Amending German competition law for digital regulation28.08.2020
Competition law poses complex problems in its application to digital business models. Many of these digital businesses are designed to operate on two-sided or multi-sided platforms. The presence of direct and indirect network effects and the improved efficiency of algorithms needed to process increased amounts of available data, have contributed to the emergence of large and powerful players. These firms also extend their portfolios by acquiring innovative services, complementary products and existing talent through intense mergers and acquisitions (M&A) activity directed, especially, at promising start-ups.
There is a widespread concern that the M&A activity carried out by large players is mainly a way of limiting potential competition to emerge and “killing” it before becomes a real threat. In recent years, several cases in digital markets have avoided review by the competition authorities because the firms involved have not met the necessary turnover thresholds. One of the reasons is they provide zero-priced services.
The acquisition of WhatsApp by Facebook in 2014 is an example of a transaction that is now seen to have had negative effects on competition (European Commission 2014). WhatsApp’s service allows users that download the application to their mobile phones to send text messages and voice messages, make voice and video calls, and share images, documents, or user locations. It was acquired by Facebook for about USD 19.3 billion. While supporting a free service and therefore having insignificant revenues, WhatsApp had a huge economic value based on the growing number of users. This is assumed to be the reason why Facebook offered to pay so much for the company. However, in this particular case, the European Commission did review the acquisition and allowed the merger to proceed (EC 2014). The merger did not reach the turnover thresholds set out in the merger regulation and was thus initially not eligible for notification to the European Commission. Facebook, however, decided to make use of the one-stop shop principle.
Several governments and institutions have been studying and providing recommendations to update existing competition laws in order to effectively deal with digital businesses. Three main aspects have attracted special concern:
- how competition law should deal with dominance in online platforms;
- the competitive role played by data and how to make access to data available to others; and,
- merger control.
German competition law
Modifications in each of these areas have been proposed in a new draft bill on the 10th amendment to the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen (GWB)). The draft act was published in January 2020 and is only available in German (GWB 2020). However, a supporting text in English explains the proposed changes to the GWB (D’Kart 2020).
The previous amendment to the GWB, which came into force in 2017, introduced substantial changes to German competition law. Although the reform was partially driven by the need to implement EU legislation into German national law, it also started addressing some of the growing challenges that come with the evolution of the digital economy. Now the German authorities are proposing more changes. The revised GWB itself builds upon two expert reports commissioned by the German government (Commission “Competition Law 4.0” 2019; Schweitzer and others 2018).
The new draft act
The new GWB is in effect a digital competition regulatory framework, which, among other topics, looks into the market power of digital platforms and proposes revisions to the German merger control regime. Other major changes include the implementation of EU Directive 2019/1, which empowers competition authorities to be more effective enforcers and to ensure the proper functioning of the EU’s internal market.
The draft act contains important and well-founded innovations in the field of abuse of dominance, which will better equip German antitrust institutions to address the special challenges that arise in connection with markets and firms in the digital economy. The draft, which is expected to be enacted in the course of 2020, contains proposals that are of great relevance for digital businesses. Some of the proposals particularly have digital platforms in mind, especially those providing advertising services on one side and offering zero-priced services to consumers on the other side.
Market power assessment
There is a growing debate on whether companies should be forced to grant access to data – principally consumer data – and how to regulate such access. Data accumulated by large digital platforms is considered by many experts to be a competitive advantage that forecloses the market to new entrants. A significant change in the GWB is the proposed modification to the procedure for assessing market power. In the process of determining dominance, authorities must now consider an entity’s “financial strength and its access to data relevant for competition” alongside other more traditional criteria such as market share (GWB 2020: Section 18 (3).
Another relevant change, as suggested in the advisory study to the Ministry (Schweitzer and others 2018: 3), is the introduction of the concept of intermediation power. The study recommended that, because of the increased importance of information intermediaries in digital businesses, a new form of market power should be accounted for, alongside supplier and buyer power. The main service that intermediaries in digital platform markets offer is access to a sales channel or customer group. These intermediaries have the ability to limit access to the market by other firms, dependent on their services. Section 18 (3b) of the draft act requires that: “when assessing the market position of an undertaking acting as an intermediary in multi-sided markets, account should be taken in particular of the importance of the intermediary services it provides for access to supply and sales markets.”
A new “essential facilities doctrine”?
Section 19 (Prohibited Conduct of Dominant Undertakings) of the draft act proposes a rewording of the essential facilities doctrine. Acknowledging the importance of data for digital platforms, one of the main objectives of the draft act is to allow access to data held by dominant platforms in order to support a potential competitor’s entry and for them to be able to compete in upstream or downstream markets.
The draft act therefore seeks to amend the German legislation of the essential facilities doctrine by extending the definition of an abuse to include the refusal to supply access to data. Specifically, it would be an abuse of a dominant position if a dominant supplier “refuses to supply another undertaking with a product or commercial service against adequate remuneration, including access to data, networks or other infrastructure, where the supply is objectively necessary in order to operate in an upstream or downstream market and the refusal to supply threatens to eliminate effective competition on that market, unless the refusal to supply is objectively justified” (GWB 2020: Section 19.2.4).
Here the draft act appears to diverge from one of the expert report’s recommendations (Schweitzer and others 2018: 5): “Nor does our report recommend the insertion of a new data-related example of abuse into the GWB … which would explicitly provide for an essential facilities doctrine as applied to data. The refusal to supply data over which a firm has exclusive control and which is essential for entering into an adjacent market can already be qualified as abusive under German (and European competition) law.”
Paramount significance for competition across markets
To tackle the concern that dominant platforms may leverage their power into adjacent markets and into new sectors and become even more difficult to challenge, the draft act includes a completely new section (GWB 2020: Section 19A), which introduces a new concept of intervention in relation to companies that can be defined as of “paramount significance for competition across markets.” In order to identify such firms, the German competition authority (Bundeskartellamt (BKA)) will look into several aspects of a company’s activity such as:
- its dominant position on one or more markets;
- its financial strength or its access to other resources;
- its vertical integration and its activities on otherwise related markets;
- its access to data relevant for competition; and,
- the importance of its activities for third parties’ access to supply and sales markets and its related influence on third parties’ business activities.
If the BKA finds that a company comes within the definition of “paramount significance for competition across markets” it will then have special intervention powers and it may issue an order prohibiting the firm from engaging in a number of practices, unless such practices are objectively justified. The prohibited practices are:
- to treat the offers of competitors differently from its own offers when providing access to supply and sales markets;
- directly or indirectly to impede competitors on a market in which the respective undertaking can rapidly expand its position even without being dominant, provided that the impediment is capable of significantly impede the competitive process;
- to create or raise barriers to market entry or otherwise impede other undertakings by using data relevant for competition which has been obtained from the opposite market side on a dominated market, also in combination with other data relevant for competition from sources beyond the dominated market, or demand terms and conditions that permit such use;
- to make the interoperability of products or services or the portability of data more difficult and thereby impede competition; and,
- to inform other companies insufficiently about the scope, the quality or the success of the performance they provide or commission, or make it difficult in other ways, for them to assess the value of this performance.
The proposed amendment provides the BKA with the power to intervene early if a strong but not dominant company tries to achieve greater scale in an anticompetitive manner and/or to significantly restrict competition. The aim is to prevent digital markets with strong cross-group positive network effects “tipping” in favour of the strongest player, quickly leading to a quasi-monopoly that it is difficult to reverse.
This amendment thus provides far-reaching powers of intervention to the BKA. Another difficulty for companies that fit in this new concept is that they will have the burden of proof that their behaviour is not anticompetitive and is objectively justified.
Relative or superior market power
German competition law, (§ 20 Prohibited Conduct of Undertakings with Relative or Superior Market Power) prohibits companies that have “relative market power” compared with small and medium-sized enterprises (SMEs) from abusing that power. Relative market power exists if the SME depends on the larger company to carry out its business. The current amendment widens the scope of protection so that it is no longer limited just to SMEs (section 20 (1)). However, the protection does not apply if the dependency of the smaller company is offset by a countervailing power in relation to the company with a strong market position.
In addition, it is proposed that relative market power shall also apply to undertakings acting as intermediaries in multisided markets. Relative market power arises where a company is dependent on an intermediary to access customers, including the situation in which it is dependent on access to data controlled by another undertaking in order to carry out its own activities. The refusal of access to such data may constitute an unfair impediment even if there is not yet a commercial agreement in place for the supply of such data.
Merger control in Germany
In Germany mergers between companies are subject to control by the BKA which must approve all deals that meet certain defined requirements. An obligation to notify a merger intention only exists where a transaction is considered a concentration within the meaning of the German Act against Restraints of Competition and where the turnover of the companies involved exceeds certain thresholds:
- a combined worldwide revenue of the undertakings to the concentration of more than EUR 500 million; and,
- a domestic revenue of at least one undertaking exceeding EUR 25 million; and,
- a domestic revenue of another undertaking exceeding EUR 5 million.
Turnover thresholds are a common feature of merger control regimes worldwide offering a simple way to focus competition authorities on the transactions which merit assessment and likely can have strong negative effects on competition.
Mergers of a larger dimension or wider geographical scope are examined under the EU Merger Regulation. In such cases, the European Commission is the competent authority to examine the merger. The legal basis for EU Merger Control is Council Regulation (EC) No 139/2004, the EU Merger Regulation. The regulation prohibits mergers and acquisitions which would significantly reduce competition in the Single Market, for example if they would create dominant companies that are likely to raise prices for consumers.
There are two ways a merger can fall within the jurisdiction of the European Commission. The first alternative requires:
- a combined worldwide turnover of all the merging firms over EUR 5 000 million, and
- an EU-wide turnover for each of at least two of the firms over EUR 250 million.
The second alternative requires:
- a worldwide turnover of all the merging firms over EUR 2 500 million, and
- a combined turnover of all the merging firms over EUR 100 million in each of at least three Member States, and
- a turnover of over EUR 25 million for at least two of the firms in each of the three Member States included under 2, and
- EU-wide turnover of each of at least two firms of more than EUR 100 million.
In both alternatives, an EU dimension is not met if each of the firms achieves more than two-thirds of its EU-wide turnover within one and the same Member State. About 300 mergers are typically notified to the European Commission each year.
The merger control rules in the draft act
The draft GWB proposes two major changes to the German merger control rules. The first major change (GWB 2020: Section 35) relates to raising the second domestic revenue threshold from EUR 5 million to EUR 10 million. This is intended to allow the authority to focus its resources on more complex cases.
The second major change concerns the possibility for the BKA to request notification from certain companies even when the current merger thresholds are not met (GWB 2020: Section 39A). This provides powers to the BKA to require a company to notify any transaction in particular sectors if the acquirer achieved a turnover of more than EUR 250 million worldwide, and if there are reasons to believe that further transactions might restrict competition in a specific sector. Several reasons could justify this demand including analysis in a sectoral study, complaints, or because a company has a track record of acquiring smaller competitors. However, any individual transaction will only be notifiable if the target company has a total turnover over EUR 2 million, of which at least two-thirds is generated in Germany. This appears to be a measure destined to tackle all types of killer acquisitions.
The significance of the draft act
The draft act proposals are of especially high relevance for undertakings in the digital sector. Before being approved, the draft GWB will raise substantial discussion. Some of them are expected to be highly controversial and no doubt some will face considerable implementation challenges.
The revisions to the GWB have been drafted at the time of an intense international debate involving the publication of many important and relevant reports on competition policy, such as the U.K. Furman Report (Digital Competition Expert Panel 2019), the European Commission’s Special Advisers’ Report (Crémer, de Montjoye, and Schweitzer 2019), the Australian ACCC’s Digital Platforms Report (ACCC 2019) and the U.S. Stigler Committee Report (Stigler 2019). Each of these reports grapples with similar issues to those that have been addressed in the draft GWB in Germany. It is possible, therefore, that the kind of changes being implemented in German law will also be enacted in other countries. These include:
- the modernization of the rules on abusive conduct by companies who possess outstanding market power;
- addressing the increasing importance of data in the assessment of the market power of a company;
- introducing the concept of “intermediation power” as a factor for determining a dominant market position in multisided markets;
- expanding the “essential facilities doctrine” to include access to data; and,
- lowering the financial threshold for review of mergers and acquisitions and giving some discretion to competition authorities in the case of digital platforms.
- See Digital Regulation Platform thematic section on “Explanation of externalities on digital platforms.” ↑
- The proposed transaction did meet the notification thresholds in three EU member states based on market share. ↑
- available here. ↑
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- The authority expects a reduction in the number of cases. ↑
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Stigler. 2019. Stigler Committee on Digital Platforms: Final Report. https://research.chicagobooth.edu/-/media/research/stigler/pdfs/digital-platforms—committee-report—stigler-center.pdf.Last updated on: 06.10.2020