would have the incentive use a variety of strategies to favour its affiliates, but whether these strategies are likely to have anticompetitive effects on the relevant market”.

        Once again, as you rightfully pointed out, it is a nuanced discussion. It depends on multiple elements such as the position the undertaking carrying out the self-preferential behavior, the existence of alternatives for suppliers to reach its potential customers and, I would add, switching costs and information asymmetry.

        Current cases related to such behaviours have in common that relate to undertakings that are “significant” and that are at least particularly relevant for suppliers to reach their potential demand.

        Certainly they are not “indispensable” and the “essential facility doctrine” is not to apply (at least not if the requirement of indispensability remains).

        So going back to the key question: Can Amazon, Google, Apple distort competition if they implement a self-preferencing behaviour even though none of them being “indispensable”?

        In my opinion the answer is yes. And my answer has nothing to do with the name of those companies but on the fact that services they provide to other undertakings are of great relevance for the latter in the journey to reach their potential customers. Those services are certainly “gatekeepers”.

        It is also noteworthy that there are other relevant aspects to assess whether such behaviours may entail a damage in terms of competition. Those other aspects are related to the demand side and are particular relevant in the digital scenario. Even though some argue that there are no significant switching costs as “Competition is just a click away” I think that this statement actually disguise the fact that there may be hidden switching costs. For example, due to network effects. If I am using whatsapp and all my family and friends are using such service there is a huge cost for me to switch to another messaging app. Also, there is another relevant factor, which is whether demand is somehow captive in the sense that is not perceiving such self-preferencial behaviours and so there is no incentive to change from one gatekeeper to another (perhaps more neutral). Being the Google Search case a good example and as per how insidious can be to manipulate search results I just let the founders of Google speak (Annex A: http://infolab.stanford.edu/~backrub/google.html).

        So I consider particularly advisable that antitrust authorities react before self-preferencing behaviours carried out by digital gatekeepers.

        It is true that this would mean a significant change (always implies a certain degree of uncertainty) as indispensability would no longer be an essential requirement, but I think it is a quite frank debate. I certainly do not perceive as a hidden attempt to circumvent Case Law. On the contrary, the European Commission has opened it to consultation.

        I also acknowledge that it may limit the degree of freedom to incur on self-preference behaviours and even change some business models. However, I think that any action by an antitrust authority limits the freedom of undertakings but the well functioning of the market is a superior legal good. Once again, the question is whether such self-preference behaviours attempt against the well functioning of the market (competition on the merits).

        I will very much appreciate your reply. But let me admit that I hope to have the chance to meet you personally someday so that we can discuss it with the depth it requires.

        Thank you again!

        Xavi

        Xavi Puig

        31 August 2020 at 10:47 am


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