Chillin'Competition

As readers will know, the Commission sent a Statement of Objections to Apple last week (for the press release, see here). The investigation focuses on the firm’s practices in relation to the conditions under which it provides access to its app store; it is confined to music streaming services. Most of you probably remember that the case traces its origins back to the complaint brought by Spotify, which concerned the 30% commission Apple ask on sales taking place via its app store.

According to the press release, the Commission has reached the preliminary view that the abovementioned practice amounts to an abuse of a dominant position. The document also mentions the ‘anti-steering provisions’ whereby app developers are restricted in their ability to inform users about alternative purchasing options.

The case has long intrigued the competition law community. The theory of harm that the Commission would pursue was not immediately obvious to infer from the publicly available information. Was the investigation really about exclusion, considering that Spotify is by some distance the market leader on the relevant market? If so, what are the conditions to assess the legality of the conduct? Was the case about exploitation instead?

The press release hints at some answers in this regard. Generally speaking, it suggests that common carrier antitrust (an emerging interpretation of competition law provisions and a new approach to enforcement) is picking up speed. I would note three aspects in this regard:

• First, the press release suggests that the lawfulness of potentially exclusionary conduct does not depend (or, rather, no longer depends) on an assessment of anticompetitive effects.
• Second, the press release signals that the Commission is ready to question firms’ business models in the digital sphere: what EU competition law, for decades, was reluctant to challenge absent exceptional circumstances, has now become a central feature of enforcement.
• Finally, the press release hints at an additional feature of common carrier antitrust: it would seem that each ecosystem is deemed a market on its own.

A farewell to anticompetitive effects?

Modern EU competition law, as interpreted by the Court of Justice, is based on the idea that the vast majority of potentially abusive practices are unproblematic where they are unlikely to have anticompetitive effects (in refusal to deal cases, the test is even stricter). This is the interpretation underpinning the most recent case law (including Deutsche Telekom, TeliaSonera, Post Danmark I and II, Intel, MEO) and the Commission’s Guidance Paper (in which the authority committed to prioritising cases that would likely lead to anticompetitive foreclosure).

The principles of contemporary EU competition law are not obvious to reconcile with the Apple investigation. In this sense, the case hints at the rise and consolidation of common carrier antitrust.

Rulings like Deutsche Telekom and MEO show that a raising rivals’ costs strategy is not anticompetitive in and of itself. An evaluation of the likely impact of the conduct is a precondition for the application of Article 102 TFEU (or, indeed, merger control and Article 101 TFEU). According to this case law, the Commission would need to establish the anticompetitive effects of Apple’s app store-related behaviour.

A cursory look at the relevant market suggests that showing the exclusionary impact of Apple’s practices on the market for music streaming services is anything but an easy task. The fact that the original complainant in the case is (and has been for a while) a market leader one of the factors in this regard. The fact that music streaming is accessible in many ways (that is, not only via Apple’s app store or, more generally, Apple devices) is another one.

The press release is interesting in that it suggests that the Commission believes that it can establish an abuse of an exclusionary nature without showing that the practice is likely to have anticompetitive effects. It would seem that the case is predicated on the idea that the Commission can discharge its burden of proof merely by showing that the practices distort competition by raising rivals’ costs. In this sense, it signals a move away from Deutsche Telekom (with all the implications and/or complications that follow).

The move away from anticompetitive effects does not seem to be an isolated instance. I have the impression that other cases in the digital sphere will be conducted following the same approach. One can think, in particular, of the Amazon case (which I discussed here). As is true of the Apple investigation, the use of non-public data by Amazon cannot be assumed to lead to the exclusion of rivals on the relevant markets (and might very well inject competition in Amazon’s marketplace).

This new approach to the assessment of practices comes at a time when the fundamental tenets of modernisation are being challenged. It has become relatively frequent to read that the effects-based approach has gone too far, or that it would place an undue burden on authorities in digital markets.

The move away from anticompetitive effects raises a number of fascinating questions. I will mention just two here. The first is whether the Court will agree to depart from the case law mentioned above and embrace the Commission’s expansive interpretation of its powers. The second is whether this new approach makes it possible to meaningfully constrain administrative action. To the extent that it equates a competitive disadvantage with harm to competition, its scope of application seems to lack clear boundaries (it is a criterion that seems fulfilled pretty much always and everywhere).

In this sense, the post-modernisation approach reminds one of the pre-modernisation times, when the Commission had a tendency to equate a limitation of a firm’s freedom of action with a restriction of competition.

Competition law and business models: what is the counterfactual?

The Apple investigation is also an example of another aspect of the emerging approach to enforcement: the Commission is no longer reluctant to challenge firm’s business models. Traditionally, the EU competition law system was deferential to firm’s strategies. It did not question, absent exceptional circumstances, a company’s decision to produce exclusively in-house. Similarly, the core of distribution methods like selective distribution and franchising are deemed prima facie lawful irrespective of their effects.

Common carrier antitrust is much less deferential to the central aspects of a firm’s business model. This approach to enforcement is fraught with challenges for an authority. First and foremost, one cannot simply assume that the undesirable aspects of a company’s core strategy can be removed without consequences. For instance, one cannot take for granted that a manufacturer will rely on franchising if it is required to accept competing products in the franchisees’ premises. Similarly, one cannot simply assume that forcing a company to deal with third parties will have no impact on incentives to invest and innovate.

Generally speaking, tweaking a firm’s business model via competition law enforcement requires a careful evaluation of the counterfactual. When it is said that a business model restricts competition, the question should be: compared to what? What would the world look like if the business model was a different one? How are the different aspects of a business model (both the desirable and undesirable) intertwined? I was reminded of these questions when reading the press release in the Apple case.

The press release suggests that a central aspect of the Commission’s case is that Apple’s 30% fee leads to higher prices for consumers (as the fee is passed on to subscribers). It is unlikely that challenging Apple’s ability to charge a fee to app developers will come for free; it will most probably be compensated elsewhere (possibly in the form of more expensive devices and/or services for end consumers). Once again: one cannot assume that the undesirable aspects of a business model can be removed without consequences.

I look forward to seeing how these central questions are addressed in the case. And I look forward to your comments, in particular if you see things differently. As you know, I have nothing to disclose in this or indeed in any other matter.