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Focus on Regulation

Digital is trump! – Market definition and new dominance criteria for digital markets

New German competition law: Germany takes a pioneering role in adapting its competition law to the digital economy (Part 2)

On 9 June 2017, the 9th amendment of the German Act Against Restraints of Competition (ARC) entered into effect introducing important amendments for companies to German competition law (please see the highlights of the 9th amendment of the ARC here). The reform deals with two main issues: the implementation of the European Cartel Damages Actions Directive (for a comprehensive coverage of the various new regulations, please see here) and the adaption of German competition law to the challenges of the digital economy.

The new provisions amongst others deal with merger control (see our previous blog post), the handling of “free” services, e.g. social media, and companies with the assessment of market power, in particular in the digital industry. This reform is likely to shape the competition law practice in Germany and Europe over the next years.

Clarification: “Free” services do not preclude the existence of a market

The new provision in Sec. 18 (2a) ARC clarifies that a service being provided free of charge does not preclude the existence of a market. This clarification is intended to cover in particular multi-sided and/or platform markets (e.g. social networks, real estate portals, hotel booking platforms or dating platforms), in which services are provided without direct monetary consideration. The clarification intends to create legal certainty and, especially in the field of the digital economy, to enable a quicker intervention of the FCO in abuse and merger control cases.
The wording of the new provision is rather wide and open to interpretation. This will lead to ambiguities as regards the interpretation of “free” services in practice, for instance the question whether trade free of charge with no pursuit of any other purchase or acquisition purpose could be classified as entrepreneurial activity. The new provision will gain particular relevance, for instance, in the case of so-called attention and advertising platforms, i.e. platforms which allow advertisers to attract the attention of other user groups without coming into direct contact with the advertisers (e.g. social networks, messenger services).

Complementing the market power criteria

In Sec. 18 (3a)  ARC, the German legislator introduces a number of new criteria which, especially in the case of multi-sided markets and networks, shall be taken into account in addition to the existing criteria for the assessment of market power in Sec. 18 (3) ARC, as additional factors in the investigation of the market position of an undertaking. The assessment of a company’s market position plays a significant role both in the context of the dominance scenario (Sec. 19, 20 ARC) as well as in merger control assessments. So far, Sec. 18 (3) ARC required the assessment of the market position of a company compared to its competitors, especially against the following criteria: market shares, financial power, access to demand- and supply-markets, integration with other companies and legal or factual market entry barriers for other companies.
The legislator feared that the mere consideration of the classical criteria for the assessment of market power in Sec. 18 (3) ARC could lead in practice to a situation in which potential concentrations as a result of network effects would not be adequately taken into account or, as the case may be, would be overestimated. The new criteria include:

  • direct and indirect network effects (No. 1),
  • the parallel use of multiple services and the switching costs for the user (No. 2),
  •  economies of scale in connection with network effects (No. 3),
  •  access to competition-relevant data (No. 4), as well as innovation-driven competitive pressure (No. 5).

Especially with regard to “Big data” it can be expected that, in the future, criterion no. 4 of “access to competition-relevant data” will play a significant role in the assessment of the market position of undertakings with data-based business models. The antitrust treatment of “Big Data” is currently in the focus of attention of the European antitrust authorities. The explicit mention of this potential market power criterion in the context of the new German competition law rules again emphasizes this current enforcement priority of the European competition authorities.

Conclusion and outlook

Germany has taken a pioneering role within the European competition framework with its most recent proposals to adapt competition legislation to the challenges of digitalization. This is reflected not only in the introduction of the digital economy provisions with the 9th Amendment of the ARC, but also in the joint report of the German FCO and the French Competition Authority on Big Data and the impact on antitrust law. The White Paper on Digital Platforms of the Federal Ministry of Economics published earlier this year points in the same direction.

The concrete application of the new rules by the FCO will show whether they will lead to an intensification of competition law enforcement in the digital economy. Especially for undertakings in the digital economy, it will be crucial to closely monitor and shape the German developments.

 

Outlook

The next post from our blog series on the German Competition Act reform “Closing the so called “Sausage-Gap” – Cartel fine proceedings after the 9th amendment to the German Act against Restraints of Competition (GWB)” will be published tomorrow.