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SPEECH/10/365

Joaquín Almunia

Vice President of the European Commission responsible for competition policy

Competition in Digital Media and the Internet

UCL Jevons Lecture

London, 7 July 2010

Ladies and gentlemen

I would like to thank the organisers for the invitation to speak here today at the Jevons Colloquium on Competition Policy in the Digital Media and the Internet.

Since I have started in my new capacity of European Commissioner for Competition Policy I have spent much of my time dealing with the consequences of the economic crisis. This has involved rescuing banks, providing temporary support to industries seriously affected by the lack of financing, and fighting cartels, most of them in mature sectors. From coal to milk to building materials I have made the rounds of many ailing sectors.

So I am particularly pleased to be here today to discuss a sector that is growing, that is innovating, and on which we can place a lot of our hopes for renewed economic growth. The digital economy has been singled out in our Europe 2020 growth strategy as one of the pillars of economic recovery. This means that it is our political mandate to ensure that this sector grows to its full potential.

It is clear to me that competition policy must be a key part of this strategy as a way to ensure market access and opportunities to all efficient players capable of delivering new value.

Today, I would like to give an overview of the main challenges that we face in the fast evolving digital landscape. From networks, to devices, to web based services, to content, there is not one part of the value chain that does not raise important questions for us.

The Role of competition

I will start with a very clear statement: I believe that the principles of competition must be maintained in the digital economy with the same intensity that they are imposed in the brick and mortar world. Competitive environments provide value and quality and most importantly they provide larger markets than those characterized by protection. They also encourage innovation that users actually will want to pay for, which is precisely what we need.

By enforcing competition, I want to ensure that no firm able to provide value, create or expand a market in whatever way is prevented from doing so through anticompetitive foreclosure. Economic growth is our priority today; more than a priority it is an imperative. We must therefore create the conditions for new economic activity to flourish.

Sound and careful regulatory policy must support and complement competition policy in creating the appropriate environment for the digital economy. Indeed state intervention might be needed to achieve public interest objectives such as universal access to basic services, scientific and artistic creation, regional cohesion or privacy and safety protection.

Telecoms Networks

Let me start my discussion with the physical networks.

Through various waves of regulation and a good number of antitrust cases, we have established over the years a strong and effective legal environment that promotes both investment and competition. The European Commission is now preparing a Recommendation for Next Generation Access networks that aims at encouraging the development of very fast broadband across Europe.

In preparing this regulation we are faced with the request that we create incentives for expensive investment but also that we guarantee a fair playing field in the fast broadband sector. I believe these objectives are not incompatible.

This is why the new regulation will not be a regulatory holiday for the big telecom operators. We will not lose the benefits of a decade of liberalisation by creating new private monopolies. The proposed new regulatory framework will continue to mandate access to the network when a dominant player operates in a market.

But we are also taking advantage of a new start to promote co-investment so that networks carry multiple cables which different owners. Our experience with copper showed, once again, that mandating access to a single infrastructure requires continued enforcement. Competition between infrastructures might help mitigate this problem and we are encouraging this. But two or three players may not guarantee competitive outcomes so strong regulatory oversight is essential, even with co-investment.

What about incentives? Reward for investment risks will be granted when calculating the price for mandated access to networks. State aid will also be a possibility to ensure coverage where demand is more uncertain. We have state aid guidelines that clarify the rules for funding broadband and « next generation access » networks. These rules are planned for review in 2012.

The potential for broadband traffic management by telecom operators in order to differentiate services by level of quality are now hotly debated. My colleague Neelie Kroes has just launched a public debate on this issue. But whether or not the Commission ultimately decides that further legislation is warranted, traffic management cannot result in instances of market foreclosure.

It is an established fact that Europe is good at networks and we have strong companies in that sector. But time after time we have failed to fill the pipes. Billions of euros were spent on the 3G licences but 3G didn't really happen until a new generation of user interface and applications came from the US. The biggest web services were all developed overseas. We cannot afford to continue to miss the boat on so many different parts of the digital value chain.

Online media

Let me start with the most glaring example. The market for online content in Europe is a shameful anachronism, and the distribution of content online across the entire European Union is expensive and difficult. This market fragmentation deprives us of scale and the lack of scale deprives us of business.

One of the key initiatives of our Digital Agenda in Europe is to develop an internal market for content. We must find a way to develop pan-European licensing while preserving and promoting the diversity of our culture. In this exercise, we must not confuse threats to the creators of content and threats to the current intermediaries.

Collecting societies serve a vital role but the way they manage licensing agreements needs to change. The fragmented national monopoly model and the de facto allocation of customers can no longer stand in their current form. Unregulated monopolies are not a great solution. Abuses and restrictions involved in collective rights management have been subject to antitrust scrutiny at both European and national level. We continue to closely monitor the practices and behaviours such as long term membership agreements and exclusive assignments of rights by the authors.

The European Commission will push forward proposals to improve the transparency and governance of collecting societies and to facilitate pan-European licensing of content. We must ensure that any initiative to foster pan-European licensing, be it private or regulatory, must exclude anti-competitive agreements between unregulated entities. In particular, such initiatives should not lead to market partitioning and allocation of customers.

Electronic Commerce

Barriers to trade within the internal market exist well beyond the licensing of content. Even if technology today makes it easier than ever before to bring down artificial geographical borders, 7 out of 10 cross border transactions attempted online within the EU still fail. Cross border online shopping has a huge growth potential that is not exploited. We have not yet generated a meaningful internal market for e-commerce and as a consequence efficient e-retailing has a difficult time developing in Europe

Although most barriers to e-commerce are regulatory or have to do with, competition policy does have a role to play in promoting the internal market. With our recently adopted rules on distribution agreements, we have taken some steps towards safeguarding consumers’ rights to shop online across the EU. Companies are not allowed to establish artificial barriers that partition the internal market to the detriment of consumers and I believe that evidence of such market segmentation should be met with enforcement.

Simple, secure and efficient payment within the European area is one of the key services for e-commerce to develop. I am working with my colleagues in the Commission to ensure the Single European Payment Area provides an integrated and open environment where payments are easy and cheap. And I want to make sure that we create an environment where innovative methods of payment can also develop.

Online services

Although e-commerce generates most revenues online, we cannot ignore the spectacular increase of new web based services that actually account for most of the traffic over the net.

Understanding the dynamics of these markets is a complex task. They are characterised by innovative business models that are constantly evolving. Some web based services are characterized by very large market shares. This is the case for both search and social networking sites, and not necessarily for the same reasons. The most important search engine in Europe benefits from a 95% market share in usage and the most important social media site has close to 70%.

Dominance on the internet is difficult to establish. The real question remains the actual degree of contestability of these markets. Switching between search engines may appear to be relatively easy. Switching between social networks may be harder because of the stronger network effects and the portability of the data. But are switching costs of users the only criteria for contestability in two sided markets? Are there other barriers to entry?

If companies do establish themselves in a strong position on a market, there may be risks that they will use this position to foreclose other markets. The fluid nature of the internet may make this more difficult to do than in other markets. Nevertheless it may be possible.

Even the basic concepts such as the definition of a market can become quite tricky in these markets. For example, web services are different but tend to monetize in a similar way, which is through advertisement. Is advertisement the only market we should care about? Is the advertisement market the same whether it is delivered in a search page or on a social media page? In both cases individuals are targeted but they are targeted in a different way. Does that account to different markets?

On the internet, information travels fast and users may be very reactive. If results on a search engine for instance are being manipulated, it may well make a difference on the market if consumers know about it. But is transparency enough?

None of these answers are easy.

As has been reported in the press, my services are currently examining some allegations of anti-competitive conduct in relation to search. The work is at an early stage, but given the importance of search to a competitive online marketplace, I am looking at the allegations very carefully.

Emerging Platforms: cloud and mobile

We have not yet solved all of the issues above and already the next generation of digital devices is transforming the way we use the internet. Mobile devices are becoming prevalent and are turning into entire eco-systems where users can access all the services they need and application providers can supply all the services they can think of.

On the business side, the new 'cloud' business model aims to provide integrated communication, data storage, data management and application services to businesses, all in one service.

We cannot and should not predict the way these environments will develop. Some companies favour open and interoperable systems. Others develop closed environments and others navigate between the two. The markets should decide which business models prevail. The task of competition authorities will remain to ensure that no market is foreclosed to competitors better able to serve their final users.

Notwithstanding this, I consider that open models and interoperability do favour entry by a greater number of players. Open and interoperable environments drive down the cost of innovation. The lower the costs of entry, the lower the risk to innovators, and the more innovators you get. A time such as this one characterized by a very dynamic environment and a high rate of innovation might not be the best time to close the door to experimentation and private initiative.

For instance, it is a combination of competitive markets in infrastructure and open standards that fostered the development of « cloud » services. And the internet would not be the success it is today, had it not been built on open, interoperable standards and protocols. These brought the « freedom to innovate » to everyone, from the largest multinational to the self employed mom in her garage. It was impossible to predict the many ways internet services would develop and it took an open environment to have the very successful – and unexpected - services that we have today. Not any one company could have dreamt them all. There are many ways society might seek to lower the cost of innovation. An internet based on open standards has proved to be a very effective platform for innovation.

This is why we will continue to work on the promotion of standards and requirements of interoperability in those instances where access becomes restricted to the point of foreclosing any kind of competition. Access will be particularly important when dealing with platforms and technologies that are essential building blocks for a next generation of innovation. It goes without saying that any public intervention aiming at promoting interoperability will have to strike a careful balance between granting access and protecting the rights of past and future successful innovators.

Standards and Protocols

When it comes to standards some minimum requirements must be met to ensure that the positive effects of standardisation can fully materialise. We have identified these requirements in the Commission’s draft guidelines on horizontal agreements which include an extensive discussion of standardisation.

The starting point is transparency: if technology is to be incorporated into a standard, then participants that own intellectual property that covers that technology should disclose their ownership. Without transparency, efficient decisions cannot be made.

For a standard to serve its purpose there should be a commitment to license on fair, reasonable and non-discriminatory terms. If so called “FRAND commitments” have been given, they should be adhered to. Moreover, those standardisation bodies that require full disclosure of the proposed terms and conditions of licensing can be assured that they will not infringe EU competition law by doing so.

In the IPComm and Rambus cases, the Commission has already shown that it is ready to intervene under competition rules to enforce these principles. With the draft horizontal guidelines we are seeking to encourage standard bodies to avoid those weaknesses and failures in the first place.

Conclusion

Let me sum up.

I have made a rapid round up of the challenges we face in the digital economy. My conclusion is that the tools of competition have served us well in the past and that these same tools will continue to serve us well in the future.

We have solid principles. Now the challenge will be to apply these principles to new business environments.

We must get it right because it is crucial that the digital economy is allowed to develop to its full potential. We need the innovation, the productivity and the jobs that the digital economy can bring to sustain growth. In times of crisis and uncertainty, economic operators will cling to situations and models that were profitable to them in the past. But growth opportunities sometimes require change and it is for politicians and regulators to accompany this change to the benefit of the citizens and the economy as a whole.

We must preserve and enhance the opportunities of our best firms to provide new and better services in the digital space. Most important, we owe it to those great firms that are not yet born to make it easier for them to be born into this new Digital Age and to grow and prosper.

Thank you.


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