Antitrust Law Daily Wrap Up, ANTITRUST NEWS: Almunia promotes reforms to aid growth of EU digital economy, (Nov 12, 2013)

By Tobias J. Gillett, J.D., LL.M.

In a speech yesterday before the London School of Economics, Joaquin Almunia, Vice President of the European Commission responsible for Competition Policy, called for public polices, including competition policies, focusing on improving the European Union’s position in the digital economy.

Almunia began his speech by noting that the European economy is gradually improving, and no longer in the “double-dip recession” that it was in during the height of the financial crisis. Therefore, he focused his speech on policy measures, particularly in the area of competition, that can be undertaken to sustain the recovery and increase its growth potential.

Almunia noted several significant aspects of the digital economy that differentiate it from other areas. These include the “churning process,” in which leading companies can emerge quickly but also disappear just as quickly; the rapid rates of change in technology, business models, and sources of revenue; and the network effects that often tie the value of a digital concern to the number of users it has.

Some of these features can enable companies to become gatekeepers in their markets easier than in the brick-and-mortar economy, Almunia asserted. Companies can acquire a gatekeeper position through economies of scale, holding a patent, being in the position to steer network traffic, and network effects, among other means. Although becoming a gatekeeper is not illegal in itself, abusing that position may be, Almunia observed.

Almunia provided several examples of cases in which the European Commission is investigating the activities of gatekeepers, including its investigation of Google’s possible diversion of web traffic to its own specialized search services rather than those of competitors; Samsung’s and Motorola’s use of injunctions against licensees of their standard-essential patents that were willing to license the patents on fair, reasonable, and non-discriminatory (FRAND) terms; and telecom providers’ possible abuse of their dominant position to degrade the quality or limit the speed of third-party content in order to favor their own content. He closed his list of examples with a reference to the Commission’s cases against Microsoft in 2004 and 2009, in which Microsoft leveraged its near-monopoly in the PC operating system market in the markets for internet browsers, workgroup server operating systems, and media players.

The European Union (EU) has trailed Asia and the United States in developing its digital economy, Almunia observed. One possible reason for this state of affairs could be the EU’s different approach to antitrust enforcement. As an example, Almunia cited the fact that exploitative practices, such as unfair or excessive pricing, are covered by Section 102 of the EU Treaty, but not by Section 2 of the Sherman Act. Almunia noted that companies may have less incentive to invest if competition authorities may cap their profits. However, he also observed that competition enforcement has frequently promoted innovation, and contended that it “is not the reason why there are not European companies among the so-called over-the-top players.”

Another possible explanation of the lack of European companies among the dominant digital service companies is the fragmentation of the internal European market, according to Almunia. The lack of an integrated single digital market forces small European companies to ensure their compliance with multiple national laws before they can increase their presence in Europe, making it harder for European countries to achieve economies of scale and suppressing their growth. Almunia noted several initiatives aimed at helping to resolve the fragmentation problem, including the effort to create an EU Unified Patent Office, the License for Europe initiative to reform copyright and licensing, and the EC’s adoption of regulations intended to achieve a single telecoms market by harmonizing rules in national markets.

Finally, Almunia noted the lack of funding for startups. In the U.S., private investors provide the bulk of corporate financing, but in Europe roughly 80 percent of such financing comes through the banking system, he observed. Bank funding is limited, and the lack of it or of alternative funding sources prevents small businesses from finding investors. Almunia noted the Commission’s efforts to update its state aid guidelines to promote access by small and medium enterprises to risk capital.

“At the end of the day, this is the challenge of the knowledge age,” Almunia concluded. “Growth, innovation, and competitiveness in Europe are crucially dependent on our ability to stay in the digital economy race.”

News: Antitrust