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EU competition policy and innovation

European Commission - SPEECH/13/697   13/09/2013

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European Commission

Joaquín Almunia

Vice President of the European Commission responsible for Competition Policy

EU competition policy and innovation

IBA 17th annual competition conference

Florence, 13 September 2013

Ladies and Gentlemen:

It is a pleasure to be back in Florence and address your annual conference; as I have done on several occasions since I became European Commissioner for competition. Once again, I would like to thank Michael Reynolds for his kind invitation.

The topic I chose for my presentation today is innovation and how the enforcement of competition law in the EU can help create optimal conditions for innovation to flourish in the Single Market.

The reason why I picked this topic in the current scenario for Europe’s economies is quite simple. After five years of crisis, Europe needs to start growing again and one cannot seriously talk about solid growth in Europe if one doesn’t start from innovation.

This is the main way Europe has to defend and increase its competitiveness in the knowledge age and at a time when global economies are increasingly integrated.

I have no doubt that Europe has all it takes to succeed; excellent education and training systems, a long entrepreneurial tradition, and above all the internal market, which we must keep open and conducive to innovation.

The consensus on the need to promote openness, a vibrant and competitive Single Market, and innovation to boost growth in the EU is very large indeed – at least in principle.

However, when we move from these broad principles to the policies that translate them into reality – and competition policy is one of them – things can change.

Often innovative products, processes and business models challenge established companies and disrupt entire industries. This is in their nature.

As a reaction, many established economic actors see this as a threat and may respond by defending their specific interests.

I can see a clear contradiction here between the positions taken in public statements – always supportive of innovation – and the moves taken by some policymakers and businesses aimed at keeping innovative competitors at bay.

These two strategies – one clearly proactive and the other defensive, we can call them openness and protectionism – are mutually exclusive.

The business practices and the policies that can foster innovation have nothing to do with the recipe offered by protectionists, which is conservative, static, and backward-looking.

Innovation and protectionism are, in fact, at loggerheads. So, today I would like to explore how competition policy can be enlisted in this contest.

Let me start by saying that, in my understanding of what competition policy is about, all its instruments must have a positive impact on innovation.

I will illustrate this starting with State aid control and then I will devote the bulk of my presentation to our other instruments – antitrust and merger – because the bulk of innovation occurs in functioning markets and we have the responsibility to make sure that no market player hinders the innovative process.

State aid modernisation for innovation

As you know, State aid policy is going through a sweeping reform thanks to the State aid modernisation strategy I launched in May last year. Its main goal is to align State aid control to the objectives of our growth strategy –Europe 2020 – and its main policy areas.

At the same time, as this period is marked by the need to consolidate public finances, the reform will also help Europe’s governments do more with less money; including more efficient ways to support economic activities and create incentives for research and innovation.

Promoting research, development and innovation is a key driver to achieve the objective of smart, sustainable and inclusive growth.

The level of research and development in Europe remains too constrained by market failures. State aid, if well-targeted, can be a positive factor and take these activities to higher levels.

Since 2007, the Commission has approved over 200 national schemes in Research, Development and Innovation, and the guidelines that we use to assess and control these subsidies are being reviewed as part of the State aid modernization process.

The main objective of the new guidelines is to increase the level of R&D&I activities in the UE, while limiting distortions to competition.

The new guidelines will cover different aspects, which I can anticipate to you.

  1. The new guidelines will include simpler and clearer rules to build a regulatory environment that will encourage the collaboration of public and private actors.

  2. The scope will be widened by including new categories of aid, such as aid for research infrastructures and enlarged scope for aid for pilot projects and prototypes.

  3. The notification thresholds will be increased to exempt small aid measures from notification. This will provide a solid basis for Member States to continue granting aid in this domain with sufficient legal certainty and a lighter administrative burden.

All these measures should foster the incentive effect for both public and private actors in R&D&I. We want to provide guidance and steer Member States towards designing "good aid" measures ensuring the engagement of private actors.

Antitrust for innovation

Moving on to antitrust, let me say from the outset that protecting innovative firms from the harm done by anti-competitive practices is one of the most important aims of competition-law enforcement.

We have seen countless times in our practice that a lack of effective competition can hold up innovation in a market.

Conversely, industries exposed to domestic and international competition have made successful efforts to innovate and become more efficient.

As a result, when we find that companies restrict the innovative process through anti-competitive practices, we intervene vigorously.

The most prominent example is our fight against cartels.

In the comfort zone of their illegal agreements, cartelists have little or no incentive to invest in innovation and the consequence of entering a cartel is a drop in productivity and innovation.

In some cartels the lifetime of outdated products and technologies is artificially extended, such as in the cartel for TV and computer tubes that we sanctioned in December last year.

The cartel started back in the 90's, when the market for cathode-ray tubes was still booming, but almost immediately they began to be progressively replaced by LCD and plasma screens.

So, the cartel members tried to squeeze as much benefits as possible from a declining market. They limited production and took measures to prop up prices. In this way, they artificially extended the lifetime of an outdated technology and hampered the diffusion of its replacement.

Another industry that has historically been highly innovative is the automotive sector.

Over the last few years, the major competition authorities around the globe have started many investigations against companies that supply parts to car manufacturers. Overall, they involve more than 100 products and more than 70 companies.

Last July we imposed the first fines in the sector against five producers of wire harnesses; which are the cables and devices that conduct electricity in cars.

We found that five Japanese and European companies had cartelised their supplies to a number of car manufacturers in Europe, including Toyota, Honda, Nissan and Renault.

Some of these infringements lasted for up to 9 years, during which the parties focused on maintaining their status quo rather than competing with each other on innovation.

The cartelists received €141 million in fines, and I expect that more decisions in this sector will follow.

It is vital to prevent such practices as they cause systemic damage to the economy and to growth prospects in Europe. We cannot afford this kind of situations either legally or economically, let alone in the current difficult juncture.

Promoting innovation

Ladies and Gentlemen:

So far I have given you some examples on the damage that certain anti-competitive practices can do to the market. Next I would like to discuss what competition policy can do to promote innovation, especially in new and growth-promising sectors.

But let me be clear on one point: we are not in the business of picking winners. Our aim is to protect innovation by competitive firms, not by each and every complainant.

E-books

I will start with the case we closed in December last year – and completed by a decision in July this year – in the market for e-books; which is still rather small in most of Europe but highly dynamic and promising.

We closed our investigations after the companies involved – Apple and five of the world’s largest publishers – pledged to change their potentially illegal practices quite radically.

Our goal in this case was to restore normal competition as quickly as possible and impose conditions that would make it more difficult for companies to collude in the future.

In cases like this, it is often better to take quick and decisive action rather than follow the much longer procedure that leads to the imposition of fines.

With a swift reset, I believe we have created the best conditions for the market to grow and continue to innovate.

Google

The next case that comes to mind is our on-going investigation of Google.

Google's algorithm played a major role in the company's success. Many start-ups – such as websites specialised in searches on particular topics – have benefited from Google’s role as one of the main entry points to the internet to roll out and rapidly bring new services to a wide audience.

At the same time, it is my responsibility to ensure that Google does not abuse this gatekeeper role in the EU to push its own services against those of competitors who may be just as innovative.

As you know, we want to find effective solutions to our concerns, so as to preserve competition in the coming years between these services. Whether we will ultimately achieve this through a commitment process is still open at this point in time.

But time is of the essence, and in the coming weeks I will take a decision about the use of Art. 9, transforming Google's proposals into legally binding commitments, or go through the Art. 7 route towards a SO and a possible negative decision.

Payments: legislation follows antitrust scrutiny

Payment markets are another area where our action may have been beneficial to innovation. The twist here is that years of antitrust enforcement have eventually been followed by the proposal of new EU laws.

One example is our case against the European Payment Council – now dropped – in the field of online payments. The core question there was whether banks were raising unjustified barriers against non-bank internet providers.

The revised Payment Services Directive would in the future explicitly allow non-bank players in internet and card payments to operate in competition with banks. This is an example of regulation being more efficient than pure ex-post enforcement, both pursuing the same goals.

Another example is the Regulation on interchange fees for card-based payments, which takes account of two decades of competition proceedings involving card companies.

Both proposals were unveiled by the Commission before the summer and are now being discussed.

Let me add one important point. Card companies and banks claim that the proposal on interchange fees is an obstacle to innovation. Our analysis, in fact, reaches the opposite conclusions.

We need to act precisely because the existing arrangements on fees stifle innovation as they prevent new players and business models from entering the market.

Intellectual property and competition policy

Ladies and Gentlemen:

Another aspect of the complex relations between competition policy and innovation is revealed when our enforcement work comes face to face with intellectual property rights – or IPRs.

IPRs result from public-policy decisions that create incentives for innovation by rewarding the bright people and companies that make it happen in the first place. So far, so good.

But the protection of intellectual property – like any other form of legal protection – may also find limits in the interest of the general public.

Such is the case of standard-essential patents, where competition law may put a limit to the innovators' right to decide whether to license out their patents or not.

This is because other companies will need to licence these patents to make or improve products that comply with the standard – as shown in our cases involving smartphone manufacturers.

Our main concern in these cases is when a company pledges to license its patents on FRAND terms in order to be part of the standard. And then, once it has achieved this and has become unavoidable to other producers, it launches injunctions against companies that are willing to licence these patents on FRAND terms.

Seeking an injunction in such circumstances can clearly be anti-competitive as it prevents innovative products from coming to the market to the detriment of the general public.

Another industry where the misuse of IPRs has been challenged from the standpoint of competition law is the pharmaceutical sector.

In the AstraZeneca case, for instance, we sanctioned originator company AstraZeneca for misusing its dominant position – and the European Court of Justice confirmed our decision in December last year.

The company had given misleading information to patent offices, which extended their original exclusive rights and delayed the sale of cheaper generic medicines.

In addition, last June we sanctioned Lundbeck and several other companies for concluding pay-for-delay agreements under the guise of patent settlements.

Let me just point out that almost at the same time in the US the Federal Supreme Court in its judgement on FTC vs. Actavis decided that such deals may indeed be anti-competitive and have to be carefully examined on a case-by-case basis.

We have some more cases in the pipeline in this sector, and for reasons linked one way or another to pay-for-delay agreements.

The telecoms markets

Ladies and Gentlemen:

The work that the European Commission is devoting to the telecoms industry will be my last topic for today.

Earlier this week the Commission approved a new "telecoms package". I believe that the draft legislation we approved is a step in the right direction towards a Single Market for telecoms, but indeed there is still a long way to go.

A well-functioning telecom sector is of crucial importance to consumers and businesses. Its role in providing innovation and connectivity means that it can boost productivity and competitiveness across many sectors of the economy. In particular, the telecom sector is a key factor that can allow the Digital Economy and its services to flourish.

Telecom companies are in the press these days also for the wave of consolidation that is sweeping the sector. As you know, a number of mergers have been announced over the last few months.

Some of them, such as Vodafone's proposed acquisition of Kabel Deutschland, merge a mobile network operator and a cable operator in the same Member State. We are currently reviewing the deal.

Other transactions will combine mobile network operators in the same Member State, such as the H3G’s acquisition of O2 Ireland and Telefónica’s acquisition of KPN’s business in Germany.

Last but not least, investments and acquisitions recently announced on both sides of the Atlantic, involving EU and US companies, go well beyond our national or European borders, showing how global strategies have increased in the last period.

But here, we are confronted with a paradox. Some strategies have a global scope, but the relevant markets for our enforcement work are still national.

Despite the package we adopted this week, the completion of a genuine Single Market for telecommunications services will take time. We do not expect market structures to change from one day to the next, and therefore we will likely continue to assess these mergers on the basis of national markets – at least for some time.

And this is a shame, because a genuine Single Market for telecoms would give a much needed boost to our economy and would help European integration.

The direct benefits of a Single Market for telecoms would be very important according to all the estimates available, and the potential spill-over gains in other sectors would add even more efficiencies and returns.

But the question is: what can one mean by a genuine Single Market for telecoms? Let me give you three quick answers.

  1. First, it would be a market where customers can obtain services from any of the operators present in the EU, regardless of location;

  2. Second, operators from any Member State could offer their services competitively to end customers throughout the EU; and

  3. Finally, in a genuine Single Market customers would not have to pay extra charges for intra-EU calls, or for roaming within the EU – which is one of the provisions included in the Regulation approved this week.

Why is this not achievable in a shorter time-frame? The answer should not be addressed to Brussels.

The obstacles against the creation of a single telecom regulator at EU level come from market participants and national capitals.

Market participants should also resist the temptation to use their commercial behaviour to create artificial barriers to intra-EU trade. Some mobile operators, active across several Member States, do not behave as truly European operators. This needs to change.

As to Member States, they need to commit to the goal of achieving a single EU market in mobile telecoms.

For instance, without a true coordination of timing and conditions for the allocation of spectrum across Member States, the development of truly pan-European players will not be possible.

Ladies and Gentlemen:

I have come to the end of my review of the many ways in which competition policy can protect and promote innovation.

I have mentioned first how our new State aid rules will include simpler and clearer rules for well-targeted aid for R&D projects.

I have also discussed the threats that certain anti-competitive practices pose to innovation.

Finally, I have reviewed what we can do as a competition authority to create positive market conditions, especially in the more dynamic markets with a good potential for growth.

Now that an economic upturn looms on the horizon, we need more than ever the firms that can challenge established companies and disrupt markets.

We need to make room for the more competitive business models they are developing and the new products and services that they can bring to the market.

Above all, we need the invigorating push of innovative firms to improve economic dynamism and boost productivity in Europe.

Thank you.


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