Commissioner for Competition Policy
Competition in the New Economy
10th International Conference on Competition
Bundeskartellamt Berlin , 21 May 2001
I am very grateful to Dr Böge for inviting me to contribute to this important debate on competition law in the new economy.
The purpose of my remarks is to offer a few introductory reflections on the role of competition authorities in the new economy:
Before I begin, I would like to make a parenthetical comment: the US Supreme Court noted that the Internet is "a unique and wholly new medium of world-wide human communication". And that, "the content on the Internet is as diverse as human thought". The commercial implications of the new economy are certainly important, but we should remember that the Internet is wider and more important than the commerce that it enables.
The ally of competition authorities
The new economy is an ally of competition authorities. This first point is straightforward obvious in many ways.
But it is all too easily forgotten: competition authorities by their very nature are confronted with market failures and competition problems. Even when we are looking at Internet and E-Commerce markets we will often have complainants coming to us and highlighting potential competition concerns.
However it is important for competition authorities to remember the enormous benefits brought about by these new economy developments:
These technological developments are therefore pointing the way towards more competitive markets: costs will be cut; producers will have improved access to customers; customers will have greater information, greater choice of producers, and lower prices.
These are all clearly positive developments. So do the competition rules still have a role in these new markets?
An ally in need of supervision
The answer to that is clearly yes. Not least because these positive developments can have less positive consequences: the lowering of prices, for example, will squeeze the profit margins of many companies, increasing their incentives to collude to keep prices high.
But before I demonstrate with reference to particular examples why the new economy still needs the competition rules, I would like to say a few words on the general applicability of the competition rules to these sectors.
The general nature of the competition rules gives them an important advantage over most other legal rules, because they apply to the factual circumstances of a particular case, no matter how quickly industries develop or change. This allows them to keep pace with technological developments, in a way that more specific regulatory frameworks cannot. The competition rules stay the same, but the application of these rules is remarkably adaptable to changing circumstances.
Assessing these issues as a competition authority requires an understanding of the underlying technology, a close following of market developments… and a great deal of healthy scepticism. The scepticism is useful when, for example, companies claim that simply because this is a high technology sector, competition problems could not arise. Experience suggests otherwise.
For some, the competition rules are no longer necessary in the world of the new economy. They believe that the pace of change that we are seeing renders the role of regulators, including competition authorities, both unnecessary (the market will correct itself) and impossible to fulfil (the change is too rapid for a competition authority to make timely decisions).
This view is wrong, both on the facts and on the law. On the facts, we have already seen a number of cases where there were very real risks to competition often through pre-existing positions of market power on infrastructure or content markets. I also have doubts that the pace of development in technology sectors will inevitably mean that market failures will last only for a short time. The risk is rather that a position of market power may be temporary in the absence of anti-competitive action but anti-competitive action by the company with market power would render that temporary strength permanent. This is surely one of the concerns of the Microsoft case in the US, and can also be seen in some of the leveraging cases that I will mention later.
On the law, if parties are proposing a merger or a joint venture, then we do not have the luxury of being able to see how the market develops in the future. We have to take a view on the basis of what we know today. Similarly if we are faced with a complaint, we must assess the complaint in light of current knowledge of course allowing for the pace of development in the sector: but we cannot simply reject the complaint because it is a new economy case.
So, in what areas have the competition rules shown themselves to be an ally of the new economy?
Horizontal issues, particularly in network infrastructure:
If we look at the infrastructure underlying the Internet, telecommunications problems are clearly relevant.
Worldcom / MCI
In 1998 the Commission authorised the proposed merger between Worldcom and MCI, two US telecoms companies with substantial Internet backbone interests. However, the authorisation was granted only on the condition that MCI divested its Internet backbone activities. Both Worldcom and MCI were major players on the Internet backbone market i.e. the market for transmitting Internet data traffic around the world. The Commission concluded that if the merger were to go ahead as planned, the combined entity would have a dominant position on this market. Thus, MCI was forced to sell its Internet backbone activities.
Essentially the same issue arose again in 2000 in the proposed MCI Worldcom / Sprint merger: Sprint was in fact one of the companies that intervened in the earlier case to complain about the merger of Worldcom and MCI. The Commission was unconvinced by the parties' proposed remedy in the Sprint case (which would have led to a divestiture of only part of Sprint's activities), and formally prohibited the merger.
These cases provide excellent examples of the strength of the competition rules: before the Worldcom / MCI merger, little attention had focussed on the regulatory implications of the Internet backbone market. However, the competition rules enabled the identification of the problem and the remedy, and did so rapidly.
The Internet's greatest strength is its ability to connect millions of individual users, regardless of their geographic location. However, given that these users often connect using the telecoms networks of dominant, often former monopoly, companies, it is no surprise that competition problems also arise at the local level. Moving therefore from global communications networks to local networks, the Commission also imposed stringent conditions on the abortive Telia / Telenor merger of 1999. There the Commission concluded that the parties' horizontal and vertical integration across a range of markets would lead to dominance problems. The Commission required both the divestiture of the parties' cable networks, and the unbundling of their local loops (i.e. opening up the parties' local telecoms networks for the use of third parties). This was highly significant for the development and deployment of residential and business Internet infrastructure in those countries. Competition in both cable and broadband telecoms networks would lead to faster and cheaper deployment of broadband services.
Although in very different areas, these three cases highlight an important point. It is a truism to say that the more users there are connected to telecoms networks, the more valuable that network becomes. The corollary of this, however, is that the more important the network becomes, the greater the risk that competition problems will emerge.
In each of the above cases, one of the Commission's concerns was that control over important infrastructure (backbone infrastructure in the first two cases, local infrastructure in the third) could be used to leverage the parties' positions into related markets.
This concern is a common one when looking at internet-related markets, given that vertical integration with the presence of the same companies on upstream and downstream markets is common.
The same concern arose in the Vodafone / Mannesmann case of 1999: there we had to address issues of horizontal concentration an accumulation of national mobile networks to form a potentially pan-European network. The Commission was concerned that this accumulation would provide the combined entity with an insurmountable lead in the delivery of pan-European services. To remedy this, the Commission sought to strike a balance between the immediate problem, and the long term development of the market. By requiring the entity to provide competitors with access to its network, the Commission ensured that the strong position in infrastructure could not simply be used to create an equally strong position on the services market. But by limiting the remedy in time (for three years) the Commission ensured that competing investment would not be undermined, and that competitors would be forced to develop their own networks.
Vertical issues, in particular gate-keeper effects
Competition issues have also emerged as a result of some notable cases of vertical integration. In AOL / Time Warner, for example, there was a concern that the concentration would bring together AOL's service provision with Time Warner's content, and Bertelsmann's content (the latter through the AOL Europe joint venture). This vertical integration could have led to a strengthening of the combined entity's position on a number of markets. The commitment to separate AOL / Time Warner from Bertelsmann allowed the merger to proceed.
Similar concerns arose in the Vivendi / Seagram case: Seagram, the parent company of Universal, was active on a number of content markets, upstream of Vivendi's various interests in pay television and internet services in Europe. Once again, there was a concern that the control over content could be leveraged into downstream markets. This concern was addressed by undertakings ensuring arms length negotiations for the sale of Universal's film rights, and non-discriminatory access to Universal's music catalogue. As with the Vodafone / Mannesmann case, the balance between immediate competition concerns and the need to ensure long-term investment was struck by limiting these undertakings to a period of five years.
The risks of leveraging market power in the new economy are not confined to those cases involving mergers and acquisitions. There are many potential competition problems revolving around existing positions of market power.
The US case against Microsoft, for example involved Microsoft using its existing power over desktop operating systems and leveraging it into the market for browsers.
The bundling of one product with another is a classic strategy of a dominant company, and one clearly condemned by the European Court of Justice in, for example, the Tetra Pak case. In high technology sectors, however, we are likely to see technological bundling of products, rather than contractual ties. Clearly designing a product so that it is effectively bundled with a separate product raises difficult questions as to the interface between legitimate product design and anti-competitive bundling. An easier case, however, is where two separate products are designed so that they are particularly complementary, undermining competition for one or the other product.
This last is our concern with the case pending before the Commission against Microsoft. I cannot discuss the case in detail, but the outline of our concern is already known. Microsoft appears to have designed one product (where it is dominant) so that it interoperates better with another Microsoft product in a separate, and more competitive market, than it does with the products of its competitors. This could be seen as an attempt to leverage its dominant position into related markets.
We can see in a number of European markets that some Internet and E-Commerce markets appear to be dominated by companies who formerly benefited from monopoly positions, most notably in the telecommunications sector. The position of T-Online here in Germany, for example, appears to be very strong: and I can see similar situations in several other Member States. Competition authorities must remain vigilant, in these circumstances, to ensure not only that there are no unlawful benefits being derived from the former monopoly position, but also that these strong positions on E-Commerce markets are not strengthened further through anti-competitive means. Strategic alliances and exclusive or preferential content arrangements revolving around these E-Commerce markets will therefore be examined very closely.
Doing Business on the Internet
We should not forget, however, that the impact of the competition rules is not confined to controlling the actions of dominant companies. The development of the new economy requires us to re-examine the existing competition rules on agreements and concerted practices to determine whether they need updating or clarifying.
Distribution and the internet
One area where new clarifications have been given to existing legal principles is the area of distribution agreements.
The Commission has recently concluded a re-examination of its vertical restraints policy and issued a block exemption and guidelines modernising our approach. One element of this modernisation is the taking into account of the implications of the Internet. We have concluded, for example, that restrictions preventing distributors from using the Internet as a distribution mechanism fall foul of Article 81. If the producer wants to ensure a certain quality of website and service for internet sales, then there are less restrictive means to achieve that end than by banning internet sales by its distributors.
The question of active and passive sales also requires reconsideration: clearly the Internet undermines the very concept of location a website may have a German. DE domain name, but be maintained on a server in the UK, and operated by a French company. If a producer has established exclusive distributors in each of the Member States, it may prevent distributors from actively selling into the exclusive territories of others. So how do we assess whether a sale is active or passive on the Internet ?
As with many problems, it is mostly a matter of common sense. If a distributor based in France registers with a .DE domain name, or advertises on German websites, or sends commercial emails to German customers, then these actions would appear to be active selling. If, on the other hand, the French company simply provides a German language version of its website, then we would regard that as passive the Internet equivalent to speaking German on the telephone to a customer who has called you.
There are, of course, complications and unresolved issues, but further elaboration of these principles will probably require cases, where the theory can be tested against the practice.
Another area where the impact of traditional competition principles needs to be assessed in light of new products and services is that of business to business (B2B) exchanges.
Although some of the hype is now dying away from these exchanges I have little doubt that some will prove to be successful in the longer term. It is important for us to understand their competition law implications. Unfortunately, that can be quite difficult, particularly in view of the limited number of cases with which we have so far had to deal.
There are a number of different forms of business to business exchanges, but all are aimed at providing a more efficient environment to bring together buyers and sellers of particular products or services. We are certainly not opposed to the creation of B2B electronic market places. The fact that these exchanges try to sign up as many industry players as possible does not itself create a competition problem. As with stock exchanges, the liquidity and effectiveness of price discovery of a B2B electronic market place may well increase with the number of users.
However, there are of course issues that could raise competition concerns. Looking at the sellers, one concern would be the question of whether the B2B marketplace will allow the exchange of sensitive information between competitors. Another issue relates to the question whether these systems can be used to exclude individual companies from the virtual market place. Looking at the buyers, we would need to examine whether the concentration of buyer power is a cause for concern.
An important procedural element which is often overlooked is the interplay between the Merger Regulation and Regulation 17. Many of the concerns surrounding these exchanges relate to the operation of the exchange in practice the exchange of confidential information, the possibility of collusion and so on. The Merger Regulation is more concerned with the creation of the exchange so the concerns as to its operation need to be assessed under Articles 81 and 82. This may require analysis under a Regulation 17 procedure even where a Merger Regulation clearance has been obtained. There have so far been no cases where this has appeared necessary.
We will therefore need to analyse carefully the workings of any proposed B2B trading system and its effects on the market. This will be done in close co-operation with other competition authorities, such as the EU national competition authorities, and the American FTC and DoJ.
The Internet and E-Commerce are clearly having an enormous impact on many aspects of business. Equally clearly, however, the competition rules and the instruments available to us are capable of dealing with the issues raised. Whether it be the fairly traditional assessment of horizontal and vertical concentration, or the more novel requirements of examining leveraging through technical bundling, the competition rules, being goal-oriented, are sufficiently flexible tools.
The need for international co-operation
However, there is one area where the existing instruments need assistance. And that is the area of international co-operation. It is now a truism to state that the world economy has become increasingly global. Inevitably, globalisation is all the more evident in the new economy. Increased co-operation with other anti-trust authorities is therefore an obvious, indeed indispensable, response to the challenges which the Commission faces as a result of this globalisation
Antitrust enforcers came to realise that the transnational character of today's competition cases clashes with the traditionally territorial scope of domestic antitrust rules. When we apply our antitrust rules today, we increasingly observe that consumers whom we are mandated to protect are being adversely affected by anticompetitive behaviour taking place outside our jurisdiction. Often, we have to overcome a number of legal and practical obstacles to discover the necessary evidence and to impose sanctions on global cartels which are detrimental to the efficient conduct of business and harm consumers. The same applies to abuses or attempts at monopolisation by dominant players on the world market.
As a means of addressing these issues we have for example concluded two competition law enforcement cooperation agreements with the United States. The 1991 (basic agreement) and 1998 ("positive comity") agreements have been a marked success. Our experience with bilateral EU/US cooperation has been that it works very effectively - and particularly so in merger cases, substantially reducing the risk of divergent or incoherent rulings. Indeed, Commission staff are in close and daily contact with their counterparts at the Antitrust Division of the US Department of Justice and Federal Trade Commission.
Cooperation in merger cases seems to be increasingly intensive. Discussions are particularly fruitful in New Economy cases, such as MCI Worldcom / Sprint and AOL / Time Warner. Such cases often raise novel issues on the definition of markets, the likely competitive impact of a transaction on those markets, and the viability of any remedies suggested by the merging parties.
This intensive co-operation for both competition authorities and private parties involved (in terms of a more rapid and coherent management of cases on both sides of the Atlantic), has obvious and specific case-related benefits. In addition, however, the close daily contact between case teams in the Commission (DG Competition) and the US DoJ and FTC has other more general benefits. It is conducive to mutual confidence building. It leads to accrued knowledge of the substantive and procedural rules in each other's jurisdictions. And it can result in substantial convergence in competition analysis, and the development of "best practices" in both substantive and procedural matters. Indeed, it has been noted by many observers that EU/US co-operation in this area has become something of a model for transatlantic co-operation generally.
There are various proposals on the table for how this form of anti-trust co-operation can be advanced globally. I have repeatedly stated that the European Commission welcomes these ideas. We have also contributed to the debate by offering some ideas on what could be an international forum for competition among authorities from all over the world.
We clearly need to spend some more time reflecting on the scope of the forum, the options and solutions, but the momentum that has been developing in recent months should not be lost.
I would like to draw some conclusions from the above, and in particular, highlight some issues that will be important in the future.
First, I am sure that it is now clear that although the development of the new economy is extremely beneficial to competition, there remain areas where the competition rules should intervene. And the competition rules can intervene effectively in those areas.
Secondly, in applying the competition rules, it is important that they are interpreted flexibly bearing in mind the underlying principles so as to take into account the new factual situation and new problems that the new economy produces.
Finally, the inherently global nature of much of the new economy requires effective international co-operation amongst anti-trust authorities.