Promoting Competition in Innovation Through Merger Control in the ICT Sector: A Comparative and Interdisciplinary Study [1st ed.] 978-3-662-58783-6;978-3-662-58784-3

Table of contents :
Front Matter ....Pages i-xxxi
Introduction (Kalpana Tyagi)....Pages 1-10
Front Matter ....Pages 11-12
(Ir-) Relevant Markets in the High Technology Sector (?) (Kalpana Tyagi)....Pages 13-29
Salient Features of the ICT Sector (Kalpana Tyagi)....Pages 31-45
Theory of Harm: Unilateral Effects in ICT Mergers (Kalpana Tyagi)....Pages 47-71
Theories of Harm: Vertical Effects in ICT Mergers (Kalpana Tyagi)....Pages 73-95
Theories of Harm: Conglomerate Effects and Types of Evidence (Kalpana Tyagi)....Pages 97-111
Merger Control in the EU and the UK (Kalpana Tyagi)....Pages 113-130
Merger Control in the US (Kalpana Tyagi)....Pages 131-140
Front Matter ....Pages 141-142
Mergers, Innovation and Remedies’ Design (Kalpana Tyagi)....Pages 143-159
Merger Remedies (Kalpana Tyagi)....Pages 161-164
Structural Remedies (Kalpana Tyagi)....Pages 165-183
Non-structural Remedies (Kalpana Tyagi)....Pages 185-205
Remedies in the Telecommunications Sector (Kalpana Tyagi)....Pages 207-220
Merger Remedy-Related Arbitration: une innovation suprenante (Kalpana Tyagi)....Pages 221-239
RTI v. Sky: The First Reported Case of Merger Remedy Related Arbitration (Kalpana Tyagi)....Pages 241-249
Monitoring Trustee (Kalpana Tyagi)....Pages 251-262
Front Matter ....Pages 263-263
Big Data and Merger Control (Kalpana Tyagi)....Pages 265-303
Front Matter ....Pages 305-305
Summary, Conclusions and Further Research (Kalpana Tyagi)....Pages 307-311
Back Matter ....Pages 313-328

Citation preview

Munich Studies on Innovation and Competition 10

Kalpana Tyagi

Promoting Competition in Innovation Through Merger Control in the ICT Sector A Comparative and Interdisciplinary Study

Munich Studies on Innovation and Competition

Volume 10 Series Editors Josef Drexl, Germany Reto M. Hilty, Germany

More information about this series at http://www.springer.com/series/13275

Kalpana Tyagi

Promoting Competition in Innovation Through Merger Control in the ICT Sector A Comparative and Interdisciplinary Study

Kalpana Tyagi Center for Legal Informatics in the Department of Law Aarhus Universitet School of Business and Social Sciences Aarhus, Denmark

ISSN 2199-7462 ISSN 2199-7470 (electronic) Munich Studies on Innovation and Competition ISBN 978-3-662-58783-6 ISBN 978-3-662-58784-3 (eBook) https://doi.org/10.1007/978-3-662-58784-3 © Springer-Verlag GmbH Germany, part of Springer Nature 2019 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer-Verlag GmbH, DE part of Springer Nature. The registered company address is: Heidelberger Platz 3, 14197 Berlin, Germany

Acknowledgements

I sincerely thank my doctor father Prof Dr Josef Drexl and supervisor Prof Dr Peter Picht for their constant supervision and guidance. Special thanks to my family and children for their love and relentless encouragement. Thanks to my colleagues and friends at the International Telecommunications Union, Geneva. The enriching and lively discussions about the sector strengthened my conviction in the promises that the converged telecommunications sector holds. Without their support and encouragement, I could have never written this PhD thesis. Errors, if any, are mine. Aarhus, Denmark

Kalpana Tyagi

v

Contents

1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1 Background and Purpose of the Book . . . . . . . . . . . . . . . . . . . 1.2 Characteristics of Competition in the ICT Markets . . . . . . . . . . 1.3 Why a Comparative Study? . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 Why an Inter-Disciplinary Study? . . . . . . . . . . . . . . . . . . . . . . 1.5 Who Should Read This Book? . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 Structure of the Book . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . .

1 2 4 5 6 7 7

(Ir-) Relevant Markets in the High Technology Sector (?) . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 The SCP Paradigm and the Relevant Market . . . . . . . . . . . . . . . . 2.2.1 Relevant Product Market . . . . . . . . . . . . . . . . . . . . . . 2.2.1.1 Structural Conduct Performance (SCP) Paradigm . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.1.2 Implications of the SSNIP Test and the SCP Paradigm for Market Definition . . . . . . . . . . . 2.2.2 Relevant Geographic Market . . . . . . . . . . . . . . . . . . . . 2.3 Relevance of the Current Approach for the ICT Sector . . . . . . . . 2.3.1 Is Market Definition (Essentially) a Means to an End? . . . 2.3.2 Does the Current Approach Facilitate Effective Identification of the (Anti-) Competitive Effects of Mergers? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3.3 Market Definition and Multi-Sided Platforms . . . . . . . . 2.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

13 13 14 15

Salient Features of the ICT Sector . . . . . . . . . . . . . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Network Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 Direct and Indirect Network Effects . . . . . . . . . . . . . .

31 31 32 32

Part I 2

3

Merger Review

. . . .

15 17 18 19 19

22 24 28

vii

viii

Contents

3.2.2 3.2.3 3.2.4 3.2.5

Negative Network Effects . . . . . . . . . . . . . . . . . . . . . . Network Effects and Economies of Scale . . . . . . . . . . . Network Effects and Two-Sided Platforms . . . . . . . . . . Network Effects, Tipping and Second-Mover Advantage . . 3.2.5.1 Second Mover Advantage . . . . . . . . . . . . . . . 3.2.5.2 Market Envelopment . . . . . . . . . . . . . . . . . . . 3.2.6 Network Effects and Barriers to Entry . . . . . . . . . . . . . Qwertynomics, Customer Lock-in and Path Dependency . . . . . . . Technological Convergence . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumerisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5.1 Consumer and Enterprise Product Markets . . . . . . . . . . 3.5.2 Consumerisation and Market Definition . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

33 34 35 35 37 37 38 40 41 42 43 43 45

Theory of Harm: Unilateral Effects in ICT Mergers . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 Types of Mergers and Theories of Harm . . . . . . . . . . . . . . . . . . . 4.3 Unilateral or Non-coordinated Effects . . . . . . . . . . . . . . . . . . . . 4.3.1 Unilateral Effects, Localised Competition and Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Unilateral Effects and the EU, the UK and the US Merger Guidelines . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3 Case Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3.1 Oracle/PeopleSoft . . . . . . . . . . . . . . . . . . . . . 4.3.3.2 Telefónica/E-Plus . . . . . . . . . . . . . . . . . . . . . 4.3.3.3 NXP Semiconductors/Freescale . . . . . . . . . . . 4.3.3.4 ARM/Giesecke & Devrient/Gemalto/JV . . . . . 4.4 Co-ordinated Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47 47 50 52

Theories of Harm: Vertical Effects in ICT Mergers . . . . . . . . . . . 5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 Vertical Mergers and Efficiencies . . . . . . . . . . . . . . . 5.1.2 Input and Customer Foreclosure . . . . . . . . . . . . . . . . 5.2 Case Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 TomTom/Tele Atlas . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.2 Google/ITA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.3 ARM/Giesecke & Devrient/Gemalto . . . . . . . . . . . . . 5.2.4 Comcast/NBCU/JV . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.5 Liberty Global/Corelio/W&W/De Vijver Media . . . . . 5.2.6 Google/Motorola . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.6.1 Google/Motorola: The EU Decision . . . . . . . 5.2.6.2 Google/Motorola: The US DOJ’s Decision . . 5.2.6.3 Google/Motorola: The Chinese MOFCOM’s Decision . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . . . . . . . .

73 73 74 75 76 77 78 80 82 85 88 89 93

.

94

Theories of Harm: Conglomerate Effects and Types of Evidence . . . 6.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Conglomerate Effects and GE/Honeywell . . . . . . . . . . . . . . . . . .

97 97 98

3.3 3.4 3.5

3.6 4

5

6

52 55 58 58 60 65 68 69

Contents

6.3

100 100 101 102 103

. . . . .

104 105 106 107 107

Merger Control in the EU and the UK . . . . . . . . . . . . . . . . . . . . . . 7.1 Historical Backdrop: From the ECSC to the Current Approach . . . 7.1.1 From the ECSC Treaty to the 1989 Merger Regulation . . 7.1.2 From the 1989 Merger Regulation to the 2004 Merger Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 Procedural Aspects of Merger Remedies . . . . . . . . . . . . . . . . . . . 7.3 When Is a Joint Venture Treated as a Concentration? . . . . . . . . . 7.4 Requests for Referral and Co-operation Between the Commission, the National Regulatory and the National Competition Authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 Electronic Communications Sector: From Regulation to Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6 Commitments: Balancing Proportionality and Effectiveness . . . . . 7.7 Commitments: Conditions and Obligations . . . . . . . . . . . . . . . . .

113 113 113

Merger Control in the US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Legislative Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 The DOJ and the FTC: The Disequilibrium of Power . . . . . . . . 8.3 Mergers and the FCC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.4 2010 Horizontal Merger Guidelines . . . . . . . . . . . . . . . . . . . . . 8.5 2011 Merger Remedies Guide . . . . . . . . . . . . . . . . . . . . . . . . . 8.6 Prohibited Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. . . . . . .

131 131 132 136 136 137 139

Mergers, Innovation and Remedies’ Design . . . . . . . . . . . . . . . . . . . 9.1 Mergers, Innovation and Competition . . . . . . . . . . . . . . . . . . . . . 9.2 Merger Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2.1 Merger Remedies: A Definition . . . . . . . . . . . . . . . . . . 9.2.2 Why Do We Need Remedies? . . . . . . . . . . . . . . . . . . . 9.2.3 Merger Remedies and the Principle of Proportionality . . . 9.2.4 Ex-post Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

143 143 149 149 151 151 153

6.5

8

Part II 9

The NHM Guidelines on the Assessment of Conglomerate Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Case Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.1 Cisco/Tandberg . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.2 Microsoft/Skype . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.3 Intel/McAfee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4.3.1 Foreclosure Effects and the Degradation of Interoperability . . . . . . . . . . . . . . . . . . . . 6.4.3.2 Foreclosure and Technical Tying . . . . . . . . . 6.4.3.3 Foreclosure and Commercial Bundling . . . . . 6.4.3.4 Foreclosure Strategy . . . . . . . . . . . . . . . . . . Quantitative and Qualitative Analysis . . . . . . . . . . . . . . . . . . . .

. . . . .

6.4

7

ix

116 120 122

123 125 129 129

Merger Remedies and Merger Remedy-Related Arbitration

x

Contents

9.3

Factors to Consider in the Design of Remedies in High Tech Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.1 ‘Upgrade Treadmill’, Hidden Costs and Consumer Harm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3.2 ‘Gatekeeper Effects’ and Merger Remedies . . . . . . . . 9.3.3 Additional Factors to Be Considered in the Design of Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. 156 . 156 . 158 . 159

10

Merger Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161

11

Structural Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 Preference for Structural Remedies . . . . . . . . . . . . . . . . . . . . . 11.2 Divestitures in Oligopolistic Markets . . . . . . . . . . . . . . . . . . . 11.3 What Is a Divestiture? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3.1 Crown Jewel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3.2 Upfront Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3.3 Carve-Outs and the Nature of Divested Business . . . 11.3.4 Access Remedies: Structural or Non-Structural? . . . . 11.4 Factors to be Considered in the Design of Structural Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4.1 Identity and Qualifications of the Buyer . . . . . . . . . . 11.4.2 Removal of Links with Competitors . . . . . . . . . . . . 11.4.3 Managing a Successful Divestiture . . . . . . . . . . . . . 11.4.4 Period for Divestiture . . . . . . . . . . . . . . . . . . . . . . . 11.4.5 Interim Period and Preservation of Assets . . . . . . . . 11.4.6 Hold-Separate Obligations and Hold-Separate Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12

. . . . . . . .

165 165 167 169 170 171 172 175

. . . . . .

177 178 179 180 181 181

. 182 . 183

Non-structural Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 When Non-structural Remedies Are More Preferable . . . . . . . . . 12.3 Access Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3.1 Intel/McAfee: Interoperability Remedies in a Conglomerate Merger . . . . . . . . . . . . . . . . . . . . . 12.3.2 Google/ITA: Non-structural Remedies in Potential Vertical Mergers . . . . . . . . . . . . . . . . . . . 12.3.2.1 Licensing of QPX . . . . . . . . . . . . . . . . . . . 12.3.2.2 Licensing of InstaSearch . . . . . . . . . . . . . . 12.3.3 Interoperability Remedies for Vertical Concerns in ARM/G&D/Gemalto/JV . . . . . . . . . . . . . . . . . . . . 12.3.4 Comcast/NBCU/JV: FRANDly Access to the OVDs . . 12.3.5 Axalto/Gemplus: FRANDly Access to the OTA SIM Platforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

185 185 187 189 191 192 193 193 194 195 197

Contents

12.4

12.5 13

14

15

xi

Other Non-structural Remedies . . . . . . . . . . . . . . . . . . . . . . . 12.4.1 Exclusive Long-Term Clauses . . . . . . . . . . . . . . . . . 12.4.2 Restrictive Licensing Practices, Non-discrimination Clauses and Anti-retaliation Provisions . . . . . . . . . . 12.4.3 Firewall Provisions . . . . . . . . . . . . . . . . . . . . . . . . . Impediments to Effective Implementation of Remedies . . . . . .

. 198 . 198 . 199 . 201 . 203

Remedies in the Telecommunications Sector . . . . . . . . . . . . . . . . . . 13.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2 T-Mobile/Orange UK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2.1 Remedies in T-Mobile/Orange . . . . . . . . . . . . . . . . . . 13.2.1.1 T-Mobile/3UK’s RAN Sharing Agreement . 13.2.1.2 Spectrum . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 Telefónica/E-Plus Deutschland . . . . . . . . . . . . . . . . . . . . . . . . . 13.3.1 The MNO Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3.2 The MBA Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3.3 The Non-MNO Remedy . . . . . . . . . . . . . . . . . . . . . . 13.4 Remedies in H3G Austria/Orange and H3G Ireland/Telefónica Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4.1 Hutchison 3G Austria/Orange . . . . . . . . . . . . . . . . . . 13.4.2 Hutchison 3G Ireland/Telefónica Ireland . . . . . . . . . . 13.4.3 H3G Italy/Wind/JV . . . . . . . . . . . . . . . . . . . . . . . . . 13.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger Remedy-Related Arbitration: une innovation suprenante . . 14.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 Arbitration Clause in Merger Commitments . . . . . . . . . . . . . . 14.3 Arbitration: An erga omnes Offer to Arbitrate . . . . . . . . . . . . . 14.4 Interpretation of Commitments . . . . . . . . . . . . . . . . . . . . . . . . 14.5 Subject Matter of Arbitration Clauses . . . . . . . . . . . . . . . . . . . 14.5.1 Type of Arbitration: Institutional or Ad Hoc? . . . . . . 14.5.2 Appointment of Arbitrators . . . . . . . . . . . . . . . . . . . 14.5.3 Confidentiality in Arbitration Proceedings . . . . . . . . 14.5.4 Burden of Proof . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.5.5 Powers of the Commission . . . . . . . . . . . . . . . . . . . 14.5.6 Pre-arbitration Dispute Settlement . . . . . . . . . . . . . . 14.5.7 Scope of Arbitration Clause: What Is Arbitrable and Who Can Initiate Arbitration? . . . . . . . . . . . . . . 14.5.8 Substantive Law . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.5.9 Interim Awards and Preliminary Rulings . . . . . . . . . 14.5.10 Place and Language of Arbitration . . . . . . . . . . . . . . RTI v. Sky: The First Reported Case of Merger Remedy Related Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.1.1 Background and Facts of the Case . . . . . . . . . . . . . 15.1.2 Jurisdiction of the Arbitral Tribunal . . . . . . . . . . . .

. . . .

207 207 209 210 210 210 212 213 213 215 215 215 217 218 219

. . . . . . . . . . . .

221 221 223 224 226 228 229 230 231 232 232 234

. . . .

236 237 238 238

. . . .

241 241 241 242

xii

Contents

15.1.3 15.1.4

244 244 247 247

Monitoring Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.1 Monitoring Trustee: The ‘Eyes and Ears’ of the Commission . . . 16.2 Appointment, Conflict of Interest and the Independence of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.3 Qualifications and Skill Set of the Trustee . . . . . . . . . . . . . . . . . 16.4 Monitoring Trustee and Confidential Information . . . . . . . . . . . 16.5 Monitoring Trustee or a Divestiture Trustee? . . . . . . . . . . . . . . 16.6 The Role and Responsibility of the Trustee . . . . . . . . . . . . . . . . 16.7 Monitoring Trustee or a ‘Managing’ Trustee? . . . . . . . . . . . . . . 16.8 The Practice in the US . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

251 251

Part III 17

. 243 . . . .

15.2 15.3 15.4 16

The Interpretation of the Commitments . . . . . . . . . . Can the Tribunal Amend the Scope of the Commitments? . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resolution of Ambiguities in the Arbitration Agreement . . . . . Baseball Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

252 254 255 256 257 259 260

Big Data Mergers: Merger Review and Remedies

Big Data and Merger Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.2 Data, Big Data, Personal Data and Merger Control . . . . . . . . . . 17.2.1 Data: The New Currency of the Digital Economy . . . . 17.2.2 Value of Big Data . . . . . . . . . . . . . . . . . . . . . . . . . . 17.2.3 Zero Price Effect & User Dynamism as Non-Price Parameter of Competition and Innovation in the MSPs . . 17.2.4 Personal Data: Privacy Concerns and Law . . . . . . . . . 17.3 Competition, Consumer Protection and Privacy Laws . . . . . . . . 17.4 Jurisdiction and Filing Threshold . . . . . . . . . . . . . . . . . . . . . . . 17.5 Case Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.5.1 Google/Double Click . . . . . . . . . . . . . . . . . . . . . . . . 17.5.1.1 Decision of the Competition Authorities . . . 17.5.1.2 Comment . . . . . . . . . . . . . . . . . . . . . . . . . 17.5.2 Facebook/Whatsapp . . . . . . . . . . . . . . . . . . . . . . . . . 17.5.2.1 Decision of the Competition Authorities . . . 17.5.2.2 Comment . . . . . . . . . . . . . . . . . . . . . . . . . 17.5.2.3 Ex-post Developments: Commission Fines Facebook . . . . . . . . . . . . . . . . . . . . . . . . . 17.5.3 Telefónica UK/Vodafone UK/Everything Everywhere . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.5.4 Microsoft/Yahoo! . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.5.5 Sanofi/Google/DMI JV . . . . . . . . . . . . . . . . . . . . . . . 17.6 Microsoft/LinkedIn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.6.1 Horizontal Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.6.2 Vertical Effects . . . . . . . . . . . . . . . . . . . . . . . . . . . .

265 265 267 268 269 270 272 274 277 280 280 280 282 283 283 284 285 286 287 288 290 291 291

Contents

17.7

17.8 Part IV 18

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17.6.3 Conglomerate Effects . . . . . . . . . . . . . . . . . . . . . . . . 17.6.4 Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Remedies for Big Data Mergers . . . . . . . . . . . . . . . . . . . . . . . . 17.7.1 The 2018 EU General Data Protection Regulation and Potential Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . 17.7.2 Thomson/Reuters . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.7.2.1 Competitive Assessment . . . . . . . . . . . . . . 17.7.2.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . Summary and Recommendations . . . . . . . . . . . . . . . . . . . . . . .

292 294 295 296 298 298 300 301

Summary, Conclusions and the Road Ahead

Summary, Conclusions and Further Research . . . . . . . . . . . . . . . . . 307

Abbreviations

4-to-3 3-to-2 AP API ARPU BKartA BNetzA BT BYOD CAS CE CFI CFIUS CIS CMA CPC CPU CR CRM DACS DBMS DBS DOJ D-I-Y DSK DT DTH DVM EC ECLR

Four-to-three Three-to-two Application Processors Application Program Interface Average Revenue per User Bundeskartellsamt Bundesnetzagentur British Telecom Bring Your Own Device Conditional Access System Consumer Electronics Court of First Instance Committee on Foreign Investments in the United States Competitive Impact Statement Competition and Markets Authority Cost-Per-Click Central Processing Unit Concentration Ratio Customer Resource Management Dynamic Availability Calculating System Data Base Management Systems Direct Broadcast Satellite Department of Justice Do-It-Yourself Dvorak Simplified Keyboard Deutsche Telekom Direct-to-Home De Vijver Media European Community European Competition Law Review xv

xvi

ECSC Treaty EE EEA EEC ERP ESA EU EU HMG EUMR FCC FERM FRAND FT FTA FTC G&D GC GDPR GECAS H3G HDD HDTV HHI HMT HSR IBP ICA ICC ICN ICT IMTC IO IoT IP IPR ISM IT KOL MBA ML MNO MOFCOM MoU MRG

Abbreviations

European Coal and Steel Community Treaty Everything Everywhere European Economic Area European Economic Community Enterprise Resource Planning European Space Agency European Union European Union Horizontal Merger Guidelines European Union Merger Regulation Federal Communications Commission Full Equilibrium Market Test Fair, Reasonable and Non-Discriminatory France Télécom Free-to-Air Federal Trade Commission Giesecke & Devrient General Court General Data Protection Regulation General Electric Capital Aviation Services Hutchison 3G Hard Disk Drive High Definition Television Herfindahl-Hirschman Index Hypothetical Monopolist Test Hart-Scott-Radino Act Internet Backbone Provider Italian Competition Authority International Chamber of Commerce International Competition Network Information Communication Technology International Multimedia Teleconferencing Consortium Industrial Organization Internet of Things Internet Protocol Intellectual Property Right Infrastructure, Industrial, Scientific and Medical Segment Information Technology Key Opinion Leader Mobile Bitstream Access Machine Learning Mobile Network Operator Ministry of Commerce Memorandum of Understanding Merger Remedies Guide

Abbreviations

MSA MVNOs MVPDs NACE NASA NCA NDRC NFC NHM NIE NIO NRA NSA OEMs OFT O&O TV OS OTA OTAs OVDs P&S system PET PND PSN RF SST RIM RTR SAIC SAMR SBM SCP SE SEPs SfB SIEC SLS SPA SO SMP SSNIP SSVs TKK TEE

xvii

Manufacturing Services Agreement Mobile Virtual Network Operators Multichannel Video Programming Distributors Nomenclature statistique des activités économiques dans la Communauté européenne National Aeronautics and Space Administration National Competition Authority National Development and Reform Commission Near Field Communications Non-Horizontal Merger New Industrial Economics New Industrial Organization National Regulatory Authority Network Sharing Agreement Original Equipment Manufacturers Office of Fair Trading Owned & Operated Television Stations Operating System Over-the-Air Online Travel Agencies Online Video Programming Distributors Pricing & Shopping System Polyethylene Terephthalate Portable Navigable Device Professional Services Network Radio Frequency Small Signal Transistors Research-in-Motion Rundfunk & Telekom Regulierungs GmbH State Administration for Industry and Commerce State Administration for Market Regulation Stretch Blow Moulding Structure Conduct Performance Secure Elements Standard Essential Patents Skype for Business Substantial Impediment to Effective Competition Substantial Lessening of Competition Sale Purchase Agreement Statement of Objections Significant Market Power Small but Significant Non-transitory Increase in Prices Security Software Vendors Telekom-Control-Kommission Trusted Execution Environment

xviii

TIP TSA TS/E UK MAG UPP US HMG VARs VCS WMP UNCITRAL UPP VAR VoIP

Abbreviations

Telepresence Interoperability Protocol Transitional Services Agreement Time Series/Economic Data UK Merger Assessment Guidelines Upward Pricing Pressure US Horizontal Merger Guidelines Value Added Resellers Video Conferencing Solution Windows Media Player United Nations Commission on International Trade Law Upward Pricing Pressure Value Added Reseller Voice over Internet Protocol

EU Treaties and Presidency Conclusions

Presidency Conclusions (Lisbon European Council, 23 and 24 March 2000)

accessed 06 January 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 Consolidated version of the Treaty on European Union [2012] OJ C 326/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 EU Regulations Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentration between undertakings [1990] OJ L395/01 . . . . . . . . 115 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentration between undertakings [2004] OJ L 24/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51, 56, 118, 120, 129 Council Regulation (EC) No 1310/97 of 30 June 1997 amending Regulation (EEC) No 4064/89 on the control of concentrations between undertakings [1997] OJ L 180/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) [2016] OJ L 119/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 296–298 EU Guidelines and Notices Commission, ‘Green Paper on the Development of the Common Market for Telecommunications Services and Equipment’ COM (1987) 290 final . . . 126 Commission Notice on the treatment of cooperative joint ventures under Article 85 of the Treaty [1993] OJ C43/2 . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Commission Notice on the definition of relevant market for the purposes of Community Competition Law [1997] OJ C372/02 . . . . . . . . . . . . . . . . 18, 23

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Commission Notice on the concept of full-function joint ventures under Council Regulation (EEC) No 4064/89 on the control of concentrations between undertakings [1998] OJ C 66/1 . . . . . . . . . . . . . . . . . . . . . . . . . . . 122 Commission Notice on remedies acceptable under Council Regulation (EEC) No 4064/89 and under Commission Regulation (EC) No 447/98 [2001] OJ C 68/3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31/05 . . . . . . . . . . . . . . . . . . . . . . 14, 15, 20, 49, 56, 70, 146, 151 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2008] OJ C265/06 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75, 76, 90, 100 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01 119–122, 129, 130, 150, 152, 163, 166, 167, 169, 170, 178– 181, 189, 190, 198, 204, 221, 223, 251, 252, 254, 256, 257 Commission Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements [2011] OJ C11/01 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91, 176, 177 EU Directives Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services [2002] OJ L 108/33 . . . . . . . . . . . Directive 2002/20/EC of the European Parliament and of the Council of 7 March 2002 on the authorisation of electronic communications services and networks [2002] OJ L 108/21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities [2002] OJ L 108/7 . . . . Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users’ rights relating to electronic communications networks and services [2002] OJ L 108/51 . . . . . . . . . . . Decision 676/2002/EC of the European Parliament and of the Council of 7 March 2002 on a regulatory framework for radio spectrum policy in the European Community [2002] OJ L 108/1 . . . . . . . . . . . . . . . . . . . . . . . . . Commission, ‘Towards a New Framework for Electronic Communications Infrastructure and Associated Services: The 1999 Review’ Com (99) 539 . .

. 126

. 126

. 126

. 126

. 126 . 126

Table of United Kingdom Legislation Enterprise Act 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 The Enterprise and Regulatory Reform Act 2013 . . . . . . . . . . . . . . . . . 119, 120

EU Treaties and Presidency Conclusions

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UK Guidelines Competition Commission, CC8 – Merger Remedies: Competition Commission Guidelines [November 2008] . . . 74, 120, 153, 156, 163, 165, 173, 176, 189 Competition Commission, CC3 – Guidelines for Market Investigations: their role, procedures, assessment and remedies [April 2013] . . . . . . . . . . . . . 20 A joint publication of the Competition Commission and the Office of Fair Trading, CC2 (Revised)/OFT 1254: Merger Assessment Guidelines [September 2010] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13, 20, 57 Table of US Legislation §7 Clayton Act 15 U.S.C. §18 . . . . . . . . . . . . . . . . . . . . . . . . . . 131, 133, 135 § 5 Federal Trade Commission Act, 15 U.S.C. § 45 . . . . . . . . . . . . . . . . . . 133 US Guidelines Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission [Issued 1992, 1997] . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division [2004] . . . . . . . . . . . . . . . . . . . . . . . . . . 167, 261 Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission [2010] . . . . . . . . . . . . . . . . . . . . . . . . 13, 15, 19, 53, 55, 56 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division [2011] . . . . . . . . . . . 137, 152, 162, 169, 185, 261 Federal Trade Commission, Premerger Notification and the Merger Review Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132, 134 Federal Trade Commission, Frequently Asked Questions about Merger Consent Order Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170

Table of Cases

Commission Decisions ABB/Daimler Benz (Case IV/M.580) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Aerospatiale-Alenia/DE Havilland (Case No IV/M.053) . . . . . . . . . . . . . . . 116 Alcan/Pechiney (Case COMP/M.1715) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M.3680) . . . . . . . . . . . . . . . 190, 229–231, 233, 234, 236–238 Apple/Beats (Case No COMP/M.7290) . . . . . . . . . . . . . . . . . . . . . . . . . 43, 148 ARM/Giesecke & Devrient/Gemalto/ JV (Case COMP/M.6564) . . . . . 9, 11, 38, 68, 76, 80, 81, 118, 122, 123, 188, 194, 253 Astra Zeneca/Novartis (Case COMP/M.1806) . . . . . . . . . . . . . . . . . . . . . . . 170 Axalto/Gemplus (Case COMP/M.3998) . . . . . . . . 130, 197, 198, 230, 233, 234, 236, 253, 254, 255, 258 Cisco/Tandberg (Case COMP/M.5669) . . . . 9, 12, 101, 108, 166, 176, 177, 188, 254, 258 Dow Chemical/Union Carbide (Case COMP/M.1671) . . . . . . . . . . . . . . . . . 190 DSM/Roche Vitamins (COMP/M.2972) . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 Elf Aquitaine-Thyssen/Minol AG (Case No IV/M.235) . . . . . . . . . . . . . 224, 229 Facebook/WhatsApp (Case No COMP/M.7217) . . . . . . . . . . . . 14, 40, 283, 285 Facebook/WhatsApp (Case N0. 8228, Article 14(1) decision) . . . . . . . . 285, 286 Liberty Global/Corelio/W&W/De Vijver Media (Case COMP/M.7194) . . . 9, 12, 85, 88, 109 Liberty Global/Ziggo (Case COMP/M.7000) . . . . . 196, 229, 230, 233–237, 239 GE/Instrumentarium (Case COMP/M.3083) . . . . . . . . . . . . . . . . . . . . . . . . 191 Gencor/Lonrho (Case No IV/M.619) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 Glaxo Wellcome/Smithkline Beecham (Case IV/M.1846) . . . . . 49, 187, 232, 246 Google/DoubleClick (Case COMP/M.4731) . . . . . . . . . . . . . . . . 9, 73, 76, 281 Google/Motorola Mobility (Case COMP/M.6381) . . . . . . . . . . 9, 12, 88, 90–92 Hoechst/Rhône Poulenc (Case IV/M.1378) . . . . . . . . . . . . . . . . . . . . . . . . . 190 Hutchison 3G Austria/Orange Austria (Case COMP/M.6497) . . . . . 57, 215, 216 Hutchison 3G Ireland/Telefónica Ireland (Case No COMP/M.6992) . . . 190, 217, 255, 260 xxiii

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Table of Cases

Hutchison 3G Italy/Wind/JV (Case M.7758) . . . . . . . . . . . . . . 60, 209, 218, 219 Hutchison 3G UK/Telefónica UK (Case M.7612) . . . . . . . . . . . . . . . . . . . . 124 Intel/McAfee (Case COMP/M.5984) . . . . . . 9, 12, 100, 103–108, 166, 188, 191, 192, 232, 234, 236–239, 253–255, 258 Johnson & Johnson/Guidant (Case COMP/M.3687) . . . . . . . . . . . . . . 179, 182 Microsoft/LinkedIn (Case M.8124) . . . . . . . . . . . . . . . . . . . . . . . . . . . 291, 292 Microsoft/Skype (Case COMP/M 6281) . . . . . . . . . . . . 12, 14, 20, 27, 102, 118 Microsoft/Yahoo! Search Business (Case COMP/M.5727) . . . . . . . . . . 287, 288 Nestlé/Perrier (Case No IV/M.190) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69, 70 NewsCorp/Telepiù (Case COMP/M 2876) . . . 195, 199, 232, 233, 239, 242, 245 Nokia/Navteq (Case COMP/M.4942) . . . . . . . . . . . . . . . . . . . . . . . . . . . 21, 42 NXP Semiconductors/Freescale Semiconductor (Case M.7585) . . . 9, 11, 48, 65, 67, 120, 153, 172, 174, 182, 201, 202, 223, 228, 229, 231, 232, 234, 235, 237, 258–260 Orange/Jazztel (Case COMP/M7421) . . . . . . . . . . . . . . . . . . . . . 228–232, 239 Pernod Ricard/Allied Domecq (Case COMP/M.3779) . . . . . . . . . . . . . . . . . 170 Pfizer/Pharmacia (Case COMP/M.2922) . . . . . . . . . . . . . . . . . . . . . . . . . . 170 Siemens/Drägerwerk/JV (Case COMP/M2861) . . . . . . . . . . . . . . . . . . . . . . 191 Siemens/VA Tech (Case COMP/M.3653) . . . . . . . . . . . . . . . . . . . . . . . . . . 180 Telefónica Deutschland/E-Plus (Case M.7018) . . . . . . . 9, 11, 57, 58, 61, 63–65, 107, 111, 123, 124, 130, 212–214 Telefónica UK/Vodafone UK/Everything Everywhere (Case COMP/M.6314) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286 Telia/Telenor (Case IV/M 1439) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 T-Mobile Austria/Tele.ring (Case COMP/M.3916) . . . . . . . . . . 34, 70, 178, 180 T-Mobile/Orange (Case COMP/M.5650) . . . 9, 49, 107, 122–124, 209, 211, 212 TomTom/Tele Atlas (Case COMP/M 4854) . . . . . . . . . . . . . . . . . . . . . . . 11, 77 Thomson Corporation/Reuters Group (Case COMP/M.4726) . . . . . . . 199, 236, 298, 200 Western Digital Ireland/Viviti Technologies (Case COMP/M.6203) . . 171, 179, 183 Nestle/Ralston Purina (Case COMP/M.2337) . . . . . . . . . . . . . . . . . . . . . . . 170 Sanofi/Google/DMI JV (Case M.7813) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 Universal Music Group/EMI Music (Case COMP/M.6458) . . . . . . . . . . . . . 178 Vodafone/ONO (Case M.7231) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 302 General Court Airtours plc v Commission (Case T-342/99) [2002] ECR II-2585 . . . . . . 56, 69, 116, 117 Arbeitsgemeinschaft der öffentlich-rechtlichen Rundfunkanstalten der Bundesrepublik Deutschland (ARD) v Commission (Case T-158/00) [2003] ECR II-3825 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150, 224 Cementbouw v Commission (Case T-282/02) [2006] ECR II-319 . . . . . . . . 129 Cisco Systems Inc. v Commission (Case T-79/12) [2013], Judgment of 11.12.2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Table of Cases

xxv

Compagnie Maritime Belge v Commission (Case T-24/93) [1996] ECR II-1201 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 00 EDP v Commission (Case T-87/05) [2005] ECR II-3745 . . . . . . . . . . . . . . . 121 Gencor Ltd. v Commission (Case T-102/96) [1999] ECR II-753, [1999] 4 CMLR 971 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 General Electric v Commission (Case T-210/01) [2005] ECR II-5575 . . . . . 121 Impala v Commission (Case T-464/04) [2006] ECR II-2289, [2006] 5 CMLR 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 00 Manufacture française des pneumatiques Michelin v Commission of the European Communities (Michelin II) (Case T-203/01) [2003] ECR II-4071 . . . . 119 Qualcomm Wireless Business Solution Europe BV v Commission (Case T-48/04) [2009] ECR II-2029 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 Royal Philips Electronics NV v Commission (Case T-119/02) [2003] ECR I-1433 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 Schneider Electric SA v Commission (Case T-77/02) [2002] ECR II-4201 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116, 117 Tetra Laval BV v Commission (Case T-5/02) [2002] ECR II-4381 . . . . 116, 117 Court of Justice Commission v Tetra Laval BV (Case C-13/03) [2005] ECR I-1113 . . . . 116, 191 Commission v Tetra Laval (Case C12/03) [2005] ECR-I 987 . . . . . . . . . . . . . 00 Compagnie maritime belge transports and Others v Commission (Joined cases C-395/96 P and C-396/96) [2000] ECR I-1365 . . . . . . . . . . 69, 71 Eco Swiss China Time Ltd. v. Benetton International NV (Case C126/97) [1999] ECR I-3055 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226, 233 Établissements Consten and Grundig-Verkaufs-Gmbh v. Commission CMLR (1961-66) (CCH) (1966) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 00 Europemballage Corporation and Continental Can Company v Commission (Case 6-72) [1973] ECR 215 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 Hoffmann-La Roche & Co. AG v Commission of the European Communities (Case 85/76) [1979] ECR 461 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Scarlet Extended SA v Société belge des auteurs, compositeurs et éditeurs SCRLC(SABAM) (Case C-70/10) [2011] ECR I-11959 . . . . . . . . . . . . . . . . 276 US Cases DOJ and FTC Cases United States v. Comcast Corp., No. 1:11-cv-00106, Proposed Final Judgment at IV (D.D.C. Jan. 18, 2011) . . . . . . 9, 12, 82–84, 138, 196, 200, 201 United States v. Google Inc., No. 1:11-cv-00688, Competitive Impact Statement (D.D.C. Apr 8, 2011) . . . . . . . . . . . . . . . . . . . . . . 84, 196, 200, 201 United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment (D.D.C. Apr. 8, 2011) . . . . . . . . 9, 138, 193, 194, 200, 201, 203, 223 United States v. Ticketmaster Entertainment, Inc., No. 1:10-cv-00139, 2010 Final Judgment (D.D.C. July 30, 2010) . . . . . . . . . . . . . . . . . . . 138, 200

xxvi

Table of Cases

Press Release, Federal Trade Commission, Federal Trade Commission Closes Google/DoubleClick Investigation (Dec. 20, 2007) . . . . . . . . . . . . . . . . . 9, 281 Statement of Federal Trade Commission, Google/DoubleClick, FTC File No. 071-0170 (Dec. 20.2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 Concurring Statement of Commissioner Jon Leibowitz, Google/DoubleClick, FTC File No. 071-0170 (Dec. 20, 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 Dissenting Statement of Commissioner Pamela Jones Harbour, Google/DoubleClick, FTC File No. 071-0170 (Dec. 20, 2007) . . . 202, 275, 281 Press Release, U.S. Dep’t of Justice, Statement of the Department of Justice Antitrust Division on Its Decision to Close Its Investigation of the Internet Search and Paid Search Advertising Agreement Between Microsoft Corporation and Yahoo! Inc. (Feb. 18, 2010) . . . . . . . . . . . . . . . . . . . . . . . 288 Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its Investigations of Google Inc.’s Acquisition of Motorola Mobility Holdings Inc. and the Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. a. . ., (Feb. 2012) . . . . . . . . . . . . . . . . . . . 9, 12, 93 United States v. Thomson Corp., No. 08-0262, Complaint (D.D.C. filed Feb.19, 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 Press Release, U.S. Dep’t of Justice, Justice Department Requires Thomson to Sell Financial Data and Related Assets in Order to Acquire Reuters (Feb. 19, 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 United States v. Bazaarvoice Inc., Case No. 13-cv-00133-WHO, 2014 WL 203966 (N.D. Cal. Jan. 8, 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 Press Release, U.S. Dep’t of Justice, Justice Department Issues Statements Regarding AT&T Inc.’s Abandonment of its Proposed Acquisition of T-Mobile USA Inc. (Dec. 19, 2011) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 In re Glaxo Wellcome plc and SmithKline Beecham plc, Docket No. C-3990, Complaint at ¶ 28 (December 15, 2000) . . . . . . . . . . . . . . . . . 166 In re Boston Scientific Corp., Docket No. C-4164, Decision and Order (July 21, 2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 In re NXP Semiconductors N.V., File Number 151-0090, Docket No. C-4560, Analysis of Agreement Containing Consent Orders to Aid Public Comment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66, 67 Statement of the Department of Justice Antitrust Division on Its Decision to Close Its Investigation of the Internet Search and Paid Search Advertising Agreement Between Microsoft Corporation and Yahoo! Inc., dt. 18 February 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 288 Justice Department will not challenge Cisco’s acquisition of Tandberg (29 March 2010) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167, 308 FTC requires NXP Semiconductors N.V. to Divest RF Power Amplifier Assets as a Condition of Acquiring Freescale Semiconductor Ltd. . . . . . . . . 308 Court Cases United States v. E.I. du Pont de Nemours & Co 366 U.S. 316 (1961) . . . . . . 165 United States v. E.I. Du Pont de Nemours & Co 351 U.S. 377 (1956) . . . . . . 15 Brown Shoe Co. v. United States 370 U.S. 294 (1962) . . . . . . . . . . . . . . . . 131

Table of Cases

xxvii

United States v. Siemens Corp. 621 F.2d 499 (2d Cir. 1980) . . . . . . . . . . . . 132 United States v. Philadelphia National Bank 374 US 321(1963) . . . . . . . . . . 132 United States v. Aluminium Company of America 377 US 271(1964) . . . . . 132 United States v. Continental Can Co 378 US 441(1964) . . . . . . . . . . . . . . . . 00 United States v. Von Grocery’s Co 384 US 270(1966) . . . . . . . . . . . . . . . . . 47 United States v. Pabst Brewing Co 384 US 546(1966) . . . . . . . . . . . . . . . . 132 United States v. Marine Bancorporation Inc. 418 US 602(1974) . . . . . . . . . 132 United States v. Connecticut National Bank 418 US 650(1974) . . . . . . . . . . 132 General Dynamics 415 US 486(1974) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132 United States v. Von’s Grocery Co 384 U.S. 270(1966) . . . . . . . . . . . . . . . . 47 United States v. Microsoft Corp 87 F.Supp. 2d 30 (D.D.C. 2000) . . . . . . . . . 33 United States v. SunGard Data Sys Inc. 172 F. Supp.2d 172 (D.D.C. 2001) . . 110 United States v. Columbia Co 334 U.S. 495(1948) . . . . . . . . . . . . . . . . . . . 131 Federal Trade Commission v. Whole Foods Market Inc. 548 F.3d 1028 (D.C. Cir. 2008) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 Hospital Corp. v. FTC 807 F.2d 1381 (7th Cir. 1986) . . . . . . . . . . . . . . . . . 131 KinderStart.com LLC v. Google, No. C06-2057 JF (RS), 2007 WL 831806 (N.D. Cal. 2007) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 New York v. Kraft General Foods Inc. 926 F.Supp 321 (S.D.N.Y. 1995) . . . . 55 United States v. Oracle Corporation 331 F. Supp. 2d 1098(N.D. Cal. 2004) . . . . 9, 11, 13, 22, 40, 43, 48, 55, 58, 59, 70, 110, 131, 132, 135, 157 FTC v. Swedish Match 131 F.Supp. 2d 151(D.D.C. 2000) . . . . . . . . . . . . . . 55 United States v. H&R Block Inc. 833 F.Supp.2d 36(2011) . . . . . 14, 15, 71, 139 United States v. Bazaarvoice, Inc. No. 13-00133, 2014 U.S. Dist. LEXIS 3284 (N.D. Cal. 2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 United States v. 3D Systems Corp 2002-2 Trade Cas. ¶ 73 (D.D.C. 2001) . . 162 American Express Co. et al v. Italian Colors Restaurant et al 667 F.3d 204, decided June 20, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 Continental T.V. Inc., v. GTE Sylvania Inc., 433 US 36(1977) . . . . . . . . . . . 00 UK Competition Authority Cases Office of Fair Trading, Anticipated acquisition by Facebook Inc. of Instagram Inc., ME/5525/12 (22 August 2012) . . . . . . . . . . . . . . 14, 25, 27, 178 Office of Fair Trading, Completed Acquisition by Motorola Mobility (Google, Inc.) of Waze Mobile Ltd., ME/6167/13 (17 December 2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 14, 277, 278 Competition & Markets Authority, BT Group plc and EE Limited: A report on the anticipated acquisition by BT Group plc of EE Limited (15 January 2016) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49, 57, 110, 124 Chinese MOFCOM (now the SAMR) Announcement No. 25, 2012 of the Ministry of Commerce-Announcement of Approval with Additional Restrictive Conditions of the Acquisition of Motorola Mobility by Google (31 May 2012) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 12, 94, 308

List of Figures

Fig. 2.1 Fig. 2.2

Harvard School’s SCP Paradigm . . . .. . .. . . .. . .. . . .. . . .. . .. . . .. . .. . . .. . 16 Chicago School’s assessment to SCP Paradigm . . . . . . . . . . . . . . . . . . . . . 17

Fig. 3.1

Microsoft’s Envelopment of Real Network . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Fig. 13.1

Overview of the telecoms market: complex relationship between the MNOs and the MVNOs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208

Fig. 17.1

Competition, consumer and data protection law in big data mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276

xxix

List of Table

Table 4.1

The pre- and post-merger Nash equilibrium best response function (in the presence of ‘localised competition’) . . . . . . . . . . . . . . . 54

xxxi

Chapter 1

Introduction

Abstract The Information Communication Technology (ICT) sector has changed our lives in more profound ways than we can imagine. Against the fascinating backdrop of digitalization, this book seeks to answer one fundamental question: How should competition authorities assess mergers in the ICT sector to promote competition in innovation? A closer look at the question reveals that it is far more complex and difficult to answer for the ICT, telecommunications, and multisided platform (MSP) economy vis-à-vis the other traditional sectors of the economy. This has led many scholars to rethink and question whether the current merger control framework is suitable for the converged ICT sector, oftentimes also referred to as the new economy. Considering the complexity of the subject, this book further divides the fundamental question— ‘design of an effective merger control framework for the ICT sector’—into a number of sub-questions. To answer them, the book is divided into four parts. The first part of this book deals with merger review, whereas the second part concerns merger remedies. During the course of my research, I found that big data and the MSPs add an even more complex dimension to merger control. They raise some peculiar challenges—such as the ‘economics of free’—which put the very basic principles of neo-classical economics to question. Moreover, just as the currency of the real world seems to progress from coins to bitcoins, the personal data of the platform users has emerged as the new currency of the data-led economy. Packaging, one of the four Ps in marketing, is key to sell the product in the real economy. In the virtual world this ‘P’ gets replaced by ‘D’ that is the ‘design’. The design of the MSPs has a psychological dimension as well, considering that they keep the users hooked on to the website, spend longer time periods, and in the process share more information about themselves. Considering this special nature of the MSPs, big data mergers are dealt with as a separate chapter in Part III of the book. Part IV comprising of Chap. 18 presents the key findings of the book and offers a roadmap for further research on the subject. The work will be highly beneficial for the competition law scholars, as the book is an updated edition on the latest practices in the sector (until 31 December 2018). Substantially speaking, the book well highlights the substantial aspects and principals of merger control in the ICT sector by the EU, the UK, the USA, and the © Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_1

1

2

1 Introduction

Chinese competition authorities. The book also has a normative dimension as it seeks to assist the competition agencies in evaluating mergers and designing remedies in the innovation-led ICT sector. The research seeks to develop a framework against the backdrop of which the competition authorities can evaluate whether the various available remedies can perform the balancing act of preventing anticompetitive conduct while preserving merger-specific efficiencies. The research seeks to fill the existing literature gap by providing an overview of various available remedies and the set of factors that need to be taken into account while selecting suitable remedies for the innovation-led ICT, MSPs, and the telecommunications sector.

1.1

Background and Purpose of the Book

In 1980, a typical working desk had a bunch of files, a couple of books, some stationary, an atlas, a planner, a telephone, a fax, and sometimes a heavy desktop or a personal computer. Today, a typical working desk has a laptop—‘only’ a laptop containing in its memory thousands of books (or possibly on the cloud), all the notes, a planner, a calculator, and an atlas. The first step while undertaking any form of research—whether looking for a nearby eating place or searching for the latest release by one’s favourite author, from calling near and dear ones to watching the latest movies or listening to the latest hits—virtually everything is just ‘one mouseclick’ away. In the near future, perhaps as early as 2025, the laptop decorating the working desks will be completely replaced by a much smaller hand-held device. Today’s smart phones may be ‘virtually’ all that one will require to do their office work; communicate with the other connected devices in the home and the workplace alike; regulate the home temperature while on the way back from work in a driverless smart car; pay contactless for groceries at the supermarket; monitor one’s health and automatically alert the family doctor in case of a potential health issue. The walls in the buildings (smart homes and smart offices) will no longer be the walls that Robert Frost poetically argued were something that no one loved1; instead, those walls may well be the interface to connect with the digital world. Way back in the 1970s, the above paragraph may have looked like a page from Isaac Asimov’s science fiction. In 2019, we call it the ‘vie quotidien’ or ‘everyday life’. On the canvas of evolution, it appears as if the modern capitalist society is experiencing Schumpeter’s ‘perennial gale of creative destruction’.2 The commonly employed nomenclature labels this wave of creative destruction as the Information Communication Technology (ICT) revolution.

Robert Frost, ‘Mending Wall’ (1914), available at accessed 06 January 2019. 2 Joseph A Schumpeter, Capitalism, Socialism and Democracy (first published 1927, Harper & Row 1942) 84. 1

1.1 Background and Purpose of the Book

3

Considering how the ICT impacts our lives, it is of paramount importance that competition law ensures that firms compete on the merits, and the society at large benefits from the endowments bestowed by this incredible innovation-led sector. Competition authorities have ex-ante and ex-post measures3 at hand to preserve conditions of competition in the market. The present study focuses on the ex-ante measures of merger review and merger remedies to promote innovation—commonly referred to as ‘competition in innovation’—in the ICT sector. The first question is why do we need a merger control regime to promote competition? Empirical evidence offers a compelling rationale to support the approach. As the experience from the past reveals—if anti-competitive and welfare-reducing mergers are cleared without appropriate antitrust intervention, they may result in irreversible and permanent adverse effects on the market under consideration. The United States, one of the first countries in modern times to have an antitrust regime in place, experienced widespread consolidation at the turn of the eighteenth and nineteenth century across key sectors of the economy such as the petroleum and the natural gas, without any simultaneous antitrust intervention. Ex-post economic studies were undertaken to analyse the impact of these harmful concentrations. Ex-post econometric study on the US Steel and Standard Oil merger highlights how the merger ‘adversely’ and ‘irreversibly’ impacted the US consumers.4 In the ICT sector, the anti-competitive effects of un-remedied mergers can be remarkably forceful and long-lasting, considering the special nature of the industry—such as the presence of network effects, customer lock-in and convergence within the sector,5 as well as its convergence with the other traditional brick and mortar industries such as the retail, the energy and the healthcare. Recognising the importance of promoting competition in the sector, the present study seeks to contribute to the growing body of literature by performing a comparative study of merger control in the ICT sector. As the scope of the present work is both merger review and merger remedies, henceforth, unless otherwise conveyed, the expression merger control is used to convey both merger review and merger remedies. The rationale for such an approach is that for creating an effective merger control, one needs to have an effective merger review process to ensure that the competition concerns are correctly identified and the remedies are proportional to the identified theory of harm.

3 Ex-ante measure to maintain competition refers to the merger control, whereas ex-post measure refers to provisions relating to cartels and abuse of dominance. 4 D Daniel Sokol and William Blumenthal, ‘Merger Control: key international norms and differences’ in Ariel Ezrachi (ed), Research Handbook on International Competition Law (Edward Elgar 2012) 320; Donald O Parsons and Edward John Ray, ‘The United States Steel Consolidation: The Creation of Market Control’ (1975) 18 Journal of Law and Economics 181. 5 For a discussion on convergence, network effects and other industry-specific features, see Chap. 3 Salient Features of the ICT Sector.

4

1.2

1 Introduction

Characteristics of Competition in the ICT Markets

In the ICT sector, firms compete for the markets rather than in the markets. This implies that dynamic or innovation-led competition is more prevalent vis-à-vis static competition. The structure of the markets is such that unilateral effects is the pre-dominantly identified theory of harm. The market power of the firm is a direct consequence of its ability to introduce innovation in the market and it retains its market power so long it continues to innovate. The moment a competing firm introduces a more innovative product, the incumbent begins to lose its market share. This innovation-led nature of the sector is commonly identified as Schumpeterian competition—signifying innovation-led competition—wherein ‘temporary incumbent monopolists’ are continuously replaced by entrants that offer new and more innovative products.6 The dynamic nature of the ICT sector has led some to argue that frequent antitrust intervention is not good for the industry and it is better to leave the industry to the market forces. Angelov et al., for instance, perform an event study and find that remedial intervention in the high-tech sector in the European Union (EU), in a statistically significant number of cases, led to insignificant returns on merging parties stocks when compared with returns that their rivals enjoyed, signalling that markets act rationally and investors prior to making any investment commitments, rationally evaluate the dynamic factors at play. This implies that any merger-led competitive advantages are seen as short-term and unsustainable; that will eventually be corrected in the long-term by endogenous market processes and therefore, ‘interventionist merger control’ practices only lead to a delay of such ‘natural competitive processes’.7 The view—as the present study seeks to highlight—is unsustainable considering the special economics of the sector.8 In the ICT sector, which is largely network-driven, the ‘positive feedback loop’ because of the presence of ‘network effects’ leads to ‘tipping’—which means that anti-competitive practices such as tying, bundling and exclusive dealing, which can at times be welfare-enhancing, can in the ICT sector oftentimes be anti-competitive since the practice can facilitate tipping in the neighbouring markets, even when the offered products and services are inferior in quality.9

6 Joseph A Schumpeter, Capitalism, Socialism and Democracy (first published 1927, Harper & Row 1942). 7 Peter Angelov, Stephanie Rosenkranz and Hans Schenk, ‘Competitive Effects of Merger Remedies in Europe’s High-Tech Industry’ (October 2012) Discussion Paper Series 12-16, Tjalling C. Koopmans Research Institute, 23 accessed 06 January 2019. 8 See Chap. 3 Salient Features of the ICT Sector. 9 Michael L Katz and Carl Shapiro, ‘Antitrust in Software Markets’ in Jeffrey A Eisenach and Thomas M Lenard (eds), Competition, Innovation and Microsoft Monopoly (Kluwer Academic Publishers 1999)

accessed 06 January 2019.

1.3 Why a Comparative Study?

5

Network effects also influence setting of standards by tipping the market to a certain standard and thus, create high entry barriers. Once the network has tipped to a certain standard, competition is confined to the particular network. Following such gatekeeper effects and entry barriers, refusal to licence can negatively impact followon innovation.10 In the digital economy, non-horizontal concerns such as vertical and conglomerate effects too can be particularly detrimental to the process of competition and innovation.11 The R&D intensive nature of these sectors means that the traditional antitrust approach of measuring market shares and looking for a theory of harm, based on industry concentration is inappropriate to evaluate the anti-competitive concerns.12 Moreover, the traditional preference for structural remedies may be inappropriate to alleviate competition concerns emanating from a proposed concentration13 as it may disrupt the ongoing research and development activities.14 Following increased acceptance of non-structural remedies, competition authorities worldwide increasingly prefer merger remedy-related arbitration and monitoring trustees as part of the commitments, as the latter ensure effective compliance with and the self-monitoring of the commitments.

1.3

Why a Comparative Study?

Over 120 jurisdictions around the world today have some form of competition law regime in place. From 1990 until today, there has been over 600% growth in the number of countries with a competition law regime.15 The world of competition law today is somewhat bipolar in the sense that the US and the EU are the world’s leading competition law jurisdictions.16 If we see the market for competition law endowed with network effects in which the two competition agencies compete Mark-Oliver Mackenrodt, ‘Assessing the Effects of Intellectual Property Rights in Network Standards’ in Josef Drexl(ed), Research Handbook on Intellectual Property and Competition Law (Cheltenham: Edward Elgar 2008) 80. 11 Carl Shapiro, ‘Competition Policy in the Information Economy’ in Einar Hope (ed), Competition Policy Analysis (Routledge 2000) 124. 12 Marc G Schildkraut, ‘Oracle: The Future of Unilateral Effect’ 19 Antitrust Magazine (2005)20, 21. 13 Frédéric Jenny, ‘Design and Implementation of Merger Remedies in High-Technology Industries’ in François Lévêque and Howard Shelanski (eds), Merger Remedies in American and European Union Competition Law (Edward Elgar 2004) 168–170. 14 For a detailed discussion, see Chaps. 9–13 in Part II of this book. 15 OECD Study, ‘Challenges of International Co-operation in Competition Law Enforcement’ (OECD 2014) 5 accessed 06 January 2019. 16 D Daniel Sokol and William Blumenthal, ‘Merger Control: key international norms and differences’ in Ariel Ezrachi (ed), Research Handbook on International Competition Law (Edward Elgar 2012) 342. 10

6

1 Introduction

against one other, then the larger the number of competition authorities that join either network, the more attractive that network becomes to the other emerging economies.17 For historic reasons, the UK Competition law too, until recently, has had a significant influence on the Commonwealth countries. The UK merger control law is more closely aligned with the EU law with some significant (and sometimes very useful) divergences, as will be discussed in this work.18 Innovation in the market for competition law models is increasingly offered by emerging economies such as China, India and Brazil—that may in turn be more attractive to the other developing and under-developed economies—as competition law enforcement in these jurisdictions may be more closely aligned with the economic realities of the emerging and less developed economies. This book looks at the practice of leading competition authorities in the ICT sector worldwide, with special focus on the EU, the UK, the US and China. Considering the jurisdictional origins of this book though, the EU merger control will remain the central focus of the work. By employing a comparative methodology, one of the objectives of this book is to benefit from the experience of different competition jurisdictions, which in turn can offer some valuable and introspective insights for developing an effective, as well as strengthening an existing merger control regime.

1.4

Why an Inter-Disciplinary Study?

The present study is also inter-disciplinary in approach. Economics provides relevant tools to identify the resulting efficiencies from proposed mergers and ascertain the impact of remedies on the market through econometric tools such as merger simulations. However, the quantitative approach tends to suffer from a severe limitation. It has so far failed to develop a ‘normative framework’ to integrate the ‘concept of rights and justice’ for individuals, as well as organisations into their ‘normative welfare theoretical approach’.19 Use of econometric simulations moreover, fails to properly incorporate the dimension of competition in innovation in 17

Ibid., pp. 342–43. Many practitioners have speculated that in the wake of the Brexit – exit of Britain from the European Union – British competition law will in the future tend to substantially diverge from the EU competition law, which was until recently harmonised with the EU competition law. This also means that many big mergers that were under the ‘one-stop principle’ notified only to the European Commission, may now be subject to notification to both the European Commission and the UK Competition and Markets Authority. See Peter Willis and Richard Eccles, ‘Brexit: Competition law implications’ (24 June 2016) < http://www.twobirds.com/en/news/articles/2016/uk/competitionlaw-implications-of-a-brexit> accessed 06 January 2019. 19 Wolfgang Kerber, ‘Should Competition Law Promote Efficiency? –Some Reflections of an Economist in the Normative Foundations of Competition Law’ in Josef Drexl, Laurence Idot and Joël Monéger (eds) Economic Theory and Competition Law (Cheltenham: Edward Elgar 2009) 105–12. 18

1.6 Structure of the Book

7

innovation-led industries such as pharmaceuticals & ICT, although the approach appropriately accounts for the static price-based competition in traditional industries such as paper and packaging.20 Appreciating the limitations of a discipline-focussed study, whether law, economics or corporate strategy, this study seeks to integrate the learnings from different disciplines to design an effective framework for merger control.21

1.5

Who Should Read This Book?

The work will be highly beneficial for competition law scholars, as the book is an updated edition on the latest practices in the sector.22 Substantially speaking, the book richly uses inter-disciplinary inputs to well highlight the substantial aspects and principals of merger control in the ICT sector by the EU, the UK, the US & the Chinese competition authorities. The book also has a normative dimension as it seeks to assist the competition agencies in evaluating mergers and designing remedies in the innovation-led ICT sector. The research seeks to develop a framework against the backdrop of which the competition authorities can evaluate whether the various available remedies can perform the balancing act of preventing anti-competitive conduct while preserving merger-specific efficiencies. The research seeks to fill the existing literature gap by providing an overview of various available remedies and factors that must be considered while selecting suitable remedies for the innovation-led ICT sector.

1.6

Structure of the Book

Although remedies form a critical part of the process of merger review, and are one of the most important policy issues confronting antitrust law,23 the ‘paradoxical situation’ of the paucity of literature on the subject may be explained by the fact that a comprehensive study of merger remedies requires a thorough inter-disciplinary

20

Stephan Davies and Bruce Lyons, Mergers and Merger Remedies in the EU: Assessing the Consequences for Competition (Edward Elgar 2007). 21 The academic and professional background of the author in law, economics and corporate strategy, is expected, to be particularly useful in navigating across the disciplines. 22 This book incorporates all the key developments until December 2018. Wherever issues emerge beyond the scope of this book, references to relevant websites, articles and case laws are provided. 23 Robert Pitofsky, ‘The Nature and Limits of Restructuring in Merger Review’ (The Cutting Edge Antitrust Conference, New York, 17 February 2000) < https://www.ftc.gov/public-statements/ 2000/02/nature-and-limits-restructuring-merger-review> accessed 06 January 2019; Albert Foer, ‘Towards Guidelines for Merger Remedies’ (2011) 52 Case Western Reserve Law Review 211.

8

1 Introduction

approach making the analytical framework for review of remedies quite complicated.24 In case of such a study, one first needs to analyse the competitive harms resulting from a proposed merger and then analyse whether the proposed remedies can effectively alleviate the competition concerns identified.25 To further complicate the situation, the ultimate goal of merger remedies can be diverse—from restoring the market structure to pre-merger set-up, to making it more competitive.26 Moreover, industry specific factors—such as network effects, and platform-based competition in the ICT markets—also play an important role in the design of remedies. In traditional industries such as consumer goods, the static aspects of price and output are more relevant, whereas in innovation-led sectors such as the ICT, pharmaceuticals and biotechnology, dynamic aspects of competition such as innovation gain prominence. To facilitate consistency in classification and make the study relevant from a policy and practitioner’s perspective, sector definition is based on the NACE classification.27 However, even if one goes by the NACE classification,28 ICT includes activities as diverse from publishing of software, computer games, motion picture, books and newspapers to sound recording and music publishing, from television programming and broadcasting to the telecommunications sector. Although there are certain principles that remain constant across these sub-sectors, however the intensity with which different factors impact each of these sub-sectors, as well as the technical aspects of each sub-field and their consequent impact on the process of merger review; creates a need to first, broadly discuss the ICT sector and the underlying principles in general and second, to discuss them as sub-categories, to offer a 360 degree view of the atypical challenges associated with the sector. Considering the complexity of the subject, a case study methodology is employed. Following chapters first offer an overview and the peculiarities of the ICT sector, followed by a detailed discussion of cases that highlight the latest practice and principles across various sub-sectors of the ICT. Considering the technical nature, process of competition and varying forces with which different factors such as network effects, two-sided markets, innovation and patents etc. impact different categories of the ICT sector, following cases have been discussed

24 Gilles Le Blanc and Howard Shelanski, ‘Telecommunications Mergers in the EU and US: A Comparative Institutional Analysis’ in François Lévêque and Howard Shelanski(eds), Merger Remedies in American and European Union Competition Law (Edward Elgar 2004) 195. 25 Ibid., pp. 194–96. 26 Ibid., p. 196. 27 NACE (Nomenclature statistique des activités économiques dans la Communauté européenne), based on the classification of UN Statistical Commission(UNSTAT) is a six-digit European Industry standard classification system. The use of the NACE is mandatory within the European statistical system and it is a subject of legislation at the European level. See NACE Rev.2: Statistical classification of economic activities in the European Union accessed 06 January 2019. 28 DG Competition employs the same system for classification of merger cases in its database.

1.6 Structure of the Book

9

at great length at different places across the book: Enterprise Resource Planning (ERP) and Customer Resource Management (CRM) solutions (Oracle/ PeopleSoft29); mobile telecommunications (T-Mobile/Orange30 and Telefónica/EPlus Deutschland31); mergers involving Standard Essential Patents (Google/ Motorola32); big data mergers (Google/ITA,33 Microsoft/LinkedIn and Google/ Double Click34); Motorola Mobility/Waze35 highlighting the share of supply test in the UK; NXP Semiconductors/Freescale36 merger—a high watermark in terms of cooperation between the competition authorities at a global level; fixed/mobile/ content integration (Liberty Global/Corelio/W&W/De Vijver Media37 and Comcast/NBCU/JV38); video conferencing solutions (Cisco/Tandberg39) and security solutions (ARM/Giesecke & Devrient/Gemalto/JV40 & Intel/McAfee41). This study is divided into four parts. Within Part I, Chaps. 2 to 8 discusses issues such as definition of relevant markets (Chap. 2); special economics of the ICT sector (Chap. 3); different theories of harm (Chaps. 4–6) and the procedural and substantial aspects of merger review in the EU (Chap. 7) and the US (Chap. 8). Part II of the book begins with a discussion on the relationship between competition and innovation, and how mergers can offer an incentive to promote innovation and ex-post 29

United States v. Oracle Corporation, 331 F. Supp. 2d 1098(N.D. Cal. 2004). T-Mobile/Orange (Case COMP/ M.5650) [2010] OJ C108/4. 31 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7. 32 Google/Motorola Mobility (Case COMP/M. 6381) [2012] OJ C075/01; Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its Investigations of Google Inc.’s Acquisition of Motorola Mobility Holdings Inc. and the Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. a. . ., (Feb. 2012), available at accessed 06 January 2019; Announcement No. 25, 2012 of the Ministry of Commerce-Announcement of Approval with Additional Restrictive Conditions of the Acquisition of Motorola Mobility by Google (31 May 2012). 33 United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment at IV (B) (D.D.C. Apr. 8, 2011), available at http://www.justice.gov/atr/cases/f269600/269632.pdf accessed 06 January 2019. 34 Google/DoubleClick (Case COMP/M.4731) [2008] OJ C184/10; Press Release, Federal Trade Commission, Federal Trade Commission Closes Google/DoubleClick Investigation (Dec. 20, 2007), available at accessed 06 January 2019. 35 Office of Fair Trading, Completed Acquisition by Motorola Mobility (Google, Inc.) of Waze Mobile Ltd., ME/6167/13 (17 December 2013). 36 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2. 37 Liberty Global/Corelio/W&W/De Vijver Media (Case COMP/ M.7194) [2015] OJ C 175/11. 38 United States v. Comcast Corp., No. 1:11-cv-00106 - RJL, Modified Final Judgment (D.D.C. Aug. 21, 2011) available at < https://www.justice.gov/atr/case-document/file/492176/ download> accessed 06 January 2019; Comcast/ NBC Universal (Case COMP/ M.5779) [2010] OJ C 157/12. 39 Cisco/Tandberg (Case COMP/M.5669) [2010] OJ C036/09. 40 ARM/Giesecke & Devrient/ Gemalto/ JV (Case COMP/M.6564) [2012] OJ C368/9. 41 Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01. 30

10

1 Introduction

studies that sought to evaluate the effectiveness of merger review and remedies (Chap. 9). Chapter 10 seeks to highlight the challenges and different approaches employed in the classification of remedies. Chapter 11 discusses structural remedies. Chapter 12 evaluates different kinds of non-structural remedies and Chap. 13 presents telecom mergers wherein a mix of structural and non-structural remedies were employed. Chapters 14–16 respectively discuss monitoring trustees and arbitration—two frequently employed mechanisms to minimise the ex-post costs of monitoring. Part II comprising of Chap. 17 discusses mergers for big data and possible remedies that may effectively deal with non-price issues. This chapter deals with the following important questions confronting competition law agencies following the emergence of big data and the multi-sided platform economy—first, do these mergers merit a detailed review; second, if the answer to the first question is in the affirmative, then to what extent and how, should the competition authorities consider non-competition issues such as ‘privacy’ and finally, if required, what kind and design of remedies may be most effective to promote competition in innovation in these big data mergers. Considering the complexity of the work and how different chapters relate to one another—for instance, two-sided platforms that are an important part of the second chapter are subsequently discussed and developed in almost each of the following chapters—any attempt to put a conclusion or a summary at the end of each chapter would have been somewhat misleading. Therefore, each chapter starts with a short description of its scope and then develops the subject step-by-step. Part IV of the book, comprising of Chap. 18, finally summarises the findings of this work and offers a roadmap for further research.

Part I

Merger Review

The first part of the book deals only with ‘Merger Review’. It comprises of seven chapters and is organized as follows. Chapter 2 discusses the concept of relevant markets, the challenges of clearly identifying one such market in the fast-moving ICT sector, two-sided and multisided platforms, and the irrelevance of the current approach particularly when direct inference of harm are more readily available. Chapter 3, based on insights from business strategy, highlights the key industryspecific features of the ICT sector—such as network effects, two-sided and multisided platforms, market evolvement and QWERTY-nomics—and how do these factors impact the process of competition, merger review and the design of remedies in the sector. Chapter 4 offers a comparative law and economic analysis of unilateral effects— the more frequently employed theory of harm in the ICT sector. Discussing at length the following cases, a detailed account of unilateral effects as dealt with by the competition authorities is provided—Oracle/PeopleSoft1 (the US case); Telefónica Deutschland/E-Plus2 (EU); NXP Semiconductors/Freescale3 (the EU and the US) and ARM/Giesecke & Devrient/Gemalto/JV4 (EU). Chapter 5 offers a detailed discussion on vertical effects—the trade-off between resulting efficiencies through elimination of double marginalisation on the one hand and possible foreclosure effects on the other. TomTom/Tele Atlas5 (EU), Google/ITA6

1

United States v. Oracle Corp., 331 F. Supp. 2d 1115 (N.D. Cal. 2004). Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7. 3 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2. 4 ARM/Giesecke & Devrient/Gemalto/JV (Case COMP/M.6564) [2012] OJ C368/9. 5 TomTom/Tele Atlas (Case COMP/M 4854) [2008] OJ C237/08. 6 United States v. Google Inc., No. 1:11-cv-00688, 2011 WL 1338047, Complaint ¶ 1 (D.D.C. Apr. 8, 2011), available at < https://www.justice.gov/atr/case-document/file/497686/download> accessed 06 January 2019. 2

12

I Merger Review

(US); Liberty Global/Corelio/W&W/De Vijver Media7 (EU) and Comcast/NBCU/JV8 (US) and the Google/Motorola merger (the EU,9 the US10 and the Chinese case11) are discussed in detail. Chapter 6 discusses conglomerate effects as a theory of harm with a detailed discussion of the analysis of the European Commission in Cisco/Tandberg12; Microsoft/Skype13 and the Intel/McAfee14 merger. The chapter also deliberates on the use of quantitative and qualitative evidence in complex merger cases and how this may facilitate the identification of a suitable theory of harm with more precision. The EU merger control, unlike other merger control regimes, has a lengthy and complex history. Chapter 7 accordingly, first offers a bird’s eye view of the merger control in the EU—from the first provisions in the ECSC Treaty to the present day framework. Periodic reference to the UK merger control regime is also made, considering that the UK competition law offers some valuable insights on key issues such as jurisdiction with its share of supply test and the unilateral effects, a key theory of harm commonly identified in the ICT sector. Chapter 8 offers a concise overview of the merger control process in the US. The first part of the book deals only with merger review. Accordingly, it deals only with the identification of relevant markets and different theories of harm. Discussions on cases in this part are thus, limited to only these two issues. The design of remedies in these cases, is dealt with in the Parts II and III of the book.

7

Liberty Global/Corelio/W&W/De Vijver Media (Case COMP/ M.7194) [2015] OJ C 175/11. United States v. Comcast Corp., No. 1:11-cv-00106—RJL, Modified Final Judgment (D.D.C. Aug. 21, 2011) available at < https://www.justice.gov/atr/case-document/file/492176/ download> accessed 06 January 2019; Comcast/ NBC Universal (Case COMP/ M.5779) [2010] OJ C 157/12. 9 Google/Motorola Mobility (Case COMP/M. 6381) [2012] OJ C075/01. 10 Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its Investigations of Google Inc.’s Acquisition of Motorola Mobility Holdings Inc. and the Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. a. . ., (Feb. 2012), available at https://www.justice. gov/opa/pr/statement-department-justice-s-antitrust-division-its-decision-close-its-investigations accessed 06 January 2019. 11 Announcement No. 25, 2012 of the Ministry of Commerce-Announcement of Approval with Additional Restrictive Conditions of the Acquisition of Motorola Mobility by Google (31 May 2012) accessed 06 January 2019. 12 Cisco/Tandberg (Case COMP/M.5669) [2010] OJ C036/09. 13 Microsoft/Skype (Case COMP/M.6281) [2011] OJ C341/02. 14 Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01. 8

Chapter 2

(Ir-) Relevant Markets in the High Technology Sector (?)

Abstract This chapter evaluates the concept of relevant markets, the challenges associated with clearly identifying one such market in the fast-moving ICT sector, two-sided and multi-sided platforms and the irrelevance of the current approach particularly when direct inferences of harm are more readily available.

2.1

Introduction

Merger analysis begins with a methodical examination of the structure of the markets. Commonly referred to as the Structure Conduct Performance (SCP) paradigm, the test has been a matter of intense debate amongst competition law and economics scholars worldwide. The US Department of Justice’s (DOJ) failure to suitably delineate a clear and well-defined relevant market in the controversial 2004 Oracle/PeopleSoft merger—the longest and the most expensive litigation in the history of US merger control—played a pivotal role in its defeat before the district court of New York.1 This led many to question if the structuralist approach, first to identify clearly the markets and then to look for harm, is suitable for the hightechnology markets, where it is generally difficult to clearly identify a relevant market and direct evidence of harm is rather much easier to ascertain. The 2010 US Horizontal Merger Guidelines2 (hereafter, 2010 US HMG), the 2010 UK Merger Assessment Guidelines3 (hereafter, 2010 UK MAG) and the 2004 EU Horizontal

1

United States v. Oracle Corp., 331 F. Supp. 2d 1124-65 (N.D. Cal. 2004). Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission [2010]

accessed 06 January 2019. 3 A joint publication of the Competition Commission and the Office of Fair Trading, CC2 (Revised)/ OFT 1254: Merger Assessment Guidelines [September 2010] accessed 06 January 2019. 2

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_2

13

14

2 (Ir-) Relevant Markets in the High Technology Sector (?)

Merger Guidelines4 (hereafter, 2004 EU HMG)—all offer the flexibility to evade the possibility to identify a ‘bright line’, well-delineated market, particularly when more direct inferences of harm are relatively easy to identify. The debate concerning the irrelevance of market definition is ever more vibrant as the information, communication and technology markets continue to evolve, innovate and converge with the other brick & mortar industries such as fashion and retail, as well as the more regulated sectors such as the food, the agriculture, the financial and the banking services. However, as the practice of the competition authorities5 indicates, the approach continues to exhibit some sort of inertia with past practices— the authorities first attempt to identify a relevant market, followed by competitive analysis. Although very promising statements on the subject have been made in key merger cases such as the H&R Block6 (US), Microsoft/Skype7 and Facebook/ Whatsapp8 (EU), Motorola Mobility/Waze9 and Facebook/Instagram10 (UK)—the competition authorities continue with the much safer and well-established approach of first defining the relevant market and then looking for a theory of harm. Because of the crucial role currently played by relevant markets in merger control investigations and the challenge in the ICT sector to clearly identify one such market, the present chapter explores the concept of relevant market (Sect. 2.2); the relevance of the current approach and its effectiveness in correct identification of the theory of harm (Sect. 2.3), followed by a conclusion in Sect. 2.4.

2.2

The SCP Paradigm and the Relevant Market

This section offers a brief overview of the current practice on the definition of the relevant market. It first discusses the concept of SCP paradigm and the relevant product market (Sect. 2.2.1), followed by a discussion on relevant geographic markets (Sect. 2.2.2).

4

Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31/05. 5 The expression competition authorities is used in a generic sense to indicate the well-accepted merger control practices of the leading competition authorities. The approach is employed to avoid any unnecessary duplication of discussion on the subject. Whenever reference is to a particular competition authority, that particular authority has been clearly identified. 6 United States v. H&R Block Inc., 77 F.Supp.2d 678 (D.D.C. 2011). 7 Microsoft/Skype (Case COMP/M.6281) [2011] OJ C341/02. 8 Facebook/WhatsApp (Case No COMP/M.7217) [2014] OJ/C 417/4. 9 Office of Fair Trading, Completed Acquisition by Motorola Mobility (Google, Inc.) of Waze Mobile Ltd., ME/6167/13 (17 December 2013). 10 Office of Fair Trading, Anticipated acquisition by Facebook Inc of Instagram Inc, ME/5525/12 (22 August 2012).

2.2 The SCP Paradigm and the Relevant Market

2.2.1

15

Relevant Product Market

While undertaking a competitive assessment of the notified transaction, the first step is the identification of the relevant product and geographic market.11 The Hypothetical Monopolist Test (HMT) or the Small but Significant Non-transitory in Prices (SSNIP) test is a widely accepted and commonly employed test. The European Union, the United States, the UK, China and India—all use the SSNIP test to identify the relevant markets. The SSNIP or the HMT test seeks to identify whether a hypothetical monopolist can profitably impose at least a small but significant and non-transitory increase in prices.12 Starting with the narrowest possible market definition, the test is iterated to define the product market and the market is expanded until the increase in prices becomes unprofitable.13 In the H&R Block merger—a transaction involving two tax software producers in the US—the district court held that the principle underlying the test is that the relevant product market should ‘ordinarily’ be defined as the ‘smallest product market’ that can satisfy the HMT test.14 It is interesting to note that during the early period of enforcement, the US competition authorities did not use the approach of market definition in monopolisation cases. It was only as the US gained more experience in competition law enforcement and the Harvard school’s SCP approach gained momentum in academic circles, that the US competition authorities started to routinely define the relevant markets.15 In fact, the concept of the HMT was officially adopted for the first time in the early 1980s, with the 1982 US Horizontal Merger Guidelines entering force. The following section first discuss the elements of the SCP paradigm and how the Harvard school and Chicago school influenced the thinking on the subject (Sect. 2.2.1.1), followed by a discussion on the implications of the SSNIP test and the SCP hypothesis for the definition of relevant markets (Sect. 2.2.1.2).

2.2.1.1

Structural Conduct Performance (SCP) Paradigm

The exercise of market definition, quantifying market shares and making inferences about competition and consumer welfare is known as the concentration-competition-

11

Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31/05, para 10. 12 Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission [2010]

accessed 06 January 2019. 13 United States v. E.I. du Pont de Nemours & Co., 351 U.S. 399(1956). 14 United States v. H&R Block Inc., 77 F.Supp.2d 678 (D.D.C. 2011). 15 OECD, ‘Market Definition’ DAF/COMP 19 (2012) pp. 106–107 < https://www.oecd.org/daf/ competition/Marketdefinition2012.pdf> accessed 06 January 2019.

16

2 (Ir-) Relevant Markets in the High Technology Sector (?)

Structure/S

•concentration, barriers to entry, product differentiation •measured through market share, concentration ratios

Conduct/C

•pricing, promotion and product development •Indicates how firms behave in the market place

Performance/P

•costs, profitability, technology employed •commonly used indicators of performance: profitability, return on investment and stock performance

Fig. 2.1 Harvard School’s SCP Paradigm

consumer welfare presumption.16 The approach is along the lines of the Harvard school’s strucutre conduct performance (SCP) paradigm. The paradigm was first proposed by Bain in his work on Industrial Organization. According to this theory, the structure of the industry effects the conduct of the enterprises which in turn impacts their profitability (See Fig. 2.1 below).17 The approach had a substantial impact in the 1970s on the thinking of the US and the EU competition law scholars. According to the SCP paradigm, higher level of concentration in the industry coupled with high barriers to market entry can lead to high prices and greater profit margins.18 Higher is the market share of the largest firms, smaller is the total number of players in the market and greater is the overall level of concentration in the market.19 This means that the definition of the relevant market is a good starting to assess the competitiveness of the market. The Chicago school was revolutionary as it challenged the Harvard school’s assumption on the unidirectional relationship between structure, conduct and performance. It argued that the relationship was infact circular, as the three factors mutually re-inforced and iteratively influenced one another (see Fig. 2.2). It is noteworthy to add how the two schools differed in their assessment of the impact of a change in concentration. Whereas the Harvard school saw higher concentration as an undesirable result of increased market power, the Chicago school considered the same outcome to be the result of the efficient conduct of the merged entity. For Harvard school economists, increased concentration led to reduction in consumer surplus and it therefore, called for a stricter merger control regime.20 For Chicago school, on the other hand, increased concentration was Michael L Katz and Howard A Shelanski, ‘“Schumpeterian” Competition and Antitrust Policy in High-Tech Markets’ (2005) 14 Competition 47, 51–53. 17 Bain, Relation of Profit Rate to Industrial Concentration: American Manufacturing, 1936–1940, 65 Quarterly Journal of Economics 293 (1951). 18 Geroski, Interpreting a Correlation between Market Structure and Performance, 30 J. Indus. Eco. 319 (1982). 19 Almarin Phillips, Market Concentration and Performance: A Survey of the Evidence, at p 1102 in Notre Dame Law Review (Vol. 61). 20 Ralf Kronberger and Theodor Taurer, Aktuelle Unterlage, Marktwirtschaft und Wettbewerb in Österreich (58), September 2008 at p 7. 16

2.2 The SCP Paradigm and the Relevant Market Fig. 2.2 Chicago School’s assessment to SCP Paradigm

17

Structure

Conduct

Perfor -mance

identified as a positive indicator of higher efficiency. Thus, for Chicago school economists the relevant criteria was increased total surplus, as opposed to only consumer surplus, the holy grail of the Harvard school economists.21 On similarities, the common and most fundamental is the importance attached to the definition of the relevant market. It is only following the definition of the relevant market, that one can assess the degree of market power and barriers to entry in the market—an issue discussed in the following sub-section.

2.2.1.2

Implications of the SSNIP Test and the SCP Paradigm for Market Definition

The definition of the relevant market is a useful exercise as it helps identify the actual and potential competitors of the merging parties. It also helps identify the ‘market power’ of the parties—which is an essential step in assessing the impact of the merger on competition.22 To assess market power, economists use the Lerner’s index. Lerner’s index assesses market power as a percentage mark-up on the marginal cost. Mathematically, it is represented as: ðpi
ci Þ=pi ¼ 1=εi

ð2:1Þ

where, pi refers to the market price of a given unit of the product, ci is the marginal cost of producing an additional unit of the product and εi is the own price elasticity of demand.

21

Ibid., p. 8. OECD, ‘Market Definition’ DAF/COMP 19 (2012) p. 105 < https://www.oecd.org/daf/competi tion/Marketdefinition2012.pdf> accessed 06 January 2019.

22

18

2 (Ir-) Relevant Markets in the High Technology Sector (?)

Instead of a marginal cost analysis as a measure of market power, some economists suggest that the presence of ‘effective competition’ may instead be a better indicator of market power.23 It is true that ‘effective competition’ may well account for the process of competition in single-sided markets, such as traditional retail and consumer goods sector. It may also be very useful to assess market power in some of the sub-sectors in the ICT, such as the market for the Enterprise Resource Planning (ERP) and the Customer Resource Management (CRM) solutions. But this only solves the problem to a limited extent. As identified in Sect. 2.3 infra, the approach may still fail to assess the market power or the absence of it in case of multi-sided platforms, such as the search engines.24

2.2.2

Relevant Geographic Market

The SSNIP test is also commonly used to identify the relevant geographic market. The relevant geographic market encompasses the area wherein ‘conditions of competition are sufficiently homogenous’ and can accordingly be segregated from the ‘neighbouring areas’ where the ‘conditions of competition’ are ‘appreciably different’.25 The product market definition raises substantially more complex set of challenges then the relevant geographic market. Moreover, the relevant geographic market for the ICT products and multi-sided platforms usually tend to be defined as global or at least European Economic Area (EEA)-wide in Europe in scope. Accordingly the issue of relevant geographic markets is not further dealt with in this book. The only exception to this observation is the case of telecommunications mergers and fixed/mobile/content mergers where on account of linguistic and cultural differences and allocation of spectrums on a national basis, the geographic market continues to be defined along national lines. The relevant geographic markets are accordingly discussed in Chap. 13 in the context of the telecommunications mergers only.

23 OECD, ‘Market Definition’ DAF/COMP 19 (2012) p. 24 < https://www.oecd.org/daf/competi tion/Marketdefinition2012.pdf> accessed 06 January 2019. 24 Considering the very special nature of multi-sided platforms and the limitations of the current approach, Chap. 17 discusses how the current approach may be modified or wherever required, changed to assess the big data mergers. 25 Commission Notice on the definition of relevant market for the purposes of Community Competition Law [1997] OJ C372/02, para 8; Case 85/76 Hoffmann-La Roche & Co. v Commission of the European Communities [1979] ECR 461.

2.3 Relevance of the Current Approach for the ICT Sector

2.3

19

Relevance of the Current Approach for the ICT Sector

On the definition of relevant markets in the ICT sector, this section, first seeks to identify whether the exercise of market definition is essentially a means to an end (Sect. 2.3.1) and whether the end—that is a correct identification of the theory of harm—is effectively met through the current approach (Sect. 2.3.2). Considering the complexity of two-sided and multi-sided platforms, Sect. 2.3.3 discusses the challenge in the context of multi-sided platforms.

2.3.1

Is Market Definition (Essentially) a Means to an End?

To begin with, it may be useful to mention that merger control is prospective as distinguished from ex-post competition law enforcement, which by its very nature is retrospective in nature. In this respect, definition of relevant markets may in certain cases and subject to appropriate adaption, may offer a better insight into the market power and anti-competitive effects of the merger. With respect to merger control, current prices26 may be considered as the competitive price to assess market power. This is in distinction to the ex-post enforcement, such as in case of abuse of dominance, where the anti-competitive effects have already taken place and using current prices as the benchmark may lead to the notoriously well-known ‘cellophane fallacy’.27 The 2010 US HMG recognised the importance of defining the relevant market and identifying the various market participants. The change in concentration levels following a merger are measured to identify the ‘line of commerce and section of country’ where the concentration may lead to ‘substantial lessening of competition’ (SLC).28 The Guidelines though cautiously underline that the exercise is only a means to analyse the competitive effects of the merger and not an end in itself.29 It is not necessary to identify a ‘bright line’ that clearly and undoubtedly separates the relevant markets.30 In case of unilateral effects, for instance, the Guidelines put diminished emphasis on defining the markets and offer the opportunity to establish a case completely on unilateral effects as a theory of harm, without first, clearly attempting to define a relevant market.31

26

The zero-price economy in the ICT sector, as discussed in Chap. 17, is an exception to this argument. 27 OECD, ‘Market Definition’ DAF/COMP 19 (2012) pp. 125–127 < https://www.oecd.org/daf/ competition/Marketdefinition2012.pdf> accessed 06 January 2019. 28 Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission [2010] §4, §5 accessed 06 January 2019. 29 Ibid., §4. 30 Ibid. 31 Ibid., §6.

20

2 (Ir-) Relevant Markets in the High Technology Sector (?)

Under the 2004 EU HMG, although market shares and concentration levels are identified as useful first indicators of the market structure and the level of competition,32 the HHI levels, along with other factors such as a merger involving a maverick or an innovator, may offer a good initial insight into the competition concerns, but these factors alone, do not clearly lead to the presumption (or the absence) of some possible anti-competitive effects.33 The 2010 UK MAG34 by the Competition and Markets Authority (CMA) state that market definition and a competitive assessment are not two discrete steps in investigating whether or not the merger may lead to a ‘substantial lessening of competition’—they are, in fact a ‘mutually re-enforcing [and an] overlapping’ exercise.35 The Guidelines offer the CMA the possibility to consider, if required, any ‘constraints outside the relevant market, segmentation within the [relevant] market, or other ways in which some constraints’ may play a more influential role than other factors.36 The European Commission too, in practice, employs a similar practice of joint determination of market definition and market power, instead of undertaking an individual two-step exercise.37 As the foregoing discussion on the different Guidelines indicates, to borrow an expression from the 2010 US HMG, the exercise is a ‘means to an end’, rather than an end in itself. In the ICT sector, the competition is for the markets rather than in the markets. This implies that even very high market shares are not conclusive evidence of market power. In Microsoft/Skype—a merger involving the market for consumer and business communication software services—the European Commission observed that market shares were ‘not the best proxy’ to evaluate market power and at best offered ‘only a preliminary indication’ of competition in dynamic markets.38 The Commission’s decision was subsequently appealed by Cisco—a competitor of Microsoft in the market for enterprise communication—before the General Court (GC). The GC upheld the Commission’s decision stating that considering the ‘recent

32

Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31/05, para 14. 33 Ibid., at para 21. 34 The Guidelines were first released by the Office of Fair Trading. The Competition and Markets Authority subsequently adopted them. 35 Competition Commission, CC3 - Guidelines for Market Investigations: their role, procedures, assessment and remedies [April 2013] para 94, 132 accessed 06 January 2019. 36 A joint publication of the Competition Commission and the Office of Fair Trading, CC2 (Revised)/ OFT 1254: Merger Assessment Guidelines [September 2010] sec 5.2 accessed 06 January 2019. 37 Kai-Uwe Kühn, ‘Reforming European Merger Review: Targeting problem areas in policy outcomes’ (2002) 2 Journal of Industry, Competition and Trade 311, 316. 38 Microsoft/Skype (Case COMP/M 6281) [2011] OJ C341/2, para 99.

2.3 Relevance of the Current Approach for the ICT Sector

21

and fast-growing’ nature of the consumer communications sector, the industry was characterised by ‘frequent market entry’ and ‘short innovation cycles’ in which ‘large market shares’ were ephemeral.39 Network-effects and resulting competition for the markets, may mean that even very high market-shares approximating 90–95% of the relevant market are not seen as a conclusive evidence of market power. This has practical strategic and business implications considering that even with very high market shares, absence of a good business strategy and business model, or the multi-sided nature40 of the market, profitability is not guaranteed.41 Moreover, in high technology markets, the concept of defining relevant markets is not a static exercise—relevant markets are rapidly evolving and the exercise therefore, is a dynamic one.42 The expression ‘dynamic’ here means that products and services that were initially not a part of the relevant product market have subsequently become one because of technological advancements, such as convergence, and business-related innovation, particularly business model innovation. To illustrate, in Nokia/Navteq, the European Commission identified a common market for all mobile phones—including smartphones and other mobile handsets.43 Just a few years later, in Google/Motorola, the Commission distinguished the smart mobile phone devices from other mobile devices—the latter including basic and feature phones. The two categories were found to differ in terms of their functionalities and channels of distribution.44 Likewise, a separate market for smart mobile phone devices in Google/Motorola was also identified by the Chinese and the US competition authorities.45

39

Case T-79/12 Cisco Systems Inc. v Commission [2013], Judgement of 11.12.2013, para 69. See Sect. 2.3.3(infra) for a discussion on multi-sided platforms. 41 David J Teece, ‘Business Models, Business Strategy and Innovation’ (2010) 43(2, 3) Long Range Planning 172, 173–74. In an inter-disciplinary study on competition policy and business model innovation, I further critically evaluate the relationship between strategy, business models, competition policy and innovation. See, for instance, Kalpana Tyagi, ‘Implications of the AT&T/Time Warner Decision for Vertical Integration and Media Business Models in the Age of Digitization’ (August 2018) 1(2) Competition Policy International, available at https://www.researchgate.net/ publication/327106444_IMPLICATIONS_OF_THE_ATTTIME_WARNER_DECISION_FOR_ VERTICAL_INTEGRATION_AND_MEDIA_BUSINESS_MODELS_IN_THE_AGE_OF_DIGI TIZATION/stats. 42 Howard A Shelanski and J Gregory Sidak, ‘Antitrust Divestiture in Network Industries’ (2001) 68 University Chicago Law Review 1, 11–12. 43 Nokia/Navteq (Case COMP/ M.4942) [2009] OJ C13/08, paras 137–39. 44 Google/Motorola Mobility (Case COMP/M 6381) [2012] OJ C075/01, para 41. 45 For a comparative discussion of the Google/Motorola case and competitive assessment, see Chap. 5 Theory of Harm: Vertical Effects in ICT Mergers. 40

22

2.3.2

2 (Ir-) Relevant Markets in the High Technology Sector (?)

Does the Current Approach Facilitate Effective Identification of the (Anti-) Competitive Effects of Mergers?

Assumption of homogeneity amongst the products in the relevant market is central to the use of the HMT test. When the goods are homogenous, then the identification of market shares and concentration levels may well suggest the presence (or absence) of market power.46 In the ICT industries, product differentiation is an important dimension of competition and a principal strategic decision made by the competing firms. This means an assumption of homogeneity can lead to grossly misleading results. Resemblance in product characteristics is a question of degree and there are no absolute answers in the binary language of one and zero. Mac book operating system (OS) and Windows OS—although both belong to the same relevant market of the OS—however, on account of their differences in terms of functionality and features, tend to diverge remarkably. As Schmalensee argues these markets are winner take most as heterogeneity in tastes and preferences often imply that ‘niche products [enjoy] pockets of loyal users’ who are willing to pay a premium and stay committed to particular brands.47 Considering that consumers have varied tastes and preferences—firms compete to differentiate—in such a case, clear-cut delineation of markets or an attempt to draw boundaries is a difficult task.48 The current approach fails to consider these subtle, yet highly profound differences. Imperfect substitutes are treated as perfect substitutes which results in market power being overstated.49 This gives rise to the first contestable outcome in the exercise—relevant markets in such industries may either lead to very broad, or very narrowly defined markets, but certainly ‘never’ the correct one.50 It was this failure to properly delineate the relevant market with a clear ‘bright line’ that led to the US DOJ’s defeat in the Oracle/PeopleSoft51 merger. Second, under the SSNIP test, a small but non-transitory increase in prices (usually 5–10%) is indicative of market power. In innovation-led sectors such as the telecommunications—positive mark-ups exceeding well beyond the threshold Louis Kaplow, ‘Why (Ever) Define Markets?’ (2010) 124 Harvard Law Review 437, 452–53. Richard Schmalensee, ‘Antitrust Issues in Schumpeterian Industries’ (May 2000) 90(2) The American Economic Review, Papers and Proceedings of the One Hundred Twelfth Annual Meeting of the American Economic Association 192. 48 Carl Shapiro, ‘Mergers with Differentiated Products’ [Spring 1996] Antitrust 23, 28; Joseph Farrell and Carl Shapiro, ‘Antitrust Evaluation of Horizontal Mergers: An Economic Alternative to Market Definition’ (Jan 2010) 10(I) The B.E. Journal of Theoretical Economics: Policies and Politics 1. 49 Louis Kaplow, ‘Why (Ever) Define Markets?’ (2010) 124 Harvard Law Review 437, 487; Jacklyn M Siegel, ‘Blind Oracle: The Flawed Role of Potential Entry in United States v. Oracle and a Proposal for Change’ (Fall 2009) 12 NYU Journal of Legislation and Public Policy 499, 516. 50 Gregory J Werden, ‘Why (Ever) Define Markets? An Answer to Prof Kaplow’ [13 February 2012] accessed 06 January 2019. 51 United States v. Oracle Corporation, 331 F. Supp. 2d 1098(N.D. Cal. 2004). 46 47

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23

limit of 10% are not ‘abnormal’—they are barely sufficient to ‘recover [substantial] fixed costs’.52 Considering these factors, the EU Commission Notice on the definition of Relevant Market in the absence of indications of ‘insufficient competition’ permits consideration of the current price levels as the right benchmark.53 But even this may be insufficient, particularly in case of telecom mergers or fixed/mobile and content mergers, as the price of the same product may vary substantially, when purchased as a stand-alone product, or as a part of the bundle.54 Third, the conventional exercise of looking at market shares to identify market power is ‘backward looking’—as it is an indicator of the firm’s past performance.55 The ICT markets, on the other hand, are forward-looking. Current concentration levels, therefore, are ‘quite unrelated’ to ‘actual and potential rivalry in [forthcoming] new products’.56 Network effects in the ICT markets means that the industry experiences increasing returns to scale. The nature of the markets, therefore, allows a ‘winner take all’ or ‘winner take most’ of the market. The discipline comes more from the Schumpeterian competition—a force that ‘disciplines before it attacks’.57 Measuring concentration levels and delta then may not be a very helpful exercise either. More useful would be an analysis of the source of these increasing returns and their impact on the structure of the industry.58 Moreover, sunk costs in R&D are usually very high and are frequently accompanied by negligible marginal costs. In fact, it is these increasing returns to scale accompanied by usually way larger than the 5–10% mark-ups that help recover the substantial sunk costs in R&D and promotional activities such as sales and marketing. Presence of network effects coupled with huge mark-ups offers firms sufficient

Jordi Gual, ‘Market Definition in the Telecoms Industry’ Prepared for the European Commission (DGCOMP) under contract: COMP/2001/7050/PSE/02, 12 [September 2002] accessed 06 January 2019. 53 Commission Notice on the definition of relevant market for the purposes of Community Competition Law [1997] OJ C372/02, para 19. 54 See the discussion on relevant markets in F/M mergers in Kalpana Tyagi, ‘Fixed/Mobile Integration in the Telecommunications Sector: Substantial Issues in the EU Merger Control’ (2018) 2 European Competition and Regulatory Law Review 107, for a critical discussion on the strategy of telecom operators to pursue Fixed/Mobile or mobile only integration. 55 Michael L Katz and Howard A Shelanski, ‘Schumpeterian’ Competition and Antitrust Policy in High-Tech Markets’ (2005) 14 Competition 47, 56 accessed 06 January 2019. 56 Morton I Kamien and Nancy L Schwartz, ‘Timing of Innovation under Rivalry’ (1972) 40 (1) Econometrica 43, 50. 57 Joseph A Schumpeter, Capitalism, Socialism and Democracy (first published 1927, Harper & Row 1942)85. 58 Jordi Gual, ‘Market Definition in the Telecoms Industry’ Prepared for the European Commission (DGCOMP) under contract: COMP/2001/7050/PSE/02, 14 [September 2002] accessed 06 January 2019. 52

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2 (Ir-) Relevant Markets in the High Technology Sector (?)

incentives to take risk and to innovate. This means that perfect competition which is based on marginal-cost pricing in competitive markets is not a good benchmark to evaluate the process of competition.59 The ICT sector thus, more closely approximates the ‘contestable markets’ or John Sutton’s exogenous sunk costs model.60 In these industries, one observes ‘technical scale economies’ whereby investment is largely determined by the ‘nature of technology’.61 These industries are dynamic as firms compete on the basis of ‘product choice, product development [and] new products’ and recurrent spending on sunk advertising and R&D costs that are an inherent aspect of the industry.62 According to William Baumol, industries with ‘continuing sunk costs [ ] cannot be expected to live up to marginal cost pricing’.63 The presence of network effects has implications for market definition as once a network is ‘sufficiently large’—in short, following network effects, once the markets have tipped, the network ‘constitutes’ a market within itself.64 It was this rationale that led the US antitrust authorities to refer to ‘tier 1 internet backbone providers (IBPs)’ and the European Commission to refer to the ‘top-level or universal connectivity’ in the failed MCI/WorldCom and Sprint merger, with the common concern raised by the two competition authorities being the absence of sufficient competition from tier 2 & tier 3 service providers.65

2.3.3

Market Definition and Multi-Sided Platforms

Multi-sided platforms—commonly found in many ICT or ICT-based industries such as electronic payments, mobile-phones & advertising-supported media—are those wherein a platform offered by the service provider resolves the transaction cost problem through cross-subsidisation and brings agents from different groups that

Richard Schmalensee, ‘Antitrust Issues in Schumpeterian Industries’ (May 2000) 90(2) The American Economic Review, Papers and Proceedings of the One Hundred Twelfth Annual Meeting of the American Economic Association 192, 193. 60 John Sutton, Sunk costs and market structure: price competition, advertising and the evolution of concentration (Cambridge: The MIT Press 1991). 61 Jordi Gual, ‘Market Definition in the Telecoms Industry’ Prepared for the European Commission (DGCOMP) under contract: COMP/2001/7050/PSE/02, 14 [September 2002] accessed 06 January 2019. 62 Ibid., p. 15. 63 Alan B Krueger, ‘An Interview with William J. Baumol’ (Summer 2001) 15(3) Journal of Economic Perspectives 211, 220. 64 Jordi Gual, ‘Market Definition in the Telecoms Industry’ Prepared for the European Commission (DGCOMP) under contract: COMP/2001/7050/PSE/02, 29-30[September 2002] accessed 06 January 2019. 65 ibid. 59

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seek to economically (and often profitably) interact on this platform.66 Two-sided markets are a type of multi-sided platform wherein two distinct user groups interact with one another on a common platform. In these multi-sided platforms, the users on the one side join the network based on their expectations of the size and the quality of the network on the other side of the platform. In Facebook/Instagram, the erstwhile Office of Fair Trading (OFT) in the UK (now replaced by the Competition and Markets Authority, CMA) identified the two-sided nature of these markets thus: [S]ocial networks are two-sided markets. They compete to add users and to attract advertising revenue. Advertisers are willing to pay to purchase advertising space on the social networks’ sites and apps based on the number of users that the network had and the information that the network records on those users (for example, their demographics).67

Two-sided markets are not a recent phenomenon. In the old economy as well, examples of two-sided markets abound. Heterosexual dating clubs for instance, provide a platform for interested men and women to meet and seek potential matches. The clubs—acting as the platform—often charge men a heavy entrance fees, whereas women, the other side of the market, are often offered free or subsidised entry into the club. The larger the number of attractive members—the women—that the club can attract, the more profitably can it charge the paying side that is the men. A decision to charge is made based on a number of factors such as which side attaches greater utility to participation in the market and thereby has a greater willingness to pay for involvement with the platform. Competitive analysis in two-sided markets merits meticulous attention—considering that if one were to analyse only one side of the market, the analysis is prone to Type I or Type II error by identifying the market as either over- or under- competitive. To get a complete picture of the competitive forces at work, one must look at the market as a whole and not its individual parts.68 The two sides of the market put asymmetrical values on participation.69 Generally speaking, the side that attaches greater value to participation subsidises the other side—the latter paying below cost or zero price to the platform provider.70 Two-sided platforms offer some noteworthy examples of highly successful disruptive innovations executed alongside an innovative business strategy. Uber, Waze and the app stores for smartphones such as the Apple iPhone have all leveraged on this David S. Evans and Richard Schmalensee, ‘The Antitrust Analysis of Multi-Sided Platforms’ in Roger Blair and Daniel Sokol (eds), Oxford Handbook on International Antitrust Economics (Oxford University Press 2015) 405–06. 67 Office of Fair Trading, Anticipated acquisition by Facebook Inc of Instagram Inc, ME/5525/12 (22 August 2012), para 7. 68 Julian Wright, ‘One-Sided Logic in Two-Sided Markets’ (2008) 3(1) Review of Network Economics 44, 48. 69 Jean-Charles Rochet and Jean Tirole, ‘Platform Competition in Two-Sided Markets’ (2003) 1 (4) Journal of the European Economics Association 990, 990–91. 70 Jean-Charles Rochet and Jean Tirole, ‘Two-Sided Markets: A Progress Report’ (2006) 37(3) The RAND Journal of Economics 645, 659. 66

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platform-based model to offer valuable innovations and thereby, re-define the interaction between humans and technology. Uber for instance, offers drivers and riders an app-based platform wherein the two sides can digitally connect in real time with literally zero transaction costs. Apple created a disruptive value for smartphone users by creating an ecosystem for app developers whereby the developers could offer innovative apps that were expected to enhance the utility of iPhones and bring them closer to the personal computers in terms of utility.71 It was this disruptive business model along with a disruptive product that contributed to Apple’s unprecedented success in the market for smartphones.72 This two-sided (or multi-sided, as the case may be) nature of the market offers the platform-provider to choose from a range of strategic options—varying from competing on one side of the market to competing on both sides of the market. Strategic choices are made by the platform provider based on factors such as which side attaches higher value to the network and enjoys greater benefits from participation in the network. Accordingly, the other side is cross-subsidised and charged far ‘below cost’ to induce participation in the network.73 Effectively this means that whereas one of the markets may be subsidised and paid—for instance in terms of valuable information and news—the other side, may be charged excessively to participate in the network. To appropriately make a competitive assessment, both sides of the platform need to be considered. Using a single-sided SSNIP test in two-sided or multi-sided platforms fails consider for ‘profit maximisation’ and ‘strategic interaction’ at the market definition stage.74 The SSNIP test may not be very useful in such markets to assess the conditions of competition, as the test may misleadingly overstate the exercise of market power in one market, whereas it may understate it in the other segment. Both sides of the network generate positive network externalities on one another. A change in conditions of competition on one side of the platform, therefore, may impact the users on the other side of the network. Increase in prices charged to one side may reduce not only the number of users on one side, it may also lead to reduced demand on the other side of the platform. In the above-referred example of online heterosexual dating websites, an increase in participation fees charged to men, may not only lead to a reduction in the number of male members; but finding lesser number of potential male matches, attractive females unable to find a suitable match, may also begin to leave the website. As remaining male members are now unable to find desirable partners, they may also begin to leave and look for alternative online

Clayton M Christensen, Michael E Raynor and Rory McDonald, ‘What is Disruptive Innovation?’ (December 2015) Harvard Business Review accessed 06 January 2019. 72 Ibid. 73 Mark Armstrong, ‘Competition in Two-Sided Markets’ (2006) 37(3) The RAND Journal of Economics 668, 682. 74 David S. Evans and Michael D. Noel, ‘The Analysis of Mergers that involve Multi-Sided Platform Business’ (2008) 4(3) Journal of Competition Law and Economics 663, 677. 71

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and offline platforms, such as other websites and dating clubs. This negative loop continues until the website irretrievably losses its market share. In case of advertising-supported media, the greater the number of users/viewers/ readers on the other side of the platform, the more attractive this platform becomes for the advertisers. The users may however, find these large number of advertisements dissuading. Put simply, a challenge emerges because of ‘asymmetry of valuation’ by different sides of the market. To resolve this challenge, the platform often offers ‘valuable content’ for free to the users.75 But as discussed in Chap. 17, this ‘apparently’ free content has an important non-price dimension as users share valuable personal information in return for access to content and information. This in turn, has led the competition authorities worldwide deal with a very challenging issue—whether competition law should consider traditionally non-competition law concerns such as privacy and consumer rights in their assessment of big data mergers?76 Moreover, despite their innovation potential, MSPs encounter significant challenges in successful monetisation of their platforms. Before its merger with Microsoft, Skype—despite its huge success as a consumer communication app— suffered major challenges in generating a positive cash flow.77 Generally, the platforms first seek to develop a certain critical number of user base and once the market reaches a certain threshold such that it is attractive to the advertisers, then the app owner starts monetising them.78 For innovative start-ups such as Skype, incentives to innovate may therefore come from another unexpected source—mergers and acquisitions, the central theme of this book. As discussed in Chap. 9 ‘Mergers, Innovation and Remedies’ Design’, the possibility of acquisition by big firms may be a very valuable source of motivation for these start-ups to innovate and disrupt the incumbent markets in the first place. This also has implications for the notification test for mergers involving big data, considering that these mergers may usually go unnoticed within the current merger control framework.79

75 David S. Evans and Richard Schmalensee, ‘Industrial Organization of Markets with Two-Sided Platforms’ (2007) 3 Competition Policy International 150, 155–56. 76 This issue is critically assessed in Chap. 17 dealing with Big Data and Merger Control. 77 Microsoft/Skype (Case COMP/M 6281) [2011] OJ C341/2, paras 85–95. 78 Office of Fair Trading, Anticipated acquisition by Facebook Inc of Instagram Inc., ME/5525/12 (22 August 2012), para 19. 79 See Chap. 17 dealing with Big Data and Merger Control for alternative tests to capture such high value transactions.

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2.4

2 (Ir-) Relevant Markets in the High Technology Sector (?)

Conclusion

The HMT test identifies how consumers will respond to a small but non-transitory increase in prices—usually taken at 5% or 10% of the current prices. The HMT test, which was initially developed to analyse the competitive effects of single-sided markets, may present an erroneous result, when applied unedited to single-sided markets. In the above example of heterosexual dating clubs for instance—if a merger between two such clubs leads to a 5–10% price increase—it may negatively impact not just the men but also the women. As the number of men (impacted by the price increase) may choose ‘not’ to join or in the alternative, the existing members may begin to leave the club, the women (the free side of the market) too may find the club less attractive on account of the diminished probability to find a suitable match. The price effects generate a ‘feedback loop’. The SSNIP test, in its present form, is insufficient to account for this feedback loop. A straightjacketed application of the HMT test would therefore lead to a very narrowly defined market and exaggerate the anticipated unilateral effects of the merger.80 Thus, standard tools of economic analysis such as the SSNIP test and the diversion ratios that have so far largely successfully managed to define a relevant market and assess conditions of competition in the old economy, are without significant adaptations ‘not applicable’ to multi-sided platforms.81 Likewise, the Lerner’s Index, an indicator used to estimate demand elasticity in one-sided markets, when applied to two-sided platforms may present exaggerated estimates of actual short-run own price elasticity of demand and the expected loss.82 Considering the limitations of the current approach and as discussed in the following chapter—in a fully convergent world, the definition of products will be service-based—implies that in certain cases the current approach to define relevant markets may need to be significantly re-adapted. In that respect, it may be useful to make a passing reference to the ‘Bedarfsmarktkonzept’ or the Full Equilibrium Market Test (FERM)83 used in Germany. The test successfully applied in the past to the computer server industry compares not only how the consumers will react to a small but significant increase in price; but also how following a price increase by the hypothetical monopolist, ‘firms outside the candidate market’ may respond to this change in prices.84 Two advantages of the test make it a better candidate for the

80 David S Evans and Michael D Noel, ‘The Analysis of Mergers that involve Multi-Sided Platform Business’ (2008) 4(3) Journal of Competition Law and Economics 663, 669–70, 674. 81 Ibid., 663, 664. 82 Ibid., pp. 663, 666. 83 For a technical discussion of the FERM test, see Eduardo P.S. Fiuza, ‘Relevant Market Delineation and Horizontal Merger Simulation: A Unified Approach’ (2015) Institute for Applied Economic Research Discussion Paper 14–17, 185 accessed 6 January 2019. 84 OECD, ‘Market Definition’ DAF/COMP 19 (2012) p. 43 < https://www.oecd.org/daf/competi tion/Marketdefinition2012.pdf> accessed 06 January 2019.

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assessment of relevant markets in the ICT sector—first, if the product or services are functionally interchangeable, present similar characteristics and price level, they are assigned to the same relevant product market.85 Second, the test also accounts for the strategic behaviour of market participants. As identified throughout the course of this book—considering the strategic interaction between market participants using game theoretic analysis86 has substantially enriched the quality of merger control assessment. Further integrating such an approach at the outset, meaning even at the level of the definition of relevant markets, will go a long way in designing an effective merger control framework for the ICT sector.

85

Ibid. For a non-technical and inter-disciplinary discussion on the application of game theory in legal analysis, see Kalpana Tyagi, Game Theory in Law and Economics in Economic Analysis of Law, accessed 6 January 2019. 86

Chapter 3

Salient Features of the ICT Sector

Abstract This chapter discusses at length special industry-specific economic factors—such as network effects, customer lock-in, path-dependency, multi-sided platforms, convergence, market envelopment and consumerisation—issues that merit special consideration while reviewing mergers and evaluating merger remedies in the high technology sector.

3.1

Introduction

ICT, pharmaceuticals and biotechnology are innovation-driven sectors, characterised by short product life cycles and market power of the firms resulting from their innovative and marketing abilities. The ICT sector in particular, presents some very peculiar, industry-specific features that determine the competitive and strategic interaction amongst the firms and with the consumers. Google, for instance, offers valuable information to the consumers to retain its attractiveness as a search engine. In return, it has access to valuable information about the consumers, which may be of great value to advertisers who like to optimise their spending on advertisements by reaching out to consumers as meaningfully as possible.1 The greater the number of searches that consumers undertake on Google, the more intelligent Google’s search engine becomes in identifying correctly the information required. Even the mistypes, wrong spellings and grammatical errors are significant inputs for the search engine. This ‘learning by doing’ (a key building block for Artificial Intelligence)—or more appropriately ‘learning by searching’—creates a kind of endless loop that improves Google’s performance with every successive search performed. The better Google understands its users, the more it attracts and locks them to ‘google’ the desired information. In fact, Google has become so central to undertaking any sort of search, that the word ‘Google’ today has become synonymous with any kind of search—whether online or offline. Today, one does 1 For a discussion on how online advertising optimises the spending of the advertising firm, see Chap. 17 Big Data and Merger Control.

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_3

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3 Salient Features of the ICT Sector

not say let’s look for it on the internet, instead the preferred expression is ‘let’s Google it’. The success of Google and many other examples discussed in this chapter—such as Apple and Microsoft—cannot be described by mere reference to ‘innovation’ or ‘technological superiority’, the success may equally be attributed to certain industry-specific features and the ability of these firms to strategically employ their features and control data to their advantage. This chapter discusses some of these features—direct, indirect & negative network effects (Sect. 3.2), indirect network effects and multi-sided platforms (Sect. 3.3), customer lock-in and path dependency (Sect. 3.4), convergence (Sect. 3.5) and consumerisation (Sect. 3.6).

3.2

Network Effects

‘Network effects’ refers to demand-side economies of scale.2 The effects follow Metcalfe’s Law—meaning that the value of a network increases as a square of its number of users.3 If the number of users on a given network is ‘n’, then the value of the network for its users is the square of ‘n’. New users adopt the network anticipating that the others too will join the same network. Expectations management, strategically speaking, therefore, plays a crucial role. Depending on the structure of the network, it may derive value from multiple sources. In economic terms, these ‘values’ are referred to as ‘externalities’ and depending on their source, nature and utility offered, they can be ‘positive’ or ‘negative’, direct’ or ‘indirect’.4 Moreover, a network may take multiple forms—it can be single-sided, double-sided or even multi-sided. In single-sided networks, users exist on only one side of the platform and they generate externalities—whether positive or negative—on the other users.

3.2.1

Direct and Indirect Network Effects

Direct network effects refers to the ‘direct physical effect’ that the purchasers add to the ‘quality of the product’.5 A classic example of a single-sided network, where users generate ‘positive externalities’ and thereby exhibit direct network effects on Joseph Farrell and Paul Klemperer, ‘Coordination and Lock-in: Competition with Switching Costs and Network Effects’ in Mark Armstrong and Robert H Porter (eds), Handbook of Industrial Organization, Volume 3(North Holland 2007). 3 Carl Shapiro and Hal R Varian, Information Rules: A Strategic Guide to the Network Economy (Harvard Business School Press 1999). 4 Arthur C Pigou, The Economics of Welfare (4th ed, London: Macmillan and Co. 1932). 5 Michael L Katz and Carl Shapiro, ‘Network Externalities, Competition and Compatibility’ (June 1985) 75(3) The American Economic Review 424. 2

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one another is the case of telephone networks. The utility of telephones increased multiple times as ownership became widespread. Indirect network effects surface when an increase in the number of users benefits the entire user base indirectly through an augmented and improved supply of complementary goods. In the case of Microsoft Windows, for instance, as the number of users grew, application developers produced more and more applications that were compatible with Windows Operating System. In the Microsoft antitrust case, this was referred to as the ‘applications barrier to entry’.6 The presence of a large user base made MS Windows attractive for app developers. Innovative and useful apps improved product performance and MS Windows users thereby ‘indirectly’ benefitted from the presence of one another.7

3.2.2

Negative Network Effects

Oktoberfest, held every year in Munich is one of the largest beer festivals in the world. The fest has many tents and some tents may be more popular than others. If on a given day, let’s say ‘Augustiner Festhalle’ attracts far more beer lovers than it can possibly host in a given time, subsequent visitors may be dissuaded from entering the tent and may instead prefer to visit the neighbouring ones. Similarly, in the example of ‘heterosexual dating clubs’,8 the more participants present on one side of the network, the lower the probability that they may find a suitable match from the other side of the platform. For example, if too many women compete for a limited number of men present on the other side, it may reduce their chances of finding an eligible match, which may in turn reduce the attractiveness of the platform for women. This may happen, although there may otherwise be sufficiently large pool of men available on the platform. The reverse scenario too is equally true. Either ways, the end result is a negative network effect, re-inforced mutually on both sides of the platform, whereby, unable to find a suitable match, the users on both sides start leaving the platform. This momentary diminished utility of ‘Augustiner Festhalle’ or the diminished attractiveness of the dating club can be explained by the economic phenomenon known as ‘negative network effects’. Negative network effects are said to arise when the ‘average costs’ of a network tends to increase because of the congestion on networks and increased software complexity, leading eventually to ‘diseconomies of scale’.9

6

United States v. Microsoft Corp., 87 F.Supp. 2d 30,36, 38–39(D.D.C. 2000). For a detailed discussion on indirect network effects and two-sided platforms, see Chap. 17 Big Data and Merger Control. 8 See Chap. 2 (Ir) relevant Markets in the High Technology Sector?. 9 David S Evans and Richard Schmalensee, ‘The Industrial Organization of Markets with Two-Sided Platforms’ (Spring 2007) 3(1) Competition Policy International 151, 155. 7

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Following the emergence of negative effects, if the platform users find an attractive and viable alternative, it may prompt significant switching away from the platform. If on a search engine, there are far too many advertisements that crowdout one another, this may lead to reduced eyeballs per advert. The consumers who are averse to high levels of advertising may in turn, prefer switching to a competing search engine with fewer ads. The reduction in the number of users may in turn diminish the utility of advertising on the search engine. Thus, there exists a possibility of both negative direct and negative indirect network effects.

3.2.3

Network Effects and Economies of Scale

Two closely related (and often confused) factors are the network effects and economies of scale. Whereas network effects is a demand side phenomenon, economies of scale operates on the supply-side leading to a decrease in the price of goods and services due to diminishing marginal costs.10 In the mobile telecommunications sector for instance, the smaller of the Mobile Network Operators (MNOs) in a given market, often acts as a ‘maverick’ and pursues an ‘aggressive pricing policy’ to build a substantial customer base, in the expectation that the large customer base may eventually help it recoup the substantial network investment and operating costs.11 An aggressive pricing policy with reduced tariffs and attractive data packages has not only oftentimes increased their customer base, but also boosted their turnover and profitability.12 Depending on the nature of the services involved, an industry may experience both—network effects and economies of scale.13 When the two forces operate simultaneously, there is a ‘[strong] push towards monopoly market structure’.14 In the telecommunications sector, both the factors play an important role. ‘Economies of scale’ and ‘network effects’ are ‘structural barriers’ to market entry as distinguished from ‘strategic barriers’ that are created or enhanced by the incumbent players to deter market entry.15 The presence of network effects in the high technology sectors may also imply that competition policy may not in itself facilitate the most optimum market

10

Stuart Minor Benjamin and James B Speta Telecommunications Law and Policy (4th edn, California Academic Press 2015)10. 11 T-Mobile Austria/Tele.ring (Case COMP/M.3916) Commission Decision 2007/193/EC [2007] OJ C193/44, para 76. 12 Ibid. 13 Stuart Minor Benjamin and James B Speta Telecommunications Law and Policy (4th edn, California Academic Press 2015)10–12. 14 Ibid. 15 OECD, Barriers to Entry, DAF/ COMP (2005) 42, 19 accessed 06 January 2019.

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outcomes. A certain degree of regulation, may therefore, be needed to ensure effective competition and optimal policy outcomes.16

3.2.4

Network Effects and Two-Sided Platforms

In two-sided markets, the platform provider creates ‘value-creating exchanges’ by managing to attract the two sides of the market and ‘minimise their transaction costs’.17 Users are attracted towards the platform in anticipation that network users from the other side of the market will also be present on the platform.18 Indirect network effects are a remarkable feature of these platforms.19 The platforms manage to bring the users on two sides of the platform together by creating sufficient incentives for users on either side to join the network. Google for instance, makes its search engine attractive for users by offering valuable and meaningful information for free. For the advertisers, the large user base of Google means that their ads are more effective as they are directed towards potential customers that are actively searching for the products and services that these advertisers sell.

3.2.5

Network Effects, Tipping and Second-Mover Advantage

The ICT industry exhibits network effects and a natural tendency to tip.20 The social networking site (and its unprecedented success) Facebook presents a textbook example of the effects. Facebook started as a close student social network at the Harvard University.21 As more users—first from the US, then Europe and then the rest of the world—joined the network, the utility of the network for Facebook users grew multi-fold as they could now connect with anyone from across the world—the

16

OECD, Roundtable on Two-Sided Markets: Note by the Delegation of the European Commission, DAF/COMP/WD (2009)69, 15. 17 David S Evans and Richard Schmalensee, Catalyst Code: The Strategies Behind the World’s Most Dynamic Companies (Harvard Business School Press 2007) 53. 18 David S Evans and Richard Schmalensee, ‘The Industrial Organization of Markets with Two-Sided Platforms’ (Spring 2007) 3(1) Competition Policy International 151, 152. 19 Jean-Charles Rochet and Jean Tirole, ‘Two-Sided Markets: A Progress Report’ (2006) 37(3) The RAND Journal of Economics 645, 659; Jean-Charles Rochet and Jean Tirole, ‘Platform Competition in Two-Sided Markets’ (2003) 1(4) Journal of the European Economics Association 990, 990–91. 20 Gregory J Werden, ‘Network Effects and Conditions of Entry: Lessons from the Microsoft Case’ (2001) 69 Antitrust Law Journal 108. 21 Sarah Philips, ‘A brief history of Facebook’ The Guardian (London, 25 July 2007) accessed 06 January 2019.

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3 Salient Features of the ICT Sector

only requirement being that the two had a Facebook account.22 The positive network externalities generated a positive feedback loop for Facebook—whereby as more users joined the network, its utility increased multi-fold to the existing users. The power of these effects was so strong that although Orkut23 and Facebook commenced their operations at almost the same time24; for the first few years, at least, Orkut was the number one social networking website in India and Brazil, and Orkut was subsequently acquired by Google—none of these advantages helped Orkut survive this race for ‘competition for the market’ and once Facebook reached a ‘critical mass’, the market for social networking quickly tipped towards Facebook, while Orkut had to eventually close shop in this network-driven market.25 Considering that network effects—an important force in network-driven economies—lead to tipping which in turn can lead to monopoly, network effects must remain central to the antirust analysis of platform economies in particular. This example of Facebook and Orkut also presents an example of a situation whereby two ‘sponsored’ technologies aggressively compete in the given market. In addition to network effects, Facebook’s ‘technological superiority’ also played an important role. It offered better and more advanced features—such as a closed user group, privacy—factors that users of social networking sites found highly useful. This implies that when two or more technologies—each with a sponsor, compete— the market exhibits a ‘second-mover advantage’. In such a set-up, the market exhibits ‘excessive foresight’ as the technologically superior product that offers better prospects of improvements and advancement in the future enjoys a key ‘strategic advantage’.26 Considering the dynamic nature of the ICT sector, this implies that while performing a competitive analysis, different factors such as product life cycle, industry life cycle, levels of innovation, emerging and competing technologies— may merit a detailed case by case analysis. Before discussing network effects as barriers to entry, it may be useful to briefly discuss two important phenomenon that substantially impact the decision of market entry—first, the concept of ‘second mover advantage’, as is well highlighted by the success of Facebook and the failure of Orkut (Sect. 3.2.5.1) and second, market envelopment (Sect. 3.2.5.2).

22

Ibid. Orkut was a social networking site like Facebook. 24 Sarah Philips, ‘A brief history of Facebook’ The Guardian (London, 25 July 2007) accessed 06 January 2019. 25 Lauren Orsini, ‘The Rise and Fall of Orkut-Google’s decade long social media experiment’ Readwrite, Social (Online, 03 June 2014) accessed 06 January 2019. 26 Michael L Katz and Carl Shapiro, ‘Technology Adoption in the Presence of Network Externalities’ (1986) 94(4) Journal of Political Economy 825. 23

3.2 Network Effects

3.2.5.1

37

Second Mover Advantage

Apple was not the first company to introduce object oriented computing (the mouse), or the mp3 player or the mobile phones. In all these categories, Apple is commonly and misleadingly identified as an innovator and first mover; whereas it was in fact, a late, second mover! In the smart phone market, for instance, Motorola and Blackberry were the initial pioneers.27 However, it was Apple’s success with iphones that disrupted the market for handphones, and in fact, led to the emergence of the market for smartphones. Likewise, Microsoft was not the first in the computer software market.28 The common key to the immense success of Apple and Microsoft was their ability to selectively choose the right features and make them more user friendly. Empirical study indicates that pioneers were successful in only 15 of the 50 product categories studied.29 Success of a product through first movement into the relevant market is only half the truth.30 The other half of the truth is the ability of second movers to learn from the mistakes of their predecessors and successfully re-launch the product.

3.2.5.2

Market Envelopment

Market envelopment is a process by which platform provider uses its strength in one market to enter the target market ‘by offering multi-platform bundles’.31 Demand side commonality such as common user base or supply side similarity such as similar inputs or production process may under certain circumstances offer a substantial vigour to the ‘platform provider’s envelopment attack’.32 Microsoft has for instance successfully used its position of strength in the market for Windows Operating System (OS) to foreclose ‘Real’ by bundling Windows Media Player (WMP) with its OS (Fig. 3.1).33 This is a very frequently employed strategy in the ICT sector, and has been identified a key source of both—competition and potential anti-competitive

Myles Udland, ‘The number one key to Apple’s success? It was second’ Business Insider (Online 8 June 2015) < https://www.businessinsider.com.au/apple-second-mover-advantage-2015-6> accessed 06 January 2019. 28 Venkatesh Shankar and Gregory Carpenter, ‘The Second-Mover Advantage’ Kellogg Insight

accessed 06 January 2019. 29 Ibid. 30 Fernando Suarez and Gianvito Lanzolla, ‘The Half-Truth of First-Mover Advantage’ Harvard Business Review (Online April 2005 Issue) accessed 06 January 2019. 31 Thomas R Eisenmann, Geoffrey Parker and Marshall W Van Alstyne, ‘Platform Envelopment’ (27 July 2010) Harvard Business School Working Paper 07-104 accessed 06 January 2019, at p. 3. 32 Ibid., at p. 1. 33 Ibid., at p. 2. 27

38

3 Salient Features of the ICT Sector

Users

Content

Streaming media

Enterprises

Users

Users

Enterprises

Streaming media Streaming media Computer OS

Computer OS

Fig. 3.1 Microsoft’s Envelopment of Real Network (Source: Eisenmann et al., p. 2)

behaviour. The joint venture between ARM, Giesecke & Devrient (G&D) and Gemalto, discussed in detail in Chap. 4, offers a very interesting example, where the European Commission anticipated that potential market entry by vertically integrated firms active in the neighbouring market was expected to alleviate anticompetitive effects of the joint venture in the market for Trusted Executed Environment(TEE) Solutions.34

3.2.6

Network Effects and Barriers to Entry

Network effects can be a significant barrier to market entry—a ‘truly formidable [one]’—helping the firm keep prices well above the competitive levels for a significant period of time and ‘without attracting entry’.35 Assessment of entry conditions in the presence of network effects is a highly complicated task that merits case by case analysis.36 The presence of network effects in the ICT markets makes them ‘tippy’. ‘Tipping’ in network-based economies results on account of the ‘positive feedback effect’. Once the market has tipped to a certain standard, it can enjoy—as clearly identified in the sections that follow—virtually enduring dominance. Competition in such markets is a ‘standard setting competition’, where the winner ‘take[s] most’ or ‘take[s]-all’ of the market.37 Moreover, the network-driven nature of the markets means that anti-competitive practices such as tying, predation and exclusive dealing,

34

ARM/Giesecke & Devrient/ Gemalto/ JV (Case COMP/M.6564) [2012] OJ C368/9, para 150. Gregory J Werden, ‘Network Effects and Conditions of Entry: Lessons from the Microsoft Case’ (2001) 69 Antitrust Law Journal 108. 36 Ibid. 37 Jonathan B Baker, ‘Can Antitrust Keep Up?: Competition Policy in high-tech markets’ (1 December 2001) Brookings accessed 06 January 2019. 35

3.2 Network Effects

39

as well as conglomerate and vertical theories of harm in ICT mergers merit detailed scrutiny as dominance in one market can easily facilitate tipping in neighbouring markets, even when the offered product is inferior in quality.38 If accompanied by ‘significant sunk costs’ such as purchase of hardware and ‘learning costs’,39 the market can be irreversibly locked-in to a standard because of these substantial sunk costs. This may overall, create substantial and overwhelming entry barriers and also adversely impact follow-on innovation and ‘compatibility’ may, therefore, be a critical dimension of industry structure and conduct, and critical to promote competition in innovation.40 Following such a scenario, refusal to license can be particularly detrimental for dynamic competition as it can negatively impact follow-on innovation.41 Even if the subsequent product is superior, high ‘sunk and learning costs’ may prevent customers from switching to the technologically superior product. A disruptive entrant or maverick, it may be argued, can launch a ‘dramatically improved product that ‘leapfrogs’ the [ ] leader’s technology’.42 Displacing the incumbent may however, be ‘not’ so easy, because once the customers have made their ‘initial choices, network effects can reinforce path dependency’ and under certain circumstances, such as prohibitive switching costs, even a technologically superior product may fail to displace the incumbent.43 The situation can be complicated in the presence of complementary goods. Consider the case of ICT goods where there are usually two components—a durable part and a complementary good or service. Acting strategically, the firm can lead to customer lock-in such that for the durable part to function effectively, s/he must purchase the complementary good or service.44

Michael L Katz and Carl Shapiro, ‘Antitrust in Software Markets’ in Jeffrey A Eisenach and Thomas M Lenard (eds) Competition, Innovation and the Microsoft Monopoly (Kluwer Academic Publishers 1999)

accessed 06 January 2019. 39 See Sect. 3.3 Qwerty-nomics, Customer Lock-in and Path Dependency. 40 Michael L Katz and Carl Shapiro, ‘Antitrust in Software Markets’ in Jeffrey A Eisenach and Thomas M Lenard (eds) Competition, Innovation and the Microsoft Monopoly (Kluwer Academic Publishers 1999)

accessed 06 January 2019. 41 Mark-Oliver Mackenrodt, ‘Assessing the Effects of Intellectual Property Rights in Network Standards’ in Josef Drexl(ed), Research Handbook on Intellectual Property and Competition Law (Cheltenham: Edward Elgar 2008)80. 42 Jonathan B Baker, ‘Can Antitrust Keep Up?: Competition Policy in high-tech markets’ (1 December 2001) Brookings accessed 06 January 2019. 43 Ilene Knable Gotts, Scott Sher and Michelle Lee, ‘Antitrust Merger Analysis in High-Technology Markets’ (December 2008) 4(2) European Competition Journal 463, 476–77. 44 Michael L Katz and Carl Shapiro, ‘Technology Adoption in the Presence of Network Externalities’ (1986) 94(4) Journal of Political Economy 825, 827. 38

40

3 Salient Features of the ICT Sector

In the Facebook/Whatsapp merger, the European Commission analysed these network effects and following a brief phase, investigation offered unconditional clearance.45

3.3

Qwertynomics, Customer Lock-in and Path Dependency

Highly sophisticated and advanced technologies may require users to have some form of technical training.46 For users to be able to easily switch to a new and improved product offered by a competing firm, they may first need to learn how to use the new technology. The more complicated the technology and the more advanced its features are, the more difficult it gets for them to switch to an alternate product or service. Switching to an alternative requires learning and adapting to the new features, and this need for training creates learning effects that in turn generates network externalities. Learning effects generate customer inertia and prevent customers from frequent switching and experimenting with alternative products. Presence of ‘excess inertia’ may effectively prevent a ‘collective switch’ of users from an adopted standard to even technologically advanced and better standards.47 Learning effects can thus, play a significant role in preventing market entry. In Oracle/ PeopleSoft, the US DOJ argued that further market entry in the highly saturated market for high function software was not possible in the anticipated time frame as purchase decisions were made based on range of factors such as fixed costs, learning and training costs of the personal and annual licensing fees that ranged between 10 and 15% of the initial purchase price, as well as additional timely updates required on a periodic basis.48 In economic terminology, this phenomenon is referred to as QWERTY-nomics. The name QWERTY-nomics is derived from the QWERTY keyboard. When typewriters were first launched, there existed two competing standards for keyboard—the QWERTY and the DSK (the Dvorak Simplified Keyboard). A series of factors such as ‘technical inter-relatedness, economies of scale and quasiirreversibility of investment’, established QWERTY as the ‘dominant standard’,49

45

Facebook/WhatsApp (Case No COMP/M.7217) [2014] OJ/C 417/4. W Brian Arthur, ‘On Competing Technologies and Historical Small Events: The Dynamics of Choice Under Increasing Returns’ (1983) IIASA Working Paper, IIASA, Laxenburg, Austria accessed 06 January 2019. 47 Ibid. 48 United States v. Oracle Corporation, 331 F. Supp. 2d 1098(N.D. Cal. 2004), Plaintiff’s Complaint 16–20. 49 Paul A David, ‘Clio and the economics of QWERTY’ (1985) 75(2) American Economic Review 332, 339–40. 46

3.4 Technological Convergence

41

although the DSK keyboard had proven to be quicker and way more efficient in various typing competitions.50 Customer lock-in can occur in two-sided and multi-sided platforms as well, wherein lock-in may occur because of time and efforts required to recover or recreate data with different service providers.51 This can in turn generate barriers to market entry, as potential competitors may be unable to attract a ‘critical mass of users’ to compete effectively with the incumbent service provider.52

3.4

Technological Convergence

In the world of telecommunications, information and broadcasting, ‘convergence’ has undoubtedly been the underlying current that revolutionised the entire industry. ‘Convergence’ means that functions that were once performed by different instruments can now be performed by a single device. At the beginning, different technological instruments such as television, radio, telephone, and handphones spoke different languages of varied analogous signals. Following the digitisation of signals, these devices can today communicate with one another. Digitisation and the advancement in transmission techniques, accompanied by deregulation, harmonisation of technical standards and licensing procedures and opening up of the telecommunications sector accelerated the pace of convergence.53 As different factors—deregulation, digitisation and competition ‘for’ the markets—re-inforce one another, convergence is emerging as a sound and an all-inclusive phenomenon, touching upon virtually every facet of the life of a digitally-connected consumer. In everyday life, it means that different devices can now connect and talk to one another. Put simply, we do not have phones or homes or TVs, instead we have smartphones, smart homes and smart TVs. This in turn impacts the definition of relevant markets as a technology-based definition that distinguishes between telecommunications, broadcasting and Information Technology is less and less meaningful.54 Rapid evolution in market definition of smartphones from Nokia/ Navteq to Google/Motorola decision as discussed in Chap. 2 is a case in point. In

50

Ibid., pp. 337–38. Preliminary Opinion of the European Data Protection Supervisor, ‘Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy’ (March 2014) 29–30 accessed 06 January 2019. 52 Ibid., p.29. 53 Alexandre de Streel, ‘Remedies in the European Electronic Telecommunications Sector’ in Damien Geradin (ed.), Remedies in Network Industries: EC Competition Law vs. Sector-specific Regulation (Intersentia, 2004) 67, 68. 54 Michael Rosenthal, ‘Mergers in the Telecommunications Sector: An overview of EU and national case law’ (6 April 2012) N
44678 e-Competitions 2. 51

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3 Salient Features of the ICT Sector

Nokia/Navteq, the Commission identified a single relevant product market comprising of navigation applications for mobile handsets.55 In Google/Motorola, smart phones were distinguished from other kinds of mobile devices, as the former were designed to ‘support computer-like features’.56 Moreover, considering the similarity of functions performed by smartphones and tablets, there seemed to be an ‘emerging convergence’ between the two types of devices.57 Technological convergence has also been responsible for shifting market boundaries as it has converted many complementary products into substitutes—such as hand-held devices that today compete with laptops and desktops.58 Convergence is still an ongoing phenomenon and in a fully converged world, market definition will be service-based.59 Customer lock-in, along with convergence also offers the potential to generate some irreversible anti-competitive effects. To illustrate, as the ICT converges with the banking and the retail sector, customer lock-in may prompt the companies to execute walled-garden strategies by offering digital ecosystems the opportunity to use information gathered during search and purchase process for other unrelated purposes.60 This in turn means that in the near future, assessing the effects of a proposed merger cannot be confined to the relevant markets only; rather, the competition authorities may need to take the impact of the concentration on digital ecosystem as a whole.

3.5

Consumerisation

This section identifies different types of ICT product markets (Sect. 3.5.1) and consumerisation in the ICT markets, and the impact that consumerisation has had on the definition of relevant product market (Sect. 3.5.2).

55

Nokia/Navteq (Case COMP/ M.4942) [2009] OJ C13/8, para 126. Google/Motorola Mobility (Case COMP/M 6381) [2012] OJ C075/01, para 27. 57 Google/Motorola Mobility (Case COMP/M 6381) [2012] OJ C075/01, para 28–29. 58 Preliminary Opinion of the European Data Protection Supervisor, ‘Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy’ (March 2014) 28 accessed 06 January 2019. 59 Alexandre de Streel, ‘Remedies in the European Electronic Telecommunications Sector’ in Damien Geradin (ed.) Remedies in Network Industries: EC Competition Laws vs. Sector-specific Regulation (Intersentia 2004) 67, 95; Michael Rosenthal, ‘Mergers in the Telecommunications Sector: An overview of EU and national case law’ (6 April 2012) N
44678 e-Competitions 2. 60 Thomas F Dapp, ‘The future of (mobile) payments: New (online) players competing with banks: New (online) players competing with banks’ [20 December 2012] DB Research: Current Issues in Global financial markets accessed 06 January 2019. 62

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3 Salient Features of the ICT Sector

segment as well and with an energised corporate strategy, Apple re-directed its attention to the enterprise segment.64 Instead of making a direct entry into the enterprise product market, Apple adopted a different strategy—having successfully established its foothold in the consumer product market, it leveraged its brand equity and engaged in a successful ‘brand extension’ strategy65 to gain a position of advantage in the enterprise product market.66 In the technological terminology, this is referred to as the ‘consumerisation of Information Technology (IT)’. In the IT jargon, it is also known as ‘Bring Your Own Device’ or simply BYOD.67 Consumerisation of IT (also referred to as consumerisation for short) may be defined as an emerging phenomenon wherein the manufacturer of IT products first establishes itself in the consumer technology markets, and having successfully achieved its objective, seeks to leverage this position of advantage to the neighbouring enterprise segments.68 Consumerisation has been highly disruptive—both from the perspective of technology, as well as from the perspective of business strategy. As the example of Apple of clearly illustrates, success in one segment irreversibly disrupted the traditional segmentation of markets between the enterprise and consumer segment, not only for Apple but for the entire market for smartphones.

64 Jake O’Donnell, ‘Apple Enterprise Support, Services Questioned and Business Push’ Search Mobile Computing (Online, 24 November 2014) accessed 06 January 2019. 65 To capitalise the value associated with their products and services, firms increasingly employ a ‘brand extension’ strategy that launch new products using the brand names associated with their successful product offerings. Apple extended its brand from the consumer to the enterprise segment. By offering a valuable solution, including productivity apps, it offered a valuable proposition to the enterprise segment, which had earlier enjoyed great success in the consumer segment. 66 Larry Dignan, ‘Between the Lines, Apple’s Enterprise Strategy: Steady as Consumerization goes’ Between the Lines (London, 25 May 2012) accessed 06 January 2019; David J Teece, ‘Business Models, Business Strategy and Innovation’ (2010) 43(2, 3) Long Range Planning 172. 67 Introduction of Apple’s iPhones and iPad is widely believed to have led to the BYOD movement in offices, law firms and consulting firms. See Kyle Russell, ‘How Apple Became the Dominant Force in Enterprise’ Business Insider (Online, 19th February 2014) < http://www.businessinsider. com/why-apple-is-dominating-enterprise-2014-2?IR¼T> accessed 06 January 2019. 68 Alexander Roth, ‘Was ist eigentlich Consumerization of IT?’ PCWelt (Online, 13 September 2014) accessed 06 January 2019.

3.6 Conclusion

3.6

45

Conclusion

The innovation-led and special nature of the ICT sector has often raised the question whether the new economy requires a new set of competition and merger control laws to effectively deal with the emerging challenges in the wake of convergence and digitalization. This chapter sought to highlight some of these industry-specific features such as network effects, convergence, second mover advantage, market envelopment, consumerisation and customer lock-in—that makes the ICT sector different from the other sectors of the economy. As the following chapters will highlight, the new economy does not require a new set of laws; instead, it is these industry-specific features that merit special consideration while undertaking merger review and the design of remedies in the sector. This observation is however, limited to the ICT and the telecommunications sector. The multi-sided platforms being even more peculiar than these two are separately dealt with in part III of this book. Second-mover advantage and market envelopment, for instance, may oftentimes be a rational strategic decision for an enterprise to enter the neighbouring markets. Market envelopment, as can be seen from the example of Microsoft’s envelopment of Real networks, does not quite exhibit the Schumpeterian dimension of competition as understood in the innovation-related literature. It is therefore important that in their assessment of competition in innovation in the ICT sector, the competition authorities consider these strategic phenomenon and wherever some strategic decisions have potential anti-competitive implications, they be thoroughly assessed and if required, remedied through suitable merger remedies. Market envelopment has important implications for assessment of non-horizontal merger effects, as discussed in more detail in Chaps. 5 and 6.

Chapter 4

Theory of Harm: Unilateral Effects in ICT Mergers

Abstract This part of the book is divided into three chapters. This chapter discusses in detail the law and economics of unilateral effects with a brief overview of co-ordinated effects. This is followed by a discussion on the vertical effects in Chap. 5 and the conglomerate effects in Chap. 6. Chapter 6 also briefly discusses the standards of proof—the relative weightage offered to qualitative and quantitative evidence—the latter being particularly useful in analysing complex unilateral and conglomerate effects cases.

4.1

Introduction

When two or more undertakings come together to form a common enterprise, or one undertaking takes control of another, the two are said to merge. For merger control there exists no distinction between mergers, acquisitions, takeovers, and hostile acquisitions. They are all collectively referred to as mergers. The expression ‘mergers’ in competition law, is somewhat broader and different from its connotation in other disciplines such as in corporate law or in the corporate finance literature. This may be attributed to the fact that in merger control, the objective is to restrain the expansion of firms with excessive market power—that may have otherwise offered them an ability to act against the interest of consumers while engaging in profit maximisation.1 It is commonly (mis-)believed that the objective of merger control is to create a constrictive regulatory regime that seeks to block mergers or impose onerous remedies. In the early days of merger control in the United States, Justice Stewart observed that the ‘sole consistency’ that he found in merger cases was that the Government was ‘always’ a winner.2 The generalisation, however, may reveal moral

1 Mike Walker and Simon Bishop, The Economics of EC Competition Law: Concepts, Application and Measurement (London: Sweet & Maxwell 2002) 253–313. 2 United States v. Von’s Grocery Co., 384 U.S. 270, 301(1966) (Stewart, J., dissenting).

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_4

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4 Theory of Harm: Unilateral Effects in ICT Mergers

heuristics,3 hardly corroborated by the actual facts and figures on the review of mergers.4 In the ICT sector, in particular, considering that the competition is ‘for’ the markets, many mergers that were three-to-two mergers (3-to-2) or even mergers to monopoly received unconditional clearance from the competition authorities. Oracle/PeopleSoft, a 3-to-2 merger, received unconditional clearance on both sides of the Atlantic.5 NXP Semiconductors/Freescale6—a merger that caused substantial competition concerns in the market for RF Power Transistors—as the combined entity was anticipated to have over 70% post-merger market share—received conditional clearance from all the leading competition law authorities worldwide. The objective of merger control regime is to ensure that the mergers do not diminish welfare.7 A key question in the ICT sector is what exactly is meant by ‘welfare’ and ‘whose’ welfare do the competition authorities seek to enhance? Is the objective consumer welfare? If yes, then what are the criteria to evaluate that welfare—static efficiency or dynamic efficiency? In the EU, the UK and the USA, it is largely agreed that the objective is to enhance consumer welfare.8 In the ICT sector, the question is what exactly does the expression ‘consumer welfare’ signify? In innovation-led sectors, such as in the market for software, the firms compete on both static, as well as dynamic dimension—static by selling current products and dynamic by offering new products.9 It is possible that dynamic competition can also lead to static welfare gains. To illustrate, a process-led dynamic innovation may also enhance consumer welfare by an overall reduction in the prices of the product or service. Price as an indicator of competition may also indicate how the other static and dynamic aspects are influenced by the presence of market power in the industry.10

3 On the role of moral heuristics and how they may lead to systemic errors and judgments, see Cass R Sunstein, ‘Moral Heuristics’ (March 2003) University Chicago Law and Economics, Olin Working Paper No 180 accessed 06 January 2019. 4 D Daniel Sokol and William Blumenthal, ‘Merger Control: key international norms and differences’ in Ariel Ezrachi (ed), Research Handbook on International Competition Law (Edward Elgar 2012) 319–20. 5 United States v. Oracle Corporation, 331 F. Supp. 2d 1098(N.D. Cal. 2004). 6 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2. 7 Massimo Motta, Competition Policy: Theory and Practice(Cambridge University Press, 2004).; Mario Monti, ‘Notice on merger remedies: how and when to cure dominance problems’ (Commission Press release IP/00/1525, 21 December 2000) accessed 06 January 2019. 8 Kalpana Tyagi, ‘Merger Control in Times of Financial Crisis: An Expedient Instrument to Heal the Fledgling Economy or an Object of Abuse?’, RILE-BACT Working Paper Series No. 2015/5 (June 2015) 13–22

accessed 06 January 2019. 9 Richard Schmalensee, ‘Antitrust Issues in Schumpeterian Industries’ (May 2000) 90(2) The American Economic Review, Papers and Proceedings of the One Hundred Twelfth Annual Meeting of the American Economic Association 192. 10 Louis Kaplow and Carl Shapiro, ‘Antitrust’ in A Mitchell Polinsky & Steven Shavell (eds) Handbook of Law and Economics Volume 2(North Holland 2007) 1073, 1080.

4.1 Introduction

49

In the UK, in the recently cleared merger between the British Telecom (BT) and the Everything Everywhere (EE) for instance, the CMA took note of the dynamic and innovation-led nature of the telecommunications sector and assessed the ‘loss of dynamic retail competition in the spectrum’.11 Likewise, in the T-Mobile/Orange merger, the European Commission’s analysis showed that neither of the merging parties was a maverick in the relevant market.12 Rather, the 3UK, the smallest of the five MNOs and a late entrant, was the real maverick, as it led the market both in terms of price and service innovation.13 The competitive analysis indicated that a post-merger competitive retail and wholesale market depended upon the 3UK’s continued ability to compete and access the spectrum.14 The European Commission takes due note of the dynamic efficiencies from the enhanced ability of the merged firm to innovate and also put pressure on the rivals to innovate.15 It considers the possibility that the merger between two firms having ‘pipelines products’ in a ‘specific product market’ may significantly impede effective competition by diminishing the number of paths to innovation, for example from two to one.16 In short, as the parties merge, the number of players that compete to innovate is diminished. This was for instance considered by the European Commission in the Glaxo Wellcome/SmithKline Beecham merger, where a competitor, with a ‘promising pipeline’ of products, was also considered to be a significant competitor, notwithstanding its insignificant market share in some of the relevant markets concerned.17 It seems that by adopting an approach that seeks to maintain the diversity of innovation path, the Commission implicitly supports evolutionary economics.18

11 Competition & Markets Authority, BT Group plc and EE Limited: A report on the anticipated acquisition by BT Group plc of EE Limited (15 January 2016) 368–369, for conclusions and findings on the issue of dynamic loss of mobile competition, see 134–135. 12 T-Mobile/Orange (Case COMP/ M.5650) [2010] OJ C108/4, paras 59–63. 13 Ibid., at para. 49. 14 Ibid., para. 80. 15 Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31/05, para 38. 16 Ibid. 17 Glaxo Wellcome/Smithkline Beecham (Case IV/ M.1846) [2000] OJ C170/6, para 188. 18 Andreas Heinemann, ‘The impact of innovation- comments on Uwe Cantner and Wolfgang Kerber’ in Josef Drexl, Wolfgang Kerber and Rupprecht Podzun, Competition Policy and the Economic Approach: Foundations and Limitations (Edward Elgar 2012) 203.

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4.2

4 Theory of Harm: Unilateral Effects in ICT Mergers

Types of Mergers and Theories of Harm

A firm may pursue an expansion strategy in several directions. When a company ‘integrates successive stages of production’—upstream towards the source of raw material and inputs or downstream to directly serve the consumers,19 it is referred to as a vertical merger. Conglomerate mergers, also referred to as economic diversification or ‘shotgun approach’ in the management literature, signify the acquisition of firms that offer products bearing ‘little relation to those of the acquiring firm’.20 Horizontal mergers involve acquisition of competitors present at ‘the [same] stage of production’ with the objective of extending geographic reach or offering a ‘broader line of similar products’.21 In horizontal mergers, the two commonly identified theories of harm are: unilateral effects and co-ordinated effects.22 Although conglomerate mergers and vertical mergers have been typically viewed as benign, the dynamics of the ICT sector indicates that such an approach may be misplaced. This is because mergers with such effects, although they may not lead to unilateral effects or increased market power, may otherwise negatively impact the process of competition by raising barriers to entry and creating gatekeeper effects. In conglomerate mergers, tying, bundling and portfolio effects are some of the frequently identified competition concerns.23 Other than the principle objective of preserving competition in the relevant market, public interest considerations may also be a key consideration in the review of these transactions. In case of media and telecommunication mergers for instance, maintaining ‘plurality of opinion’ can be an important factor that may lead to prohibition or conditional clearance of an otherwise competitive merger.24 There is an apparent need for flexibility in devising remedies in the sector because of the presence of competition and non-competition concerns (such as media plurality).25 Moreover, there exists multiple approaches to deal with it—either the competition authorities or the regulatory authorities or the two together—may take public policy into consideration while reviewing such mergers.26 The EU merger control ‘only’ Robert M. Allan Jr., ‘Expansion by Merger’ in William W. Alberts and Joel E. Segall (eds), The Corporate Merger (Chicago and London: The University of Chicago Press, 1969) 101. 20 Ibid., pp. 101–02. 21 Ibid., p. 101. 22 D Daniel Sokol and William Blumenthal, ‘Merger Control: key international norms and differences’ in Ariel Ezrachi (ed), Research Handbook on International Competition Law (Edward Elgar 2012) 331. 23 Ibid., p. 332. 24 Institute of Competition Law research sponsored by Clifford Chance and PricewaterhouseCoopers LLP (the UK firm), ‘The Merger Remedies Matrix’ Concurrences

accessed 06 January 2019. 25 Ibid. 26 Prof Josef Drexl, ‘Copyright, Competition and Development’. Report by the Max Planck Institute for Intellectual Property and Competition Law, Munich (December 2013), prepared for the World 19

4.2 Types of Mergers and Theories of Harm

51

looks at the economic aspects of a media merger, leaving the aspects of ‘media plurality’ to be dealt with by the Member States.27 In the US, the Federal Communications Commission (FCC) is responsible for assessing whether the merger is in the ‘public interest’.28 In its assessment, the FCC evaluates issues such as diversity, spectrum allocation and universal access. The public policy dimension in these mergers is far more challenging and far more complex than those associated with ‘steels and bananas’.29 This may be particularly true for the more nascent competition law jurisdictions wherein the issue of competition is not merely an economic one; it also has a social, democratic and constitutional dimension as the democracy is in its ‘infancy’ and may be under significant ‘pressure’.30 To effectively deal with the topic, the subject requires way more detailed discussion that looks at the interface of promoting competition in innovation alongside promoting ‘creative competition’ in the converged fixed/ mobile and content sector. Promoting media plurality and cultural diversity through competition law, may be referred to as ‘creative competition’31—a subject matter of research in itself.32 Considering the complexity of the subject and the scope of present research, the issue is not further dealt with in this work.33 Intellectual Property Organisation accessed 06 January 2019. See discussion at p. 184 discussing Commission prohibition decision in Bertelsmann/ Kirch/ Premiere as the market was expected to create dominant position in the pay-TV market in Germany. 27 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentration between undertakings [2004] OJ L 24/01, article 21(4) states that “[ ] Member States may take appropriate measures to protect legitimate interests other than those taken into consideration by this Regulation and compatible with the general principles and other provisions of Community law. Public security, plurality of the media and prudential rules shall be regarded as legitimate interests within the meaning of the first subparagraph.” This according to the author may not allow the competition authority to safeguard media plurality in countries such as Germany, where there exists a dual system of control through competition and regulation agencies. Jurisdictions like UK and Austria, whereby media plurality is assessed within the framework of national merger control regime may not benefit from this provision, as 139/2004 Merger Control Regulation precludes the application of national merger control regime. See Josef Drexl, ‘Competition Law in Media Markets and its Contributions to Democracy – A Global Perspective’, (2015) 38(3) World Competition 367, 381–85. 28 47 U.S.C. § 214(a) and 47 U.S.C. § 310(d). 29 Damien Geradin and J Gregory Sidak, ‘European and American Antitrust Approaches to Antitrust Remedies and the Institutional Design of Regulation in Telecommunications’ in Martin E Cave, Sumit K Majumdar and Ingo Vogelsang(eds) Handbook of Telecommunications Economics Vol 2 (Oxford University Press 2006) 530, 543. 30 Josef Drexl, ‘Competition Law in Media Markets and its Contributions to Democracy – A Global Perspective’, (2015) 38(3) World Competition 367, 397. 31 Ibid., pp. 367, 377–78. For the purpose of this book, discussion on media plurality is limited to promoting diversity of content through merger control. 32 Maurice E Stucke and Allen P Grunes, ‘Antitrust and the Marketplace of Ideas’ (2001) 69 Antitrust Law Journal 249, 249–50. The authors argue that a competitive analysis of media mergers should also analyse the impact on the ‘marketplace of ideas’. 33 The issue is discussed elsewhere by the author in Kalpana Tyagi, ‘Fixed/Mobile and Content Integration in the EU & the US Telecommunications Sector: Between Media Plurality and Merger

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This chapter and the next concentrate on the theories of harm—horizontal, vertical and conglomerate—with an in-depth discussion of case law from across the Atlantic, as well as the decisions of the Asian competition authorities.

4.3

Unilateral or Non-coordinated Effects

Unilateral effects are the most frequently identified theory of harm in the ICT sector. Considering their frequent recurrence, this section offers a detailed discussion on the law and economics of unilateral effects followed by a brief overview of the coordinated effects, a relatively uncommon theory of harm in ICT mergers, in Sect. 4.4.

4.3.1

Unilateral Effects, Localised Competition and Innovation

Game theory has richly contributed to the study of industrial organisation by offering valuable insights on oligopoly, co-ordinated and non-coordinated (unilateral) interaction in particular.34 Game theory may be defined as the study of mathematical models of conflict and co-operation between intelligent and rational decisionmakers.35 It follows the methodological approach of making abstract models of firm behaviour and strategic decision-making.36 Firms are rational decision makers that seek to maximise their profits and decide their strategies based on the possible set of decisions taken by other firms. The equilibrium point is the solution whereby all the firms have taken the best strategic decision given the possible set of competitors’ reaction. The Nash equilibrium is attained whereby none of the players in the game has an incentive to deviate ‘unilaterally’ from their strategy, given the choices exercised by its opponents.37 On unilateral effects, anti-competitive effects following a merger are determined by the proximity of competition between the merging firms in addition to the traditional market share analysis—meaning that ‘negative welfare effects can

Control’ presented at the 2018 Annual MACCI Conference at Mannheim. Forthcoming. Copy available with the author on request. 34 Jean Tirole, The Theory of Industrial Organization (The MIT Press 1988). 35 Myerson B Roger, Game Theory: Analysis of Conflict (Harvard University Press 1991). 36 Eric Rasmusen, Games and Information (4th ed, Blackwell Publishing 1989). 37 John Nash, ‘The Bargaining Problem’ (1950) 18 Econometrica 155; John Nash, ‘Equilibrium Points in n-Person Games’ (1950) Proceedings of the National Academy of Science 36, 48–49.

4.3 Unilateral or Non-coordinated Effects

53

occur well below single-firm dominance’.38 The issue that merits consideration is whether the buyers consider the products of the competing firms as their next best substitute? Theoretical insights from industrial economics, with inputs from the game theory, have richly contributed to the understanding of these effects.39 In perfect competition, the products offered by different firms are perfect substitutes for one another. In monopolistic competition, competitors seek to distinguish by offering differentiated products at competitive prices. Product differentiation may be attributed to various factors such as quality, product attributes, price, positioning and advertising. Products sold by no two firms are perfect substitutes for one another. Products offered by some sellers may seem more similar when compared with products of the others.40 In the 1992 US HMG, competition between these set of firms selling more similar products in comparison to those of others is referred to as ‘localised competition’.41 The firms selling close substitutes form a ‘localised competition space’, as they have ‘similar relative advantages in serving particular buyers or groups of buyers’.42 A merger between these firms may lead to a loss of competition although there may be many other sellers selling their product in the relevant market. As the other non-merging firms are ‘spatially distant’ from these closely situated firms, both in terms of attributes and features of the products offered, cross-price elasticity between the products of the merging firms is higher when compared with the products of their competitors. This similarity in product attributes may be actual or perceived and its actual impact is the presence of ‘localised competition’ between the merging firms. While analysing unilateral effects, the competition authorities and the courts seek to identify whether this difference is ‘real’—signifying presence of ‘localised competition’—or whether it may be explained on account of some ‘subjective consumer preferences’. To understand how mergers may lead to unilateral effects by loss of localised competition by altering the incentives of the merging firms, consider a hypothetical case of two firms A and B that offer ‘closely related substitutes’ and choose to merge and form a new firm AB. Let Neaop and Nebop be the pre-merger Nash-equilibrium 38 Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission [2010] §2 accessed 06 January 2019. 39 Oliver Budzinski and Arndt Christiansen, ‘Simulating the (Unilateral) Effects of Mergers: Implications of the Oracle/PeopleSoft case’ (August 15, 2006) accessed 06 January 2019. 40 Collin A Gannon, ‘Product Differentiation and Locational Competition in Spatial Markets’ (June 1977) 18(2) International Economic Review 293, 295–97. 41 The expression ‘localised competition’ is an economic term that better describes the economic theory behind ‘localised competition’ and ‘unilateral effects’. In the 2010 HMG, the term has been replaced by simpler non-economic expressions such as ‘closeness of substitutes’. The present section seeks to explain the economic theory followed by the next section—which presents the legal position on unilateral effects in simpler, easy to understand and non-economic terms. 42 Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission [Issued 1992, 1997] §2.21 accessed 06 January 2019.

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4 Theory of Harm: Unilateral Effects in ICT Mergers

Table 4.1 The pre- and post-merger Nash equilibrium best response function (in the presence of ‘localised competition’) Merging firms A & B Non-merging firms

Pre-merger ea eb N op & N op eothrs N op

Post-merger eab op eothrs N op N

best response function for A and B respectively and let Neothrsop be the pre-merger Nash-equilibrium best response function for the other non-merging firms. Postmerger, economic theory suggests that the Nash-equilibrium best response function for the merged firm AB changes to Neabop, whereas Nash-equilibrium best response function for the other firms remains unchanged. As can be seen in Table 4.1, following the merger, the merged entity experiences a change in incentives, whereas the other non-merging firms experience no such change following the merger. This change in incentives can be explained by the ‘internalisation of rivalry’ between the merging firms. This ‘internalisation of rivalry’ alters their incentives to compete, whereas the other non-merging firms continue to face the same Nash-equilibrium best response function. Economic theory and econometric studies indicate that it is this change in best-response functions of the merged parties accompanied by no corresponding change in the incentives of the non-merging parties that leads to unilateral effects. This is turn generates incentives for the merged firm AB to act unilaterally43 following an oligopolistic merger. Unilateral effects is one of the most frequently identified theory of harm in ICT mergers. Unilateral effects may also adversely impact innovation when the effects are at the innovation level, as distinguished from an impact at the product level only.44 For instance, following a patent race, ‘localisation’ of ‘competition in innovation’ would require an ‘analysis of the set of firms with particular skills and assets necessary to undertake the relevant R&D’.45 Absent localised competition, there will be many firms competing to innovate.46 However, if the requirement for innovation exists only in a localised competition space,47 then the loss of competition is also a concern from the perspective of innovation—considering there exists a positive relationship between the closeness of competition and the intensity of innovation within this localized space.48

Gregory J Werden and Luke M Froeb, ‘Unilateral Competitive Effects of Horizontal Mergers’ in Paolo Buccirossi (ed), Handbook of Antitrust Economics (Cambridge and London: The MIT Press 2008) 49. 44 Michael L Katz and Howard A Shelanski, ‘Mergers and Innovation’ (2007) 74(1) Antitrust Law Journal 1, 32. 45 J Gregory Sidak and David J Teece, ‘Dynamic Competition in Antitrust Law’ (2009) 5 Journal of Competition Law and Economics 581,584. 46 Ibid. 47 Ibid. 48 For a detailed discussion on mergers in the ICT sector and their interaction with competition and innovation, see Chap. 9. 43

4.3 Unilateral or Non-coordinated Effects

4.3.2

55

Unilateral Effects and the EU, the UK and the US Merger Guidelines

In the US, the term ‘unilateral effects’ was introduced for the first time in the 1992 HMG.49 Before the Oracle/PeopleSoft50 merger, Swedish Match51 and New York v. Kraft Gen Foods Inc.52 were two key decisions on unilateral effects. The Oracle/ PeopleSoft merger was the first ICT merger based on unilateral effects theory that underwent a full-fledged trial before the US courts. From the Oracle/PeopleSoft to the 2010 US HMG—competition law and economics has taken great pains to incorporate economic thinking on the subject. The 2010 US HMG identifies unilateral effects as a harm that may in itself lead to substantial lessening of competition.53 Direct evidence of harm renders the exercise of market definition unnecessary. The Guidelines completely do away with the economic terms such as ‘localised competition’ and ‘node’ of competition as used in the 1992 Guidelines.54 Although conceptually speaking, the theory of unilateral effects remains unchanged; the 2010 Guidelines are an advance as they simplify the language, explain it with examples and very importantly, discuss unilateral effects in detail against different market scenarios such as in the case of markets with differentiated products55; bargaining and auctions56; capacity and output for homogenous products57 and innovation and product variety.58 The expression ‘localised competition’ is explained in terms of ‘closeness of substitutes’ and the ‘extent of direct competition’ between the products of the merging parties. The 2010 HMG pose a simplified and direct question to identify the effects—do the consumers consider the products of the merging firms as their ‘next-best substitutes’ and following a hypothetical price increase, does there exist a ‘diversion’ of sales between the two products? These diverted sales under the new Guidelines can be measured using the

49 Paul T Denis, ‘Advances of the 1992 Horizontal Merger Guidelines in the Analysis of Competitive Effects’ (1993) 38(3) Antitrust Bulletin 479. 50 United States v. Oracle Corporation, 331 F. Supp. 2d 1098 (N.D. Cal. 2004). 51 FTC v. Swedish Match (2000) 131 F.Supp. 2d 151, 168 (D. D.C.). 52 New York v. Kraft General Foods, Inc. 926 F.Supp 321, 333–35(S.D.N.Y. 1995). 53 Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission [2010] §6 accessed 06 January 2019. 54 Ibid. 55 Ibid, at §6.1. 56 Ibid, at §6.2. 57 Ibid, at §6.3. 58 Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission [2010] §6.4 accessed 06 January 2019.

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Upward Pricing Pressure (UPP)59 test—a test that is considered a far better measure to predict the unilateral effects of mergers when compared with the more traditional HHI60 index. The HHI index measures only concentration levels and the change in concentration that is the delta following the merger. The 2010 HMG Guidelines also recognise the importance of simulation to quantify unilateral effects by assessing the price response of the non-merging firms as well as measuring merger specific efficiencies. The Guidelines clearly state that such a model for evaluating unilateral effects need not rely on market definition.61 Unilateral effects in mergers in markets where procurement occurs through bargaining and auctions62 is especially well-suited to analyse the enterprise markets in the ICT sector. Such markets may for instance include large scale enterprise-wide procurement of IT solutions as in the case of the CRM and the ERP solutions or the Database Management Systems (DBMS). In the EU, the legal substantive ‘Substantial Impediment to Effective Competition’ (SIEC) test fills the perceived ‘gap’ in the erstwhile dominance test as illustrated in the Airtours decision under the old Merger Regulation.63 The ‘gap’ refers to a situation where in a resulting merger does not lead to dominance but the merger may lead to anti-competitive unilateral effects.64 It transcends the concept of dominance and clearly includes within it the cases of unilateral effects.65 The 2004 EU HMG defines ‘horizontal non-coordinated effects’ (unilateral effects) as the ‘loss of competition’ following a merger between sellers, that pre-merger exercised a significant ‘competitive constraint’ on one another.66 In case of oligopolistic markets, the elimination of an ‘important competitive constraint’ that the ‘merging parties exerted upon each other together with a reduction of competitive pressure on the remaining competitors’, can lead to non-coordinated effects and result in significant impediment to effective competition.67

59 Gopal Das Varma, ‘Will Use of the Upward Pricing Pressure Test Lead to an Increase in the Level of Merger Enforcement?’ (2009) 24(1) Antitrust 27. 60 Herfindahl Hirschman Index(HHI). 61 Horizontal Merger Guidelines, U.S. Department of Justice and the Federal Trade Commission [2010] §6.1 accessed 06 January 2019. 62 Ibid., §6.2. 63 Case T-342/99, Airtours plc v Commission [2002] ECR II-2585. 64 Ioannis Kokkoris and Rodrigo Olivares-Caminal, Antitrust Law Amidst Financial Crisis (Cambridge University Press 2010) 40. 65 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentration between undertakings [2004] OJ L 24/01, recital 25. 66 Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31/05, para 24. 67 Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31/05, para 25; Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentration between undertakings [2004] OJ L 24/01, recital 25.

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When oligopolists act independently to harm competition, it leads to ‘unilateral effects in an oligopolistic market’—a harm that must be distinguished from ‘collective dominance’ that creates incentives for firms to co-ordinate and collectively harm the process of competition.68 In the Hutchison 3G Austria/Orange merger, the Commission identified the inability of the competitors to respond to a price increase by the merged entity, as ‘the products’ of the merging parties were found to be ‘endogenously differentiated in terms of their market positioning’. Widely accepted ‘robust economic theory’ indicated that in response to an increase in prices by the merged entity, the ‘profitmaximising response’ by competitors following such a merger too was a likely increase price.69 In Telefónica E-Plus/Deutschland, the Commission paralleled this behaviour with the concept of ‘strategic complementarity’ in economic theory, whereby in response to a price increase, the competing firms tend to increase their prices. This ‘strategic complementarity of pricing decisions’70 has been identified as a common feature of the ‘standard models of oligopolistic competition’.71 In the UK, in the recently cleared merger between the British Telecom (BT) and the Everything Everywhere (EE), the CMA analysed unilateral effects in the retail mobile and retail broadband market—the CMA assessed whether following the merger, the merged entity could unilaterally ‘increase prices, lower quality and reduce the range of their services and/or reduce innovation’? The presence of the other three MNOs in the market was expected to restrain the combined BT/EE from engaging in such an anti-competitive conduct.72 Horizontal unilateral effects may arise on account of the loss of existing competition or the elimination of potential competition.73 When products are differentiated on account of factors such as branding or the quality of goods and services, unilateral effects are more likely to arise when the products of the merging firms are one another’s close competitor.74 It needs to be noted that the UK CMA, as well as 68

Ioannis Kokkoris, Merger Control in Europe: The Gap in the ECMR and National Merger Legislations (Routledge Research in Competition Law 2011), 115. 69 Hutchison 3G Austria/ Orange Austria (Case COMP/M.6497) [2013] OJ C224/12, para 367. 70 Let’s assume that there are two firms A and B in the relevant product market, that are one another’s strategic complements. According to game theory, pricing and quantity decisions of the two firms have a positive impact on one another. This implies that an increase in price or quantity by firm A increases the marginal revenue of firm B and vice-versa. Thus, price and quantity decisions of the two firms A and B tends to move in the same direction. 71 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 532. 72 Competition & Markets Authority, BT Group plc and EE Limited: A report on the anticipated acquisition by BT Group plc of EE Limited (15 January 2016) 84. 73 A joint publication of the Competition Commission and the Office of Fair Trading, CC2 (Revised)/ OFT 1254: Merger Assessment Guidelines [September 2010] 41 accessed 06 January 2019. 74 A joint publication of the Competition Commission and the Office of Fair Trading, CC2 (Revised)/ OFT 1254: Merger Assessment Guidelines [September 2010] 41–43 accessed 06 January 2019. 75 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C 086/7, paras 688–91. The Commission views that ‘closer’ the parties are in terms of competing with each other, greater is the degree of price increase following the merger, See para 690 of the decision. 76 The focus of the discussion here is the theory of harm and the competitive analysis. The remedies in these mergers are discussed in the subsequent chapters. 77 United States v. Oracle Corp., 331 F. Supp. 2d 1124-25 (N.D. Cal. 2004).

4.3 Unilateral or Non-coordinated Effects

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are used to organise, support and standardise business processes to maximise organisational efficiency.78 The DOJ’s proposed theory of harm was that the merger would lead to unilateral effects because of the loss of ‘localised competition’ between the merging parties. Rejecting the DOJ’s claim and finding the then 1992 HMG Guidelines as ‘helpful but not sufficient’,79 Judge Walker proposed the following four-pronged test to identify unilateral effects.80 This four pronged test comprised of the following four factors: first, the firms sold ‘differentiated products’; second, the products of the merging parties were ‘close substitutes’; third, the degree of differentiation between the products of the merging and non-merging firms was to such an extent that a post-merger SSNIP was profitable and fourth, the competitors could not ‘re-position’ their offering in response to a post-merger price increase.81 Whereas the first three factors addressed demand-side substitutability, the last one concerned supply-side substitution.82 During trial, as the plaintiffs ‘failed’ to show a ‘node’ or area of localised competition, the court did not proceed further to analyse whether a merged Oracle/ PeopleSoft could exercise ‘monopoly power’ over this ‘node’.83 The court had earlier rejected the DOJ’s market definition of ‘high function’ Human Resource Management (HRM) and Financial Management Software (FMS) software within the ERP segment, wherein Oracle, PeopleSoft and SAP were identified as the three main players, as in the opinion of the court, the expression ‘high function software’ had no recognised and standard meaning in the literature.84 The Oracle/PeopleSoft decision clearly indicates that the issue in case of unilateral effects is one of market power.85 Neither the then Guidelines nor the economic theory required that the merged entity possess ‘near monopoly power’ over some clearly identifiable group of customers.86 The Court’s continued over-emphasis on the definition of relevant markets was also misplaced,87 considering that for an

78 J.H. Blackstone Jr., Cox J.F., 2005 APICS Dictionary, 11td ed. at page 38. APICS: The Association for Operations Management. 79 United States v. Oracle Corp., 331 F. Supp. 2d 1115 (N.D. Cal. 2004). 80 Ibid., p.1117. 81 Ibid., pp. 1117–18. 82 Ibid., p.1119. 83 Ibid., pp. 1125–1142. 84 Ibid., pp.1124–65. See also, R Preston McAfee, David S Sibley and Michael A Williams, ‘Oracle’s Acquisition of PeopleSoft: U.S. v. Oracle’ in John E. Kwoka and Lawrence J White (eds.) Antitrust Revolution: Economics, Competition and Policy (OUP 2008). 85 Daniel L Rubinfeld, ‘Current Issues in Antitrust Analysis, in Competition Policy and the Economic Approach: Foundations and Limitations’ in Josef Drexl, Wolfgang Kerber and Rupprecht Podzun, Competition Policy and the Economic Approach: Foundations and Limitations (Edward Elgar 2012) 81. 86 John Harkirder, ‘Proving Anticompetitive Impact: Moving Past Merger Guidelines Presumptions’ (2005) Columbia Business Law Review 317, 332. 87 Oliver Budzinski and Arndt Christiansen, ‘The Oracle/PeopleSoft Case: Unilateral Effects, Simulation Models and Econometrics in Contemporary Merger Control’ (2007) 34 Legal Issues of Economic Integration 133, 155–156.

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analysis of unilateral effects in differentiated products market—neither concentration nor 35% market share thresholds are determinative.88 By introducing the third factor discussed above, Judge Walker (misleadingly) conflated the concept of market power in Section 2 (Sherman Act) with Section 7 (Clayton Act). Market power is a ‘question of degree’ with absolute market power signifying monopoly. By wrongly identifying and misclassifying the harm, the court failed to consider situations whereby horizontal mergers lead to price rise because of elimination of direct competition between the merging firms, even when other firms continue to compete independently.89

4.3.3.2

Telefónica/E-Plus

In the last couple of years, the telecommunications sector has experienced immense consolidation and witnessed multiple four-to-three (4-to-3) mergers. Telefónica Ireland’s acquisition of Hutchison 3G UK(H3G) in Ireland, Telefónica Deutschland’s acquisition of E-Plus in Germany, the H3G’s acquisition of Orange in Austria and Vodafone in the UK—all notified during the same time, were assessed by the European Commission along similar lines. Considering the complex dynamics at play, these telecom mergers were also subject to a detailed phase II investigation. Whereas the first three received conditional clearance, the H3G UK/Telefónica UK merger was prohibited by the Commission, as the UK CMA had already recently cleared the BT/EE merger, leaving the UK telecommunications market highly concentrated. The Commission thereby concluded that any further concentration was expected to significantly impede effective competition in the UK mobile telecommunications market that could not be remedied by any set of commitments. Common to all these transactions was the detailed unilateral effects analysis highlighting the Commission’s latest practice on unilateral effects. In the latest 4-to-3 mergers, such as the H3G Italy/Wind/JV as well, the Commission has assessed unilateral effects along the same lines.90 The design of remedies in all these merger decisions, however, is very different.91 This section seeks to elaborate on the assessment of the unilateral effects, by taking the Telefónica/E-Plus merger as a case study. Telefónica/E-Plus was phase-II conditional telecommunications merger clearance decision by the European Commission, wherein Telefónica acquired sole

Jonathan B Baker and Steven C Salop, ‘Should Concentration be dropped from the Merger Guidelines?’ (2201) 33 UWLA Law Review 3, 11–12; Armando E Rodriguez and Malcolm B Coate, ‘Merger Pitfalls in Practice: Three Case Studies’ (1999) 20 University of Pennsylvania Journal of International Economic Law 793, 802. 89 Ibid., p.23. 90 Hutchison 3G Italy/Wind/ JV (Case M.7758) [2015] OJ C 391/05. 91 For a comprehensive and critical discussion on recent mergers in the mobile telecommunications sector, see Kalpana Tyagi, ‘Four-to-Three Telecoms Mergers: Substantial Issues in EU Merger Control in the Mobile Telecommunications Sector’, International Review of Intellectual Property and Competition Law 49(2) (2018), pp 185–220, available at 10.1007/s40319-018-0677-3. 88

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control over E-Plus92—creating the largest Mobile Network Operator (MNO) in terms of the number of subscribers and the third largest in terms of overall revenue in the retail market.93 In the post-paid segment, the parties were expected to be a leader both in terms of number of subscribers and the overall revenues.94 German mobile communications market consists of Mobile Virtual Network Operators (MVNOs), Service Providers and Branded Resellers as principal mobile communication service providers. Whereas the MNOs have their own network infrastructure, other service providers do not own any mobile network.95 The three types of service providers differ in terms of the level of vertical integration and the range of services offered. The branded reseller offers the brand whereas the MNO offers the infrastructure.96 The MVNOs and the Service Providers need wholesale access from the MNOs to offer services to the final customers in the downstream market.97 The merger between Telefónica and E-Plus was expected to significantly impede effective competition in the internal retail market for mobile telecommunication services as it would (i) eliminate two close competitors; (ii) eliminate E-Plus (and Telefónica) as an important competitive force; (iii) reduce incentives of the merged entity in a market characterised by high entry barriers and limited buyer power; (iv) absence of sufficient incentives for competing MNOs to compete aggressively and (v) ‘possible’ efficiencies being insufficient to ‘offset’ the resulting competition concerns.98 In the horizontal market, the transaction created anti-competitive concerns in the retail market for mobile telecommunication services and the German market for wholesale access and call origination on public mobile telephone networks and the wholesale market for international roaming in Germany.99 In the retail market for mobile telecommunication services, the Commission identified horizontal non-coordinated effects, as the proposed concentration would reduce the number of MNOs from 4-to-3 and create three MNOs of similar size.100 The merger was also expected to create incentives for competitors to increase prices as the two aggressive players Telefónica and E-Plus would no longer compete on prices, which in turn was expected to ‘relax’101 the competitive set-up to the advantage of the other players.102 Moreover, as the MVNOs, the Service Providers or the Branded Resellers, could not meaningfully react to this loss of competition, there was a possibility of reduced

92

Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 1. Ibid., at para 225. 94 Ibid. 95 Ibid., at para 174. 96 Ibid., at paras 637–38, 674–75. 97 Ibid., at paras 174–75. 98 Ibid., at para 1379. 99 Ibid., at paras 102–03. 100 Ibid., at para 211. 101 Ibid., at para 212. 102 Ibid., at para 212. 93

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competition and increased prices in the post-merger market, characterised by a more symmetric market structure. The Commission identified a single retail market for mobile telecommunication services constituting of voice, SMS and data services offered to end customers.103 However, in its competitive analysis, the Commission took special note of certain segments in this market, such as the pre-paid segment, as the position of the parties in the different segments offered a valuable insight about the impact of the transaction on the overall market. The reason identified by the Commission for such an approach was the ‘relative importance in terms of size and impact on the competitive dynamics of the relevant market, of the segments on which the Parties’ focus their activities over the total retail market’.104 The Commission found that the mobile telecommunication services was a differentiated products market as it varied in terms of a range of factors such as network technology, quality, coverage and price.105 Merger simulations indicated that the parties were one another’s ‘close competitors’. Internal documents made available by the merging parties corroborated the results of the simulation. To assess the closeness of competition, the Commission calculated the diversion ratios.106 First, the ‘benchmark’ diversion ratios were calculated—this was the actual diversion ratio between the parties based on (a) their number of subscribers and (b) their shares based on contestable customers in the pre-paid and the post-paid segment.107 Contestable customers were defined in the data set as those customers that may either be new or retained subscribers. Based on the two calculations, it was found that the actual number of customers switching between the two was larger than indicated by their market shares—this indicated closeness of competition between the merging parties. Telefónica was found as the ‘only close competitor’ of E-Plus in the pre-paid segment in 2012 and 2013 and E-Plus—the ‘only close competitor’ of Telefónica for the year 2012.108 Based on the market investigation and factors such as network quality, the ARPU (Average Revenue per User) and the pricing of tariffs, the Commission found that the parties were each other’s ‘close competitors’.109 The internal documents further substantiated this assertion.110 The Commission in phase-II investigations undertook merger simulation by conducting an in-depth quantitative analysis of the horizontal non-coordinated effects. It performed two quantitative tests to assess the same. The first was an 103

Ibid., at paras 30–67, 75. Ibid., at para 232. 105 Ibid., at para 269. 106 Ibid., at para 273–88. 107 Ibid., at para 273. 108 Ibid., at para 286. 109 Ibid., at paras 289–308. 110 Ibid., at paras 290–320. 104

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extended upward pricing pressure (UPP) framework, which analysed the likely price effect based on ‘observed diversion ratios between MNOs and observed prices and margins at the segment level for voice and data’. The second test was an econometric estimation of consumer demand in the residential segment using only tariff level data. While performing the second test, data-only services were excluded.111 The two merger simulations were performed to complement one another and offer a more coherent picture of the anticipated non-coordinated effects.112 The merger simulation was based on a model of differentiated products industry wherein firms set prices to maximise their profits and the post-merger entity considers the ‘internalisation’ of profits that was earlier contestable between the two merging parties.113 In a non-technical parlance, it means that the merger simulation exercise modelled the competition in the mobile telecommunications industry in Germany, based on the assumption that the various mobile service providers maximise their profits, and post-merger the sales that E-Plus was earlier losing to Telefónica, would now, thanks to the merger, be diverted towards it. The Commission performed a quantitative analysis to validate the horizontal non-coordinated effects. First, it used an extended framework of the UPP test to analyse the impact of the change in prices. Second, it conducted an econometric estimation of consumer demand in the residential segment using tariff-level data. ‘Data only services’ were excluded while analysing the price effects.114 The quantitative analysis was based on the Bertrand Nash model of competition in differentiated products industry, wherein firms set prices at a level wherein they can maximise their profits.115 In such a model, the firms ‘compete on price in a market with differentiated products’.116 The post-merger prices indicate the loss of competition because of the ‘internalisation’ of sales that were previously contested for by the merging parties. In the modified UPP analysis, the post-merger prices of competing firms as well as the merged entity substantiated these findings. In a Bertrand-Nash differentiated products model, the firms compete on price. Because of the merger, the two brands Telefónica and E-Plus were brought under a common ownership. Earlier, when Telefónica increased its prices, it would lose some of its customers to E-Plus and vice-versa. This substitution between the two brands is reflected in their diversion ratios—the closer the customers perceive the products of Telefónica and E-Plus, the higher is the diversion ratio between them. This diversion ratio is an indication of the post-merger unilateral increase in prices, as the customers that Telefónica and E-Plus previously lost to each other, following

111

Ibid., at paras 677–680. Ibid., at para 682. 113 Ibid., at para 681. 114 Ibid., at para 678. 115 Ibid., at para 681. 116 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, Annex A: The Commission’s Quantitative Analysis, Section 2 Common Framework: Bertrand-Nash Competition in Differentiated Products, para 17. 112

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the merger would no longer be lost, and instead be internalised by the merged entity. This unilateral increase in prices by the merged entity also leads the rivals to react by changing the prices of their products and services. This implies that after the merger, all the firms may change their prices. The overall change and the direction of change (whether an overall increase or decrease in prices) depends upon how closely the merging parties compete and the degree of competition offered by the rivals. Based on its modified UPP analysis, the Commission found that the elimination of competition between the merging parties to attract contestable customers would lead to a significant price increase in all the segments including the pre-paid and the post-paid segment of services.117 The second merger simulation conducted by the Commission was a demand estimation-based simulation.118 In this model, the relationship between the number of contestable subscribers of a given tariff and the change in prices was examined. Contestable customers were referred to as new customers for whom the parties competed and the customers it could retain because of a given pricing structure.119 To model this simulation, a discrete choice demand model120 family was used as an estimation framework.121 Random coefficient122 and nested logit123 type demand 117

Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, paras 736–52. Demand estimation-based simulation is a type of merger simulation that considers dynamic nature between prices, supply conditions and other factors. Based on the complexity of the model, the simulation can have different parameters. For example, to simulate the demand for ice creams, various factors can be modelled to estimate the demand. Relevant factors may include price of the ice cream, change in prices, geographical location, weather conditions etc. The model is very useful to see the impact of change in prices following a merger between two products or services. In this ice-cream example, a potential merger between two ice-cream vendors Häagen-Dazs and Magnum can be modelled as a resulting change in consumption of the ice-cream following a post-merger hypothetical increase in prices. 119 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 754. 120 Discrete choice demand model is frequently used in the telecommunications sector to assess outcomes in situations where the decision is discrete or there are finite number of alternatives. As an example an MNO offers five bundles of data/voice combination that the user can choose from. Discrete choice demand model can be very useful to identify the number of customers that may select each one of these given bundles. 121 Steven T Berry, ‘Estimating Discrete-Choice Models of Product Differentiation’ (1994) 25 (2) The RAND Journal of Economics 242. 122 Random Coefficient Models are used where the parameters of the model vary. This accounts for dynamism and change in values unlike the static standard regression model, wherein the parameters are assigned a fixed value. For example to model the research output across different academic institutions, random coefficient model will use different coefficients to account for the heterogeneous research output across institutions. 123 In a nested-logit model, we do not define different choices or available alternatives only as individual classes. Instead, we first cluster them on some basis. For example in a nested logit model with four parameters for multi-play—we have four components: fixed, mobile, internet and pay-TV. In a nested logit model, we can have different nest-type structure to classify this—quad play comprising of all the four components; voice only (including fixed and mobile); fixed/pay-TV (comprising of fixed line and pay-TV) etc. Thus, there can be a big nest, accounting for different possibilities in which the consumers purchase each of the four elements of the quad play. The 118

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models were also relied upon in the simulation exercise.124 The Commission, recognising the limitations and advantages of the different models, performed simultaneous simulations and considering that the results of the two models that is the random coefficient and nested logit model corroborated each other—indicating an upward movement in prices post-merger in both the pre-paid and post-paid residential segments—the simulation predicted an overall price increase.125 Overall, the Commission concluded that unless otherwise offset by possible ‘buyer power, entry and efficiencies’ the merger led to non-coordinated effects that would significantly impede effective competition on the retail market for mobile telecommunication services in Germany.126

4.3.3.3

NXP Semiconductors/Freescale

In NXP Semiconductors/Freescale, NXP Semiconductors—a developer and manufacturer of semiconductors acquired sole control over Freescale, engaged in the development, manufacturing and sale of embedded processors.127 Semiconductors are elements such as silicon that are ubiquitous in the electronic devices. Because of their special physical and chemical properties, semiconductors can function both as insulators, as well as the conductors of electricity.128 They can be visualised as the skeleton of consumer electronics (CE)—present in all electronic items ranging from mobile phones to big industrial equipment, from domestic appliances to aerospace engines. Semiconductors are thus, a critical input for the electronic equipment industry. They are rarely purchased by end consumers. They are generally brought by the manufacturers such as Original Equipment Manufacturers (OEMs) who require it for further assembling and manufacturing of the electronic equipment.129 Semiconductors may be further classified into four categories: ICs, Discretes, Optical Semiconductors & Sensors and Actuators.130 The market for discretes may be further sub-divided into: (i) RF and microwave; (ii) power transistors and thyristors; (iii) rectifiers and power diodes and (iv) small signal and other discretes.131 Discretes are assembled semiconductors that can

advantage of such an approach is that it not only helps consider the individual utility of each component; it also accounts for the value of the product when offered along with the other components in a bundle. 124 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 754. 125 Ibid., at paras 763–72. 126 Ibid., at para 773. 127 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, paras 4–6. 128 Ibid., at para 10. 129 Ibid., at para 11. 130 Ibid., at paras 12–15. 131 Ibid., at para 60.

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perform elementary electronic function.132 The RF and the microwave discretes can be further sub-divided into (i) RF power transistors and (ii) RF small signal transistors (RF SST) and RF diodes.133 RF and microwave technology using radio waves is the backbone of wireless communications and connectivity.134 In the RF and the microwave discretes segment, the sub-segment of RF power transistors generated significant competition concerns.135 Based on the end application, the RF power transistors may be further sub-divided into (i) wireless infrastructure, (ii) military, (iii) commercial avionics and air traffic control, (iv) the ISM, (v) broadcast and (vi) non-cellular communications.136 RF power transistors require substantial investments over long periods and need special expertise in design, manufacturing, testing and packaging, which differentiates it from the other two sub-categories of RF and microwave discretes.137 The RF power transistors may have LDMOS technology or GAN-on-SIC technology. The RF transistors employing LDMOS technology was, at the time of the proposed merger, the leading technology—used in over 80–95% of all RF power devices for wireless manufacture.138 The technology was highly popular on account of its cost, performance, high voltage operation and the ease of use. The GAN-on-SIC, an upcoming technology, although highly promising due to efficiency and resistancerelated factors, was primarily limited to military, radar/avionics and satellite/space communications.139 Market investigation indicated that although there were several entrants in the GAN-on-SIC segment, there was no meaningful entry in the RF power transistors employing the LDMOS technology.140 This meant that the postmerger market may have potentially not enjoyed any further market entry. The European Commission141 and the US FTC142 reached similar conclusions—the competition authorities saw that the post-merger market would not see any meaningful entry into the market for RF power amplifiers. The NXP Semiconductors/Freescale merger is a high watermark in terms of interagency co-operation. The US FTC, the DG competition in the EU, the Chinese MOFCOM (now the SAMR), the Japanese FTC and the Korean FTC simultaneously reviewed the transaction in close cooperation with one another and reached

132

Ibid., at para 59. Ibid., at para 61. 134 Ibid., at para 63. 135 Ibid., at paras 78–80. 136 Ibid., at para 75. 137 Ibid., at para 74. 138 Ibid., at para 70. 139 Ibid., at para 70. 140 Ibid., at para 194. 141 Ibid. 142 In re NXP Semiconductors N.V., File Number 151-0090, Docket No. C-4560, Analysis of Agreement Containing Consent Orders to Aid Public Comment, available at accessed 06 January 2019. 133

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substantially similar findings on the relevant markets and the theory of harm. The relevant geographic market was found to be worldwide in scope, as manufacturing and competition occurred on a global scale. Absence of regulatory barriers and low transportation costs, accounting for less than 1% of the total product value indicated that the semiconductor manufacturers operated at a global level.143 Competition concerns in the market for RF power transistors wherein the combined market shares were expected to be about 60–70% were identified.144 The RF power transistors market was further sub-divided into the market for wireless infrastructure, the ISM and the broadcast. In each one of these sub-segments, the combined market share was well above 60–70%.145 The proposed concentration thus, raised competition concerns because of the strengthening of dominant position.146 The US FTC too found that the merger created a highly concentrated market for RF power amplifiers with a delta of 1837—an increase in the HHI from 2203 to 4040.147 Based on high market shares ranging from 60 to 70% of the combined entity in the RF transistors for wireless infrastructure, the industrial, scientific, medical(ISM) and broadcast segments, the proposed transaction would have created a dominant player.148 The Commission’s findings based on market shares, was further corroborated by market investigations149 and the parties internal documents150 that led it to conclude that the merger would lead to unilateral effects and the loss of localised competition between the number 1 and number 2 player in the internal market for RF Power transistors employing the LDMOS technology.151 The US FTC too reached similar conclusions on the merger leading to ‘unilateral effects in the form of higher prices and reduced innovation’, especially in the wireless infrastructure segment.152

143

NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, para 53. Ibid., at para 183. 145 Ibid., at paras 184–86. 146 Ibid., at para 187. 147 In re NXP Semiconductors N.V., File Number 151-0090, Docket No. C-4560, Analysis of Agreement Containing Consent Orders to Aid Public Comment, available at accessed 06 January 2019. 148 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, paras 185–187. 149 Ibid., at paras 188–189. 150 Ibid., at paras 190–193. 151 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, para 195, 197. 152 In re NXP Semiconductors N.V., File Number 151-0090, Docket No. C-4560, Analysis of Agreement Containing Consent Orders to Aid Public Comment, available at accessed 06 January 2019. 144

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ARM/Giesecke & Devrient/Gemalto/JV

The proposed transaction was a joint venture between ARM, Giesecke & Devrient (G&D) and Gemalto. The ARM was active in the business of licensing Intellectual Property (IP) for application processors (APs). The ARM’s IP license included an integrated security feature called the ‘Trust Zone’.153 The G&D offered security solutions for the production and processing of banknotes and secure elements (SE). In the year 2012, the G&D commercially released a Trust Executed Environment (TEE) software security solution called MobiCore—that was designed to work with Trust-Zone enabled APs. Gemalto created in 2006 following a merger between Axalto and Gemplus, offered secure personal devices such as the SEs and tokens, the Near Field Communications (NFC) solutions. Gemalto was the first company to commercially offer the TEE solution for Trust Zone-enabled APs.154 The proposed joint venture aspired to leverage the G&D and Gemalto’s activities in the marketing and development of TEE solutions for use with APs incorporating ARM’s Trust Zone technology155 and develop and market TEE security solutions. In the market for the provision of TEE solutions for APs for CE devices, the joint venture combined Gemalto and G&D, world’s two most advanced TEE technologies, then available on the merchant market, with a total market share of over 95%.156 However, even with such a high market share, the Commission was of the opinion that factors such as—the nascent stage of the market, insignificant revenues, immense potential for growth in the near future because of increased demand for CE devices such as smartphones and tablets and the likelihood of further market entry—alleviated any competition concerns expected to result from the horizontal aspect of the proposed transaction.157 A key objective of the joint venture was to develop a new product that contained the main features of both—Gemalto and G&D’s TEE solutions.158 The proposed transaction, nonetheless, did not raise competition concerns as there was immense actual and potential competition for the provision of TEE solutions for the ‘merchant market or for their captive use’.159 The Commission took note of market entry by vertically integrated large IT companies or firms active in the neighbouring markets such as by Apple, Microsoft, Intel, Oracle, Oberthur, Solacia and Sierraware, as well as certain semiconductor manufacturers such as Qualcomm and ST-Ericsson.160 For effective competition to prevail in the market for TEE solutions, it was noted, that ARM must maintain interoperability of its TrustZone technology with the TEEs

153

ARM/Giesecke & Devrient/ Gemalto/ JV (Case COMP/M.6564) [2012] OJ C368/9, para 4. Ibid., at para 6. 155 Ibid., at para 7. 156 Ibid., at para 65. 157 Ibid., at para 66. 158 Ibid., at paras 73–77. 159 Ibid., at para 78. 160 Ibid., at paras 80–95. 154

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offered by the other service providers.161 This was an important pre-requisite for the continued existence of effective competition in the market, considering that the actual and/or potential competitors were to be based on the ARM’s TrustZone technology.162 Thus, despite very high market shares, the joint venture did not raise any horizontal concerns. It was interestingly, the non-horizontal effects in the market for IP licensing—an issue discussed in the following chapter—that led the parties to offer significant ‘interoperability’ remedies.

4.4

Co-ordinated Effects

Firms in an oligopolistic market may behave ‘as if’ they are colluding, without there being an explicit coordination between them. It is noteworthy that Article 101 TFEU does not apply to such tacit coordination. Article 101 is also inapplicable when the enterprise makes a partial or complete acquisition or reorganises its ownership structure.163 In Airtours, the CFI (now the General Court) held that the merger may lead to a collective dominant position wherein it is ‘possible, economically rational and hence preferable, to adopt on a lasting basis a common policy’ to maintain supracompetitive prices, without any threat of reaction by actual or potential competitors or the consumers.164 Nestlé/Perrier was the first merger case wherein the Commission assessed the coordinated effects from a merger in an oligopolistic market. The Commission found that Nestlé’s acquisition of Perrier led to a position of collective dominance in the French market for mineral water. Factors that led to coordinated effects were high market shares, price parallelism, high entry barriers and market transparency.165 In Kali und Salz, the Court held that the concept of dominant position in article 2 of the Merger Regulation is also referred to the concept of collective dominant position166 the finding of which is based on an ‘economic assessment’ of the market structure.167 To assess the possibility of coordinated effects, the Commission considers the features of the relevant market, such as the structural features and the past behaviour

161

Ibid., at paras 79, 96. Ibid., at paras 79, 96. 163 Ioannis Kokkoris, Merger Control in Europe: The Gap in the ECMR and National Merger Legislations (Routledge Research in Competition Law 2011) 17. 164 Case T-342/99, Airtours plc v Commission [2002] ECR II-2585, para 51. 165 Nestlé/Perrier (Case No IV/M.190) Commission Decision 92/553/EEC [1992] OJ L356/1. 166 In the EU, collective dominance is referred to as coordinated effects. 167 Joined cases C-395/96 P and C-396/96 P Compagnie maritime belge transports and Others v Commission [2000] ECR I-1365, para 45. 162

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of firms,168 prior coordination between them, especially if the dynamics of the market have not changed and are likely to remain unchanged in the near future169 and the evidence of coordination in related markets.170 The co-ordinated effects as a theory of harm, however, is generally dismissed in the innovation-led ICT sector, as the sector experiences rapid innovation and short product life cycles. The sunk costs of R&D are high whereas the marginal costs of producing an additional unit of the output are almost negligible.171 In the traditional brick and mortar industries such as the cement and the rubber, once the plant has attained economies of scale, the manufacturer experiences diminishing returns to scale and the marginal costs tends to rise. However, unlike traditional industries that experience capacity constraints, the software industry does not experience any such constraints. The method of customer acquisition and sales also plays an important role in determining the incentives to coordinate. Product characteristics and product differentiation through innovation and attractive advertising can also make it difficult to coordinate. If the method of procurement is irregular with occasional big orders from the purchaser and the sellers largely compete through bids and auctions, there may be diminished incentives to coordinate. In the Oracle/PeopleSoft merger for instance, as the products were differentiated, prices and discounts offered were not transparent, the sellers were sophisticated, the vendor selection involved an intensive bidding process and SAP was the undisputed market leader with Oracle and PeopleSoft being a distant number 2 and number 3, the court found the market structure did not offer co-ordination friendly conditions. The presence of ‘fringe’ vendors too was expected to disrupt any possible post-merger collusion.172 The role of mavericks to disrupt possible coordination was also duly recognised by the European Commission in the T-mobile Austria/Tele.ring merger.173 However, even in such heterogeneous markets there is increasing evidence that there could be a case for ‘collective dominance’ and the players can ‘tacitly’ share the markets by developing a niche in vertical domains. Co-ordination may for instance occur in the ‘form of an understanding not to poach rivals’ customers’.174 Put simply, the possibility for ‘market sharing’ persists, as in case of multi-market contacts—wherein the parties may prefer to share the markets on a geographical

168

Nestlé/Perrier (Case No IV/M.190) Commission Decision 92/553/EEC [1992] OJ L356/1, paras 117–18. 169 ABB/ Daimler-Benz (Case IV/M580) [1997] OJ L11/1; para 95. 170 Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31/05, para 43. 171 Richard A Posner, ‘Antitrust in the New Economy’ (November 2000) University of Chicago Law and Economics, Olin Working Paper No. 106 accessed 06 January 2019. 172 United States v. Oracle Corporation, 331 F. Supp. 2d 1098(N.D. Cal. 2004). 173 T-Mobile Austria/Tele.ring (Case COMP/M.3916) Commission Decision 2007/193/EC [2007] OJ C193/44. 174 Gregory J Werden, ‘Why (Ever) Define Markets? An Answer to Prof Kaplow’ [13 February 2012] accessed 06 January 2019.

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basis.175 However, it is difficult to ‘isolate’ outright a merger that may lead to co-ordinated effects. Insights from applied economics indicate a need for a ‘careful case by case analysis’.176 A finding of collective dominance is based on an ‘economic assessment’ of the market structure.177 The US court in H&R Block recently enjoined the merger of the second and the third largest tax preparation software vendors on account of anticipated coordinated effects, although the two were ‘sufficiently heterogeneous’ in terms of their product offerings.178

B Douglas Bernheim and Michael D Whinston, ‘Multimarket contact and collusive behaviour’ (1990) 21(1) RAND Journal of Economics 1. 176 Gisela Aigner, Oliver Budzinski and Arndt Christiansen, ‘The Analysis of Coordinated Effects in EU Merger Control: Where Do We Stand after Sony/BMG and Impala?’ (2006) 2(2) European Competition Journal, 331, 334. 177 Joined cases C-395/96 P and C-396/96 P Compagnie maritime belge transports and Others v Commission [2000] ECR I-1365, para 45. 178 United States v. H&R Block Inc., 77 F.Supp.2d 122 (D.D.C. 2011). 175

Chapter 5

Theories of Harm: Vertical Effects in ICT Mergers

Abstract This chapter first presents the economic theories on vertical integration, followed by a detailed discussion of five recent case laws where the EU, the US and the Chinese competition authorities assessed potential anti-competitive effects resulting from integration between players at different levels in the value chain.

5.1

Introduction

The European Commission in 2007 issued its first ever non-horizontal merger (NHM) Guidelines. The Guidelines are applicable to vertical and conglomerate mergers. Interestingly, Google/DoubleClick1—the first merger to be assessed under the NHM by the European Commission—concerned the ICT markets.2 In the first year following the notification of the Guidelines, over 14 cases were reviewed by the Commission in Phase II proceedings, from which six were predominantly or completely assessed for potential non-horizontal effects. Out of these six, following four concerned the high-tech sector—Nokia/Navteq, Google/ DoubleClick, IBM/Telelogic and TomTom/Tele Atlas. All these mergers received unconditional clearances on both sides of the Atlantic. The European investigations lasted much longer including in the TomTom/Tele Atlas case that lasted well over seven months, before it received the Commission’s unconditional approval. In the US, the non-horizontal merger Guidelines were issued for the first time in 1984 and have remained unchanged since. This reflects a sort of divorce between the guidelines and the actual practice of the US competition authorities.3 The

1

Google/DoubleClick (Case COMP/M.4731) [2008] OJ C184/10. Julia Brockhoff, Bertrand Jehanno, Vera Pozzato, Carl-Christian Buhr, Peter Eberl and Penelope Papandropoulos, ‘Google/DoubleClick: The first test for the Commission’s non-horizontal merger guidelines’ (2008) 2 Competition Policy Newsletter accessed 06 January 2019. 3 James Langfeld, ‘Non-Horizontal Merger Guidelines in the United States and the European Commission: Time for United States to Catch Up?’ (2009) 16 George Mason Law Review 851. 2

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_5

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Guidelines are largely inspired from the Chicago school and clearly fail to consider post-Chicago developments in competition law and economics.4 In the following discussion, the focus, will therefore, be on the practical approach of the US competition authorities that are more aligned with the post-Chicago thinking. Following sections first describe the economic theory on vertical effects (Sects. 5.1.1 and 5.1.2), followed by a discussion of case laws from the US, the EU and the Chinese competition authorities (Sect. 5.2).

5.1.1

Vertical Mergers and Efficiencies

Vertical mergers have the potential to generate efficiencies through the elimination of double marginalisation, lower transaction and inventory holding costs. In other words, vertical mergers can help rationalize activities at various levels of the supply chain.5 In industries such as telecommunications, vertical integration may be an important way of meaningful differentiation with the competitors. It may thus, be rational for firms to integrate vertically to realise the following benefits: the elimination of the problem of double marginalisation on one hand, and the opportunity to engage in price discrimination and to achieve market foreclosure on the other.6 The authorities analyse the resulting trade-off between promoting efficiency through integration and impeding entry through strategic behaviour.7 Whatever be the source of the relevant customer benefit—whether economies of scale, generating efficiencies through vertical integration or ‘increase in access points’ in case of network industries, such benefits, must be merger-specific, outweigh the potential anti-competitive effects and benefit the ‘relevant’ customer.8 The ‘relevant’ customer refers to the users or consumers of the product or service at ‘any point in the chain of production and distribution’.9 Economic tools and econometrics, as discussed in the following sections, offer particularly useful insight into the trade-off between efficiencies and anticompetitive effects resulting from vertical integration through quantification of

4

Ibid., pp. 851–53. Competition Commission, CC8 - Merger Remedies: Competition Commission Guidelines [November 2008] recital 1.20 accessed 06 January 2019. 6 Gilles Le Blanc and Howard Shelanski, ‘Merger Control and Remedies Policy in the E.U. and U.S: the case of Telecommunications Mergers’ (November 2002) accessed 06 January 2019. 7 Competition Commission, CC8 - Merger Remedies: Competition Commission Guidelines [November 2008] recital 1.20 accessed 06 January 2019. 8 Ibid., at recital 1.14–1.20. 9 Ibid., at recital 1.16. 5

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efficiencies and potential foreclosure effects. To illustrate, while analysing the impact of vertical integration, economic tools may help put a number on margins earned through the foreclosure of competitiors. If the input is only a small part of the downstream product price, and there are other competing suppliers offering the same or similar input, foreclosure may after all, not be a very rationale strategy for the vertically integrated firm.10

5.1.2

Input and Customer Foreclosure

Vertical mergers offer various efficiency enhancing effects such as the elimination of double marginalisation and related production and distributional efficiencies,11 but under certain circumstances, they can also lead to anti-competitive effects such as input foreclosure.12 Vertical integration may enable either customer foreclosure or input foreclosure by ‘(enabling) price coordination in the primary market by facilitating monitoring of prices in the secondary market’.13 Contributions from game theory have offered valuable insights into the set of circumstances wherein vertical mergers can lead to anti-competitive effects, such as opportunities that the merger may create for the parties to behave strategically.14 In the ICT sector, input foreclosure and customer foreclosure are the more commonly identified theories of harm. Google/Motorola, Liberty Global/Corelio/W&W/De Vijver Media and Tomtom/Tele Atlas, all discussed in detail in Sect. 5.2 below, are some of the important ICT mergers wherein the Commission used its NHM Guidelines to assess input foreclosure. Foreclosure may be total or partial and may take one of the two forms: input foreclosure or customer foreclosure. Input foreclosure refers to a theory of harm wherein the vertically integrated merged entity potentially restricts access to its downstream competitors resulting in increase in the cost of access for its downstream rivals.15 When the vertically integrated company absolutely stops supplying inputs to

Raphaël De Coninck, ‘Economic Analysis in Vertical Mergers, Opinions and Comments’ (2008) 3 Competition Policy International, 50 accessed 06 January 2019. 11 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2008] OJ C265/06, paras 11–15. 12 Raphaël De Coninck, ‘Economic Analysis in Vertical Mergers, Opinions and Comments’ (2008) 3 Competition Policy International, 48 accessed 06 January 2019. 13 D Daniel Sokol and William Blumenthal, ‘Merger Control: key international norms and differences’ in Ariel Ezrachi (ed), Research Handbook on International Competition Law (Edward Elgar 2012) 331–32. 14 Raphaël De Coninck, ‘Economic Analysis in Vertical Mergers, Opinions and Comments’ (2008) 3 Competition Policy International, 48–50 accessed 06 January 2019. See also the footnotes therein. 15 Ibid., at p. 49. 10

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its downstream competitors, it is referred to as total foreclosure and when it degrades the quality of the input, or raises the prices charged, it is referred to as partial foreclosure.16 For input foreclosure to be a credible theory of harm, the anticompetitive effects of the foreclosure must outweigh the efficiencies reslting from vertical integration.17 The vertically merged entity is said to engage in customer foreclosure where it restricts upstream rivals’ access to a sufficient customer base.18 A vertically integrated entity may also gain a competitive advantage as it gains access to commercially sensitive information about its upstream and downstream rivals. This sensitive information may then be in a position to use this information to its advantage and to the detriment of the consumer.19 Foreclosure is one of the more frequently employed strategies to exclude competitors. Consider a case, wherein the competitor has access to essential patents in the upstream market and these patents are required for further production in the downstream market. A refusal by the owner of the patent to its competitors may be exclusionary and can retard the pace of innovation in the downstream market. In the ARM/Giesecke & Devrient/Gemalto/JV,20 the Commission cleared the merger only after ARM submitted a comprehensive set of remedies to alleviate the Commission’s vertical foreclosure concerns (although horizontal effects were, as discussed in the previous chapter, completely dismissed by the Commission).

5.2

Case Laws

This section discusses recent key mergers that raised vertical effects. To offer a comprehensive and comparative perspective, the decision of the EU and the US competition authorities are discussed in detail. The Google/Motorola case (Sect. 5.2.6) also includes the decision of the Chinese competition authority that unlike the EU and US, offered its conditional decision following submission of substantial remedies. Section 5.2.1 discusses the TomTom/Tele Atlas case; Sect. 5.2.2, the Google/ITA case; ARM/G&D/Gemalto/JV is discussed in Sect. 5.2.3 followed by a discussion on Comcast/NBCU/JV in Sect. 5.2.4. As data, alongside vertical integration, was a key consideration in the Google/DoubleClick21 merger, it is discussed in Chap. 17 dealing with big data and merger control.22

16

Ibid., at pp. 49–50. Ibid., at p. 49. 18 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2008] OJ C265/06, para 30. 19 Ibid., at para 78. 20 ARM/Giesecke & Devrient/ Gemalto/ JV (Case No COMP/M.6564) Commission Decision [2012] OJ C368/9. 21 Google/DoubleClick (Case COMP/M.4731) [2008] OJ C184/10. 22 See Chapter 17 Big Data and Merger Control. 17

5.2 Case Laws

5.2.1

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TomTom/Tele Atlas

TomTom/Tele Atlas was a merger between two firms operating at different levels in the value chain. TomTom was at the time, the largest portable navigable device (PND) manufacturer. Tele Atlas, was the largest producer of navigable maps. The Commission for the first time employed the Non-Horizontal Merger Guidelines to assess its alleged theory of foreclosure. The Commission conducted an empirical analysis to evaluate whether Tele Atlas’ ability to refuse to supply or increase prices to the rivals of TomTom would be rational considering that such a refusal would diminish the sale of Tele Atlas. The issue was whether the decrease in sales in the upstream market would be profitable. The margins in the downstream market were far in excess of those in the upstream market—a fact that justified foreclosure concerns. However, the cost of this input—that is the maps (in the upstream market)—was only a small component of the downstream product that is the PNDs. This meant that even significant price increase by the merged entity, could only minimally impact its competitors in the downstream market. The merger also resulted in benefits to the merged TomTom/Tele Atlas in the form of elimination of double marginalisation. Empirical analysis indicated low cross-elasticity in the downstream market between TomTom and its competitors. Overall, a foreclosure strategy was found unprofitable as the loss of sales in the upstream market, did not adversely impact the competitive strength of the competitors of TomTom (the downstream market). The Commission also assessed the impact of the merger on the merged parties’ incentives to protect confidential information.23 Commission’s quantitative analysis showed that any foreclosure strategy—whether to increase prices or degrade quality for TomTom’s competitors—was unlikely to significantly adversely impact the downstream PND and navigation software markets.24 Paragraph 8 of the EU HMG states that the firm’s compete on price, as well as non-price dimensions that may in turn influence the purchasing behaviour of its customers.25 The EU HMG, thus, offers the possibility to evaluate non-price factors as a measure of market power. The Commission in TomTom/Tele Atlas seems to have adopted this direction whereby it paralleled the degradation of confidentiality to product degradation and was of the opinion that the PND manufacturers would consider the maps as inferior quality, should Tele Atlas choose to share their confidential information with TomTom.26 Any degradation of confidentiality through breach of firewalls and non-disclosure agreements by Tele Atlas,27 it was

23

TomTom/Tele Atlas (Case COMP/M 4854) [2008] OJ C237/08, para 272. Ibid., at para 251. 25 European Commission Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, [2004] OJ C 31/05, para 8. 26 TomTom/Tele Atlas (Case COMP/M 4854) [2008] OJ C237/08, para 274. 27 Ibid., at para 272. 24

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expected, would lead Tele Atlas’ customers to consider switching to NAVTEQ.28 Loss of reputation, it was believed, would have negative spillover effects in other markets such as in the market for car and mobile phones.29 Following a detailed phase II review, the Commission finally unconditionally cleared the merger between Tom Tom and Tele Atlas. In the US, the FTC too offered the merger its unconditional clearance.

5.2.2

Google/ITA

In Google/ITA, Google—a provider of Internet search and advertising services, acquired ITA—a provider of ‘leading independent airfare pricing and shopping system’ (P&S system).30 Google purchased the flight search software marker for $700 million.31 The transaction was assessed by the DOJ as it was a noticeable transaction under the US merger control under the ‘size-of-the-transaction’ test. As the transaction did not meet the turnover requirement of the EU merger control, it was not subject to the assessment of the European Commission. This section accordingly discusses the US DOJ’s assessment of the potential anti-competitive effects of the transaction. Online Travel Agencies (OTAs) such as Expedia and Travelvelocity offer flight search functionality for which they need access to the P&S systems. This involves a complex interplay of sophisticated algorithms to analyse the vast range of information available about flights and translate them into a simple user-friendly format that in turn helps the final consumer make value-maximising purchase decisions. The complexity of the system means that the functionality offered by the P&S systems— such as an ability to analyse complex fare algorithms of different airlines quickly and efficiently—has a crucial impact on the services offered by the OTA in the downstream market. P&S systems are an important flight search tool in the market for online travel. ITA offered QPX, a P&S system- that it licensed to some of the ‘most popular and innovative OTI’s’ such as Orbitz, Kayak and Microsoft’s Bing Travel.32 Considering the advanced and sophisticated features of the QPX, such as the ‘speed and 28

Ibid., at paras 274–275. Ibid., at para 275. 30 United States v. Google Inc., No. 1:11-cv-00688, 2011 WL 1338047, Complaint ¶ 1 (D.D.C. Apr. 8, 2011), available at accessed 06 January 2019. 31 Claire Cain Miller, The New York Times, U.S. Clears Acquisition of Travel Software, dt. 08th April 2011, available at accessed 06 January 2019. 32 United States v. Google Inc., No. 1:11-cv-00688, 2011 WL 1338047, Complaint ¶ 3 (D.D.C. Apr. 8, 2011), available at accessed 06 January 2019. 29

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flexibility’ offered through its sophisticated advanced and proprietary Dynamic Availability Calculating System (DACS), ITA’s QPX was a ‘critical flight search tool’ for its licensees.33 QPX was also a leader in terms of P&S system innovation as it had launched advanced products with complex features such as InstaSearch—that relied on cutting-edge computing techniques to minimise query response times.34 The US DOJ analysed potential vertical foreclosure of access to data from Google’s acquisition of ITA. ITA offered P&S systems to OTAs. The DoJ analysed the potential vertical concerns as the transaction had a potential competition35 dimension.36 Google’s motive to acquire ITA was to offer ‘comparative flight search services’ by launching an Internet travel site.37 The DOJ’s concern was that the merger offered Google the ‘means and incentives’ through ownership of QPX ‘to foreclose or disadvantage its prospective flight search rivals’ through degradation of access or denial of access to the QPX.38 Foreclosure was expected to lead to ‘reduced quality, variety and innovation for consumers of comparative flight search services’.39 The DOJ identified foreclosure concerns as Google ‘intended to use QPX as the back-end technology for its forthcoming comparative flight search services’.40 With the launch of its travel services, Google intended to compete with the OTIs in the downstream market—this offered it the incentive to foreclose ‘competing OTIs’ access to QPX’.41 Google had incentives to engage in partial foreclosure (through degradation) or absolute foreclosure (through denial) of access to QPX. This was expected to lead to increased customer traffic to its newly launched travel websites from rival OTIs that would have likely far outweighed ‘any lost profits from reduced licensing revenues from QPX’.42 This was also expected to negatively impact travel site innovation.43 It would, in turn, also offer Google access to ‘competitively sensitive information from competing OTIs’ concerning their use of QPX, which

33

Ibid., at ¶ 3, 31–32. Ibid., at ¶ 33, 37. 35 The doctrine states that although the parties may not, at the time of the merger be directly competing against one another; they are expected to potentially compete in near future either through extension of existing product lines or through an expansion of operations in different markets. 36 J Thomas Rosch and Darren S Tucker, ‘Emerging Theories of Competitive Harm in Merger Enforcement’ (October 2011) The Antitrust Source 1, 5. 37 United States v. Google Inc., No. 1:11-cv-00688, 2011 WL 1338047, Complaint ¶ 4 (D.D.C. Apr. 8, 2011), available at accessed 06 January 2019. 38 United States v. Google Inc., No. 1:11-cv-00688, 2011 WL 1338047, Complaint ¶ 5 (D.D.C. Apr. 8, 2011), available at accessed 06 January 2019. 39 Ibid., at ¶ 4–5. 40 Ibid., at ¶ 29. 41 Ibid., at ¶ 28–29. 42 Ibid., at ¶ 38. 43 Ibid., at ¶ 39. 34

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in turn could negatively impact competition in the comparative flight services market.44 High entry barriers would have averted further entry into the market. The significance of entry barriers were evident from the fact that even Google could not develop its own P&S system because of the ‘complexity of the algorithms’ in comparing flights.45 The merger was cleared following submission of substantial behavioural commitments including a commitment to license the QPX, firewalls and baseball style arbitration.46 The commitments were to stay in force for five years.

5.2.3

ARM/Giesecke & Devrient/Gemalto

The previous chapter discussed the background and the potential unilateral effects from the proposed joint venture between ARM, G&D and Gemalto. The joint venture, in addition, also established a vertical relationship between the activities of the firms—with ARM active in the development and the supply of IP for semiconductors, the joint venture expected to offer TEE solutions and pre-issuance applications (level 3) and Gemalto and G&D active in the market for post-issuance applications that were to run on top of the joint venture’s TEE solution.47 Interestingly, although the joint venture’s total market share in the market for TEE solutions was well over 95%; however, as the market for TEE solutions was in a nascent stage, the Commission did not identify any unilateral effects.48 Although vertical integration, as discussed in the following paragraphs, was expected to lead to potential anticompetitive effects in the market for IP licensing. In the upstream market for IP licensing for APs for CE devices, ARM held a very strong market position in CE devices such as smartphones and tablets where its market share was close to 90–100%.49 Considering ARM’s position in this upstream market, it had the ability to ‘unilaterally standardise the hardware interface with TrustZone’,50 which meant that ARM could modify the TrustZone technology and/or interface that would ‘degrade the interoperability between TrustZone and TEE solutions developed by the competitors of the joint venture.51 ARM had the ability to deny complete and timely access to the current and future versions of

44

Ibid., at ¶ 40. Ibid., at ¶ 41–42. 46 For a discussion of these remedies, kindly refer Chap. 11 Non-structural Remedies and Chap. 14 Merger Remedy-related Arbitration: Une innovation suprenante. 47 ARM/Giesecke & Devrient/ Gemalto/ JV (Case COMP/M.6564) [2012] OJ C368/9, para 118. 48 Ibid., at para 65. 49 Ibid., at paras 145, 155–57. 50 Ibid., at para 148. 51 Ibid., at para 149. 45

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TrustZone.52 There was a risk that ARM could modify TrustZone’s API and/or its other technical aspects, refuse to provide interoperability information to the competitors or technically degrade the performance of these alternative TEE solutions.53 On ARM’s incentives to foreclose the joint venture’s competitors, the Commission identified a high risk of monopoly on the TEE market because of the presence of ARM and a possibility that it could favour the joint venture over competing TEE providers.54 ARM had an incentive to do so by leveraging its market power in the provision of IP for APs for CE devices in the emerging nascent market for the provision of TEE services because of the following factors. First, the competitors of joint venture in the TEE services were different from ARM’s direct customers for licensing of IP for APs for consumer electronic devices. This meant that post-transaction, any loss of revenue and potential disruption would be limited, as it would be more than offset by gains from ARM’s share in the joint venture’s revenues in the TEE market following foreclosure/marginalisation of the competitors. Second, ARM’s foreclosure strategy would not lead to any loss in revenues, as it did not charge for licensing TrustZone to its customers. Considering that ARM made no profit from TrustZone and any strategy favouring the joint venture’s TEE solution would only bring additional revenues for ARM, foreclosure at least in the short run was a profitable strategy.55 ARM’s incentives to foreclose joint venture’s competitors were therefore, deemed to be real.56 Such a foreclosure strategy, it was expected, would prevent third party developers from introducing competing TEE solutions that would be interoperable with the TrustZone technology. This in turn would adversely affect the Original Equipment Manufacturers (OEMs), who were customers of the joint venture, by limiting their choices and potential to innovate and increase their cost of procurement.57 It would also constrict innovation in the downstream market for the development of pre-issuance and post-issuance trusted applications, which in turn could restrict consumer choice for the MNOs for pre-issuance trusted applications and for end-customers for post-issuance trusted applications.58 This meant that ARM would have the ability, as well as the incentive to foreclose and/or marginalise the joint venture’s competitors in the market for the provision of TEE services.59 Contractual tying between ARM’s IP for CE devices and the joint venture’s TEE solutions was dismissed as a possible theory of harm, as ARM’s customers were

52

Ibid., at paras 149, 159–60. Ibid., at paras 161–63. 54 Ibid., at para 165. 55 ARM/Giesecke & Devrient/ Gemalto/ JV (Case COMP/M.6564) [2012] OJ C368/9, para 170. 56 Ibid., at para 171. 57 Ibid., at paras 173–177. 58 Ibid., at para 178. 59 Ibid., at para 179. 53

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primarily silicon vendors, whereas those of the joint venture’s TEE solutions were most likely to be the OEMs.60 The merger was cleared subject to submission of behavioural remedies including the licensing of ‘Trust Zone Secure Monitor Code’—a remedy that was expected to alleviate the potential anti-competitive effects in the market for IP licensing.61

5.2.4

Comcast/NBCU/JV

In the Comcast/NBCU joint venture, Comcast, GE, NBCU and Navy LLC (NewCo) entered into a joint venture to be named Newco. Comcast was a Philadelphia-based US corporation that was the nation’s largest video programming distributor & principal high-speed Internet provider.62 GE was a New York-based US conglomerate that owned 88% stake in the NBCU.63 The traditional video programming industry constitutes of a three level value chain—content production, content aggregation or networks, and distribution.64 Television production studios produce content and license it to broadcast and cable networks.65 Through its ownership in studios, NBCU was active in the production of ‘first-run movies’.66 Programming networks67 can be broadcast or cable networks whose function is to aggregate content and offer them to the consumers. Owners of broadcast network programming such as NBCU licensed their broadcast networks such as the NBC either to their network affiliate or to their owned and operated television stations (O&Os).68 Video programming distributors such as Comcast, alternatively, could also purchase or launch their own cable networks.69 There are two types of distributors—multichannel video programming distributors (MVPDs) or Online Video Programming Distributors (OVDs). MVPDs

60

Ibid., at paras 180–183. For a detailed and critical discussion on the remedies in ARM/ Giesecke & Devrient/ Gemalto, see Chap. 12 Non-Structural Remedies. 62 United States v. Comcast Corp., No. 1:11-cv-00106, Complaint ¶ 15 (D.D.C. Jan. 18, 2011), available at accessed 06 January 2019. 63 Ibid., at ¶ 16. 64 Ibid., at ¶ 20. 65 Ibid., at ¶ 21. 66 Ibid., at ¶ 23. 67 The market evolution can be appreciated from the fact that from a single cable network HBO in 1970s, there emerged over 700 cable programming networks by the year 2009. Amongst these 700+ networks, over 100 were available in high definition. See United States v. Comcast Corp., No. 1:11cv-00106, Complaint ¶ 24 (D.D.C. Jan. 18, 2011), available at accessed 06 January 2019. 68 United States v. Comcast Corp., No. 1:11-cv-00106, Complaint ¶ 25 (D.D.C. Jan. 18, 2011), available at accessed 06 January 2019. 69 Ibid., at ¶ 28–30. 61

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include incumbent cable companies, DBS providers, broadband service providers and telecommunication companies.70 OVDs71 offered a range of ‘on-demand professional and full-length’ video programming on the Internet—which could be either streamed or downloaded on internet-connected smart televisions and other devices.72 The availability of ‘attractive content’ differentiates different video programming distribution services.73 NBCU had control over valuable content that was ‘important to customers’.74 This raised two competition concerns: first, the resulting ability of Comcast to deny access to its rivals75 and second, the loss of the maverick NBCU.76 NBCU was considered a maverick as it had experimented with different kinds of online distribution, supported various OVDs such as Apple’s iTunes, Amazon and Netflix and was the founding partner of Hulu, the country’s largest OVD at the time of the transaction.77 OVDs’ offered the maximum competitive constraint in Comcast’s cable franchise areas, whereby the competition was otherwise low.78 But the OVDs suffered a key limitation that is ‘only’ those OVDs that owned the ‘last mile connection’ in a given network area could offer ‘video programming distribution services’.79 Emerging competition between the OVDs and the MVPDs was because of ever increasing broadband speeds, OVDs entering the upstream market for professional content, improved technology and an increase in the level of internet-based advertising.80 This in turn led to more and more consumers to ‘cord-shave’, that is subscribe to a lesser number of premium channels or purchase fewer VOD offerings and instead access the content online.81 OVDs were an emerging threat to the MVPDs and the degree to which they could present themselves as a better substitute for the MVPDs was dependent on the access

70

Ibid., at ¶ 32. OVDs are distributors that offered video programming to consumers over the internet. United States v. Comcast Corp., No. 1:11-cv-00106, Complaint ¶ 3 (D.D.C. Jan. 18, 2011), available at accessed 06 January 2019. 72 United States v. Comcast Corp., No. 1:11-cv-00106, Complaint ¶ 33 (D.D.C. Jan. 18, 2011), available at accessed 06 January 2019. 73 Ibid., at ¶ 5. 74 Ibid., at ¶ 6. 75 Ibid., at ¶ 6. 76 Ibid., at ¶ 7. 77 Ibid., at ¶ 52. 78 Ibid., at ¶ 9. 79 Ibid., at ¶ 41. 80 Ibid., at ¶ 34, 35. 81 Ibid., at ¶ 34. 71

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to content, ability to offer protection from piracy, the OVD’s financial and technical prowess and the availability of high speed internet connections.82 As the joint venture was to operate at all the levels of the value chain, it offered an ability, as well as an incentive to hinder any further development of the OVDs. The proposed transaction if un-remedied would have nipped any further development of the OVDs in the bud—as the joint venture would have eventually denied these OVDs’ access to the ‘must-have’ NBCU content.83 The joint venture formed a vertically integrated enterprise that offered Comcast access to assets used for the production and aggregation of important video content.84 As per the DOJ’s competitive analysis, it offered Comcast control over NBCU’s programming, which in turn gave Comcast the possibility to harm competition by refusing to deal with its competitors by denying access to important content or raising rival’s costs by offering the same at unreasonably higher prices.85 As the joint venture raised significant anti-competitive concerns, the US DOJ filed a complaint before the US District Court for the District of Columbia alleging that the merger was expected to diminish competition in the market for video programming distribution resulting in a violation of Section 7 of the Clayton Act.86 The parties however, subsequently consented to enter into a ‘Final Judgment without trial or adjudication of any issue of fact or law’.87 In lieu of the final settlement, the joint venture offered substantial behavioural commitments.88 Notably, the commitments included provision of comparable video programming to the OVDs on ‘economically equivalent terms’ and baseball-style arbitration to resolve any programming-related disputes.89 The European Commission too assessed the effects of the transaction in the market for the licensing of TV content, online advertising, production of motion pictures for theatrical distribution and home entertainment. Considering the very

82

United States v. Comcast Corp., No. 1:11-cv-00106, Competitive Impact Statement at page 17 (D.D.C. Jan. 18, 2011), available at accessed 06 January 2019. 83 United States v. Comcast Corp., No. 1:11-cv-00106, Complaint ¶ 54, 55 (D.D.C. Jan. 18, 2011), available at accessed 06 January 2019. 84 Ibid., at ¶ 37. 85 Ibid., at ¶ 4. 86 Ibid., at ¶ 37. 87 United States v. Comcast Corp., No. 1:11-cv-00106 - RJL, Modified Final Judgment (D.D.C. Aug. 21, 2011) available at accessed 06 January 2019. 88 For a discussion of these remedies, kindly refer Chap. 11 Non-structural Remedies and Chap. 14 Merger Remedy-related Arbitration: Une innovation suprenante. The joint venture was also assessed by the Federal Communications Commission, and to the extent the discussion on remedies is relevant from the perspective of competition authorities, it is discussed in the referred chapters. 89 United States v. Comcast Corp., No. 1:11-cv-00106 - RJL, Modified Final Judgment pp 13–14 (D.D.C. Aug. 21, 2011) available at accessed 06 January 2019.

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limited market shares of the joint venture in the European Economic Area (EEA) member states in each of the above discussed relevant markets, the merger was not expected to generate any anti-competitive effects. Following a brief phase I assessment, the Commission offered its unconditional decision under Article 6(1) (b) of the Merger Regulation.90

5.2.5

Liberty Global/Corelio/W&W/De Vijver Media

Liberty Global/Corelio/W&W/De Vijver Media was a partial joint venture in which Telenet was to hold 50% of the shares of De Vijver Media (DVM), while Corelio and W&W held remaining 25% each.91 Liberty Global, active across 12 countries in Europe, offered ‘TV, broadband internet and voice telephony services via its cable network’ and was the controlling shareholder of Telenet, a leading cable network operator and provider of pay-TV channels in the Flemish area of Belgium, Brussels and parts of French speaking Wallonia.92 De Vijver was a broadcaster of prominent Dutch TV channels ‘Vier’ and ‘Vijf’. It was also active in producing TV content and selling advertising space on different TV channels.93 This merger was assessed by the European Commission only. The rationale of the transaction was that with this partial joint venture, Liberty Global sought to enter the basic pay-TV market by acquiring a stake in DVM.94 DVM was active in the ‘upstream market for the wholesale supply of TV channels’ where it licensed Vier and Vijf to downstream TV distributors, including Telenet.95 This market was expected to be vertically effected, as Telenet had a significant market share downstream in the ‘retail provision of TV services to end users’.96 The Commission assessed whether the transaction led to input foreclosure, customer foreclosure or other non-coordinated effects. On input foreclosure, the Commission assessed whether the merged entity may engage in total input foreclosure by ‘denying access to its input to one or more targeted non-merging firms’ or engage in partial input foreclosure by discriminating against one or more targeted non-merging firms by raising the ‘price charged for the input’.97

90

Comcast/ NBC Universal (Case COMP/ M.5779) [2010] OJ C 157/12. Liberty Global/Corelio/W&W/De Vijver Media (Case COMP/ M.7194) [2015] OJ C 175/11, para 12. 92 Ibid., at para 8. 93 Ibid., at para 11. 94 Ibid., at para 644. 95 Ibid., at para 220. 96 Ibid., at paras 220–221. 97 Ibid., at paras 229–230. 91

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Post-merger, the merged entity owned ‘Vier’ and ‘Vijf’—two ‘must have Flemish channels’. The channels were identified ‘an important input’ for competing in the ‘downstream market for the provision of TV retail services within the Telenet footprint’.98 The Commission assessed whether Telenet had incentives to engage in total input foreclosure that is whether Telenet had incentives to deny access to the must have channels Vier and Vijf.99 To have sufficient incentives, an important condition was that the profits generated at the distribution level outweigh the losses incurred on account of the lost advertising revenue and licence fee otherwise generated De Vijver media.100 To assess this, the Commission considered three scenarios—first when, the Notifying Parties foreclosed all the rival platforms from accessing its channels; second, when only Belgacom, the largest rival TV distributor was foreclosed and finally, when only smaller rival TV distributors that is Snow and TV Vlaanderen were denied access to Vier and Vijf.101 Under each one of these three scenarios, switching analysis indicated that the profit derived from actual number of customers switching to the Notifying Parties was far in access of the minimum critical switching rate required to make it a profitable strategy.102 The Commission also found that post-merger, the parties may find it even more profitable to engage in partial foreclosure (as compared to total foreclosure) that is discriminate against one or more rivals by ‘raising the license fee’ charged for Vier and Vijf.103 The merger offered the parties a stronger bargaining position while negotiating with rival TV distribution platforms over license fees for DVM’s channels. This was because of post-merger internalisation of profits from customers switching to Telenet.104 To quantify these, the Commission employed a ‘simple bargaining framework’ that indicted license fees were expected to increase multifold and was even more significant than in case of total foreclosure.105 Input foreclosure in turn was expected to substantially increase barriers to entry ‘in the market for the provision of retail TV services within Telenet’s footprint’ and substantially increase license fees for Telenet’s rivals.106 This could in turn harm consumers in the form of higher prices, reduced choices and softened downstream competition.107 The Commission also assessed whether the merged parties could engage in customer foreclosure. Following total customer foreclosure, TV broadcasters are

98

Ibid., at paras 238–240, 271–274, 284. Ibid., at para 323. 100 Ibid., at paras 324–326. 101 Ibid., at paras 336–366. 102 Ibid., at paras 339–366. 103 Ibid., at paras 383, 394–395. 104 Ibid., at paras 387–392. 105 Ibid., at paras 396–99. 106 Ibid., at paras 434–445. 107 Ibid., at para 446. 99

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denied access resulting in blackout and thus, the customers are unable to watch the foreclosed channels. In case of partial customer foreclosure, subscribers can still access the channel but there is significant quality degradation.108 Partial foreclosure may also result by degrading the viewer experience or making content less easily available on the platform or threaten foreclosure to force rival TV broadcasters to accept lower license fees for their channels and services.109 The Commission’s assessment indicated that as advertising was an important source of revenue for both free to air (FTA) and basic pay TV channels such as Medialaan and VRT’s non-linear services, access to Telenet’s platform, the largest TV distributor in Flanders was crucial for their survival.110 The Commission’s analysis indicated that Telenet had the ‘ability’ to engage in customer foreclosure of DVM’s competitors for both their linear TV channels and non-linear audio visual content.111 Whether it was a profitable strategy depended upon the percentage of customers that may switch away from Telenet following foreclosure.112 Medialaan’s channels 2BE and Vitaya and non-linear services of Medialaan, as well as VRT’s channel Canvas and VRT’s non-linear services that ‘closely competed’ for advertising space with DVM’s channels Vier and Vijf were identified as potential targets for partial customer foreclosure by Telenet.113 Considering the high viewership of VTM (Medialaan’s main channel) and VRT’s must-carry status, the Commission found that total customer foreclosure was unlikely to be a profitable strategy.114 Pre-transaction, Telenet was ‘not’ vertically integrated and thus, it did not consider the impact on its broadcasting business. Following the transaction, as Telenet would be vertically integrated, it had incentives to engage in customer foreclosure as it could now internalise the resulting profits.115 The Commission’s analysis indicated that from a shift in viewership at the margin following quality degradation which in turn was expected to lead to substantial increase in advertising revenues, Telenet had incentives to engage in partial customer foreclosure.116 Post-merger, as Telenet enjoyed an improved bargaining position, it could also ‘hard bargain’ and pay lower license fee to rival broadcasters.117 Partial customer foreclosure was expected to weaken competition in the upstream market for the wholesale supply of FTA/basic pay TV channels, result in

108

Ibid., at paras 448. Ibid., at paras 521, 530–538, 539–547. 110 Ibid., at paras 457–472. 111 Ibid., at para 488. 112 Ibid., at para 497. 113 Ibid., at paras 502–514. 114 Ibid., at paras 515–519. 115 Ibid., at para 520. 116 Ibid., at paras 530–547. 117 Ibid. 109

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higher advertising fees charged by DVM and overall result in reduction in choice for customers.118 Even before the submission of final commitments, Belgacom and DVM entered into a new carriage agreement. DVM also entered into carriage agreements with other TV distributors to licence its channels Vier and Vijf to address input foreclosure concerns. Telenet too entered into agreements with Medialaan and VRT to address customer foreclosure concerns.119 The parties also proposed to offer third party Distributors, including those offering an OTT service, access to its channels on fair, reasonable and non-discriminatory terms.120 The parties undertook ‘not’ to intentionally degrade the quality of channels Vier and Vijf.121 The parties also offered to amend the Medialaan Carriage Agreement.122 The parties could ‘not close the concentration’ without the appointment of a Monitoring Trustee.123 A fast track dispute resolution under the rules of Belgian Centre for Arbitration and Mediation to resolve any commitment-related disputes was proposed.124 Commitments were to stay in force for seven years.125

5.2.6

Google/Motorola

In Google/Motorola,126 Google acquired sole control over Motorola Mobility. Google is a US-based internet search and online advertising services provider that also offers an open source mobile operating system called Android.127 Motorola Mobility was a supplier of mobile devices, TV set-top boxes, end-to-end video solutions and cable broadband access solutions.128 The acquisition also offered Google access to Motorola’s [7000–8000] patent portfolio relevant to wireless communication hardware and high-definition television.129 The patent portfolio

118

Ibid., at paras 548–553. Ibid., at paras 593–617. 120 Liberty Global/Corelio/ W&W/ De Vijver Media, Case M. 7194, Commitments by Liberty Global/ Waterman & Waterman/ Corelio Publishing/ JV, Section B Commitment to offer access to the Channels, para 1. 121 Ibid., at para 2. 122 Ibid., at Section C. 123 Ibid., at Section D. 124 Ibid., at Section E. 125 Ibid., at Section F. 126 Google/Motorola Mobility (Case COMP/M. 6381) [2012] OJ C075/01, paras 1, 5. 127 Ibid., at para 3. 128 Ibid., at para 4. 129 Ibid., at para 6. 119

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included numerous standard essential patents (SEPs)130 that read on ‘wireless standards, smartphones, video, HDTV and batteries’.131 Google/Motorola is an interesting merger decision that highlights the difference in approach of the EU and US competition authorities with that of the Chinese MOFCOM(now the SAMR). Three relevant product markets were identified by all the three competition authorities: first, the market for operating systems, second, the market for mobile devices and third, an upstream market for SEPs as inputs for smart mobile devices.132 The EU and the US competition agencies offered unconditional clearance in light of Google’s letter to the SSOs promising to honour its FRAND commitment to license the SEPs. The Chinese MOFCOM(now the SAMR) on the other hand chose to offer a conditional clearance. Following section discusses the approach of the three competition authorities.

5.2.6.1

Google/Motorola: The EU Decision

A smart mobile device such as a smartphone or a tablet requires a mobile operating system (OS). The probability of commercial success of these devices increases exponentially if in addition to the ‘design and functionality’, they contain a ‘mobile OS’ that facilitates access to greater and more useful applications. A mobile OS is likewise commercially more attractive if it is compatible with its surrounding ecosystem.133 Although the Android mobile OS source code is available for free under an open source license134, Google controls Android and the market share of Android is effectively Google’s market share in the market for mobile OS.135 Android mobile OS is an essential input for Android mobile devices.136 This meant that post-transaction, Google would be the vertically integrated producer of smart mobile devices.137 It may be useful to add at this point that the US and the EU competition authorities in their assessment identified Google, following consummation of the merger, as a vertically integrated producer of the smart mobile devices because the production facilities and the patent portfolio of Motorola, along with Google’s control over Android mobile OS, offered it the prospect to act as a vertically integrated entity with complete control over the entire supply chain—from the patents and the OS in the upstream market to the production of handsets in the downstream market.138

130

Ibid., at para 7. Ibid., at para 7. 132 Ibid., at paras 12–61. 133 Ibid., at para 65. 134 Ibid., at para 67. 135 Ibid., at paras 64–72. 136 Ibid., at para 73. 137 Ibid., at para 77. 138 Evelyn M. Rusli and Claire Cain Miller, New York Times, Google to Buy Motorola Mobility for $ 12.5 Billion, dt. 15 August 2011, available at https://dealbook.nytimes.com/2011/08/15/googleto-buy-motorola-mobility/, accessed 12 March 2018. 131

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The issue was whether the merger offered Google the ability and the incentive to engage in SIEC by ‘foreclosing or degrading the access of other OEMs to the Android mobile OS and hence the [mobile] ecosystem’.139 Vertical effects were expected from Google’s combined ownership of both Android, the mobile operating system, a ‘key input into smart mobile devices’ and Motorola’s SEPs, ‘key inputs’ in the manufacturing of mobile phones.140 For a merger to lead to incentives to create SIEC they need to be mergerspecific.141 Google had the ability to favour Motorola Mobility over other device manufacturers by giving preference to Motorola’s handsets, leak information received during the approval of the OEMs to Motorola and hinder innovation through its anti-fragmentation policy and degrade the quality of Android offered to third party OEMs.142 However, as all these factors were present even prior to the merger and none of them was merger-specific, it led the Commission to conclude that the merger did not lead to a change in the ability of Google to favour ‘one or another Android partner’.143 On the issue of incentives, the Commission accepted Google’s contention that the rationale for the transaction was the ‘acquisition of Motorola’s patent portfolio’.144 Google’s Android business was higher-margin and more profitable then Motorola’s lower-margin hardware unit.145 Moreover, continued preference for Motorola’s hardware business would have also negatively impacted Google’s ‘mobile search and advertising revenues’.146 Thus, Google was ‘unlikely’ to have incentives to prevent third party OEMs from accessing Android.147 As Google did not have sufficient incentives to ‘foreclose OEMs from access to Android and even if it did pursue such a strategy, the competing OEMs would continue to enjoy the availability of other alternatives to replace Android as a mobile OS, the SIEC was thus, unlikely to arise.148 Even prior to the transaction, Motorola was the ‘exclusive’ user of Android on its smart mobile devices.149 The transaction thus, did not change access to Motorola’s smart mobile devices, whose market share was anyways limited150 and even if Google did choose to foreclose, Android’s competitors had other alternative

139

Google/Motorola Mobility (Case COMP/M. 6381) [2012] OJ C075/01, para 77. Ibid., at para 62–63. 141 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2008] OJ C265/06, para 32. 142 Google/Motorola Mobility (Case COMP/M. 6381) [2012] OJ C075/01, para 81. 143 Ibid., at para 85. 144 Google/Motorola Mobility (Case COMP/M. 6381) [2012] OJ C075/01, para 86. 145 Ibid., at para 92. 146 Ibid., at para 93. 147 Ibid., at para 94. 148 Ibid., at paras 95–99. 149 Ibid., at para 101. 150 Ibid., at para 102. 140

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OEMs ‘as potential users of their mobile OSs’ and thus, customer foreclosure was not expected to take place.151 Post-standardisation, the IPR holder may ask for excessive fees152 for access to the SEPs. FRANDly commitments prevent this hold-up from demand for higher royalties by the patent holder.153 A SEP holder may demand unreasonably high royalties or force the potential licensee to agree to ‘onerous licensing terms’ that it might not have otherwise agreed to.154 The SEP holder may also force non-SEP holders to ‘cross-license’ in return for a license of the SEPs.155 The acquisition offered Google ownership of Motorola’s SEPs. This patent portfolio was however, much smaller than that of other players such as Microsoft, Oracle and Sony.156 Google promised to continue licensing Motorola’s SEPs on FRANDly terms. It also sent a letter to various SSOs to that effect.157 As many market participants had pre-existing ‘license or cross-license’ arrangements for Motorola’s SEPs, any attempt to renegade on those promises could be subject to contract law.158 Moreover, Motorola was already seeking injunctions against Apple and Microsoft for its SEPs.159 Thus, although the merger offered some ability to Google in terms of seeking and enforcing injunctions, Google was constrained in its attempts on account of the foregoing factors.160 Google’s rationale for the transaction was to achieve ‘patent balance’ to ensure that Android was insulated from the patent wars and could compete and innovate effectively.161 Moreover, the Commission took special note of the letter dated 8th February 2012 to the SSOs, which offered Google’s ‘irrevocable’ commitment to be bound by Motorola’s FRAND commitment to offer licenses at Motorola’s prevailing maximum rate of 2.25% of the ‘net selling price of the relevant product’.162 The Commission also rejected the argument that Google was likely to ‘forcibly extract cross-licenses which would otherwise not been entered into’ by using the threat of injunctions.163 For this, the Commission relied on Google’s four principle arguments: first, that the objective of the transaction was to ensure that Android continued to innovate; second, use of Motorola’s SEPs to engage in SIEC would

151

Ibid., at paras 102–103. Case 27/76 United Brands v Commission [1978] ECR 207, para 250. 153 Commission Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements [2011] OJ C11/01, para 287. 154 Google/Motorola Mobility (Case COMP/M. 6381) [2012] OJ C075/01, para 107. 155 Ibid., at paras 107–109. 156 Google/Motorola Mobility (Case COMP/M. 6381) [2012] OJ C075/01, para 110. 157 Ibid., at paras 111–112. 158 Ibid., at para 114. 159 Ibid., at para 115. 160 Ibid., at para 116. 161 Ibid., at para 118. 162 Ibid., at para 120–21. 163 Ibid., at para 127. 152

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anyways be subject to the ‘Commission’s enforcement policy under Article 101 and 102 with respect to FRAND commitments; third, Google’s public letter that it said was ‘irrevocable’ and ‘legally binding’ and finally, there remained a real possibility of counter-suits by other key players in the sector, such as Microsoft and Apple.164 The Commission relied on Google’s letter dated 8th February 2012 with ‘binding legal effects’ to the SSOs that created a binding effect as a matter of ‘contract law’ and principles of ‘general equity/estoppel and good faith’.165 It is interesting and ironical to note that although the Commission identified the ‘binding nature’ of Google’s letter, it refrained from taking any position on the nature of the letter.166 This can potentially be explained by the fact that although the Commission identified the ‘binding nature of the letter’ in contract law and principles of general equity, it did not accept them as commitments. This implies that the remedy, following a subsequent potential breach shall be based in contract law and the law of tort, but not in competition law. Based on the contents of the letter, the Commission found that Google had limited incentives and ability to force licenses and cross-licenses by threating injunction.167 On the impact of the transaction on competition, the Commission noted that the FRAND rate and the basis on which it was charged by Motorola was not mergerspecific and considering the prevailing rate—which anyways was the highest prevalant rate in the market, it was ‘unlikely’ that Google would subsequently change the rate or the basis for calculating it.168 As for the ability to pursue injunctions, Motorola was already involved in two infringement injunctions against Apple and Microsoft in Germany169 and if at all, Google had given its consent to Motorola to accept an offer from the defendants, in case it found them to be ‘commercially acceptable’.170 Recognising the benefits of cross-licensing, the Commission was of the opinion that cross-licenses were not necessarily anti-competitive.171 Overall, it was identified that the transaction would not lead to SIEC in the internal market because of Google’s acquisition of Motorola Mobility’s IP rights, including the SEPs.172

164

Ibid., at paras 128–149. Ibid., at para 134. 166 Google/Motorola Mobility (Case COMP/M. 6381) [2012] OJ C075/01, para 135. 167 Ibid., at para 135. 168 Ibid., at para 153. 169 Ibid., at paras 154–55. 170 Ibid., at para 156. 171 Ibid., at para 159. 172 Ibid., at para 160. 165

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Google/Motorola: The US DOJ’s Decision

The European Commission and the US DOJ closely cooperated in the Google/ Motorola investigations.173 The competitive analysis and the outcome too were very similar on the two sides of the Atlantic. The US DOJ simultaneously assessed three notified transactions—Google’s acquisition of Motorola Mobility, Rockstar Bidco’s (a partnership between Apple, Microsoft and Research in Motion (RIM)) acquisition of some of Nortel Networks Corporation patents and Apple’s acquisition of some of Novell’s patents.174 In all these three transactions—the US DOJ analysed the harm resulting from foreclosure or raising of rivals’ costs through the acquisition of patent portfolios.175 While unconditionally clearing all three, the DOJ took special note of Google, Apple and Microsoft’s commitments to the SSOs and their public statements concerning their SEP licensing policies.176 Practical experience indicated that F/RANDly commitments to the SSO did not prevent disputes or demand for injunctive relief arising in connection with the licensing of SEPs.177 Although the DOJ found that Google’s licensing commitment were ambiguous, it held that any subsequent abuse by the company would be subject to suitable enforcement action.178 The DOJ’s analysis, similar to that of the Commission, focussed on ‘how the proposed transaction’ changed the incentives and the ability of Google to ‘hold up’ competitors, concerning the SEPs—by threatening an injunction or an exclusion order.179 The DOJ identified that traditionally Motorola pursued an aggressive enforcement policy to ‘capitalise on its intellectual property’ and its acquisition by Google ‘would not substantially alter current market dynamics’.180 It added though that the conclusion was ‘limited to the transfer of ownership rights and not the exercise of those transferred rights’.181

173

Statement of the Department of Justice’s Antitrust Division on Its Decision to Close Its Investigations of Google Inc.’s Acquisition of Motorola Mobility Holdings Inc. and the Acquisitions of Certain Patents by Apple Inc., Microsoft Corp. a. . ., (Feb. 2012), available at https://www. justice.gov/opa/pr/statement-department-justice-s-antitrust-division-its-decision-close-its-investiga tions accessed 06 January 2019. 174 Ibid. 175 Ibid. 176 Ibid. 177 Ibid. 178 Ibid. 179 Ibid. 180 Ibid. 181 Ibid.

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In closing, the DOJ mentioned its ‘concerns’ regarding ‘potential inappropriate use of SEPs to disrupt competition’ and undertook to continue monitoring the use of SEPs in the consumer electronics market.182

5.2.6.3

Google/Motorola: The Chinese MOFCOM’s Decision

The Chinese competition authority analysed the Google/Motorola merger along the same lines as the US and the EU competition authorities. Similar relevant product markets were identified—the market for operating system wherein Google was present through its Android OS and the market for licensing of SEPs. Following a detailed phase II investigation, the MOFCOM (now the SAMR)183 conditionally cleared the merger. Whereas the EU and the US unconditionally cleared the merger—taking due note of Google’s public commitments and the letter to the SSOs, the MOFCOM (now the SAMR) viewed them as insufficient to alleviate the concerns identified. The MOFCOM (now the SAMR) identified vertical concerns, as well as unilateral effects from the transaction. The relevant product market was the market for smart mobile devices and the OS for smart mobile devices. Each of the product markets was defined as China-wide. The market for smart mobile devices was identified as sufficiently competitive. The market for OS, wherein Google’s Android had over 74% market share—indicating a CR3 ratio184 of around 97%—was found to be highly concentrated. Unilateral effects from Android’s market share were anticipated because of: (i) possible changes to the open-source policy following the transaction; (ii) choice of Motorola as a preferred OEM to the disadvantage of other smart mobile manufacturers; (iii) possible unfair licensing of Motorola’s IPRs and (iv) high barriers to any subsequent market entry.185 On foreclosure, the MOFCOM (now the SAMR) identified ‘possible discriminatory licensing’ as a real harm following Google’s control over Motorola’s 17,000 plus patents that included many SEPs. This was expected to be disadvantageous for the Chinese OEMs that feared receiving old and outdated versions of the Android

182

Ibid. Until March 2018, China had the following three authorities that dealt with competition-related concerns: the Ministry of Commerce (MOFCOM), the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC). Following the then Chinese President Xi Jinping’s announcement on 17th March 2018 at the National People’s Congress to restructure the administrative agencies for more effective market regulation, the three bodies were merged into one State Administration for Market Regulation (SAMR). The SAMR is now responsible for the enforcement of the anti-monopoly laws, including merger control in China. 184 CR3 refers to the concentration ratio of the top three firms in the relevant market. 185 Announcement No. 25, 2012 of the Ministry of Commerce-Announcement of Approval with Additional Restrictive Conditions of the Acquisition of Motorola Mobility by Google (31 May 2012) accessed 06 January 2019. 183

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OS. Android OS was identified as an essential input in the manufacturing of smart phones.186 The MOFCOM (now the SAMR) offered conditional clearance only after Google offered a substantial set of behavioural remedies to be in force for a period of five years following the clearance. The remedies included- (i) Google’s undertaking ‘not’ to introduce any changes to its open source policy; (ii) to refrain from imposing any discriminatory measures against smart mobile devices’ OEMs; (iii) to continue to respect the FRAND commitments and (iv) the appointment of a monitoring trustee to oversee compliance with the remedies.187 It has been argued elsewhere that Chinese’ limited experience in ex-post competition law enforcement wherein its enforcement agencies the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC) have very little experience as opposed to the MOFCOM(now the SAMR) that has a very rich experience of dealing with a large variety of mergers, could have prompted it to resort to an exhaustive set of behavioural remedies.188

186

Ibid. Ibid. 188 Yo Sop Choi and Sang Youn Youn, ‘The Enforcement of Merger Control in China: A Critical Analysis of Current Decisions by MOFCOM’ (2013) 44 International Review of Intellectual Property and Competition Law 948, 962. 187

Chapter 6

Theories of Harm: Conglomerate Effects and Types of Evidence

Abstract This chapter first discusses the conglomerate effects in ICT mergers, followed by a discussion on the significance of qualitative and quantitative evidence to identify the most suitable theory of harm.

6.1

Introduction

This chapter concentrates on the third theory of harm that is the ‘conglomerate effects’. To truly appreciate the evolution of the Commission’s approach in the assessment of conglomerate effects, its decisions may be categorised into two phases. The first phase existed prior to the issuance of the NHM Guidelines in the EU. The Commission’s prohibition decision in GE/Honeywell was highly criticised by competition law and economics scholars on both sides of the Atlantic. The second phase emerged following the EU NHM Guidelines entering force. In this current and ongoing phase, the Commission identifies that conglomerate mergers generally have a positive or neutral impact on competition; however, the special nature of the ICT sector implies that there may be occassional anti-competitive effects following conglomerate combinations. This chapter is organised as follows. Section 6.2 offers a brief overview of the Commission’s practice on treatment of conglomerate effects in light of the very controversial GE/Honeywell decision. Section 6.3 offers a brief overview of the nonhorizontal merger guidelines. Section 6.4 presents a detailed discussion on recent decisions in the high tech sector. Following conglomerate cases are discussed in Sect. 6.4—Cisco/Tandberg (Sect. 6.4.1), Microsoft/Skype (Sect. 6.4.2) and Intel/ McAfee (Sect. 6.4.3). Another recent and very important merger decision dealing with conglomerate effects is the Microsoft/LinkedIn merger. Considering that big data played a key role in the Commission’s assessment of the transaction, it is discussed in Chap. 17 dealing with big data mergers. It is noteworthy to add that in Microsoft/LinkedIn, the parties submitted substantial non-structural commitments to alleviate the Commission’s concerns resulting dues to the conglomerate effects of

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_6

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the transaction. It may therefore, be useful to read this chapter alongside the discussion on Microsoft/LinkedIn merger in Chap. 17 of the book. Section 6.5 discusses the significance and the role of different types of evidence—both qualitative as well as quantitative—in identifying a suitable theory of harm in complex merger cases.

6.2

Conglomerate Effects and GE/Honeywell

In the 1990s and early 2000, conglomerate effects revealed greatest divergence in the approach1 of the US and the EU competition authorities.2 GE/Honeywell was the high watermark reflecting the divide between the two competition authorities in their assessment of non-horizontal mergers.3 The proposed merger was prohibited by the European Commission. The merger received a conditional clearance from the US DOJ on submission of minor remedies that included divestiture of Honeywell’s military helicopter division and commitment to offer its maintenance services for certain Honeywell engines.4 Even with the latest developments on conglomerate effects—such as the 2008 EU NHM Guidelines and the Commission’s decision in Cisco/Tandberg, Microsoft/ Skype and Intel/McAfee, all of them dealing with the ICT sector and discussed as case studies in Sect. 6.4 below, the significance of the proposed GE/Honeywell merger cannot go unacknowledged. In GE/Honeywell, the Commission identified that GE was dominant in the market for large commercial jets and Honeywell enjoyed a leading position in the market for avionics and non-avionics aerospace components.5 The merger was expected to impede effective competition on account of conglomerate effects. First, post-merger, the merged entity was expected to engage in exclusionary practices by using mixed bundling as it sold ‘complementary goods to a single group of customers’.6 GE could further strengthen its dominance by using the strength of GE Capital Aviation William J Kolasky, ‘Conglomerate Mergers and Range Effects: It’s a Long Way from Chicago to Brussels’ (2002) 10 George Mason Law Review 533. 2 D Daniel Sokol and William Blumenthal, ‘Merger Control: key international norms and differences’ in Ariel Ezrachi (ed), Research Handbook on International Competition Law (Edward Elgar 2012) 331. 3 See Drauz Götz, ‘Unbundling GE/Honeywell: The Assessment of Conglomerate Mergers Under EC Competition Law’ (2001) 25(4) Fordham International Law Journal 885; Donna E Patterson and Carl Shapiro, ‘Transatlantic Divergence in GE/Honeywell: Causes and Lessons’ (Fall 2001) Antitrust 18. 4 US DOJ, ‘GE-Honeywell: The U.S. Decision’ (29 November 2001) accessed 06 January 2019. 5 Jeremy Grant and Damien Neven, ‘The Attempted Merger between GE & Honeywell: A Case Study of Transatlantic Conflict’, (2005) European Commission Website 4 accessed 06 January 2019. 6 Drauz Götz, Conglomerate and Vertical Mergers in light of the Tetra Laval Judgment, (2005) Competition Policy Newsletter 37–39. 1

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Services (GECAS) in the ‘market for leasing services’.7 Although GE’s market share in the market for aircraft leasing was only 10% at the time, GE could tip the market because of the complex nature of the market for aircrafts—where airlines increasingly leased (rather than purchased) aircrafts. This meant that GECAS could use its financial strength to buy only those aircrafts that used the GE/Honeywell engines and components. This second effect was referred to as ‘Archimedean Leveraging’ wherein firms with limited presence in the downstream market and a strong position in adjacent markets, could affect competitive outcomes in upstream markets because of the “embedded nature of the products”.8 This argument was the principal reason that led to the Commission’s prohibition decision. The US DOJ differed in its assessment of the merger and conditionally cleared the same following submission of divestiture and behavioural commitments. It identified market for aircrafts as ‘bidding markets’, where the consumers make large and high value purchases. The European Commission’s decision was largely criticised on account of its failure to first, incorporate in its analysis the bidding nature of the markets and second, consider the efficiencies resulting from the merger.9 The Commission was criticised for ‘wrongly’ identifying GE’s competence in the capital markets as an efficiency offence, rather than an efficiency defence as recognised by the US DOJ. The latest merger decisions, especially in the high technology sector, indicate that the differences between the two sides of the Atlantic are gradually waning away there being occasional commotion in the world of merger control. Today conglomerate mergers, as the following sections reveal, are generally viewed as benign. In the ICT sector, nonetheless, the assessment needs to be made on a case-by-case basis. The European Commission is particularly conscious of the significance of non-horizontal merger effects in the ICT sector where network effects lead to tipping of the market to a certain standard. This difference in the Commission’s assessment is particularly evident in Intel/McAfee and Microsoft/LinkedIn decisions. Both these mergers received unconditional approval from the US DOJ, although the European Commission cleared these mergers only after the parties submitted substantial remedies. Following sections first discuss the EU’s 2008 NHM Guidelines (Sect. 6.3), followed by a discussion on the Commission’s conglomerate decisions (Sect. 6.4).

Jeremy Grant and Damien Neven, ‘The Attempted Merger between GE & Honeywell: A Case Study of Transatlantic Conflict (2005) European Commission Website 5 accessed 06 January 2019. 8 Ibid., pp. 5–6. 9 Ibid., pp. 11–13, 24. 7

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6 Theories of Harm: Conglomerate Effects and Types of Evidence

The NHM Guidelines on the Assessment of Conglomerate Effects

According to the 2008 EU NHM Guidelines, a conglomerate merger may confer on the merging parties, the ability to leverage strong market position from one market to another through tying, bundling and other exclusionary practices.10 This can be the case wherein the merged entity has a strong market position in one of the markets which offers it the possibility to engage in exclusionary bundling or tying practices and disadvantage or foreclose its competitors.11 Bundles may be ‘pure’ bundles or ‘mixed’ bundles. Pure bundles are a bundle of product or services (hereafter, services) sold ‘jointly’ for a uniform price through a common contract. These products and/or services are not otherwise available on a ‘stand-alone’ basis. In case of ‘mixed’ bundling, services available as part of a bundle are sold on a discounted rate, whereas their stand-alone equivalent costs more.12 This means that in case of a mixed bundle, the consumer has the choice to buy an individual product and/or service, albeit at a higher cost. For foreclosure to be effective, the firm needs to have a significant degree of market power in at least one of the relevant markets.13 The European Commission conducts a three-step test to assess the likelihood of foreclosure—first, it assesses whether the merged firm will have the ‘ability’ to foreclose, second whether it will have an ‘economic incentive’ to foreclose and finally, whether foreclosure can lead to an impediment to effective competition and harm the consumers.14

6.4

Case Laws

Following section discusses conglomerate effects as identified in three recent key high-tech mergers—Cisco/Tandberg (Sect. 6.4.1), Microsoft/Skype (Sect. 6.4.2) and Intel/McAfee (Sect. 6.4.3).

10

Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2008] OJ C265/06, paras 92–93. 11 Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/1, at para 121. 12 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2008] OJ C265/06, para 96. 13 Ibid., at paras 23, 95 and 99. 14 Ibid., at para 94.

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Cisco/Tandberg

In Cisco/Tandberg, Cisco—a US-based Internet Protocol (IP)-based networking and communications solutions provider acquired Tandberg, a Norwegian and US-based video communications solutions provider.15 The relevant market was the market for video conferencing solutions (VCS). VCS are ‘interactive telecommunications technologies’ that enable users situated in different locations (technically referred to as endpoints) to interact real time using voice and data.16 Conglomerate effects were identified as Cisco also operated in markets neighbouring to VCS solutions such as unified communications, contact centres and data networking equipment.17 Under the Commission’s assessment, although Cisco was a market leader in network infrastructure, it did not enjoy significant market power in any of the neighbouring markets that could have led to possible foreclosure concerns.18 Even with a very narrowly defined market, the Commission identified that mixed bundling was a remote possibility19 that was difficult to implement as networking equipment and video communications solutions were not complementary, purchase decision to buy either of them was made at different times and any possible anti-competitive practice by Cisco could be offset through effective counter-strategies of its competitors.20 The merger did not offer Cisco control over any of the ‘must-have products in networking equipment market’.21 Any sort of technical and/or pure/commercial bundling was also ruled out, considering the VCS and networking infrastructure (PBX, routers and switches) had different product lifecycles and different replacement/update priorities amongst the customers.22 The customers pursued a ‘best of breed’ strategy while selecting the networking equipment and associated components from different vendors.23 Moreover, as Cisco was under an obligation to respect internet quality of standards set by the international SSOs, any strategic decision to ‘advantage network traffic involving its own endpoint’ was expected to negatively impact its networking equipment business as well.24 Overall, this meant that revenues gained through increased sales of endpoint solutions could not offset loss of revenues from decreased sales of high value network equipment business.

15

Cisco/Tandberg (Case COMP/M.5669) [2010] OJ C036/09, para 1–3. Ibid., at para 4. 17 Ibid., at para 125. 18 Ibid., at para 138. 19 Ibid. 20 Ibid., at para 141. 21 Ibid., at paras 138–39. 22 Ibid., at para 139. 23 Ibid., at paras 139–40. 24 Ibid., at para 144. 16

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Overall, the foregoing observations led the Commission to conclude that there were no concerns regarding conglomerate effects.25

6.4.2

Microsoft/Skype

In Microsoft/Skype, Microsoft active in the ‘design, development and supply of computer software and related services’ acquired Skype, a provider of software for internet-based communication.26 As the two offered ‘complementary or at least closely related’ products, the Commission assessed possible conglomerate effects27 based on Microsoft’s ability to foreclose, incentives to foreclose and the resulting harm to consumers.28 Considering Microsoft’s strong market power in some of the markets, it clearly had the ability to degrade the interoperability of Skype with competing operating systems and platforms to enhance user experience of Skype on MS Windows platforms; or alternatively engage in tying Skype with Windows or MS office or commercially bundle Skype with Windows or Office.29 However, degradation of Skype’s performance was expected to prompt customers to switch to competing consumer communication services.30 ‘Degradation’ of Skype’s inter-operability was counterintuitive to Skype’s $ 8.5 billion acquisition—as one of the major attractiveness of Skype was its large user base.31 As neither Skype nor Windows Messenger were a ‘must-have product’, degradation could prompt switching to competing providers such as Google and Apple who already actively pre-installed Google Talk and Facetime on Android and iOS, respectively.32 The Commission also took note of Steve Balmer, then CEO of Microsoft, publicly promising to support Skype on non-Microsoft platforms.33 In addition to the foregoing arguments being equally valid for tying, the tendency of consumers to multi-home and use various online platforms such as Facetime and Google Talk, that offered way richer user experience, overall dismissed a possibility of tying.34 Commercial bundling was also not viable as Skype was at the time freely downloadable and any subsequent decision to charge for Skype would have

25

Ibid., at para 145. Microsoft/Skype (Case COMP/M.6281) [2011] OJ C341/02, paras 1–5. 27 Ibid., at paras 133. 28 Ibid., at paras 142. 29 Ibid., at paras 143. 30 Ibid., at paras 144–45. 31 Ibid., at paras 146. 32 Ibid., at paras 148. 33 Ibid., at paras 149. 34 Ibid., at paras 151–55. 26

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prompted users to switch to competing providers such as Google, Facebook, and Viber.35 Thus, neither of the three foreclosure strategies—degradation of interoperability, tying or commercial bundling was found viable.36 Overall, conglomerate effects were expected ‘not’ to adversely impact competition and consumers as Skype was already a closed system, meaning that users of Skype could not communicate with other service apps as Viber or Facetime; second, although Skype came pre-installed, very few users actuallty used the pre-installed version; third, sale of smartphones and tablets was expected to soon overtake that of personal computers and desktops, the market segment in which Microsoft Windows enjoyed a position of dominance; fourth, new communication apps such as Google Talk could be used online without being downloaded first and finally, the presence of alternative communication apps meant that any strategy to charge would immediately prompt customers to engage in switching.37 Thus, the Commission dismissed any possible conglomerate effects.38 The Commission also dismissed any possible foreclosure effects in the market for enterprise communications services, as Microsoft neither had the ability, nor the incentive to engage in such a strategy considering that Lync was a relatively small player that faced fierce competition from market leaders such as Cisco and IBM in the fast growing enterprise communications services markets and Skype was not a ‘must have’ product in the customer support services, such as call centres.39

6.4.3

Intel/McAfee

The US FTC and the European Commission closely co-operated during the investigation of the proposed Intel/McAfee merger and reached very different conclusions.40 Whereas the FTC offered unconditional clearance to the merger, the Commission cleared the merger following parties’ interoperability commitments to alleviate the conglomerate concerns.41

35

Ibid., at paras 156–57. Ibid., at para 158. 37 Ibid., at paras 159–169. 38 Ibid., at para 170. 39 Ibid., at paras 203–22. 40 United States, ‘Discussion on International Co-operation operation’ (June 2012) Working Paper No. 3 on Co-operation and Enforcement, DAF/COMP/WP3/WD (2012) 24 accessed 06 January 2019. 41 Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01. 36

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Intel was a leading producer of central processing units (CPUs), chipsets and digital computing technologies.42 McAfee offered security solutions for laptops, computers and other consumer electronic devices, with special focus on protecting devices that were connected to the Internet.43 Intel and McAfee operated in separate markets, their products were complementary and closely related and the two had no horizontal or vertical overlaps.44 From a technical perspective, the two products were identified to operate in ‘closely related markets’45, considering that for a security software to function effectively, its vendors must have current, accurate and complete information about the CPU and chipsets.46 Second, certain security features such as file scanning for detecting viruses are more effective and quicker when performed at the level of the CPU.47 Commercially too, the products were identified to operate in closely related markets as the same set of intermediaries—the Original Equipment Manufacturers (OEMs) or Value Added Resellers (VARs) in the enterprise market were the relevant decision makers that made purchase decisions for the two product categories—the CPUs, as well as the security solutions.48 The European Commission identified and assessed the following conglomerate effects: (i) degradation of interoperability between Intel’s hardware and security solutions and those of its competitors; (ii) technical bundling/tying; (iii) commercial bundling and (iv) the combination of commercial bundling along with technical tying or degradation of interoperability.49

6.4.3.1

Foreclosure Effects and the Degradation of Interoperability

‘Degradation’ was defined as ‘positive or negative discrimination’ (1) to the detriment of Security Software Vendors (SSVs) competing with McAfee in achieving interoperability with Intel CPUs or chipsets or (2) to the detriment of CPUs or chipset producers competing with Intel to be interoperable with McAfee. The merged parties could engage in degradation through varied measures ranging from non-availability of information to incomplete and delayed disclosure of information.50 Both McAfee and Intel had the technical ability to exercise the strategy of denying interoperability and ensure degradation as was evident from their internal

42

Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01, para 2. Ibid., at para 3. 44 Ibid., at para 6. 45 Ibid., at para 20. 46 Ibid., at para 18. 47 Ibid., at para 19. 48 Ibid., at paras 21–22. 49 Ibid., at para 124. 50 Ibid., at para 128. 43

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documents.51 They also had incentives to engage in such a strategy for the following reasons: first, such a measure was expected ‘not’ to adversely impact their profitability, as was clear from the public statement of Intel’s CEO52; second, a recent FTC settlement required Intel to disclose that Intel computer compilers discriminated between its CPUs with those of others53; third, reducing interoperability could be advantageous for Intel/McAfee in the endpoint security markets and finally, Intel’s hardware enjoyed a ‘must-stock status’.54 Diminished interoperability was expected to further increase barriers to market entry ‘by locking out other CPU manufacturers’ and this was overall expected to have an adverse impact on innovation and choice for consumers in the market for endpoint security and CPUs/chipsets markets.55

6.4.3.2

Foreclosure and Technical Tying

Under this conglomerate theory of harm, the Commission assessed whether the ‘embedding of security solutions in Intel’s CPU and chipsets platforms’ could prevent other security solutions from functioning effectively.56 Based on the market investigation, internal documents and public statements of Intel’s top executives, tying seemed technically viable.57 Intel had incentives to engage in such a strategy as it had profitably engaged in similar tying and bundling strategies in the past.58 Although such a strategy offered some efficiency advantages such as the elimination of double marginalisation, it was expected to result in anti-competitive effects such as a reduction of competition in the complementary product market or reduce innovation in the market for CPUs.59 Considering the ‘must-stock’ status of Intel and the limited ability of ex-post enforcement of antitrust rules on earlier occasions to reverse the anti-competitive effects, the OEMs would not have been able to play any meaningful rule in preventing this adverse impact on competition.60 Overall,

51

Ibid., at paras 139–148. Ibid. 53 Intel Corporation v The Federal Trade Commission, Docket n
9341, File n
061 0247(2009). 54 Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01, at paras 149–62. 55 Ibid., at paras 169–74. 56 Ibid., at paras 175–76. 57 Ibid., at paras 198. See for instance, Intel’s then CEO Paul Otellini noted that bringing together the assets of McAfee and Intel would ensure that security if hardware enabled and that this differentiation would offer the most effective form of security and a value differentiator from the Intel-based platforms. See Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01, at para 197. 58 For instance Intel had earlier combined its CPU with wireless technologies that were earlier implemented in separate semiconductor products. Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01, paras 203–204. 59 Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01, para 205. 60 Ibid., at paras 206–11. 52

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technical tying was anticipated to result in conglomerate effects leading to foreclosure of McAfee’s competitors in the market for endpoint security solutions and possibly also strengthen the position of Intel in the chipset and the CPU markets.61

6.4.3.3

Foreclosure and Commercial Bundling

The third theory of harm under the conglomerate effects was Intel/McAfee’s ability to engage in pure and mixed commercial bundling.62 Intel had the ability to engage in bundling as it enjoyed substantial bargaining power over the OEMs. The internal documents substantiated such a theory, as McAfee offered a certain ‘synergy potential’ to engage in bundling.63 To evaluate Intel’s incentives to bundle, the Commission employed the critical loss64 analysis65 and found that the ‘risk of losing CPU sales to OEMs’ could have a disciplining effect and limit Intel’s incentives to engage in commercial bundling.66 Overall, considering the disciplining effect of ‘risk of losing CPU sales’ and possible ex-post antitrust enforcement limited the harm from commercial bundling of Intel’s hardware solutions with McAfee’s security software solutions.67 However, the possibility of degradation of interoperability of Intel’s products with McAfee’s competitors68 ‘and/or’ foreclosure from technical tying of the Intel and McAfee’s products69 along with this possibility of commercial bundling was ‘together’ expected to create significant impediment to effective competition.70

61

Ibid., at paras 219–21. Ibid., at paras 222–23. Pure bundling implied that Intel’s CPUs and McAfee’s endpoint security solutions were sold ‘exclusively together’. Mixed bundling meant that either of the two products was offered at a discount when customers purchased the two together from the merged entity. 63 Ibid., at paras 237–38. 64 Critical loss (CLxy) may be defined as the lost profit from reduced sales of product x that would be exactly offset by the increase in profits from increased sales of product. 65 Both the notifying parties and the Commission undertook a Critical Loss Analysis. The Commission’s CLA found the critical loss from lost sales to OEM’s to be higher than the one submitted by the notifying parties. The differences can be attributed from the difference in the assumptions made. Although both analyses indicated that the loss would have a disciplining effect on incentives to engage in commercial bundling. See, Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01, paras 239–76. 66 Ibid., at para 276. 67 Ibid., at paras 289–90. 68 See supra Sect. 6.2.3.1. 69 See supra Sect. 6.2.3.2. 70 Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01, para 291. 62

6.5 Quantitative and Qualitative Analysis

6.4.3.4

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Foreclosure Strategy

In addition to the above foreclosure strategies, the Commission identified that there were various permutations and combinations of foreclosure strategies that along with the commercial bundling strategy71 could potentially coerce the OEMs to accept ‘commercial’ bundles.72 This could in turn foreclose McAfee’s competitors from the endpoint security solutions market and/or Intel’s competitors in the market for CPUs and chipsets.73 Correct identification of the relevant theory of harm in complex merger cases has been possible by use of both qualitative, as well as quantitative techniques. To appreciate how, the following section elaborates on the two techniques, and seeks to identify whether one is more relevant than the other or the two together are equally relevant to identify the most befitting theory of harm.

6.5

Quantitative and Qualitative Analysis

‘Complex merger cases’ such as those involving differentiated products (as in the case of Telefónica Deutschland/E-Plus74 telecoms merger) or those with heavy sunk costs but minimal or even zero marginal costs (as in the enterprise software solutions in Oracle/PeopleSoft and Oracle/Sun Microsystems) and complex parameters of differentiation (as in case of books in Lagardère/Natexis/VUP) present ‘significant [ ] challenges’ in merger review [on account of] peculiar economic characteristics of these markets.75 In T-Mobile/Orange, the Commission undertook ‘switching data analysis’ to analyse the closeness of competition between the merging firms76 and assess whether either of the merging firms was a maverick.77 In TomTom/Tele Atlas and Nokia/Navteq the Commission used a ‘nested logit model’, a ‘discrete choice’ demand system to estimate the downstream elasticities and calculate the amount of sales the vertically integrated merged entity would have

71 Note that commercial bundling strategy (see Sect. 6.2.3.3) was in isolation not expected to cause significant impediment to effective competition. 72 Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/01, para 293. 73 Ibid., at paras 294–96. 74 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 532. 75 Commission, ‘Roundtable on Managing Complex Merger Cases: How Agencies Deal with Complex Data Analysis, Surveys and Market Studies, and Obtain the Necessary Expertise for Complex Substantive Issues’ (2007) Working Paper No. 3 on Co-operation and Enforcement DAF/COMP/WP3/WD(2007)90, para 1 accessed 06 January 2019. 76 T-Mobile/Orange (Case COMP/ M.5650) [2010] OJ C108/4, paras 55–58. 77 Ibid., at paras 59–63.

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acquired, were it to engage in an input foreclosure strategy.78 Critical price increase as shown by econometric studies were analysed with reference to the specific features of the market.79 In Intel/McAfee too, the Commission performed a ‘critical loss analysis’ to evaluate the incentives of the combined entity to engage in pure and/or mixed bundling.80 Econometric tools have been extremely helpful in the sense that they have alleviated the need to define relevant markets in mergers involving differentiated products.81 However, the approach presents peculiar challenges as the results are determined by the quality of data and the kind of analysis undertaken. In case sufficient data is not available to estimate the relevant elasticities of demand82— which is a rather frequent occurrence—the gaps in data need to be filled in with assumptions.83 Moreover, as these tools are based on a particular model of competition, it can lead to particularly misleading results, especially when a given model does not properly depict the conditions of competition in the industry.84 In the Cisco/ Tandberg merger for instance, the European Commission found the econometric model developed by Cisco’s economic advisors dubitable as it lacked sufficient ‘explanatory power’ and the results were not robust to changes in its specification and failed to offer a ‘convincing model of determinants of Cisco’s discounts’.85 The Commission instead chose to undertake its own analysis of the opportunity datasets provided by Cisco and Tandberg. The analysis showed that the parties were each other’s ‘close competitors’ in the dedicated-room solutions.86 Thus, based on the econometric model used and specification employed, the same model produced entirely different results. The Commission relied on the econometric analysis conducted by its team of economists, the results of which were greatly substantiated by the results of market investigation. The two pieces of evidence—qualitative and

Raphaël De Coninck, ‘Economic Analysis in Vertical Mergers, Opinions and Comments’ (2008) 3 Competition Policy International, 50–51 accessed 06 January 2019. 79 Ibid., p. 51. 80 Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/1, paras 239–76. 81 Oliver Budzinski & Isabel Ruhmer, ‘Merger Simulation in Competition Policy: A Survey’ (2010) 6 Journal of Competition Law and Economics 277. 82 Gregory J Werden, ‘Why (Ever) Define Markets? An Answer to Prof Kaplow’ [13 February 2012] accessed 06 January 2019. 83 Roy J Epstein & Daniel L Rubinfeld, ‘Merger Simulation: A Simplified Approach with New Applications’ (2002) 69 Antitrust Law Journal 883, 885–87. 84 Gregory J Werden, Luke M. Froeb & David T. Scheffman, ‘A Daubert Discipline for Merger Simulation’ (Summer 2004) Antitrust 89. 85 Cisco/Tandberg (Case COMP/M 5669) [2010] OJ C036/09, paras 49–50. 86 Ibid., at para 51. 78

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quantitative—together indicated that Cisco and Tandberg were one another’s close competitors in the market for dedicated-room solutions.87 Another issue on quantitative approach concerns the determination of unilateral effects. It is not always possible to ‘satisfactorily predict’ the unilateral effects of mergers in differentiated products industry by simply employing modern tools such as merger simulation without first clearly defining the relevant market.88 Obtaining ‘confidential data’ from different parties may be another related challenge.89 However, because of the special position of the competition agency and its investigative powers, it can formally raise a request for such data from different parties. Moreover, the parties have a compelling interest to present a data set and an analysis that strengthens their case.90 This is equally true for the merging parties, as well as its competitors in the relevant market. However, to free the data set and empirical analysis from any selection bias, the authority ‘needs’ to undertake an independent assessment.91 In Liberty Global/Corelio/W&W/De Vijver Media, however, the Commission failed to take this into account. For an estimate of the actual switching rate, the Commission completely relied on a confidential survey commissioned by Belgacom.92 This merits criticism, considering that it is well known, that competitors have their own reasons to misrepresent facts and present data and/or analysis that strengthens their case. The Commission could have in the alternate taken an average of the two estimates—one by Belgacom and the other by the Notifying Parties to approximate the actual switching rate. The Commission has done this in telecom mergers on several occasions in the past and has reached a far better approximate figure. In the H3G Ireland/Telefónica Ireland merger for instance, to find the critical number of customers required by an MVNO to consider its upgrade into an MNO as a profitable strategy, the Commission averaged the numbers offered by the Notifying Parties and its competitors.93

87

Ibid., at paras 48, 51. Please note that whereas the market studies indicated that the parties were one another’s closest competitors (para 48), the econometric analysis indicated that the parties were close competitors in the dedicated room solutions market (para 51). Overall, the Commission seems to have accepted the position that under the economic theory, unilateral effects may result when the parties are close competitors (meaning they need not be the closest competitors). 88 Gregory J Werden, ‘Why (Ever) Define Markets? An Answer to Prof Kaplow’ [13 February 2012] accessed 06 January 2019. 89 Commission, ‘Roundtable on Managing Complex Merger Cases: How Agencies Deal with Complex Data Analysis, Surveys and Market Studies, and Obtain the Necessary Expertise for Complex Substantive Issues’ (2007) Working Paper No. 3 on Co-operation and Enforcement DAF/COMP/WP3/WD(2007)90, para 21 accessed 06 January 2019. 90 Ibid., at paras 19–21. 91 Ibid. 92 Liberty Global/Corelio/ W&W/ De Vijver Media, Case M. 7194, at para 379, 517. 93 Kalpana Tyagi, ‘Four-to-Three Telecoms Mergers: Substantial Issues in EU Merger Control in the Mobile Telecommunications Sector’, International Review of Intellectual Property and Competition Law 49(2) (2018), pp 185–220, available at accessed 06 January 2019.

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In the BT/EE telecommunications merger,94 the UK CMA summarised the challenge thus: [A]n assessment of the incentive of the merged entity may involve qualitative and quantitative evidence. Evidence does not have specific probity according to its characteristics so that, for example quantitative evidence is not necessarily better evidence than qualitative evidence. A quantitative approach may involve ‘vertical arithmetic’, involving a calculation of the likely margin foregone through sales lost due to foreclosure and the likely margin gained by the merged entity through sales acquired elsewhere in the value chain. [..] A qualitative approach may in particular be important where there is considerable uncertainty over the quantitative assumptions made [. . .].95

Market surveys can play an important role in verifying the authenticity of the submissions made by the parties. It can also be very helpful in assessing the boundaries of the relevant market, the closeness of competition particularly in unilateral effects cases and the barriers to market entry.96 To be useful, the competition authority must identify the ‘right’ set of customers. This refers to the marginal customers97 who will respond to an SSNIP. The US courts in SunGard Data Sys rejected the customer testimony drawn from a small sample as it found it ‘unreliable and insufficient’ to draw conclusions about a large heterogeneous market.98 In Oracle/PeopleSoft, the district court of North California held that the customer testimony was ‘unhelpful’, as ‘unsubstantiated customer apprehension’ was not supported by the ‘hard evidence’ on record.99 Consumers may exhibit behavioural limitations and ‘bounded rationality’ as sometimes even ‘sophisticated buyers’ do not undertake a rational analysis while evaluating alternative options and making purchase decisions. The goal of competition law is consumer welfare and consumers with their predictive testimony are essentially presenting their perception of the situation.100 Testimony from such a

94

Competition & Markets Authority, BT Group plc and EE Limited: A report on the anticipated acquisition by BT Group plc of EE Limited (15 January 2016). 95 Ibid., at paragraph 258 stating that ‘quantitative evidence is not higher than qualitative evidence’. 96 Commission, ‘Roundtable on Managing Complex Merger Cases: How Agencies Deal with Complex Data Analysis, Surveys and Market Studies, and Obtain the Necessary Expertise for Complex Substantive Issues’ (2007) Working Paper No. 3 on Co-operation and Enforcement DAF/COMP/WP3/WD(2007)90, para 31 accessed 06 January 2019. 97 Marginal customers must be distinguished from the infra-marginal customers. The marginal customer will quickly respond to an SSNIP, determined based on the elasticity of demand and availability of substitutes. Infra-marginal consumers are the core consumers of a product and have strong preferences for the given product. Choice of infra-marginal customers can lead to narrowly defined markets. See Robert Pitofsky, ‘New Definitions of the Relevant Market and the Assault on Antitrust’ (1990) 90 Columbia Law Review 1805, 1806. 98 United States v. SunGard Data Sys Inc., 172 F. Supp.2d 182-83 (D.D.C. 2001). 99 United States v. Oracle Corp., 331 F. Supp. 2d 1131 (N.D. Cal. 2004). 100 Ibid., at 1098.

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‘rationally ignorant customer’101 can nonetheless be insightful, as the goal of competition law is to protect the consumer. Even with their ‘bounded rationality’, consumers share the information that in ‘their ‘opinion’, best protects their interests. In fact, customer complaints have for long been recognised by the FTC as a credible source of information in its merger investigations.102 Likewise, the responses of competitors tend to suffer from a possible bias in case of vertical mergers, wherein a clearance decision for an efficiency-reducing merger may benefit the competitors and vice-versa may also be equally true. To minimise the possibility of these defects, the survey questionnaire should be well-designed, it must be neutral and the sample population must be carefully selected.103 The results should then be cautiously interpreted by considering the totality of evidence available. In Telefónica/E-Plus, the Commission observed that for an assessment of the competitive impact of the concentration, the assessment should be supported by a ‘sufficiently cogent and consistent body of evidence’ that is ‘factually accurate, reliable and consistent’.104 Collectively considering the results of market investigation, the internal documents105 along with diversion ratios, the Commission reached the conclusion that the parties were each other’s close competitors.106 Overall, it emerges that quantitative evidence or empirical exercise in isolation presents an incomplete picture. Quantitative evidence, particularly in case of complex merger cases, is the equivalent of high-quality bricks that need a good quality cement to be put together effectively in order to make a strong foundation for the building. Qualitative analysis offers that high quality cement to make the structure resilient. An analysis based on ‘various sources of evidence’ such as market studies, customer interviews, independent industry studies and (if required) an econometric study can effectively enhance ‘the robustness of a decision’.107

101 Ken Heyer, ‘Predicting the Competitive Effects of Mergers by Listening to Customers’ (2007) 74 Antitrust Law Journal 87. 102 David Scheffman, Malcolm Coate and Louis Silvia, ‘Twenty Years of Merger Guidelines Enforcement at the FTC: An Economic Perspective’ (2003) 71 Antitrust Law Journal 277, 304. 103 Commission, ‘Roundtable on Managing Complex Merger Cases: How Agencies Deal with Complex Data Analysis, Surveys and Market Studies, and Obtain the Necessary Expertise for Complex Substantive Issues’ (2007) Working Paper No. 3 on Co-operation and Enforcement DAF/COMP/WP3/WD(2007)90, para 33 accessed 06 January 2019. 104 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 124. 105 While assessing the internal documents, the Commission takes note of the specific circumstances prevalent during their preparation and use, as also the general market situation prevalent during their assessment. See for instance, Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 125. 106 Ibid., at para 320. 107 Commission, ‘Roundtable on Managing Complex Merger Cases: How Agencies Deal with Complex Data Analysis, Surveys and Market Studies, and Obtain the Necessary Expertise for Complex Substantive Issues’ (2007) Working Paper No. 3 on Co-operation and Enforcement DAF/ COMP/WP3/WD(2007)90, para 20 accessed 06 January 2019.

Chapter 7

Merger Control in the EU and the UK

Abstract This chapter presents an overview of merger control procedure in the European Union. The UK merger control to the extent relevant for the current work is also discussed. Section 7.1 presents an overview of the evolution of the merger control in the Union from the ECSC Treaty to the current merger control regime. Considering the relationship between competition and regulation in the ICT sector, the chapter also offers instances of cooperation between the European Commission, the National Regulatory and Competition Authorities. The co-operation is particularly relevant for the telecommunications and the media, considering that these sectors were historically subject to sector-specific regulation and the relevant geographic markets to this day remain divided on a national basis.

7.1

Historical Backdrop: From the ECSC to the Current Approach

This section is divided into two parts. The first part (Sect. 7.1.1) briefly discusses the historical developments from the ECSC Treaty to the 1989 merger regulation. Section 7.1.2 discusses the gaps in the 1989 merger regulation that were subsequently resolved by the 2004 Merger Regulation, currently in force.

7.1.1

From the ECSC Treaty to the 1989 Merger Regulation

The European Coal and Steel Community (ECSC) Treaty emphasised the need for development through ‘peaceful cooperation’ and ‘competition rules’.1 Although the

1 Ernst-Joachim Mestmäcker, ‘Towards a Concept of a Workable European Competition Law Revisiting the Formative Period’, in Kiran Klaus Patel and Heiki Schweitzer (eds), The Historical Foundation of European Competition Law (Oxford University Press 2013) 191.

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_7

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ECSC Treaty had provisions relating to merger control, its applicability was limited only to coal and steel. As stated in its Article 2,2 the Treaty of Rome promoted competition over regulation, wherein it emphasised on creating conditions that would on their own facilitate the most ‘rational distribution of production’, maximise efficiencies and vitalise the economy of the Member States. The Treaty led to the formation of the European Economic Community (EEC), which later became the European Community (EC) and eventually evolved into the present day European Union (EU).3 The Treaty contained provisions to prohibit cartels although no equivalent provisions for merger control were present; though it did identify a need for merger control and foresaw that prohibition of cartels would lead to accelerated merger activity amongst the firms. As there was no separate provision for merger control, two working groups of national experts were formed to evaluate the use of Article 85 (renumbered Article 101 under the Lisbon Treaty) or Article 86 (renumbered Article 102 under the Lisbon Treaty) to prevent anti-competitive concentrations.4 On the failure of both the groups to reach any conclusion and consensus, the Commission eventually adopted an approach that was completely different from the one suggested by the two groups—it sought to apply Article 86 to concentrations that ‘eliminated competition or strengthened a dominant position in a substantial part of the common market’.5 The Commission subsequently used the provisions under Article 86 to prohibit the merger in Continental Can, on the ground that it led to the strengthening of the dominant position of the acquirer. On appeal, the Court of Justice upheld the application of Article 86 (now Article 102 TFEU) to prohibit anti-competitive concentrations.6

Article 2 “The European Coal and Steel Community shall have as its task to contribute, in harmony with the general economy of the Member States and through the establishment of a common market as provided in Article 4, to economic expansion, growth of employment and a rising standard of living in the Member States. The Community shall progressively bring about conditions which will of themselves ensure the most rational distribution of production at the highest possible level of productivity, while safeguarding continuity of employment and taking care not to provoke fundamental and persistent disturbances in the economies of Member States.” 3 The concept of the European Economic Community was first presented at the 1955 Messina Conference that eventually charge Paul-Henry Spaak with the task of preparing a report on the benefits of having a common market. For an excellent and detailed overview of the evolution of the European Union from six Member States that first signed the Treaty of Rome to the present day European Union comprising of 28 Member States, see Robert Schütze, European Union Law, Cambridge University Press (Cambridge) 3–42. 4 Ernst-Joachim Mestmäcker, ‘Towards a Concept of a Workable European Competition Law Revisiting the Formative Period’, in Kiran Klaus Patel and Heiki Schweitzer (eds), The Historical Foundation of European Competition Law (Oxford University Press 2013) 201. See also the references therein. 5 Ibid., pp. 201–02. 6 “With a view to safeguarding the principles and attaining the objectives set out in articles 2 and 3 of the treaty, articles 85 and 90 have laid down general rules applicable to undertakings. Article 85 concerns agreements between undertakings, decisions of associations of undertakings and concerted practices, while article 86 concerns unilateral activity of one or more undertakings. 2

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The EU finally had its first merger control regime in 1990, when the first Council regulation on the control of concentrations (hereinafter, 1989 Merger Regulation) came in to force on 21 September 1990.7 The 1989 Merger Regulation offered for the first time the ‘one-stop shop principle’,8 which meant that all the proposed mergers that crossed a certain threshold could now be notified directly to the Commission. With the 1989 Merger Regulation, the Commission sought to promote the objective of common market, encourage dynamic conditions and raise the standards of living in the community and create an effective merger control regime that would prevent mergers that may significantly impede effective competition in the common market.9 The first merger prohibition because of single firm dominance under the 1989 Council Regulation was the Aerospatiale case, wherein the Commission analysed whether the resulting adverse effects were temporary or permanent

Articles 85 and 86 seek to achieve the same aim on different levels, viz, the maintenance of effective competition within the common market. The restraint of competition which is prohibited if it is the result of behaviour falling under article 85, cannot become permissible by the fact that such behaviour succeeds under the influence of a dominant undertaking and results in the merger of the undertakings concerned. In the absence of explicit provisions one cannot assume that the treaty, which prohibits in article 85 certain decisions of ordinary associations of undertakings restricting competition without eliminating it, permits in article 86 that undertakings, after merging into an organic unity, should reach such a dominant position that any serious chance of competition is practically rendered impossible. Such a diverse legal treatment would make a breach in the entire competition law which could jeopardize the proper functioning of the common market. If, in order to avoid the prohibitions in article 85, it sufficed to establish such close connections between the undertakings that they escaped the prohibition of article 85 without coming within the scope of that of article 86, then, in contradiction to the basic principles of the common market, the partitioning of a substantial part of this market would be allowed. The endeavour of the authors of the treaty to maintain in the market real or potential competition even in cases in which restraints on competition are permitted, was explicitly laid down in article 85 (3) (b) of the treaty. Article 86 does not contain the same explicit provisions, but this can be explained by the fact that the system fixed there for dominant positions, unlike article 85 (3), does not recognize any exemption from the prohibition. With such a system the obligation to observe the basic objectives of the treaty, in particular that of article 3 (f), results from the obligatory force of these objectives. In any case articles 85 and 86 cannot be interpreted in such a way that they contradict each other, because they serve to achieve the same aim.” (Emphasis added) Case 6-72 Europemballage Corporation and Continental Can Company v Commission [1973] ECR 215, para 25. In the appeal, the Court of Justice agreed with the application of Article 86 to mergers; however, the Commission decision was annulled on grounds that it had narrowly defined the relevant market. 7 Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings [1990] OJ L395/01. 8 Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings [1990] OJ L395/1, Article 1, 2; Edurne Navarro Varona, Andrés Font Galarza, Jaime Folguera Crespo and Juan Briones Alonso, Merger Control in the EU (2nd edn, Oxford University Press 2005) 3–5. 9 Nicolas Levy, ‘EU Merger Control: From Birth to Adolescence’ (2003) 26(2) World Competition 195, 196–99.

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in nature. The Commission was of the opinion that a transaction should be prohibited only in case of permanent adverse effects on competition.10 From the Treaty of Rome to the 1989 Merger Regulation, the first ever Council regulation on the control of mergers, the unifying thread was the objective of creating a competitive market dynamics that facilitated the long cherished goal of promoting a common market.11

7.1.2

From the 1989 Merger Regulation to the 2004 Merger Regulation

2002 was annus horribilis for the Commission,12 as the General Court annulled three Commission decisions in quick succession because of lack of clear and cogent reasoning and insufficient economic evidence. The Commission’s defeat in Airtours,13 Schneider Electric14 and Tetra Laval15 led to an accelerated move towards the reform of the then merger control regime to a more reformed one that was expected to employ a ‘more economic approach’.16 In Airtours, the Commission prohibited the merger between Airtours and First Choice, as it reduced the number of

10 Aerospatiale-Alenia/DE Havilland (Case No IV/M 053) Commission Decision 1991/619/EEC [1991] OJ L 334/42. 11 The EEC Treaty aspired to create a ‘common market’ comprising of all the economic sectors, excluding those covered by the ECSC Treaty or the Euratom Treaty. See Alan Dashwood, Michael Dougan, Barry Rodger, Eleanor Spaventa and Derrick Wyatt, Wyatt and Dashwood’s European Union Law (6th edn, Hart Publishing 2011) 8. ‘Internal Market’ or ‘European Single Market’ are the other, and more appropriate expressions to communicate the single market that promises the free movement of the four factors of production that is goods, capital, services and labour. The 1985 White Paper by the Delors Commission produced a landmark document called ‘Completing the Internal Market’ that introduced the concept of ‘internal market’ that was expected to be achieved by the Single European Act by the year 1992. The Reform Treaty that was signed in December 2007 in Lisbon and entered force in December 2009 and re-baptised as the Lisbon Treaty retains the expression ‘internal market’ (Article 3(2) TEU). The meaning and the significance of these expressions are beyond the scope of the present work. Interested readers may refer to Robert Schütze, European Union Law, Cambridge University Press (Cambridge) 3–42; Lorna Woods, Philippa Watson and Marios Costa, Steiner & Woods EU Law (13th edn, Oxford University Press 2017) 3–16; Koen Lenaerts, Piet Van Nuffel, Robert Bray and Nathan Cambien, European Union Law (3rd edn, Sweet & Maxwell 2011) 195–285. 12 Paul Craig, EU Administrative Law (New York: Oxford University Press 2006) 452. 13 Case T-342/99, Airtours plc v Commission [2002] ECR II-2585. 14 Case T-77/02, Schneider Electric SA v Commission [2002] ECR II-4201. 15 Case T-5/02, Tetra Laval BV v Commission [2002] ECR II-4381; C-13/03 P Commission v Tetra Laval BV [2005] ECR I-1113. 16 Mario Monti, ‘Convergence in EU-US antitrust policy regarding mergers and acquisitions: an EU perspective’ (UCLA Law First Annual Institute on US and EU Antitrust Aspects of Mergers and Acquisitions, 28 February 2004) accessed 06 January 2019.

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tour operators from 4-to-3 in a highly concentrated market in the UK. The Commission’s theory of harm was that the reduction of tour operators from 4-to-3 would lead to a position of collective dominance, particularly on the ‘capacity-setting decisions’. The Court of First Instance (CFI) (now the General Court (GC)) rejected the Commission’s decision as the latter failed to offer sufficient evidence that the postmerger market met the conditions for collective dominance—that is transparency, mechanism to monitor deviation, presence of retaliatory mechanisms and following deviation, consumers and competitors’ reaction in the market.17 The CFI (now the GC) overturned the Commission’s decision in Schneider Electric because of noteworthy substantial and procedural lapses in the Commission’s assessment of the transaction, particularly substantial differences in the Commission’s objections in the Statement of Objections and its arguments in the final decision. The Commission’s procedural errors, in the opinion of the court, resulted in a denial to Schneider of its right to defend during the Commission proceedings.18 In Tetra Laval, the CFI (now the GC) overturned the Commission’s conglomerate decision to prohibit the merger between Tetra, at the time the world’s leading company for cartoon packaging and dominant in the market for aseptic packaging and Sidel, a leading producer and supplier of ‘stretch blow moulding’ (SBM) machines, used in the manufacture of polyethylene terephthalate (PET) packaging material. The CFI (now the GC) annulled the Commission’s decision as the Commission had committed manifest errors in its assessment of the leveraging effects and strengthening of Tetra’s dominant position in the market for cartoons.19 From a substantial perspective, two important aspects of the 1989 Merger Regulation, that also subsequently led to its reform were—first, the dominance test (Article 2)20 and second, the form-based approach to identify harm (Recital 7).21 Under the old test, ‘dominance’ was a necessary requirement to identify impediment to competition.22 In this respect, the 2004 Merger Regulation has been identified as ‘effectsbased’ as it ‘closes the gap’ by ascertaining the impact of the transaction on the change in “prices, outputs and other important features of an oligopolistic market – including efficiencies”.23 The discussion in Chaps. 4 and 5 about the ARM/Giesecke

17

Case T-342/99, Airtours plc v Commission [2002] ECR II-2585, paras 109–20, 172–81, 270–77. Case T-77/02, Schneider Electric SA v Commission [2002] ECR II-4201, paras 78–83. 19 Case T-5/02, Tetra Laval BV v Commission [2002] ECR II-4381. Paras 148–155, 210–220, 261–269. 20 Article 2(3) A concentration which creates or strengthens a dominant position as a result of which effective competition would be significantly impeded in the common market or in a substantial part of it shall be declared incompatible with the common market. 21 “Whereas a new legal instrument should therefore be created in the form of a Regulation to permit effective control of all concentrations from the point of view of their effect on the structure of competition in the Community and to be the only instrument applicable to such concentrations.” 22 Lars-Hendrik Röller and Miguel de la Mano, The Impact of the New Substantive Test in European Merger Control, European Commission (22 January 2006), 3–7. 23 Lars-Hendrik Röller and Miguel de la Mano, The Impact of the New Substantive Test in European Merger Control, European Commission (22 January 2006), 8. 18

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& Devrient/Gemalto JV24 in particular is very useful to underscore the application of the new ‘effects-based’ approach. Despite over +95% market shares in the TEE solutions, the Commission’s concerns related to the vertical effects of the transaction. Under the dominance test of the erstwhile Regulation that is the old-form based approach, the joint venture would either have been subject to a prohibition decision or a conditional clearance with substantial divestiture remedies to alleviate the horizontal concerns.25 Likewise, in the Microsoft/Skype26 merger, the European Commission and on appeal, the General Court held that in innovation-led sectors, such as the market for communication apps, market shares were not the best proxy to evaluate market power. The 2004 Merger Regulation offers the flexibility to consider the effect of the merger on the incentives to innovate. Although not explicitly mentioned by the Commission, but as a matter of fact, by identifying large market shares as emphermal and instead focus on the vertical effects of the transaction, the approach in ARM/Giesecke & Devrient/Gemalto JV can well be considered as ‘effects-based’. The global competition law practitioners too played an instrumental role in the drive towards the ‘more economic approach’—the role of the US lawyers representing international firms being particularly noteworthy as they regularly confronted and found it difficult to meet the more stringent standards of the EU competition law.27 The 1989 Merger Regulation, lasted for well over 15 years, before it was finally replaced by the new merger control regime in 2004 (hereinafter, the 2004 Merger Control Regime).28 On 1st December 2009, following the Treaty of Lisbon entering into force,29 the 2004 European Community Merger Regulation was re-named as the European Union Merger Regulation.

24

ARM/Giesecke & Devrient/Gemalto/JV (Case COMP/M.6564) [2012] OJ C368/9. The remedies in ARM/Giesecke & Devrient/Gemalto/JV alleviated vertical, innovation-related concerns. No remedies were submitted to alleviate the horizontal effects. 26 Microsoft/Skype (Case COMP/M.6281) [2011] OJ C341/02. 27 Heike Schweitzer and Kiran Klaus Patel, ‘EU Competition Law in Historical Context Continuity and Change’ in Kiran Klaus Patel and Heiki Schweitzer (eds), The Historical Foundation of European Competition Law (Oxford University Press 2013) 224. The seminal work of Barry Hawk that had a significant influence on EU approach to vertical restraints: See Barry E Hawk, ‘System Failure: Vertical Restrains and the EC Competition Law’ (1995) 32 Common Market Law Review 973. See also Alexander Schaub, ‘Continued focus on reform: Recent developments in EC competition policy’ (Twenty-eighth Annual Conference on International Antitrust Law and Policy, Fordham Corporate Law Institute, 25 and 26 October 2001) accessed 06 January 2019. 28 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings [2004] OJ L24/01. 29 The Lisbon Treaty further advanced the acquis constitutional of the Rome Treaty Establishing the European Community and the Maastricht Treaty establishing the European Union. Although it merged both of them into the European Union, it preserved the dual treaty base. This dual treaty base notwithstanding, both of them—that is the TEU and the TFEU—concern the European Union. Hence, the dual concept of Community Treaty and the Union Treaty were done away with and all the legislation henceforth, referred to the European Union. Robert Schütze, European Union Law, Cambridge University Press (Cambridge) 3–42. 25

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An important evolution from the 1989 Merger Regulation to the 2004 Merger Regulation, was the introduction of the new test—the ‘substantial impediment to effective competition’30 test and the second was the introduction of the ‘effectsbased approach’ discussed above, which in the opinion of many competition law and economic scholars closed the legislative gap for the analysis of unilateral effects.31 Whereas, in the erstwhile form-based approach, the anti-competitive effects of an activity were inferred from the act itself32; under the effects-based approach, the authorities were required to first verify the alleged harm and then examine in detail and verify the existence of the same.33 The reform of the 1989 Merger Regulation also led to the reform of the Commission Notice on Merger Remedies. The Remedies Notice seeks to be a general guide as it is based on the Commission’s experience in earlier merger proceedings and the interpretation offered by the General Court and the Court of Justice in numerous landmark merger decisions. The present Merger Remedies Notice came into effect in 2008, replacing the earlier 2001 Notice on Remedies.34 The revision of the earlier notice was identified because of the new Merger Regulation (EC) No 139/2004 and the Commission Regulation (EC) No 802/2004 (the ‘Implementing Regulation’) on 1 May 2004 entering into force, recent decisions of the courts, findings of the 2005 Merger Remedies Study by the DG Competition and the evolution in the Commission’s own merger control practice over time.35 In the UK, the Competition Commission and the Office of Fair Trading were abolished in 2014 and replaced by the Competition and Markets Authority (CMA),36 whose objective is to ‘promote competition, both within and outside the United Kingdom to the benefit of consumers’.37 The CMA came into operation on 1st April 2014 and is an ‘independent non-ministerial department’ responsible for investigating mergers that lead to substantial lessening of competition and permits the CMA to undertake investigations concerning alleged breach of the UK or the EU competition law.

30

Ibid., Article 2(2), 2(3). Alistair Lindsay and Alison Berridge, The EU Merger Regulation: Substantive Issues (3rd edn, Sweet & Maxwell 2012) 42–55. 32 T-203/01 Manufacture française des pneumatiques Michelin v Commission of the European Communities (Michelin II) [2003] ECR II-4071, para 56. 33 Report by the EAGCP, ‘An economic approach to Article 82’ (July 2005) 13 accessed 06 January 2019. 34 Commission Notice on remedies acceptable under Council Regulation (EEC) No 4064/89 and under Commission Regulation (EC) No 447/98 [2001] OJ C 68/03. 35 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 2. 36 The Enterprise and Regulatory Reform Act, 2013, Section 26. 37 Under the Enterprise and Regulatory Reform Act 2013, s 25, the Guidance and publications issued by the OFT, unless otherwise specified or updated, continue to reflect the practices of the CMA. 31

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Procedural Aspects of Merger Remedies

In the EU, Article 2(3) of the 2004 Merger Regulation lays down the SIEC test. According to the test—a concentration leading to substantial impediment to effective competition in the common market38 (SIEC) because of the creation or strengthening of a dominant position shall be declared incompatible with the common market.39 In the UK, when a ‘relevant merger situation’ results or is expected to result in a ‘substantial lessening of competition’ (SLC), the CMA decides the appropriate course of action—that is whether to ‘remedy, mitigate or prevent’ the adverse impact of the SLC.40 Article 6(2) and 8(2) of the Merger Regulation offer the Commission the possibility to declare a concentration compatible with the common market, either before or after the initiation of the proceedings, subject to the condition that the parties are able to offer remedies that can alleviate any competition concerns from the proposed transaction. Modifications to a concentration, in the form of commitments are known as ‘remedies’.41 The Commission notice on remedies provides guidelines on modifications and commitments undertaken by the parties to modify a concentration. Recital 3042 of the Regulation highlights some important aspects of the merger control process. The first aspect is the principle of proportionality which means that the commitments proposed must be proportional to the competition problem identified and should be able to eliminate the competition concerns completely. Second, the Commission has the power to accept commitments even before it formally initiates proceedings.43 Third, timeliness and effectiveness is a critical criteria in the acceptance of or the rejection of the commitments. Finally, in order to ensure

Kindly note that the Merger Regulation refers to the ‘common market’ (Article 2(2) 2004 Merger Regulation), although the Lisbon Treaty uses the expression ‘internal market’ (Article 3(2) TEU). This leads one to question, whether the expressions ‘common market’ and ‘internal market’ essentially mean the same thing or in the alternative, the expression ‘common market’ in Article 2(2) of the 2004 Merger Regulation be read as ‘internal market’. The latter in the opinion of the author would be a more appropriate approach, considering Article 3 of the TFEU states that ‘The Union shall establish an internal market’. Further, Article 26(2), TFEU defines an ‘internal market’ as ‘an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured in accordance with the provisions of the Treaties’. Kindly refer to Sect. 7.1.1 specially footnote 12 above for a discussion on the connotation of these expressions. 39 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings [2004] OJ L24/01. 40 The Enterprise and Regulatory Reform Act, 2013, Section 36; Competition Commission, CC8— Merger Remedies: Competition Commission Guidelines [November 2008] recital 1.6 accessed 06 January 2019. 41 Johannes Lübking, ‘Revision of the Notice on merger remedies’ (2007) 2 Competition Policy Newsletter 3, 4 accessed 06 January 2019. 42 Commission notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, recital 30. 43 In NXP Semiconductors/Freescale Semiconductor (Case M7585) [2015] OJ 375/2, for instance, the parties proposed the commitments at the time of filing and initiation of proceedings. 38

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transparency in proceedings and participation, the Commission regularly consults the member states and interested parties throughout the investigation. The Commission cannot, unilaterally impose any conditions. It can only attach conditions to the clearance decision, based on the commitments made by the parties. It is the responsibility of the parties to propose commitments within the available time frame and offer commitments that are ‘comprehensive and effective’ from all points of view.44 In case ex-post monitoring is required, it is the responsibility of the parties to propose commitments that are full and effective from all aspects—such as proposing a self monitoring mechanism, like a monitoring trustee or merger remedyrelated arbitration.45 Whether the Commission finally proposes to clear a proposed transaction or prohibit it or clear it following the submission of commitments, the burden of proof is on the Commission to prove that the proposed concentration would not lead to significant impediment to effective competition.46 In the European Union, the important legislations and texts governing the law of mergers and merger remedies are the European Union Merger Regulation (EUMR), the Implementing Regulation, the Remedies Notice, Best Practice Guidelines on Remedies that also include two model texts one on the model divestiture commitments and the other on the model trustee mandate.47 The Commission was the first competition authority to publish such extensive text and guidelines. When submitting commitments, the parties are expected to submit in the form of standard text as set out in the Best Practice Guidelines.48 Any deviation from the language of the text has to be explained in the accompanying Form RM. The reason why parties may need to explain deviation is that parties may deliberately choose to deviate from the standard form—an issue that may merit the attention of the Commission. Adherence to the standard text minimises transaction costs of evaluating the impact of the proposed commitments on the relevant market.

44

Case T-210/01 General Electric v Commission [2005] ECR-II-5575, para 52. Case T-87/05 EDP v Commission [2005] ECR-II- 3745, para 105. 46 Commission notice on remedies acceptable under Council Regulation(EC) No 139/2004 and under Commission Regulation(EC) No 802/2004 [2008] OJ C 267/01, para 8. In the Qualcomm Wireless Business Solution case, the Court of First Instance held that: “It is therefore for the Commission to show, with a sufficient degree of probability, in its decision declaring a concentration compatible with the common market that the concentration, as modified by the commitments proposed by the party thereto, will not create or strengthen a dominant position as a result of [which] effective competition will be significantly impeded in the common market or in a substantial part of it.” Case T-48/04 Qualcomm Wireless Business Solution Europe BV v Commission [2009] ECR-II2029, para 89. 47 See text concerning merger control in the EU, titled, ‘EU competition law- rules applicable to merger control’ accessed 06 January 2019. 48 See text concerning merger control in the EU, titled, ‘EU competition law- rules applicable to merger control’ accessed 06 January 2019. 45

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To facilitate the Commission in assessing the effect of the proposed remedies, the parties need to provide the Commission with all the relevant and detailed information.49 Form RM, an annex to the Implementing Regulation, provides details of the information that the parties need to offer to the Commission. The Implementing Regulation casts a duty on the merging parties to provide this information.50

7.3

When Is a Joint Venture Treated as a Concentration?

In many of the cases discussed through the course of this book—such as the ARM/G&D/Gemalto/JV51 and the T-Mobile/Orange52 joint venture—although the concentrations were joint ventures, they were all subject to merger review. The issue that merits clarification under merger control regulation is when is a joint venture treated as a merger? Following the amendment of Article 3 of the erstwhile 1989 Merger Regulation53 and the introduction of the Commission’s notice on full-function joint ventures,54 full function joint ventures began to be treated as concentrations within the meaning of merger control with effect from 1 March 1998. Before 1998, the Commission’s policy was to distinguish between concentrative and cooperative joint ventures. Whereas cooperative joint ventures were treated under Article 81 of the Treaty and were governed by the regulation that applied Article 81 and Article 82,55 concentrative joint ventures were dealt with under the 1989 Merger Regulation.56 Under the present approach, with effect from 1998, for a given joint venture to be treated under the merger regulation, the proposed venture must have the following

49 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 7. 50 Ibid. 51 ARM/Giesecke & Devrient/Gemalto/JV (Case COMP/M.6564) [2012] OJ C368/9. 52 T-Mobile/Orange (Case COMP/M.5650) [2010] OJ C108/4. 53 Council Regulation(EC) No 1310/97 of 30 June 1997 amending Regulation(EEC) No 4064/89 on the control of concentrations between undertakings [1997] OJ L 180/01. Regulation 1310/97 amended the Regulation 4064/89. The amended paragraph 2 of Article 3 of Regulation 4064/89 provided: “The creation of a joint venture performing on a lasting basis all the functions of an autonomous economic entity shall constitute a concentration within the meaning of paragraph 1 (b).” The same text was subsequently included as Article 3(4) in Regulation 139/2004. 54 Commission Notice on the concept of full-function joint ventures under Council Regulation (EEC) No 4064/89 on the control of concentrations between undertakings [1998] OJ C 66/01. 55 Commission Notice on the treatment of cooperative joint ventures under Article 85 of the Treaty [1993] OJ C43/2. 56 Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentration between undertakings [1990] OJ L395/1, Article 3(2); Edurne Navarro Varona, Andrés Font Galarza, Jaime Folguera Crespo and Juan Briones Alonso, Merger Control in the European Union (2nd edn, Oxford University Press 2005) 38–40.

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three features.57 The first feature is the presence of joint control by the parties who propose to form the venture.58 The second condition is that it should be a full function joint venture. There are two key aspects of this feature: first, the internal aspect that is the joint venture should have independent tangible and financial resources, such that it can operate independently and viably on a lasting basis, and compete with other undertakings in the market place.59 The external aspect is the existence of commercial independence such that it is a distinct commercial entity, operating independently from its parent companies.60 The third feature is the permanent nature of the joint venture, which means that the venture should last for at least such duration that it causes a lasting change in the undertakings concerned.61 As the proposed joint venture between ARM Limited, Giesecke & Devrient GmbH and Gemalto presented all the three features, it was assessed as a concentration under the 2004 Merger Regulation.62 Likewise in T-Mobile/Orange joint venture was treated as a ‘full-function JV performing on a lasting basis all the functions of an autonomous economic entity’63 and thereby, constituted a concentration, under Article 3(1)(b) of the 2004 Merger Regulation.64

7.4

Requests for Referral and Co-operation Between the Commission, the National Regulatory and the National Competition Authorities

Pursuant to Article 9(2), the National Competition Authorities (NCAs) may request that a matter under review by the Commission be referred to it. The issue has arisen more frequently in the telecommunications sector. The general practice, as the following referral requests illustrate, is to refuse such requests. In Telefónica/E-Plus for instance, Bundeskartellamt (BKartA) made a request for referral as the proposed concentration significantly affected competition in the German retail market for mobile telecommunication services and German wholesale market for access and call origination.65 The request was refused by the Commission.66 57 Edurne Navarro Varona, Andrés Font Galarza, Jaime Folguera Crespo and Juan Briones Alonso, Merger Control in the European Union (2nd edn, Oxford University Press 2005) 40–50. 58 Ibid., p. 41. 59 Ibid., p. 41–43. 60 Ibid., pp. 43–49. 61 Ibid., p. 50. 62 ARM/Giesecke & Devrient/Gemalto/JV (Case COMP/M.6564) [2012] OJ C368/9, para 3. 63 T-Mobile/Orange (Case COMP/M.5650) [2010] OJ C108/4, para 10. 64 T-Mobile/Orange (Case COMP/M.5650) [2010] OJ C108/4, para 11. 65 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 18–20. 66 Ibid., at para 23.

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In T-Mobile/Orange, the United Kingdom’s OFT (now the CMA), made a request for referral, as the proposed transaction affected the UK mobile communications market.67 However, as the commitments submitted to the Commission alleviated its concerns, the OFT (now the CMA) subsequently withdrew its referral request.68 Similarly in the recent H3G UK/Telefónica UK,69 the UK CMA made a referral request to the Commission, which was rejected, and the Commission subsequently prohibited the merger considering the dynamics in the telecommunications market following the unconditional BT/EE70 merger clearance by the CMA. The rationale for such frequent refusal to comply with the requests is that the Commission has significant expereince with assessing complex telecom merger. Further, the Commission considers it important to ensure pan-European ‘coherent and consistent’ approach in the assessment of telecommunications mergers.71 During its merger investigations, the Commission also closely co-operates with the concerned national competition and regulatory authorities. In Telefónica/E-Plus for instance, there was extensive cooperation between the Commission and the competition authorities of several Member States and the telecommunications regulators such as German Bundesnetzagentur (BNetzA) and Austrian Rundfunk & Telekom Regulierungs GmbH (RTR)—all of whom were party to the oral hearing and were offered an opportunity to ask questions during the hearing following the issuance of the Statement of Objections by the Commission.72 The German market for mobile telecommunication services and the German wholesale market for access and call origination on public mobile telephone network were effected vertically, as the parties were active both on the retail and at the wholesale level and their market shares exceeded 25%.73 The wholesale market for international roaming in Spain, the Czech Republic, the United Kingdom, Ireland and Slovakia too were vertically affected by the transaction.74 The Commission took note of the regulation imposed by national telecom regulators such as BNetzA in Germany75 and made no further competitive analysis of these vertical effects. However, the Commission’s analysis indicated that sector specific regulation was not sufficient to mitigate the other likely anti-competitive effects, as competition and regulation have very different objectives

67

T-Mobile/Orange (Case COMP/M.5650) [2010] OJ C108/4, para 14. Ibid., at para 18. 69 Hutchison 3G UK/Telefónica UK (Case M.7612) [2016] OJ C 357/08. 70 Competition & Markets Authority, BT Group plc and EE Limited: A report on the anticipated acquisition by BT Group plc of EE Limited (15 January 2016). 71 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 23. 72 Ibid., at para 4. 73 Ibid., at para 104. 74 Ibid., at para 105. 75 Ibid., at paras 109–11. 68

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and the two regimes may harmoniously co-exist in parallel.76 In the German telecoms sector for instance, some of the powers can be exercised by the BNetzA ‘only’ following a finding of Significant Market Power (SMP). More particularly, when the merger does not lead to dominance, the powers of regulation cannot in itself be sufficient to mitigate the competition concerns of the proposed transaction.77 On the issue of the commitments as well, the Commission took special note of the observation by the BKartA and Monopolkommission that suggested improvements in the initially proposed commitments—considering they were insufficient to alleviate the competition concerns identified.78 In the merger remedies phase as well, the Commission took note of the role of the BNetzA, such as in the leasing of the spectrum wherein the BNetzA had the right to oppose the lease of the spectrum to any new MNO.79 Overall, it seems that although there may be a trend towards refusing these referrals to the national authorities, the principal rationale for such refusals is to develop a pan-European approach in the telecommunications sector. This can possibly be explained because of the significance of the converged telecommunications sector to the Digital Single Market (DSM) strategy. The Commission though does take note of the observations and concerns of the NCAs and national regulatory authorities (NRAs) in its investigations. All the three cases referred above also highlight the very positive interaction between the NRAs, the NCAs and the European Commission. The following section further illustrates this point.

7.5

Electronic Communications Sector: From Regulation to Competition

The electronic communications sector was traditionally subject to sector-specific regulation. The sector was considered a natural monopoly as it enjoyed significant economies of scope and network effects. Absent legal basis for a unified electronic communications policy in the treaties, the European Commission used the provisions in competition law and the internal market rules to develop a common and competitive market for electronic communications.80 The first attempt to develop a regulatory framework was in 1987 with the publication of the Green Paper on the

76

Ibid., at para 207. Ibid., at para 207. 78 Ibid., at para 1288. 79 Ibid., Commitments to the European Commission paras 49, 51–52. 80 Dušan Popoviü, ‘Merger Remedies and Regulatory Measures in the EU Electronic Communications Sector: A Critical Assessment’ (December 2010) 10(4) European Business Organisation Law Review 575, 576. 77

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Development of the Common Market for Telecommunications Services and Equipment.81 In the early 1990s, two disruptive innovations unsettled the electronic communications sector—first, the rapid growth of the Internet and second, convergence. These developments in turn led to the adoption of a consolidated ‘Electronic Communications Package’ comprising of the Framework Directive,82 the Authorisation Directive,83 the Access Directive,84 the Universal Services Directive85 and the Radio Spectrum Decision.86 Identifying the growing importance of electronic communications sector, the European Council for the first time issued a statement in Lisbon, calling for the need for transformation to a digital, knowledge-based society.87 The Commission recognised the importance of competition in the ‘emerging’ and ‘convergence-led’ dynamic electronic communications sector and came out with a 1999 review that was subsequently replaced by the EC regulatory framework on electronic communications. The objective of the review was to develop a regulatory regime that could be rolled back as competition strengthened in the market. The new regulatory regime aspired to ‘control market power through the application of Community competition law’.88 The consumers too, have played an important role in the process. Article 11, TEU provides right of citizens’ initiative offering the citizens a role in the European policy making purposes. The policy objective is to create a more democratic dialogue and engage citizens more directly in the legislative process.89 In the 2012 petition, the consumers used Article 11 TEU to propose a Single Communications Tariff Act in the telecommunications sector that would eliminate the roaming tariff in the EU and

81 Commission, ‘Green Paper on the Development of the Common Market for Telecommunications Services and Equipment’ COM (1987) 290 final. 82 Directive 2002/21/EC of the European Parliament and of the Council of 7 March 2002 on a common regulatory framework for electronic communications networks and services [2002] OJ L108/33. 83 Directive 2002/20/EC of the European Parliament and of the Council of 7 March 2002 on the authorisation of electronic communications services and networks [2002] OJ L 108/21. 84 Directive 2002/19/EC of the European Parliament and of the Council of 7 March 2002 on access to, and interconnection of, electronic communications networks and associated facilities [2002] OJ L 108/07. 85 Directive 2002/22/EC of the European Parliament and of the Council of 7 March 2002 on universal service and users’ rights relating to electronic communications networks and services [2002] OJ L108/51. 86 Decision 676/2002/EC of the European Parliament and of the Council of 7 March 2002 on a regulatory framework for radio spectrum policy in the European Community [2002] OJ L 108/01; Dušan Popoviü, ‘Merger Remedies and Regulatory Measures in the EU Electronic Communications Sector: A Critical Assessment’ (December 2010) 10(4) European Business Organisation Law Review 575, 577. 87 Presidency Conclusions (Lisbon European Council, 23 and 24 March 2000) accessed 06 January 2019. 88 European Commission, ‘Towards a New Framework for Electronic Communications Infrastructure and Associated Services: The 1999 Review’ Com (99) 539. 89 Iris Benöhr, EU Consumer Law and Human Rights (Oxford University Press 2013) 171–72.

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create a European common market for mobile phone users.90 On 15 June 2017, the roaming legislation finally entered force and at present, users pay only domestic charges while travelling across the European Union (EU) and the European Economic Area (EEA).91 In the initial years of merger enforcement, the Commission was subject to frequent academic criticism. Many scholars argued that the Commission used competition law as an instrument to further its ‘regulatory objectives’.92 In Telia/ Telenor, the parties committed to local loop unbundling—an objective that was otherwise, to come into force almost 2 years later through a pan-European Regulation.93 The merger was cleared ‘only’ after the Swedish and Norwegian governments offered commitments to introduce local loop unbundling in their respective countries.94 This commitment was offered almost 1 year in advance of the Regulation 2887/2000 that imposed a similar condition of local loop unbundling on the Member States. Similar arguments were raised about the Pay-tv related remedies in the Newscorp/Telepiù merger.95 It was argued that the Commission used merger remedies to accelerate the adoption of sector-specific legislation by the Member States.96 Earlier instances of ‘excursion into the regulatory domain’ by the Commission led some to argue that the remedies were well beyond the domain of the well-established doctrine of proportionality.97 Sidak et al question the use of antitrust remedies to restructure the telecommunications sector and achieve certain pre-specified regulatory objectives.98 90

Ibid., p. 173. Digital Single Market Policy: Roaming Policy, accessed 6 January 2019. The roaming charges have been abolished for customers travelling within the European Union and the European Economic Area. 92 Dušan Popoviü, ‘Merger Remedies and Regulatory Measures in the EU Electronic Communications Sector: A Critical Assessment’ (December 2010) 10(4) European Business Organisation Law Review 575, 586–588. 93 Alexandre de Streel, ‘Remedies in the European Electronic Telecommunications Sector’ in Damien Geradin (ed.) Remedies in Network Industries: EC Competition Laws vs. Sector-specific Regulation (Intersentia 2004) 67, 91. 94 Telia/Telenor (Case IV/M 1439) Commission Decision 2001/98/EC [2001] OJ L40/1. 95 Lexecon Competition Memo, ‘Merger to Monopoly: Newscorp/Telepiù’ (June 2003) accessed 06 January 2019. 96 Alexandre de Streel, ‘Remedies in the European Electronic Telecommunications Sector’ in Damien Geradin (ed.) Remedies in Network Industries: EC Competition Laws vs. Sector-specific Regulation (Intersentia 2004) 67, 91; Dušan Popoviü, ‘Merger Remedies and Regulatory Measures in the EU Electronic Communications Sector: A Critical Assessment’ (December 2010) 10(4) European Business Organisation Law Review 575, 588. 97 Dušan Popoviü, ‘Merger Remedies and Regulatory Measures in the EU Electronic Communications Sector: A Critical Assessment’ (December 2010) 10(4) European Business Organisation Law Review 575, 588. See also the references therein. 98 Damien Geradin and J Gregory Sidak, ‘European and American Antitrust Approaches to Antitrust Remedies and the Institutional Design of Regulation in Telecommunications’ in Martin E Cave, Sumit K Majumdar and Ingo Vogelsang (eds), Handbook of Telecommunications Economics Vol 2 (Oxford University Press 2006) 530, 555. 91

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A bare perusal of statistics in the 1990s have often led scholars to conclude that the Commission was more interventionist in the electronic communications sector than other economies at the time.99 DeStreel’s study found that the Commission imposed remedies in 8.4% of electronic communications services cases, in contrast to an overall 7% average.100 The approach is not necessarily interventionist; rather it can be explained because of the ‘parallelism of interests’ between the Commission, the NRAs and the merging parties.101 From the competition law perspective, the Commission was confronted with the challenge of avoiding the leveraging of market power from markets in which the incumbents enjoyed a position of dominance to new emerging markets and ‘reverse leveraging of the power in emerging markets’ to reinforce their position of strength in traditional markets.102 Moreover, in the newer decisions, one observes a more ‘effects-based’ approach. 103 Today there seems be to be emergence of another level of competition and regulatory cooperation. As the detailed discussion on remedies in recent telecommunications mergers in Chap. 13 indicates, the Commission considers sector specific regulation and has in recent times been very willing to ‘accept’ less onerous remedies. This new and unique approach appears to be a sort of ‘hybrid regulation’—highly desirable for the ICT industries as it offers the potential to facilitate better functioning of competitive markets in the sector and facilitate effective implementation and ex-post monitoring of behavioural remedies. The 2011 US Merger Remedies Guide too foresees increased co-operation between competition and regulation to foster a more effective remedial framework.

99 Dušan Popoviü, ‘Merger Remedies and Regulatory Measures in the EU Electronic Communications Sector: A Critical Assessment’ (December 2010) 10(4) European Business Organisation Law Review 575, 597. 100 The figures relate to the period 1990 to 2006. Source: Alexandre De Streel, ‘The Relationship between Competition Law and Sector-Specific Regulation: The Case of Electronic Communications’ (2008) XLVII Reflets et perspectives de la vie économique 55. 101 Herbert Ungerer, ‘Use of EC Competition Rules in the Liberalisation of the European Union’s Telecommunications Sector’ (Brussels, 2001) accessed 06 January 2019. 102 Dušan Popoviü, ‘Merger Remedies and Regulatory Measures in the EU Electronic Communications Sector: A Critical Assessment’ (December 2010) 10(4) European Business Organisation Law Review 575, 587. 103 Michael Rosenthal, ‘Mergers in the Telecommunications Sector: An overview of EU and national case law’ (6 April 2012) N 44678 e-Competitions 2, 3.

7.7 Commitments: Conditions and Obligations

7.6

129

Commitments: Balancing Proportionality and Effectiveness

What kind of commitments are acceptable to the Commission? The 2008 Merger Remedies Notice describes three principle features of commitments that may be acceptable to the Commission. First, the commitments should be able to completely alleviate the competition concerns raised by the Commission; second, they must be ‘comprehensive and effective from all points of view’ and thirdly, they should be effectively implementable in a relatively short interval of time.104 The basic objective of the remedies is to restore pre-merger market structure. Because of the potential of structural commitments to swiftly alleviate the competition concerns and no related requirement for long-term monitoring, structural remedies such as divestitures are the most preferred remedies.105 The Commission may accept commitments in either phase of the investigation. Commitments submitted by the parties in phase I, must be sufficient to clearly rule out ‘serious doubts’ under Article 6(1)(c) of the 2004 Merger Regulation.106 Under Article 10(2) of the 2004 Merger Regulation,107 the Commission must take an immediate clearance decision on the ‘removal of doubts’. The commitments proposed must not ‘only be proportionate to the competition problems identified’, they must also entirely eliminate these concerns.108 Once the Commission issues the Statement of Objections (SO) in phase-II proceedings, the proposed commitments must be able to alleviate the SIEC as identified in the SO.109

7.7

Commitments: Conditions and Obligations

Commitments may either be implemented before or after the Commission’s conditional clearance. It is relatively more frequent that commitments are implemented following the clearance decision.110 To ensure timely and effective compliance by the parties, such that effective competition is restored in the relevant market, the

104

Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, paras 9, 12. 105 Ibid., at para 15. 106 Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentration between undertakings [2004] OJ L 24/01, Article 6(1). 107 Ibid., Article 10(2). 108 Case T-282/02 Cementbouw v Commission [2006] ECR II-319, para 307. 109 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 18. 110 Ibid., at para 5.

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Commission has the power to attach ‘conditions and obligations’,111 to declare the proposed transaction compatible with the common market.112 In case of divestiture as a remedy for instance, the requirement to achieve the structural change that is the ‘divestment of a business’ is a condition. However, the ‘implementing steps’ to ensure the divestiture, such as the appointment of a managing trustee or a divestiture trustee are an obligation.113 ‘Measures’ that lead to structural changes are referred to as conditions, whereas the implementing steps to achieve those changes are knows as obligations.114

111

Classification as conditions and obligation is important, as the Commission has different powers in case of a breach of a condition and an obligation. When the parties breach an obligation, the Commission can revoke the clearance decision issued under Article 6(2) and Article 8(2), under Article 6(3) or Article 8(6) respectively. The parties can also be subject to fines and periodic penalty payments under Article 14(2) (d) and Article 15(1) (c) respectively. In case of a breach of a condition, the ‘compatibility decision’ becomes void. The Commission in such a circumstance, can first take some interim appropriate measures to restore competition under Article 8(5)(b) and second, in case, the conditions under Article 8(4)(b) are met, the Commission can take steps to dissolve the concentration or take other appropriate measures under Article 8(7) or take a decision pursuant to Article 8(1)-(3). The parties can additionally also be fined pursuant to Article 14(2) (d). See Commission Notice on remedies acceptable under the Council Regulation(EC) No 139/2004 and under Commission Regulation(EC) No 802/2004[2008] OJ C267/01, para 20. 112 Commission notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C267/01, recital 30. 113 Ibid., at para 19. 114 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 1405; Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34, para 93.

Chapter 8

Merger Control in the US

Abstract This chapter offers a brief overview of the substantive and procedural aspects of merger control in the US. Functions and the disequilibrium of power between the two competition authorities—the Department of Justice (DOJ) and the Federal Trade Commission (FTC)—are also discussed.

8.1

Legislative Framework

The Clayton Act is an integral part of the antitrust laws of the United States.1 Section 7 of the Clayton Act prohibits a merger whose affect ‘may be substantially to lessen competition (SLC) or to tend to create a monopoly’.2 Such a substantial lessening of competition needs to be proven by a ‘preponderance of evidence’.3 When first enacted in 1914, the provision only targeted the acquisition of stocks. In 1970, following the unsuccessful attempt of the US Government to challenge an acquisition by the US Steel Corporation,4 the Congress made an amendment to include asset acquisitions as well.5 In the Hospital Corp case, Judge Posner remarked that Section 7 of the Clayton Act required ‘[a] predicative judgment, necessarily probabilistic and judgmental’.6 In Brown Shoe, the first case wherein the US Supreme Court applied the amended section, the Court noted that use of the term ‘may be substantially to lessen competition’ indicates that the intention of the legislature was to ascertain with probabilities and not certainties.7 Under the Section 7 standard, for a showing that a given merger is anti-competitive, the litigant needs to show with a ‘reasonable Section 1 of the Clayton Act, 15 U.S.C. §§ 12. 15 U.S.C. § 18(1988). 3 United States v. Oracle Corp., 31 F.Supp. 2d 1109 (N.D. Cal. 2004). 4 United States v. Columbia Co., 334 U.S. 495 (1948). 5 Cellar-Kefauver Act of 1950, 64 Stat. 1125 (1950), codified as 15 U.S.C. § 18 (1994). 6 Hospital Corp. v. FTC, 807 F.2d 1381, 1389 (7th Cir. 1986). 7 Brown Shoe Co. v. United States, 370 U.S. 294, 323 (1962). 1 2

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_8

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probability’ meaning ‘preponderance of probabilities’ that the merger may lead to SLC.8 In the 1960s, the US Supreme Court interpreted the amended Section 7 in many of its celebrated decisions, which set a precedent for US merger control for the coming decades—United States v. Philadelphia National Bank,9 United States v. Aluminium Company of America10 and United States v. Pabst Brewing Co.,11 to name a few. The General Dynamics decision of the US Supreme Court set the tenor for the current merger control approach in the United States.12 In two successive decisions in the same year, the Supreme Court of the United States emphasised the need for clearly defining a relevant market before proceeding to the theory of harm and stated that the Government had the onus probandi to prove that a given merger was anticompetitive before the burden shifted to the merging parties to present evidence to the contrary.13 In the latest Oracle/PeopleSoft merger for instance, Judge Walker opined that as the DOJ could not establish a relevant market, the court could neither conduct a ‘burden shifting statistical analyses’ under the Philadelphia Nat Bank nor could it apply the concentration methodology of the Guidelines.14

8.2

The DOJ and the FTC: The Disequilibrium of Power

When a proposed transaction meets the criteria specified under Section 18 of the Hart-Scott-Radino (HSR) Antitrust Improvements Act, 1976, the merging parties need to file a ‘Notification and Report Form’ with the FTC and the Assistant Attorney General in charge of the Antitrust Division of the Department of Justice.15 HSR is a procedural improvement over the pre-1976 antitrust enforcement practice. Before 1976, mergers could be challenged only after they had been implemented, which often involved ‘unscrambling the eggs’ as the merged firm was ordered to divest long after the implementation of the merger.16

8

United States v. Siemens Corp., 621 F.2d 499, 506 (2d Cir. 1980). 374 US 321(1963). 10 377 US 271(1964). 11 384 US 546(1966). 12 United States v. General Dynamics Corp., 415 US 486(1974). 13 United States v. Marine Bancorporation Inc., 418 US 602(1974) and United States v. Connecticut National Bank, 418 US 650(1974). 14 United States v. Oracle Corporation, 331 F. Supp. 2d 1098(N.D. Cal. 2004). 15 Federal Trade Commission, ‘Pre-merger introductory guides’ accessed 06 January 2019. 16 Christophe R Leslie, Antitrust Law and Intellectual Property Rights Cases and Materials (Oxford University Press 2011) 445. 9

8.2 The DOJ and the FTC: The Disequilibrium of Power

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The Federal Trade Commission (FTC) and the Department of Justice (DOJ) review the notified transaction and then decide which of the two antitrust agencies should follow-up—a decision made essentially based on the sector-specific expertise of the two authorities.17 The subsequent procedure varies depending on the agency that undertakes further investigations. The FTC, being a quasi-judicial administrative body, can use its own internal administrative procedure to settle the case or it may also approach the court to block the proposed transaction. When parties propose a settlement, the FTC votes to accept or reject the same. The resulting order is appealable by the parties before the federal courts of appeal for a final appellate review. The FTC derives its merger enforcement powers from Sections 5(a),18 5(b)19 and 13(b)20 of the FTC Act and Sections 721 and 7A22 of the Clayton Act. Two different sources of merger enforcement power available with the FTC means that transactions that may not catch the attention of Section 7 of the Clayton Act, may fall under the standard of ‘unfair methods of competition’ under Section 5 of the FTC Act.23 The DOJ on the other hand, has the enforcement tool of Section 15 of the Clayton Act24 only, whereby it must prove that the ‘merger may lead to substantial lessening of competition’ as defined in Section 7 of the Act. At the DOJ, unlike at the FTC, the proceedings are relatively adversarial, as the DOJ must first file a suit in a federal court to challenge or block a proposed merger.25 In case the parties choose to offer remedies, the department prepares a ‘competitive impact statement’26 and files the proposed consent decree before the relevant court. The decree discusses the impact of the proposed remedies and the court evaluates whether they can alleviate the particular competition harm alleged. The consent decree must be approved by a federal court under the Tunney Act.27 In its judicial review, the federal court considers the competitive impact of the remedies, their nature and duration, alternative relief contemplated by the DOJ and any other related factor that may impact the efficacy of the proposed decree. On hearing the parties, the DOJ and the experts, the 17 Federal Trade Commission, ‘How mergers are reviewed?’ accessed 06 January 2019. 18 15 U.S.C. §§ 45(a). 19 15 U.S.C. §§ 45(b). 20 15 U.S.C. §§ 53(b). 21 15 U.S.C. §§ 18. 22 15 U.S.C. §§ 18A. 23 Joseph Krauss and Christian M Rowan, ‘The FTC Act in Merger Policy Integration’ in Nicolas Charbit, Elisa Ramundo, Anna Chehtova and Abigail Slater(eds), William E. Kovacic: An Antitrust Tribute, Liber Amicorum- Volume I (Paris: Institute of Competition Law 2013) 285. 24 15 U.S.C. §§ 25. 25 Diane P.Wood, ‘A Comparison of Merger Review and Remedy Process in the United States and the European Union’ in François Lévêque and Howard Shelanski(eds), Merger Remedies in American and European Union Competition Law (Edward Elgar 2004) 68–70. 26 15 U.S.C. § 16(e). 27 Tunney Act 15 U.S.C. § 16 (2004).

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court may approve the decree, reject or may also propose alternative or additional remedies.28 The Tunney Act was amended in 2004, whereby the US Congress added a list of factors that the court ‘shall’ and ‘may’ consider while reviewing a consent decree.29 Immediately following the said amendment, courts examined two challenged mergers in the telecommunications sector—the SBC/AT&T, as well as the MCI/Verizon merger. The review was rather an exception, considering that in practice, the judicial review of the decree until today remains limited and any changes proposed by the court are largely based on the ‘public interest test’.30 Following its review of the proposed transaction, the Government has three alternatives—to clear the merger unconditionally, to block the deal or to negotiate remedies that may clear concerns resulting from the substantial lessening of competition.31 As is evident from the foregoing discussion, unequal legislative tools available to the FTC and the DOJ may limit how the two authorities review a notified transaction. The DOJ has no power to enjoin a merger under section 5-type provision of the FTC Act, whereby the FTC can enjoin a merger on grounds of ‘unfair method of competition’ or being ‘against the public interest’. Second, the DOJ also suffers from procedural limitations as it has no ‘equivalent administrative procedures’ like the FTC and it must resort to a federal court for preliminary and permanent injunctions by meeting the stricter requirements of the Clayton Act.32 The different standards required of the DOJ and the FTC are illustrated by two recent cases.33 In Whole Foods and Oracle/PeopleSoft, the FTC and the DOJ respectively sought injunctive relief from the federal courts. In Whole Foods, although Judge Brown agreed with district court’s reasoning that the FTC may ‘never be able to prove a PNOS market’; however, as preliminary injunction under §§53(b) required that the FTC ‘need only show a ‘likelihood of success’, the DC

Luc Gyselen, ‘Merger Remedies in the EU and USA’ in Practical Law Company’s Cross-Border Competition Handbook (2006/07) accessed 06 January 2019. 29 Ibid. 30 For a detailed guide on the merger review process, see Ilene Knable Gotts (ed.), The Merger Review Process: A step-by-step guide to US and Foreign Merger Review (3rd edn, American Bar Association 2006). 31 Federal Trade Commission, Premerger Notification and the Merger Review Process accessed 06 January 2019. 32 Joseph Krauss and Christian M. Rowan, ‘The FTC Act in Merger Policy Integration’ in Nicolas Charbit, Elisa Ramundo, Anna Chehtova and Abigail Slater(eds), William E. Kovacic An Antitrust Tribute, Liber Amicorum- Volume I, Institute of Competition Law (Paris: Institute of Competition Law 2012) 282. 33 Joseph Krauss and Christian M. Rowan, ‘The FTC Act in Merger Policy Integration’ in Nicolas Charbit, Elisa Ramundo, Anna Chehtova and Abigail Slater(eds), William E. Kovacic An Antitrust Tribute, Liber Amicorum- Volume I, Institute of Competition Law (Paris: Institute of Competition Law 2012) 284–85. 28

8.2 The DOJ and the FTC: The Disequilibrium of Power

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Circuit issued the same in favour of the FTC.34 In contrast to this, stands the strict standards set for the DOJ by Justice Walker of the US District Court of California in Oracle/PeopleSoft, wherein the entire case failed as the DOJ failed to delineate a clearly identifiable relevant product and geographic market.35 The discretion available to the FTC has also meant that it has often exercised administrative trial rather than going to the federal court for obtaining permanent injunction.36 This in turn has resulted in varying outcomes depending on which of the two authorities reviews the proposed transaction. These differing standards led the Antitrust Modernization Committee to recommend the amendment of Section 13 (b) of the Federal Trade Commission Act to ensure that the FTC, like the DOJ seeks both preliminary, as well as final injunctions in a federal court.37 The FTC and the DOJ also have disparate weapons for negotiating and monitoring compliance with merger and antitrust matters. Whereas the FTC has a dedicated Compliance Division responsible for negotiating and monitoring remedies, the DOJ has no such compliance team. At the DOJ, the responsibility for negotiating and managing compliance with the consent order is with the staff lawyers. Once the staff lawyers negotiate the consent order, it is subject to the approval of the Assistant Attorney General for Antitrust, followed by a filing of a Competitive Impact Statement (CIS) with the federal courts. Further, the private parties can claim treble damages and the attorney’s fees for injuries from any act that is prohibited under the antitrust laws of the country.38 Section 16 of the Act offers private parties a right to injunctive relief from the infringement of antitrust laws including the Section 7 of the Clayton Act.39 The competitors can also use this provision as they have the standing to challenge a horizontal merger.40 In Chrysler Corp. v. General Motors Corp.,41 Chrysler Motor Co., a competitor was allowed to challenge a joint venture approved by the FTC between two automobile manufacturers General Motors and Toyota Motors. The matter was subsequently settled out of court. The settlement reduced the terms of the joint venture from 12 to 8 years.42

34

Federal Trade Commission v. Whole Foods Market Inc., 548 F.3d 1028, 1041 (D.C. Cir. 2008). United States v. Oracle Corporation, 331 F. Supp. 2d 1098(N.D. Cal. 2004). 36 Joseph Krauss and Christian M. Rowan, ‘The FTC Act in Merger Policy Integration’ in Nicolas Charbit, Elisa Ramundo, Anna Chehtova and Abigail Slater (eds), William E. Kovacic An Antitrust Tribute, Liber Amicorum- Volume I, Institute of Competition Law (Paris: Institute of Competition Law 2012) 285. 37 Antitrust Modernization Commission, ‘Antitrust Modernization Commission: Reports and Recommendations’ (April 2007) accessed 06 January 2019. 38 Section 4, Clayton Act, 15 U.S.C. §§ 15. 39 Section 16, Clayton Act, 15 U.S.C. §§ 15. 40 Frank H Easterbrook, ‘The Limits of Antitrust’ (1984) 63(1) Texas Law Review 1, 41. 41 589 F. Supp. 1182(D.D.C. 1984). 42 E Thomas Sullivan, Herbert Hovenkamp, Howard A Shelanski and Christopher R. Leslie, Antitrust Law, Policy, and Procedure: Cases Materials, Problems (7th edn, Lexis Nexis 2014) 989. 35

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Mergers and the FCC

If a merger concerns the communications sector, it is subject to the DOJ (and not the FTC) and the FCC’s review. Although the FCC can exercise its powers under the Section 7 of the Clayton Act, in practice the FCC has almost always acted only under the Federal Communications Act.43 The Communications law has been particularly instrumental in preserving and promoting ‘content diversity’.44 A spectrum license cannot be authorised unless the Commission approves that the transfer will be in ‘public interest, convenience and necessity’.45 The FCC’s merger review has played an important role in obtaining commitments in otherwise competitive mergers.46 Considering the scope of present work, the FCC’s role in communications sector has not been discussed any further in this work.47

8.4

2010 Horizontal Merger Guidelines

Merger enforcement has evolved and adapted to the needs of the new economy. This is reflected in the evolution of merger enforcement since 1968, when the US Horizontal Merger Guidelines were first introduced to the most recent 2010 Guidelines, reflecting the ‘more economic thinking’ in the US enforcement practice.48 The early days of enforcement focussed almost exclusively on coordinated effects that were more descriptive of the theory of harm in the age of steel whereby products were relatively homogeneous and prices more similar.49 In the present day information age, the products are differentiated, thereby making unilateral conduct or dominance a far greater area of concern as mergers may adversely impact both price based and innovation based competition.50 The case is further complicated as in case of unilateral conduct whereby the harm is not uniform across the market.51 James R Weiss and Martin L Stern, ‘Serving Two Masters: The Dual Jurisdiction of the FCC and the Justice Department Over Telecommunications Transactions’ (1998) 6 Communications Law Conspectus 195, 198; Christopher L Sagers (ed), ABA Section of Antitrust Law, Handbook on the Scope of Antitrust, (American Bar Association 2015) 252–53. 44 Christopher L Sagers (ed), ABA Section of Antitrust Law, Handbook on the Scope of Antitrust, (American Bar Association 2015) 242–43. 45 47 U.S.C. §310(d). 46 See for instance, SBC/AT&T, Verizon/MCI, Bell Atlantic/NYNEX, XM/Sirius and Comcast/ NBC JV, where the FCC imposed substantial conditions. 47 For a critical discussion on FCC’s role in the communications mergers, see Kalpana Tyagi, F/M and Content Integration in the EU & the US Telecommunications Sector: Between Media Plurality & Merger Control (forthcoming, copy available with the author upon request). 48 Carl Shapiro, ‘The 2010 Horizontal Merger Guidelines: From Hedgehog to Fox in Forty Years’ (2010) 77 Antitrust Law Journal 701,703–706. 49 Ibid., pp. 701, 707–711. 50 Ibid., pp. 701, 715. 51 Ibid., pp. 701, 717. 43

8.5 2011 Merger Remedies Guide

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Either a type I or type II error in merger enforcement has serious repercussions on all kinds of competition: product competition, R&D competition and competition in innovation. The 2010 Guidelines are laudatory in the respect that they recognise the special needs of the present day information age and the consequent harm to competition that strikes the new economy with greater intensity.52 The 2010 Guidelines incorporate the more ‘economic approach’ to remedy the harms in the new economy, which its predecessor the 1992 Guidelines failed to address adequately. Under the erstwhile Guidelines, the government had the burden to prove that a given merger was ‘likely to lessen substantial competition’ whereas the 2010 Guidelines reinforce the original Clayton standard of ‘may [lessen competition]’, thereby, laying greater emphasis on the ‘incipiency’ standard of the Act.53 The 2010 HMG offers the Government greater leeway to intervene, and in that respect is a kind of ‘counter-revolution’ to the principles of Chicago School.54 This may be referred to as the post-Chicago thinking.55 With the 2010 HMG, the popular US/EU divide on the subject seems to be waning away. Issues such as (ir)relevance of defining relevant markets to identify a theory of harm, identification and treatment of unilateral effects and the discussion on entry in the 2010 US HMG—issues dealt with elsewhere in this book—are way more aligned with the approach recommended in the 2004 European HMG.56

8.5

2011 Merger Remedies Guide

The Antitrust Division of the DoJ issued a revised Policy Guide to Merger Remedies in 201157 that replaced the earlier 2004 Guide to Merger Remedies.58 The 2011 Merger Remedies Guide (hereafter, the 2011 MRG) identifies three types of remedies: structural, conduct and hybrid remedies.59

52

Ibid., p. 701. Daniel J Gifford and Robert T Kudrle, The Atlantic Divide in Antitrust: An Examination of US and EU competition policy (Chicago and London: The University of Chicago Press 2015) 45. 54 Thomas J Horton, ‘The United States Horizontal Merger Guidelines: Devolution, Evolution or Counterrevolution?’ (2011) 2 Journal of European Competition Law and Practice 158. 55 Mika Oinonen, Does EU Merger Control Discriminate Against Small Market Companies? Diagnosing the Argument with Conclusions (Kluwer Law International 2010) 27–57. 56 Drauz Götz, Stephen Mavroghenis and Sara Ashall, ‘Recent Developments in EU Merger Control’, (2011) 2 Journal of European Competition Law and Practice 46. 57 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division [June 2011] accessed 06 January 2019. 58 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division [June 2011] accessed 06 January 2019. 59 Ibid., §§ II. 53

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The 2004 Remedies Guide indicate a clear preference for structural or clean-break remedies as they are simpler to administer, cost effective and require no ex-post assessment, unlike behavioural or conduct remedies that are cumbersome, more expensive, require ex-post monitoring and are easier to evade.60 However, the 2010 HMG and the 2011 MRG, unlike the 2004 MRG, show a clear preference for behavioural remedies. The 2011 MRG states that behavioural or conduct (as referred to in the US) remedies are a ‘valuable tool’, as they enable the balancing of two key objectives of merger control—preserving merger-specific efficiencies while simultaneously remedying the identified harm. The 2011 MRG states that conduct remedies can be a ‘valuable tool’ for the Division, especially when the implementation of structural remedies threatens to eliminate the resulting efficiencies; but absent remedies, the merger would be anti-competitive.61 The Guide further states that conduct remedies are more commonly employed in vertical mergers. In horizontal mergers, structural remedies are clearly more preferable. However, in case of certain horizontal mergers, whereby a clean-break remedy is not possible as such a remedy may defeat the likely benefits of the merger; conduct remedy too can be a viable alternative.62 The consent decrees in Ticketmaster/Live Nation,63 Google/ ITA64 and Comcast/NBCU/JV65 indicate a gradual shift of merger enforcement with increased preference for conduct remedies.66 Considering the technical nature of the sectors concerned and the sweeping significance of these remedies, the three cases have been a subject matter of detailed discussion elsewhere in this book.

Ibid., §§ III. Ibid., §§ II. 62 Ibid., §§ II. 63 United States v. Ticketmaster Entertainment, Inc., No. 1:10-cv-00139, 2010 WL 5699134, Final Judgment (D.D.C. July 30, 2010), accessed 06 January 2019. 64 United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment at IV (B) (D.D.C. Apr. 8, 2011), accessed 06 January 2019. 65 United States v. Comcast Corp., No. 1:11-cv-00106, Proposed Final Judgment at IV (D.D.C. Jan. 18, 2011), accessed 06 January 2019. 66 John E Kwoka and Diana L Moss, ‘Behavioral Merger Remedies: Evaluation and Implications for Antitrust Enforcement’ [November 2011] American Antitrust Institute 27, 28 accessed 06 January 2019. 60 61

8.6 Prohibited Mergers

8.6

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Prohibited Mergers

In the US, the competition authorities have lately blocked mergers wherein the parties offered a ‘fig-leaf divestiture or an unworkable conduct remedy’.67 The DOJ and the FCC found the proposed merger between T-Mobile and AT&T to be anti-competitive68 and accordingly the DOJ decided to block the merger.69 The parties eventually abandoned the deal.70 The market for mobile telecommunications showed more competitive activity following the prohibition as shortly after the deal was abandoned, T-Mobile invested over $ 4 billion to modernise its network and deploy 4G LTE services, offer better consumer contracts with i-phones and jointly acquire more spectrum in collaboration with Verizon.71 This in turn, promoted innovation-based competition in the market for mobile telecommunications.72 The DOJ also recently managed to successfully enjoin the merger of H&R Block and Tax Act.73 The two competed closely in the market for digital do-it-yourself (D-I-Y) tax preparation software. In this case, the blocking of the merger proved to be more beneficial to the interests of the consumers. Ex-post evidence indicated that post prohibition decision, the major competitors experienced fierce competition and to counter the same they launched more mobile apps, started live tax consultation and offered a digital version of D-I-Y products at no additional costs.74

67 Bill Baer, ‘Reflections on Antitrust Enforcement in the Obama Administration: Remarks as Prepared for Delivery to the New York State Bar Association’, 12 (New York, January 30, 2014) < https://www.justice.gov/atr/file/517761/download> accessed 06 January 2019. 68 Allen P Grunes and Maurice E Stucke, ‘Antitrust Review of the AT&T/T-Mobile Transaction’ (2011) 64 Federal Communications Law Journal, 47 accessed 06 January 2019. 69 Second Amended Complaint, United States v. AT&T Inc., No. 1:11-1560 (D.D.C. 2011) accessed 06 January 2019. 70 Press Release, U.S. Dep’t of Justice, Justice Department Issues Statements Regarding AT&T Inc.’s Abandonment of its Proposed Acquisition of T-Mobile USA Inc. (Dec. 19, 2011) accessed 06 January 2019. 71 Bill Baer, ‘Reflections on Antitrust Enforcement in the Obama Administration: Remarks as Prepared for Delivery to the New York State Bar Association’, 16 (New York, January 30, 2014) accessed 06 January 2019. See also the references therein. 72 Ibid., pp. 16, 17. 73 United States v. H&R Block Inc., 77F.Supp. 2d 678(D.D.C. 2011). 74 Bill Baer, ‘Reflections on Antitrust Enforcement in the Obama Administration: Remarks as Prepared for Delivery to the New York State Bar Association’ (New York, January 30, 2014) accessed 06 January 2019. See (reported therein) also Margaret Collins, ‘TurboTax Offers Live Tax Advice to Lure Clients from H&R Block’ Bloomberg (Online, 14 February 2012) accessed 06 January 2019; Eileen AJ Connelly, ‘Live Online Tax Prep Help Sign of Competitive 2012’ Mainstreet (Online, 9 December 2911) accessed 06 January 2019.

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In 2001, EchoStar and DirecTV, at the time the only direct broadcast satellite (DBS) companies offering multichannel video programming distribution (MVPD) services across the entire continental United States, announced their intention to merge.75 As the merger between the ‘only’ two DBS suppliers in the United States, the transaction was a merger to monopoly for ‘consumers without access to cable television’ in the United States. Moreover, it was also a three-to-two (3-to2) merger in the market for the supply of multichannel video programming distribution (MVPD) services.76 The parties’ argument was that as the two had a large overlap in the programmes offered, the merger would lead to efficiency gains by removing capacity constraints through avoidance of duplication and freeing up of the capacity.77 As the DOJ and the FCC decided to challenge the proposed transaction, the parties decided to abandon the deal. Although difficult to state with certainty how markets may have evolved postmerger,78 ex-post analysis of the market developments indicate that EchoStar and DirecTV subsequently attained the ‘claimed merger-specific efficiencies’ even without the merger materializing and in fact each of the parties, individually organically surpassed the very modest objectives that they had otherwise aspired to achieve through the merger.79

Richard J Gilbert and James Ratliff, ‘Sky Wars: The Attempted Merger of EchoStar and DirecTV (2002)’ in John E. Kwoka, Jr. and Lawrence J. White, The Antitrust Revolution Economics, Competition and Policy (fifth edition, Oxford University Press 2009) 115. 76 Ibid., p. 117. 77 Ibid., pp. 117–18. 78 Another related event, may have served as an impetus to the subsequent developments. Soon after the parties abandoned the deal, NewsCorp made an equity purchase in DirecTV that was cleared by FCC following the submission of non-discriminatory access commitments from NewsCorp. 79 Richard J Gilbert and James Ratliff, ‘Sky Wars: The Attempted Merger of EchoStar and DirecTV (2002)’ in John E. Kwoka, Jr. and Lawrence J. White, The Antitrust Revolution Economics, Competition and Policy (fifth edition, Oxford University Press 2009) 135–37. 75

Part II

Merger Remedies and Merger Remedy-Related Arbitration

The first part of the book offered a detailed account of the different theories of harm and special industry-specific factors that merit consideration in the review of ICT mergers. This second part of the book concentrates on the relationship between the design of remedies, merger review and their impact on innovation. Chapter 9 evaluates the relationship between mergers and the incentives to innovate. The chapter also offers an overview of the various empirical and quantitative studies undertaken to ex-post evaluate the impact of merger control on static and dynamic competition. Chapter 10 first presents an overview of various attempts at classification of remedies and then discusses the approach pursued in this book along with the rationale for pursuing such a classification. Chapter 11 discusses the advantages and the disadvantages of different types of structural remedies and offers some recommendations to make them more effective. Chapter 12 offers a detailed discussion on different types of non-structural remedies such as access remedies and interoperability remedies. The chapter seeks to highlight the valuable nature of these non-structural remedies in balancing the two critical factors in the design of remedies—first, preserving the pre-merger conditions of competition and second, promoting incentives to innovate. Chapter 13 discusses the remedies in the telecommunications sector. The chapter focusses on the evolution of remedies in the telecommunications sector by offering a detailed account of the decisions in H3G Ireland/O2, Telefónica Deutschland/E-Plus and H3G/Orange Austria. The innovative remedial design and the analysis of unilateral effects in these mergers makes the discussion equally relevant and applicable across the ICT sector in general (with the exception of multi-sided platforms, that are discussed separately in Part III of this book). The chapter also critically assesses the Commission’s conditional clearance decision in H3G Italy/WIND/JV and deliberates whether this decision indicates a detour from the Commission’s earlier practice in four-to-three telecom mergers. Chapters 14 and 15 offer a detailed discussion on merger remedy-related arbitration. RTI v. Sky, the first and to date, the only arbitration resulting from merger commitments is discussed as a case study in chapter 15. These two chapters together

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II

Merger Remedies and Merger Remedy-Related Arbitration

seek to highlight the innovative nature of this innovation suprenante and offer recommendations to further refine these arbitration clauses. Chapter 16 discusses the roles and responsibilities of monitoring trustees. It also evaluates the advantages and the challenges associated with an ever-expanding role of the trustee. The chapter argues that the trustees’ function has transgressed from the traditional function of monitoring commitments to a more proactive role of managing trustee. The trustee today plans an increasingly active role in managing the divested business and supervising behavioural commitments.

Chapter 9

Mergers, Innovation and Remedies’ Design

Abstract This chapter first evaluates how mergers have a positive impact on the incentives to innovate, followed by a discussion on merger remedies. It also discusses key economic and econometric studies that ex-post evaluated the impact of merger control on competition. The chapter concludes by summarising the key set of factors that need to be considered in the design of ICT merger remedies.

9.1

Mergers, Innovation and Competition

In ‘innovation intensive industries’, the law enforcers are forced to make a difficult ex-ante analysis of predicting the future effects on consumer interests.1 This difficulty gets even more evident while making conditional merger clearances—wherein the challenge is the selection of a suitable (behavioural) remedy designed on the basis of a ‘prospective market analyses’.2 There are three criteria to determine whether a given resource allocation is efficient: allocative, productive and dynamic.3 Whereas

Josef Drexl, ‘Real Knowledge is to Know the extent of One’s Own Ignorance: On the Consumer Harm Approach in Innovation-related Competition Cases’ (2009–2010) 76 Antitrust Law Journal 677, 706. 2 Patrice Bougette and Christian Monet, ‘Doutes sur les remèdes non structurels dans le contrôle des concentrations’ (2005) 2 Revue Lamy de la Concurrence 9, 10. 3 Allocative efficiency refers to a state whereby existing resources in the economy are allocated to their most efficient use. In economic parlance, this is the equivalent of Pareto efficiency as any redistribution will benefit one individual to the detriment of another. Productive efficiency means that each unit of output produced consumes the smallest possible quantity of inputs. Dynamic efficiency is attained when the cost of the last unit of investment in research and development (R&D) is equal to the anticipated revenue generation from this unit. In economic terms, when the marginal cost of R&D is equal to the marginal revenue generated from this investment, a given process is said to be dynamically efficient. See, Ulrich Schwalbe and Daniel Zimmer, Law and Economics in European Merger Control (Oxford University Press, 2009) 3–10. 1

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_9

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allocative and productive efficiency are static concepts of efficiency, dynamic efficiency is a dynamic concept that directly impacts innovation.4 The relationship between the market structure and innovation is unsettled and so are the criteria against which one can evaluate the impact of a proposed concentration on the intensity of innovation. While evaluating the impact of a given merger on price and innovation, the competition authorities struggle to answer and balance this trade-off between dynamic and static efficiency.5 Schumpeter’s theory of creative destruction views competition as a dynamic and on-going process. This implies that the cycle of creative destruction leads entrepreneurs to create and introduce innovative products and services that in turn offers them a position of monopoly. This monopoly is short-lived and the profits earned are the rent received for taking the risk. It lasts only until another firm introduces a new and improved product to challenge this position of leadership.6 In contestable markets without political, legal or strategic barriers to entry and with the presence of ‘innovative’ and ‘imitative’ entrepreneurial culture, minimalist competition policy may indeed be in the best interest of competition such that the rivalry leads to an ongoing cycle of innovation and creative destruction.7 The process of active rivalry and competition is however, based on the presumption that the market experiences little or no entry barriers. However, this presumption gets challenged in the ICT sector as network effects generate substantial first mover (or second-mover advantages, as discussed in Chap. 3) and incumbency advantages, which in turn creates opportunities for incumbents to act strategically and raises barriers to market entry. Presence of network effects ensures that the first mover can benefit from ‘path dependency, lock-in effects and patent thickets’ to enjoy a position of dominance spanning over many subsequent product generations.8 To avert this and ensure competitive markets, merger control can play an instrumental role in promoting competition in innovation. The neo-Austrian school is an elaboration of the Schumpeter’s theory of creative destruction.9 The neo-Austrians, like Schumpeter, reject the static neo-classical equilibrium model and argue that in the market place, economic disequilibrium 4 Ulrich Schwalbe and Daniel Zimmer, Law and Economics in European Merger Control (Oxford University Press, 2009). 5 J Gregory Sidak and David J Teece, ‘Dynamic Competition in Antitrust Laws’ (2009) 5 Journal of Competition Law and Economics 581, 584. 6 The term is named after Joseph Schumpeter, who propounded that innovation competition and not static competition is the tour de force of the new age. Thus, temporary incumbent monopolists are replaced by new innovating firms who introduce new and more innovative products in the market. See, Joseph A Schumpeter, Capitalism, Socialism and Democracy (first published 1927, Harper & Row 1942). 7 Oliver Budzinski, ‘Pluralism of Competition Policy Paradigm and the Call for Regulatory Diversity’ [2003] Philipps University of Marburg Volkswirtschaftliche Beitraege No. 14/2003 21–22. 8 Ilene Knable Gotts, Scott Sher and Michelle Lee, Antitrust Merger Analysis in High-Technology Markets, European Competition Journal Vol. 4 No. 2 (December 2008) at pp 465–466. See also the references therein and the discussion on the Portuguese Autoridade da Conorrencia’s conditional clearance of the Sonaecom and Portugal Telecom merger. 9 Mika Oinonen, Does EU Merger Control Discriminate Against Small Market Companies? Diagnosing the Argument with Conclusions (Kluwer Law International 2010) 57.

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characterises the process of rivalry and competition.10 Hayek sees this as a ‘discovery procedure’11 and argues that ‘competition is valuable only because and so far as, its results are unpredictable and on the whole different from those which anyone has, or could have deliberately aimed at’.12 In both, the Schumpeterian and the neo-Austrian approach, the structural approach of the Harvard school to analyse competition through the Structure Conduct Performance (the SCP) paradigm is disregarded. Instead, it is the real world dynamic process of competition that is considered way more insightful. The seminal question is: whether the competition in the industry is an open process wherein barriers to entry do not restrict potential entrepreneurs from entering the market or introducing a new product that is capable of challenging the incumbent monopolist.13 As we shall see in the following chapters, factors such as intellectual property rights and the related access issues may present high entry barriers for potential entrants. In Google/Motorola for instance, the European Commission, the US FTC and the Chinese MOFCOM (now the SAMR), analysed vertical effects resulting from Google’s ownership of Android, the mobile OS, a key input in smart mobile devices, and the SEPs as key inputs that Google, following the transaction, was to acquire from Motorola.14 The EU and the US competition authorities offered unconditional clearance by considering Google’s commitment letter, although the Chinese MOFCOM (now the SAMR) cleared the merger only after the parties submitted substantial behavioural commitments. In Intel/McAfee, Cisco/Tandberg, Google/ITA and ARM/Giesecke & Devrient/ Gemalto/ JV, the relevant competition authorities identified access and interoperability issues that were expected to adversely impact future innovation and cleared the merger only after the parties submitted substantial access remedies with suitable monitoring mechanisms. The presence of network effects, means that in certain cases, a merger could create an impetus for further innovation as ‘networks require certain scale and scope’ to be able to endow its customers with the benefits of a large userbase.15 This has, for instance, been accepted as an argument by the European Commission in telecommunications mergers wherein the merger is expected to

10 Martti Virtanen, Market Dominance-related Competition Policy: An Eclectic Theory and Analysis of Policy Evolution (Publications of the Turku School of Economics and Business Administration 1998) 41. 11 Friedrich-August von Hayek, ‘Der Wettbewerbs als Entdechungsverfahren’ 1968 lecture sponsored by the Institut für Weltwirtschaft at the University of Kiel, published at No. 56 in the series Kieler Vorträge translated as ‘Competition as a Discovery Procedure’ (Marcellus S. Snow (tr) (Fall 2002) 5(3) The Quarterly Journal of Economics 9). 12 Ibid. 13 Mika Oinonen, Does EU Merger Control Discriminate Against Small Market Companies? Diagnosing the Argument with Conclusions (Kluwer Law International 2010) 57–58. 14 Google/Motorola Mobility (Case COMP/M 6381) [2012] OJ C075/01, paras 62–63. 15 Ilene Knable Gotts, Scott Sher and Michelle Lee, ‘Antitrust Merger Analysis in High-Technology Markets’ (December 2008) 4(2) European Competition Journal 463, 477.

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benefit the firm through a pan-European network and facilitate its endeavour to offer next generation services.16 As opposed to the more traditional approach in the mainstream Industrial Organization, the New Industrial Organization (NIO) or the New Industrial Economics analyses the dynamics of competition in a market and how economic agents strategically interact in the market place to ‘pre-empt such anticompetitive behaviour’.17 The NIO uses game theory models to analyse such strategic interaction amongst the agents.18 There are two main kinds of strategic behaviour: cooperative and non-cooperative. Non-cooperative behaviour leads to unilateral effects.19 An important consequence of using the tools of NIO is the replacement of the traditional SCP approach with a more dynamic modelling wherein one observes the three factors—structure, conduct and performance— acting endogenously and influencing one another simultaneously. Empirically, this means to effectively assess the competitive situation, cross-sectional econometric studies need to be complemented with inter- and intra-industrial time series analysis.20,21 However, as identified in the discussion on quantitative methods in merger control, the econometrics studies, despite their high degree of sophistication, present limitations and need to be interpreted cautiously in light of the available qualitative evidence.22 The EU, the UK and the US competition authorities tend to consider both the qualitative, as well as quantitative evidence—with some subtle differences in the relative weightages offered to the two types of evidence. In certain scenarios where the change in HHI levels may be below the prescribed levels in the 2004 EU HMG, the Commission may nonetheless identify competition concerns. Under the 2004 EU HMG, the loss of a maverick or an important innovator can have significant negative effects on the process of competition.23 A maverick with a previous history of innovation presents way higher probability of disrupting coordination.24 Likewise, if a merger leads to the loss of a ‘potential

16

See Chap. 13 Remedies in the Telecommunications Sector. Mika Oinonen, Does EU Merger Control Discriminate Against Small Market Companies? Diagnosing the Argument with Conclusions (Kluwer Law International 2010) 65. 18 George B Shepherd, Joanna M Shepherd and William G Shepherd, ‘Antitrust and market dominance’ (Winter 2001) 46(4) The Antitrust Bulletin 835, 850–852. 19 See Chap. 4: Theory of Harm: Unilateral Effects in ICT Mergers. 20 In time series analysis frequency of events are statistically assessed to make interpretations about the trend. The analysis is frequently used in weather forecasting and stock exchange analysis. 21 Mika Oinonen, Does EU Merger Control Discriminate Against Small Market Companies? Diagnosing the Argument with Conclusions (Kluwer Law International 2010) 68. 22 See Chap. 6 Theories of Harm: Conglomerate Effects and Quantitative Analysis in ICT Mergers. 23 Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31/05, para 20. 24 Ibid. 17

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entrant’ or a ‘recent entrant with a small market share’, the Commission may categorise them as horizontal competition concerns.25 Do competitive markets lead to greater or reduced levels of innovation? Can mergers create an incentive for start-ups to innovate? Who is more innovative—a start-up or the incumbent market leader? Empirical evidence indicates that large companies are better at incremental innovations, and they also better adapt to the gradual evolution of the markets.26 However, these large corporations find it a challenge to cope with disruptive innovation such as a breakthrough technology or a significant regulatory change in the market—changes that may be better dealt with by a new entrant.27 Start-ups may be better positioned to take advantage of these disruptions in the market, as well as disruptive scientific advancements that may potentially eat into the market share of the incumbent product.28 Mergers can in this respect play an important role as it may actually be efficient for big firms to grow inorganically by acquiring innovation from specialised targets rather than engage in an innovation race and conduct in-house R&D.29 An active acquisition market is also a strong incentive for start-ups to innovate and conduct R&D.30 When a monopolist innovates, the profits from the new innovation may replace the profits earned from the existing product. The new product cannibalises the profits earned from an existing product. This is referred to as ‘replacement effect’. Presence of replacement effect diminishes the incentives of an established market leader to introduce new products as the latter exerts ‘replacement effect’ on the current product.31 A start-up or a small firm on the other hand faces no such constraints and has greater incentives to innovate and disrupt the existing market structure. Once the prevailing market structure is disrupted, or is on its way to get disrupted, the acquisition of the product or the service by the incumbent player(s)32 is their most rational strategy. In the Google/ITA merger for instance, Google found that conducting in-house R&D to develop its own P&S

25

See discussion on the effects-based approach under the 2004 Merger Regulation in Chap. 7 Merger Control in the EU and the UK. 26 Clayton Christensen and Michael Overdorf, ‘Meeting the Challenge of Disruptive Change’ [March-April 2000] Harvard Business Review 67. 27 Ibid. 28 Kenneth J Arrow, ‘Economic Welfare and the Allocation of Resources to Invention’ in Richard Nelson (ed), The Rate and Direction of Economic Activity (Princeton University Press 1962) 609, 622–26. 29 Philippe Aghion and Jean Tirole, ‘On the Management of Innovation’ (1994) 109(4) Quarterly Journal of Economics 1185. 30 Gordon M Philips and Alexei Zhdanov, ‘R&D and the Incentives from Merger and Acquisition Activity’ (2013) 26(1) The Review of Financial Studies 34. 31 Kenneth J Arrow, ‘Economic Welfare and the Allocation of Resources to Invention’ in Richard Nelson (ed), The Rate and Direction of Economic Activity (Princeton University Press 1962) 609. 32 Depending upon the current market structure—whether it is a monopoly or oligopoly—the market may currently be served by a different number of players.

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system was expensive, uncertain and time-consuming. The acquisition of ITA instead, was viewed as a better strategy to enter the market for travel websites.33 For the incumbent monopolist/oligopolists too, it may be a good strategy, considering that with their marketing acumen and resources they are rather betterpositioned to engage in further product development, its integration with the existing portfolio of products and market them successfully. In the Apple/Beats merger for instance, Apple acquired control of Beats Electronics and Beats Music.34 Apple is a US-based manufacturer and seller of mobile communication devices, media devices, and digital music online.35 To sell the music, Apple distributes software application iTunes, which can help its users purchase and download music from iTunes Store.36 Beats Electronics during the merger sold audio products such as headphones and audio speakers under the brand ‘Beats by Dr. Dre’ and was also engaged in the business of audio software and hardware for computers.37 Beats Music, a spin-off from Beats Electronics also offered streaming of music, via its software called Beats Music.38 The European Commission in its competitive analysis identified two relevant markets—the market for headphones39 and the market for digital music distribution.40 For Apple, the acquisition was part of its ‘concentric expansion strategy’. Under this strategy, the firm identifies its core strengths at the nucleus. These strengths may include marketing acumen, management expertise or research and development and production abilities. Having identified its ‘core strengths’ (and key weaknesses), the firm then seeks to expand towards its ‘strengths and away from its weaknesses’.41 From the perspective of Beats Electronics and other such start-ups, value received from such acquisitions is a key incentive to engage in such disruptive entrepreneurial ventures and innovate. The price paid for the acquisition was the ‘innovation rent’ received by the start-up ‘Beats Electronics’—the prospect of which was its key motivation to engage in the race for challenging the incumbent market structures in the first place. Viewed from this perspective, a start-up in the Schumpeterian analysis is that innovator who receives a ‘premium’ for undertaking the risk to disrupt the status quo. Mergers may thereby seem to offer an impetus for innovation and in that respect are pro-innovation.

33 United States v. Google Inc., No. 1:11-cv-00688, 2011 WL 1338047, Complaint ¶ 42 (D.D.C. Apr. 8, 2011), available at accessed 06 January 2019. 34 Apple/Beats (Case No COMP/M.7290) [2014] OJ C260/08, para 1. 35 Ibid., at para 2. 36 Ibid. 37 Ibid., at para 3. 38 Ibid., at para 4. 39 Ibid., at paras 11–16. 40 Ibid., at paras 17–21. 41 Robert M Allan Jr, ‘Expansion by Merger’ in William W. Alberts and Joel E. Segall (eds), The Corporate Merger (Chicago and London: The University of Chicago Press, 1969) 102.

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However, mergers in certain scenarios may also be anti-competitive. In the United States, an anticompetitive deal that is not reportable under Hart-Scott-Radino and has already been consummated can still be subject to challenge under Section 7 of the Clayton Act. The US Department of Justice challenged the consummated acquisition of Power Reviews by Bazaarvoice.42 The parties were one others’ closest rivals in the market for Internet product ratings and reviews platforms. Judge Orrick observed: [T]he fact that social commerce and eCommerce tastes and products are developing and constantly changing does not diminish the applicability of antitrust laws - they apply in full force in any market. There is no antitrust exemption that allows the market-leading company in a highly concentrated market to buy its closest competitor, even within the evolving social commerce space, when the effect is likely to be anticompetitive.43

9.2

Merger Remedies

This section seeks to define merger remedies and how lawyers and economists differ in the meaning that they attach to the expression remedies (Sect. 9.2.1), followed by a discussion on why are remedies required in the first place (Sect. 9.2.2) and how remedies need to be proportional to the competitive harm identified and balance the competition and innovation trade-off (Sect. 9.2.3). Section 9.2.4 discusses ex-post studies on the effectiveness of merger remedies. These studies were undertaken by various competition authorities and economists on both sides of the Atlantic.

9.2.1

Merger Remedies: A Definition

Merger remedy may be defined as the obligations made by the merging parties in order to receive a conditional clearance decision of the relevant competition authority. The principle objective of such a remedy is to balance the objectives of promoting competition while preserving merger-related advantages.44 Three factors impact the choice of remedies—the elimination of competition concerns, the implementation concerns and the ability to monitor commitments.45

42 United States v. Bazaarvoice Inc., Case No. 13-cv-00133-WHO,2014 WL 203966 (N.D. Cal. Jan. 8, 2014) accessed 06 January 2019. 43 Ibid., ¶ 133. 44 Institute of Competition Law research sponsored by Clifford Chance and PricewaterhouseCoopers LLP (the UK firm), ‘The Merger Remedies Matrix’ Concurrences

accessed 06 January 2019. 45 Mika Oinonen, Does EU Merger Control Discriminate Against Small Market Companies? Diagnosing the Argument with Conclusions (Kluwer Law International 2010) 52.

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Modifications to concentrations, in the form of commitments are described as ‘remedies’46 and the Commission’s notice on remedies47 provides guidelines on modifications and commitments undertaken by the parties to modify the concentration. Such commitments have to be proposed by the parties and the Commission cannot unilaterally impose them on the parties.48 While accepting commitments, the Commission limits itself by a ‘margin of discretion’. The 2008 Merger Remedies Notice sets the outer boundary for this discretionary limit. This self-limit of margin of discretion is the effect of ‘principle of legitimate expectations’.49 In case the notified concentration raises ‘serious doubts’, the Commission has a ‘broad discretion’ to ask for commitments from the parties.50 It is only when the Commission has committed a ‘manifest error of assessment’ that such a decision is subject to judicial scrutiny.51 From an interdisciplinary perspective, it is also noteworthy to mention how differently the lawyers and the economists understand the expression remedies.52 Whereas a lawyer’s perception of a ‘legal remedy’ is the identification of action to be undertaken in case of a finding of an illegal conduct; an economist identifies a remedy as an act to correct the market failure identified.53 There would be perfect congruity in the two approaches if legislatures and courts made rules that would come into operation only on a finding of a market failure.54 Considering the prospective nature of merger control, that however, is not the case, and it is this disconnect between the ideal world and the real world that this second part of the book aspires to bridge.

Johannes Lübking, ‘Revision of the Notice on merger remedies’ (2007) 2, 3–4 Competition Policy Newsletter accessed 06 January 2019. 47 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01. 48 Ibid., at para 2. 49 Ioannis Lianos, ‘Competition Law Remedies in Europe Which Limits for Remedial Discretion?’ (January 2013) CLES Research Paper Series 2/2013, 52 accessed 06 January 2019. 50 Case T-158/00, Arbeitsgemeinschaft der öffentlich-rechtlichen Rundfunkanstalten der Bundesrepublik Deutschland (ARD) v Commission, [2003] ECR II-3825, para 328. 51 Case T-119/02, Royal Philips Electronics NV v Commission [2003] ECR I-1433, para 77. 52 Damien Geradin and J Gregory Sidak, ‘European and American Antitrust Approaches to Antitrust Remedies and the Institutional Design of Regulation in Telecommunications’ in Martin E Cave, Sumit K Majumdar and Ingo Vogelsang (eds) Handbook of Telecommunications Economics Vol 2 (Oxford University Press 2006) 530, 530–32. 53 Ibid. 54 Ibid. 46

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9.2.2

151

Why Do We Need Remedies?

In case of mergers taking place in ‘imperfectly competitive markets’, a proposed concentration can simultaneously lead to two countervailing effects—on the one hand it may lead to ‘downward shifts in marginal costs’ and on the other, it may lead to ‘increased market power’.55 Merger control in such a case is a balancing exercise and the key issue is: post-merger which of the following two effects is likely to be more dominant—efficiency (whether dynamic or static) or market power? In case of mergers leading to competitive harm, the competition authorities want to ensure that the mergers retain the resulting efficiency benefits while potential anti-competitive effects are remedied. Viewed from this perspective, the remedies perform the balancing act of preserving merger-specific efficiencies while simultaneously remedying the resulting anti-competitive effects. If a merger leads to certain competitive harm, the authorities analyse whether post-merger market entry may be sufficient to offset the anti-competitive effects and make the market competitive. Such an entry may be committed or uncommitted. Committed entry is said to take place when post-merger new entrants enter the market by incurring substantial sunk costs. Considering that the time frame considered by the competition authorities is usually two to three years, it is clearly committed entry that is deemed to be more relevant. In case the entry is not expected to materialise in the anticipated time frame or the merger increases barriers to entry, the remedies seek to lower these entry barriers and facilitate timely entry. The 2004 EU HMG Guidelines for instance, identify ‘technical advantages such as preferred access to essential facilities’, ‘innovation and R&D, or intellectual property rights’ as incumbency advantages that may create barriers to market entry.56 Access remedies can play an important role in lowering these entry barriers.57

9.2.3

Merger Remedies and the Principle of Proportionality

Remedies must ‘preserve the efficiency-enhancing potential’ of the transaction without compromising the principle of preserving competition.58 An effective remedy is one that ‘just’ addresses the harm to competition from the merger, ‘preserve

55 Daniel J Gifford and Robert T Kudrle, The Atlantic Divide in Antitrust: An Examination of US and EU competition policy (Chicago and London: The University of Chicago Press 2015) 52. 56 Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings [2004] OJ C31/05, paras 71(b)-(c). 57 See Chap. 11 Structural Remedies and Chap. 12 Non-structural Remedies. 58 David A Balto and Richard G Parker, ‘The Evolving Approach To Merger Remedies’ Antitrust Report (May 2000 Washington DC).

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competition’ and ‘not’ determine the outcomes in the market and is based upon the proposed theory of harm such that the remedy ‘just’ cures the identified harm. The US Merger Remedies Guide, 2011 state that the objective of the remedies is to ensure pre-merger market equilibrium.59 The remedy does not need to make the market more competitive; it only needs to restore the market condition to the pre-merger equilibrium.60 In the EU, Article 5(3) and 5(4) of the TEU lay down the principles of subsidiarity and proportionality.61 These principles lie at the heart of the EU law in general. On merger control in particular, the commitments should be ‘proportionate’ to the competition problem identified62 and must be successful in eliminating them in entirety.63 The Remedies Notice lays down that such a commitment should be able to completely eliminate all the concerns and must be ‘comprehensive and effective from all points of view’.64 The ultimate benchmark to evaluate the value of merger remedies is their effectiveness in attaining the given objective.65 In the EU, the merger remedies aim not only to restore pre-concentration levels of competition, it also aims to facilitate ‘competitive market structures’.66 This implies that in the EU, the Commission may accept remedies that ‘presumably establish a market equilibrium that is more competitive than the pre-merger equilibrium’.67 For a phase-I conditional clearance decision, the competition problem must be ‘so straightforward and the remedies so clear-cut’ that any serious doubts concerning

59 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division, 2 [June 2011] accessed 06 January 2019. 60 United States, ‘Roundtable on Remedies in Merger Cases – Contribution from the United States’ (Working Part No. 3 on Cooperation and Enforcement, June 2011) DAF/COMP/WP3/WD(2011) 58 accessed 06 January 2019. 61 Article 5, part IV, Consolidated version of the Treaty on European Union [2012] OJ C 326/13. 62 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, recital 6. 63 Ibid., at recital 30. 64 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01. 65 The Merger Remedies Matrix is a database consisting of over 600 national merger decisions in various EU member states where in the commission used remedies to alleviate the competition concerns. See Institute of Competition Law research sponsored by Clifford Chance and PricewaterhouseCoopers LLP (the UK firm), ‘The Merger Remedies Matrix’ Concurrences

accessed 06 January 2019. 66 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 15. 67 Ioannis Lianos, ‘Competition Law Remedies in Europe Which Limits for Remedial Discretion?’ (January 2013) CLES Research Paper Series 2/2013, 49 accessed 06 January 2019.

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substantial impediment to effective competition are clearly ruled out within the meaning of Article 6(1)(c) of the 2004 Merger Regulation.68 The UK Merger Remedies Guide, 2008 states that the remedies ‘must’ be proportionate to the competition concerns identified, the substantial lessening of competition and the consequent adverse impact.69 The principle of proportionality lies at the core of the EU merger control. Amongst various feasible remedies, the one least disproportionate in terms of costs is the one that is also the most desirable, even if it can only ‘partially remedy’ the SLC.70 Cost effectiveness refers to different aspects of the cost, such as costs incurred by the ‘merger parties, third parties, the OFT (now the CMA) and other monitoring agencies’,71 that may need to incur ‘significant ongoing compliance costs’, the ‘foregone benefits’ or costs in the form of ‘distortions in market outcome’.72 It may also include an evaluation of foregone benefits that may have otherwise benefitted the customers.73

9.2.4

Ex-post Studies

Considering the prospective nature of merger remedies, a periodic ex-post evaluation is a very constructive exercise to assess their effectiveness. Based on the experience from the past practices, it may therefore be useful to incorporate the findings from these ex-post studies to further enhance the overall effectiveness of merger control. The US FTC was one of the first authorities to undertake such an exercise. The FTC’s 1999 ex-post study found divestitures to be largely successful in creating competitors, although there are still considerable problems in restoring effective competition. Asymmetry of information and strategic behaviour by the respondents such as the deliberate selection of marginally acceptable buyers frequently impeded the eventual success of the divested business.74 This implies that although the divestitures did lead to market entry in the short term; however, the owners of divested business failed to offer viable competition in the long run. In the EU, the DG Competition undertook a merger remedies study in 2005, wherein it reviewed conditionally cleared mergers between 1996 and 2000. The

68

NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2, para 246. Competition Commission, CC8 - Merger Remedies: Competition Commission Guidelines, recital 1.7 [November 2008] accessed 06 January 2019. 70 Ibid., at recital 1.9–1.13. 71 Ibid., at recital 1. 72 Ibid., at recital 1.11. 73 Ibid., at recital 1.15. 74 Federal Trade Commission, ‘A Study of the Commission’s Divestiture Process’ [1999] accessed 06 January 2019. 69

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study reviewed the design and implementation issues associated with merger remedies.75 The US FTC is also the most recent to undertake an ex-post assessment of the effectiveness of merger remedies. The FTC recently released its report, wherein it evaluated the effectiveness of remedies in over 89 merger orders—including 85 horizontal and 4 vertical merger decisions—issued by it between the period 2006 and 2012.76 A remedy was considered successful only if it ‘maintained’ or ‘restored’ conditions of competition in the relevant market.77 With this standard, ‘all the divestitures’ that involved an ongoing business were found successful.78 The study indicated that the “scope of the assets package, the adequacy of the due diligence and the transfer of back-office functions” were some of the areas that require further improvement.79 Merger remedies have also been analysed using the event study methodology. Event studies are based on the premise that the markets are rational and that these studies when conducted objectively, are useful in highlighting the evolution of postremedy market structure and the process of competition. Duso et al. employed an event study methodology to identify the anticompetitive effects of merger control in the EU and reached the conclusion that remedies were inappropriately imposed by the Commission in a substantial percentage of the cases. The study found that although the market could correctly anticipate the effectiveness of phase I remedies; it failed to similarly accurately predict the impact of phase II remedies.80 In another study, Duso et al. use stock market data to evaluate whether the EU merger procedures were prone to any errors. It identified that consumer surplus was ‘not’ the only determinative factor that influenced Commission’s choice of remedies; other institutional and political factors, as well as market definition and the procedural aspects of merger control significantly influenced the final outcome.81

75 DG Comp, European Commission, ‘Merger Remedies Study’ [October 2005] accessed 06 January 2019. 76 Federal Trade Commission, ‘The FTC’s Merger Remedies 2006–2012: A Report of the Bureau of Competition and Economics’ [January 2017] accessed 06 January 2019. 77 Ibid., at pp. 1–2. 78 Ibid. 79 Ibid., at p. 2. 80 Tomaso Duso, Klaus Gugler and Burcin Yurtoglu, ‘EU Merger Remedies: A Preliminary Empirical Assessment’ in Vivek Ghosal and Johan Stennek (eds), The Political Economy of Antitrust: Contributions to Economic Analysis (London: Elsevier 2007) 302. 81 Tomaso Duso, Damien J Neven, and Lars-Hendrik Röller, ‘The Political Economy of European Merger Control: Evidence Using Stock Market Data’ (2006) Discussion Paper FS IV 02-34r, Wissenschaftszentrum Berlin

accessed 06 January 2019.

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In an empirical assessment of merger remedies in phase I and phase II conditional clearance decisions, it was identified that in over 13.2% of the conditional clearances, ‘only’ structural remedies were used, whereas 5.4% of the mergers received only behavioural commitments. About 15.6% of the mergers were cleared with a mix of structural and behavioural remedies.82 Angelov et al. use event study methodology to assess the competitive effects of remedies in the ICT sector. The key assumption of the studies is that when parties announce to merge and the EC83 follows it up with an investigation, such decisions influence the stock return of competitors and thereby present the opportunity to evaluate the competitive effects of such events in varied set-ups.84 Based on the market reaction, they suggest that remedial intervention in the ICT horizontal mergers are more frequent by the EC, even when going by market response, such mergers are not anti-competitive. In short, going by market reaction, such merger may not have been anti-competitive, they nonetheless, received conditional clearance from the Commission.85 The findings of the study, although important—but as discussed Chap. 4 dealing with the Unilateral Effects in the ICT sector and Chap. 7 dealing with the Merger Control in the EU and the UK—seem to have only historical significance. Bougette et al. develop and empirically evaluate a discrete choice model of merger remedies as a basis to analyse the merger control policies of the European Commission. The research sought to identify the ‘determining factors’ by employing a ‘neural network model’86 utilising three multinomial logit models. It identified that market power was frequently positively co-related with remedies, irrespective of the phase of merger review; second, innovation-led sectors such as energy, transport and communications experienced more frequent behavioural intervention and finally, the

Tomaso Duso, Klaus Gugler and Burcin Yurtoglu, ‘EU Merger Remedies: A Preliminary Empirical Assessment’ in Vivek Ghosal and Johan Stennek (eds), The Political Economy of Antitrust: Contributions to Economic Analysis (London: Elsevier 2007) 302, 302–312. 83 When the article was written, the present day European Union was the European Community. The EC is now the EU and European Commission is referred to as the EU Commission. 84 Peter Angelov, Stephanie Rosenkranz and Hans Schenk, ‘Competitive Effects of Merger Remedies in Europe’s High-Tech Industry’ (October 2012) Discussion Paper Series 12–16, Tjalling C. Koopmans Research Institute, 23 accessed 06 January 2019. 85 Ibid. 86 Neurons are the most fundamental components in the human nervous system. They are organised in layers where each neuron performs a specific pre-defined function—as an afferent axons that is the input layer, hidden layer or efferent axons, the output layer. Neural Network Model first developed by the mathematicians McCulloch and Pitts in 1943 to explain how the neurons function, learn and unlearn and respond to signals, the stimuli, was subsequently improved and adapted as a ‘neural network model’, today widely applied in econometric analysis. The model is designed along similar lines as discussed above and is highly useful to explain nonlinear relationships between predictors and target variables. 82

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then Competition Commissioner in charge Mario Monti’s policies, also positively co-related with a more interventionist merger control policy.87 Kwoka et al. conducted an empirical study of merger control across a range of sectors from automobiles to aviation and found that mergers ‘[mostly] result in competitive harm, usually in the form of a higher price’ and diminished innovation.88

9.3

Factors to Consider in the Design of Remedies in High Tech Mergers

The ‘particular circumstances, available information and time constraints of the case’ are key factors that limit the choice of remedies.89 Relevant customer benefits, refers to benefits to the customer that may result because of ‘lower prices, higher quality or greater choice of goods or services’ or ‘greater innovation’.90 In network industries, ‘potential relevant customer benefits’ may include ‘increase in the number of access points’ that may lead to improved reach and services offered by the network.91 Mergers may also lead to ‘economies of scale’, such as in production and distribution.92 Following section considers two key issues—the first factor usually leads to direct consumer harm and unfortunately, is largely neglected in most, if not all of the high technology mergers and the second concerns the gatekeeper effect. These two factors are particularly relevant in the design of remedies in the fast-moving innovation-led consumer segment of the ICT sector.

9.3.1

‘Upgrade Treadmill’, Hidden Costs and Consumer Harm

A merger between the two companies does not necessarily mean that their products will merge as well. For existing users of the acquired product, the cost of upgrading

87 Patrice Bougette and Stéphane Turolla, ‘Merger Remedies at the European Commission: A Multinomial Logit Analysis’ LAMETA Working Paper 2006-08, accessed 06 January 2019. The database constituted phase 1 and phase 2 merger cases in Europe from the 1990 to 2005. 88 John Kwoka, Mergers, Merger Control, and Remedies (The MIT Press 2015) 158. 89 Competition Commission, CC8 - Merger Remedies: Competition Commission Guidelines, recital 1.4 [November 2008] accessed 06 January 2019. 90 Ibid., at recital 1.14. 91 Ibid., at recital 1.19. 92 Ibid., at recital 1.13.

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or purchasing a new software,93 support for installed products, re-funds in case of non-performance and limit on subsequent software maintenance fee—are some of the critical issues. Enterprise products in particular require continued investments for updating the existing software—this can be a substantial proportion of a firm’s expenses. Thus, ‘upgrade treadmill’ or ‘hidden costs’ of a package software such as the ERP or video conference systems include the continuous investments involved in upgrading the installed software and training the in-house personnel to leverage the benefits of the IT infrastructure. On account of the huge sunk costs of implementation, including related learning effects, purchasing firms get locked-in to the system such that considering a switch to other substitutes, even if available, is not always practically feasible. In case of the proposed Oracle/PeopleSoft merger for instance, the dangers of such ‘hidden costs’ and the apprehension of Oracle not providing timely upgrades to the existing ERP customers and thereby locking the users in antiquated PeopleSoft ERP systems was palpably clear from the testimony of both the plaintiffs’ and the defendants’ witnesses.94 This cost is a continuous ongoing investment for the customers that make high value purchases for in-house use. Complex IT systems have significant learning costs in terms of training the personnel, consultation, change management and technical integration of the application with user enterprise’s pre-existing IT system. Considering their durability and the huge investments involved in the procurement of these systems, such products and services are often identified as ‘capital investment’ by the customers. These costs must be considered in evaluating the anti-competitive effects of the merger. The acquiring undertaking clearly has a ‘conflict of interest’ to offer timely and competitive upgrades of the products earlier offered by the acquired firm. Moreover, when the acquisitions are hostile and the objective of the acquisition is to have the customers of the acquired firm, the Oracle/PeopleSoft merger being a notable example of this ‘conflict’, there exists clear incentives to degrade the quality of the incumbent systems. The competition authorities must take this factor into account, particularly in their assessment of merger in markets that require substantial ‘capital investment’ by the customers. Conduct (or non-structural) remedies with an undertaking by the parties to provide timely upgrades at reasonable costs to the merged firm’s incumbent users, any further point solutions be interoperable with existing products and reasonable investment in R&D, could be some potential remedies to undo the harm while preserving the benefits of mergers in these markets. In the recent Google/ITA merger, as discussed in the following chapters, the US DOJ seems to have considered these factors in the remedial design.

93 In latest mergers, it emerges, that Commission has started to take note of this fact. See for instance, the Microsoft/ LinkedIn merger discussed in Chap. 17. 94 See for instance the Testimony of Kenneth Johnson and Michael Sternklar in Oracle/PeopleSoft who identified it as a ‘continuous investment’, United States v. Oracle Corp., 331 F. Supp. 2d 1098 (N.D. Cal. 2004).

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9 Mergers, Innovation and Remedies’ Design

‘Gatekeeper Effects’ and Merger Remedies

In case of telecommunications, media and internet mergers, vertical integration may lead to ‘gatekeeper effects’. Gatekeeper effects refers to the anti-competitive concerns arising resulting from the consolidation of key indispensable technologies in the hands of merging firms at different levels in the value chain and further strengthening of the effects by the presence of network effects, usually in the downstream market.95 In the ICT sector, wherein ‘third party access to essential infrastructures or networks and regulating emergence of ‘gate keepers’ controlling access to these facilities’ are the Commission’s key concerns, usually a mix of behavioural and quasi-structural remedies are employed.96 Remedies such as compulsory licensing that ‘use behavioural commitments to bring about structural changes’ in the market are frequently employed in cases involving intellectual property that offer competitive and strategic advantages to the merged parties.97 In Glaxo/Welcome merger for instance, in order to receive the conditional clearance, the parties offered to ‘exclusively license’ to a competitor the pipeline drug for oral anti-migraine. Ciba Geigy/ Sandoz likewise, was cleared, when the parties offered to license gene technology on a non-exclusive basis. At the time of the merger, it was the only gene technology available for the treatment of tumours. Gatekeeper effects are particularly noteworthy in the telecommunications sector. When liberalisation led to the opening up of the sector, the vertically-integrated incumbent monopolists were confronted with new entrants in the downstream market that had little or no presence in the upstream market. These entrants in order to be able to compete effectively with the incumbent operators, required access to inputs in the upstream market. The incumbent monopolists had incentives to refuse to deal with its competitors to prevent successful entry of competitors in the downstream market.98 Telecommunications mergers discussed in Chap. 13 deal with these gatekeeper effects, and how the European Commission has been during the regime of Commissioner Almunia particularly innovative in designing and accepting hybrid remedies in these mergers. Media markets, like the telecommunications sector too are frequently subject to gatekeeper effects. Media markets are ‘copyright-related markets’, wherein market power arises on two accounts: first, when right holders build large repertoires of works which collectively are ‘an essential input for the downstream markets’99 and second, dominance may also (and more frequently) result from control over

Eleanor Morgan, ‘Steering Mergers through the EU’s Regulatory Blocks: Remedies Under the EU Merger Control Regulation’ (October 2002) 20(5) European Management Journal 549, 552. 96 Ibid., pp. 549, 555–56. 97 Ibid., pp. 549, 555. 98 Dušan Popoviü, ‘Merger Remedies and Regulatory Measures in the EU Electronic Communications Sector: A Critical Assessment’ (December 2010) 10(4) European Business Organisation Law Review 575, 586–587. 99 Josef Drexl, ‘Competition Law in Media Markets and its Contributions to Democracy – A Global Perspective’, (2015) 38(3) World Competition 367, 378–79. 95

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‘bottleneck facilities and distribution networks’ that connect the final consumers with the service provider.100 This implies that the power-holders are the ‘intermediaries that stand between the creators and consumers’.101 In the US, the Comcast/ NBCU/JV and in the EU, the Liberty Global/Ziggo and the Liberty Global/Corelio/ W&W/De Vijver Media merger, discussed as case studies in Chaps. 4 to 6, offer an insightful discussion on these gatekeeper effects.

9.3.3

Additional Factors to Be Considered in the Design of Remedies

Mergers in the high technology sector have frequently been subject to in-depth and simultaneous examination by multiple jurisdictions worldwide. The authorities confront the challenge at every step of the competition analysis—from defining relevant markets to the pursuit of remedies. These mergers take place in a rapidly evolving market with scant guidance from academic literature revealing little about the possible future evolution of these markets. Particularly challenging have been the mergers in the multi-sided markets, wherein an attempt to define the relevant market has been equivalent of chasing a mirage. Erroneous assumptions and remedies can have disastrous and irreversible consequences for innovation in the sector—a price that an economy that seeks to lead through dynamic competition can hardly afford to pay. There is an added dimension of complexity to the review of these high tech mergers as competition authorities in the EU and US seem to be converging but the developing economies’ competition authorities such as the China’s MOFCOM (now the SAMR) seems to have followed an intermittently different line of approach. If Cisco/Tandberg is a watermark in the convergence of the two leading authorities on the two sides of the Atlantic, Google/Motorola is a landmark case that underscores the diverging approach of the Chinese MOFCOM (now the SAMR) from the EU and the US competition authorities. The latter decision also leads one to question, whether the pursuit of achieving industrial policy objectives through the instrument of merger control in particular and competition law in general is permissible. The following chapters discuss the different types of remedies employed by the competition authorities in recent high technology mergers.

100 101

Ibid., pp. 367, 379. Ibid., pp. 367, 379–80.

Chapter 10

Merger Remedies

Abstract Following three chapters (Chaps. 10–12), first attempt to define and classify merger remedies (Chap. 10); followed by a discussion on structural remedies (Chap. 11) and non-structural remedies (Chap. 12).

The previous chapter defined remedies and underscored the different perception of lawyers and economists on the nature, the function and the objective of remedies. This chapter concentrates on the classification of remedies. Classification of remedies raises two questions. The first challenge relates to the classification and categorisation of remedies as structural, behavioural and quasi-structural. A second and more significant reservation concerns the need for such a classification in the first place. Does classification of remedies on some basis help facilitate the process of competition? Does the process of classification help devise some ‘ready and instant’ merger remedies tool box from where the competition agencies can promptly pick up the tool of remedy to fix the identified harm? This brief chapter seeks to answer some of these questions. It begins by first looking at some of the frequently employed basis for the classification of remedies and then proceeds to formulate an approach that is useful and relevant from the perspective of this book. Motta et al classify remedies as structural and non-structural. They take allocation of property rights as the basis for the classification of remedies. Structural remedies are defined as those that ‘modify the allocation of property rights and create new firms’. Divestitures and partial divestitures are some of the frequently employed remedies that are clearly structural in nature. Residual remedies that merely seek to constrain the exercise of property rights such as compulsory licensing and access to intellectual property are defined as non-structural.1

1 Massimo Motta, Michele Polo and Helder Vasconcelos, ‘Merger Remedies in the European Union: An Overview’ in François Lévêque and Howard Shelanski (eds), Merger Remedies in American and European Union Competition Law (Edward Elgar 2004) 108.

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_10

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International Competition Network (ICN) classifies the remedies as structural and behavioural.2 ‘One-off remedies’ that do not require ex-post monitoring are classified as structural, whereas behavioural remedies are ‘normally ongoing remedies’ that ‘modify or constrain the behaviour’ of the merging parties.3 Intellectual property rights (IPRs) present a slightly complex case—they may be classified either as structural or behavioural—depending on whether there is a divestiture or the licensing of IPRs. The 2011 US Merger Remedies Guide classifies remedies as structural and conduct remedies. It defines structural remedies as those that involve the sale of physical assets or the creation of new competitors through the sale or licensing of intellectual property rights.4 Conduct remedies are defined as ‘provisions that prescribe certain aspect of the merged firm’s post-consummation business conduct’.5 The 2011 US Merger Remedies Guide identifies divestiture of all the assets that are necessary for the purchaser to be an effective and long-term competitor as clearly structural in nature. These assets may be tangible, non-tangible or a combination of both; divestiture of an existing business unit that is already operating independently of the other business units in the company and the divestiture of critical intangible assets to one or more purchasers either through sale or through licensing.6 Conduct remedies include firewall provisions, non-discrimination provisions, mandatory licensing, transparency, anti-retaliation, prohibitions on certain contracting parties and other miscellaneous remedies such as a requirement to notify otherwise non-reportable mergers, supply contracts, restriction on re-acquisition of scarce personnel assets and arbitration.7 The Guidelines also acknowledge that in certain cases, hybrid remedies—remedies that involve the combination of structural and conduct provisions may be most effective to alleviate the competition concern identified.8 Hewitt in his submission to the OECD Roundtable on Merger Remedies, classified remedies into four categories: (i) divestiture of a stand-alone, ongoing business;

2 The International Competition Network undertook Remedies Review Project which eventually led to the Recommended Remedies Practice. 3 ICN Merger Working Group: Analytical Framework Subgroup, ‘Merger Remedies Review Project, Report for the fourth ICN annual conference’ (Bonn June 2005) 7 accessed 06 January 2019. 4 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division, §§ II [June 2011] accessed 06 January 2019. ; United States v. 3D Systems Corp., 2002-2 Trade Cas. ¶ 73, 738(D.D.C. 2001). 5 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division, §§ II [June 2011] accessed 06 January 2019. 6 Ibid. 7 Ibid. 8 Ibid.

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(ii) divestiture of something less than a stand-alone, ongoing business; (iii) contractual arrangements such as the licensing of intellectual property; and (iv) other behavioural remedies.9 The Merger Remedies Study, 2005, conducted by the DG Competition, classified remedies into the following four categories based on their ‘intended competitive effect’: (i) transfer of market position; (ii) exit from a joint venture; (iii) granting access to assets and markets and (iv) other remedies.10 The Commission, as stated in the 2008 EU Remedies Notice, without making a strict compartmentalisation like the 2011 US Merger Remedies Notice, makes a general distinction between divestitures, other structural remedies such as offering non-discriminatory access to infrastructure or inputs and commitments that concern the future behaviour of the merging parties.11 In the UK, the remedies are classified into three broad categories: first, structural remedies that include divestiture, prohibition decisions, and intellectual property remedies; second, behavioural remedies that include IP-related remedies, enabling measures and controlling outcomes and finally, recommendations on regulations and conduct.12 Two features merit attention: first, unlike the 2008 EU Merger Remedies notice that views prohibition as an alternative in case the parties fail to recommend suitable remedies, the UK merger control views prohibition as one of the structural remedies. Second, like the EU and the US merger control, the UK merger remedies notice too, views intellectual property remedies at the interface of structural and behavioural remedies.13 From the foregoing discussion, the classification of remedies as structural and behavioural is not in black and white and is often an exercise of academic convenience.14 Considering a very practical and application-oriented dimension of the research that forms the basis of this book, it refrains from putting remedies in the straightjacket classification of structural, behavioural15 and hybrid. Instead the approach pursued is to broadly classify the remedies as structural and

Gary Hewitt, ‘Note de référence : Remèdes en cas de fusion’ (2005) 2(7) Revue de l’OCDE sur le droit et la politique de la concurrence 91ff. 10 DG Comp, European Commission, ‘Merger Remedies Study’, para 30 [October 2005] accessed 06 January 2019. 11 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 17. 12 Competition Commission, CC8 - Merger Remedies: Competition Commission Guidelines, part 2, recital 2.1-2.12 [November 2008] accessed 06 January 2019. 13 Competition Commission, CC8 - Merger Remedies: Competition Commission Guidelines, recital 2.7 [November 2008] accessed 06 January 2019. 14 Dušan Popoviü, ‘Merger Remedies and Regulatory Measures in the EU Electronic Communications Sector: A Critical Assessment’ (December 2010) 10(4) European Business Organisation Law Review 575, 582. 15 The expression behavioural, conduct and non-structural remedies will be used interchangeably. 9

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‘non-structural’,16 the latter generally referring to those that require continuous ex-post monitoring. The objective to use such a framework is twofold. First, this book intends to develop a guiding framework for the design of remedies— suggesting the merits and limitations of each of the remedies. The objective in pursuing such an approach is to offer the competition authorities and practitioners a ready reference for merger control.17 Second, behavioural commitments are often accompanied by additional ex-post measures for monitoring. These ex-post measures may involve employing a trustee and incorporating a merger remedy-related arbitration clause in the commitments. To ensure that the remedies are effective and achieve the desired results—use of trustees and arbitration merits special attention and are accordingly discussed as separate topics.18

16

The term non-structural is used to refer to remedies that require continuous ex-post monitoring. This book accordingly classifies remedies as structural (see Chap. 8) and non-structural (Chap. 9). To reiterate, as already mentioned in Chap. 1- merger control refers to the entire process of merger review from competitive assessment to merger remedies and the ex-post self monitoring mechanisms such as the monitoring trustees. 18 See Chap. 16 dealing with Monitoring Trustee and Chaps. 14 and 15 dealing with Merger Remedy-related Arbitration. 17

Chapter 11

Structural Remedies

Abstract This chapter discusses different types of structural remedies and their advantages and disadvantages. It also discusses the special set of factors that merit consideration in the design of structural remedies.

11.1

Preference for Structural Remedies

In United States v. E.I. du Pont de Nemours & Co.,1 the Supreme Court of United States held: [D]ivestiture has been called the most important of antitrust remedies. It is simple, relatively easy to administer, and sure. It should be in the forefront of a court’s mind when a violation of §7 has been found.

Today, even 50 years later, as this chapter identifies, it emerges that the competition authorities follow the advice with regularity in their choice and design of remedies! Remedies that restore rivalry referred to as structural remedies or divestitures are ‘expected to address the adverse effects at source’ and are ‘normally preferable to measures that seek to regulate the ongoing behaviour of the relevant parties’.2 The latter referred to as behavioural remedies, include ‘price caps, supply commitments or restrictions on use of long term contract’—may fail to be as effective and comprehensive as their structural counterparts and can also generate distortions of an otherwise competitive outcome.3 Behavioural remedies are less practical to implement as they require ‘ongoing monitoring and compliance activity’.4 Structural

1

366 U.S. 316, 330–31(1961). Competition Commission, CC8 - Merger Remedies: Competition Commission Guidelines, recital 1.8 [November 2008] accessed 06 January 2019. 3 Ibid., at recital 1.8, 2.14. 4 Ibid., at recital 1.8. 2

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_11

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remedies such as divestiture or prohibition are more preferable as they are more effective in dealing ‘directly and comprehensively [with SLC] at source by restoring rivalry’ and normally require no monitoring and enforcement post-implementation.5 They are widely accepted as the suitable benchmark by the EU, the UK and the US competition authorities for evaluating the effectiveness and efficiency of proposed remedies to preserve and promote effective conditions of competition.6 The remedial design in Glaxo plc/Wellcome Plc, a pharmaceuticals merger and Cisco/Tandberg, an ICT merger for instance, well highlight the preference for structural remedies. In Glaxo plc/Wellcome Plc, the FTC identified competition concerns in nine markets, three of which were expected to experience particularly diminished levels of innovation, as well as significant post-merger increase in prices.7 These three markets were: first, the market for second generation oral and intravenous antiviral drugs for treating herpes, wherein Glaxo and SB were the only drug providers8; second, the market for Topical prescription herpes antivirals wherein only SB was present, and Glaxo with its Zovirax creme was a potential competitor, offering the possibility to enter the market in less than a year9 and third, the Triptain drugs offered by Glaxo which along with its pipeline compound, SB209509, was a dominant player in the market for treating migraine headaches.10 The merger was cleared following a detailed divest and transfer agreement along with a provision for managing trustee to ensure the timely and proper execution of the divestiture.11 In Cisco/Tandberg, to alleviate competition concerns in the market for ‘dedicated room solutions’,12 the parties undertook to implement the interoperability remedies including inter alia, ‘the assignment of the management of updates of TIP to an independent industry body’.13 The remedies were crafted in the form of a divestiture and an independent industry body was assigned the task of managing the

5

Ibid., at recital 2.14. Bill Baer, ‘Acting Associate Attorney General Bill Baer Delivers Remarks at American Antitrust Institute’s 17th Annual Conference ‘Living with Market Concentration? New Perspectives on Merger Policy” (American Antitrust Institute’s 17th Annual Conference, Washington DC, US, 16 June 2016) accessed 06 January 2019; Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 61; Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/01, para 305. 7 In re Glaxo Wellcome plc and SmithKline Beecham plc, Docket No. C-3990, Complaint at ¶ 28 (December 15, 2000), available at accessed 06 January 2019. 8 Ibid., at ¶ 19, ¶28. 9 Ibid., at ¶ 21, 28. 10 Ibid. 11 Ibid., at ¶ 18–44. 12 Cisco/Tandberg (Case COMP/M 5669) [2010] OJ C036/9, para 87. 13 Ibid., at paras 147–150, 157. 6

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Divestitures in Oligopolistic Markets

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interoperability commitments.14 The DOJ found that the commitments made to the European Commission were sufficient to alleviate the competition concerns identified and both the authorities offered simultaneous conditional clearance to the proposed transaction.15 Divestiture or clean-break remedies have traditionally been a preferred form of remedy as they require no ex-post allocation of resources for monitoring and are believed to efficiently and promptly alleviate the competition concerns.16 For drafting these divestiture commitments, the Commission has provided on its website a detailed note titled ‘Best Practices Guidelines for Divestiture Commitments’. The ‘Model Text for Divestiture Commitments’ and the ‘Model Text for Trustee Mandates’ offer an outline for the design of structural remedies.17 The framework is a rough outline that indicates the key indicators that must be considered and included in the design of remedies. These Guidelines offer the parties the flexibility to adapt the commitments under the peculiar requirements of the case under consideration.

11.2

Divestitures in Oligopolistic Markets

Although the buyers of the divested assets and the merging parties differ significantly in their preferences, they share one identical interest—both sides intend to limit rivalry and prevent effective competition. The observation is particularly true in case of oligopolistic markets, where the markets are in a state of ‘competitive equilibrium’ and only a limited amount of ‘financial pie’ is available for sharing.18 Divestiture in such a scenario, if not cautiously executed, may help attain this mutually re-inforcing anti-competitive objective of limiting the process of competition. Ex-post studies undertaken by the EU and US competition agencies wellhighlight this strategic behaviour of the parties. The FTC’s 1999 Divestiture Study defined a divestiture as successful, if following the remedy a new entrant successfully entered the relevant market. Even with this

14

See Chap. 6 for a detailed discussion on theories of harm and remedies in the Cisco/Tandberg merger. 15 Justice Department will not challenge Cisco’s acquisition of Tandberg (29 March 2010) accessed 06 January 2019. 16 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division, §§ III A[October 2004] accessed 06 January 2019; Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, recital 15. 17 For a detailed discussion, kindly refer Chap. 7 Merger Review in the EU. 18 Joseph Farrell, ‘Negotiation and Merger Remedies: Some Problem’ in François Lévêque and Howard Shelanski (eds), Merger Remedies in American and European Union Competition Law (Edward Elgar 2004).

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limited definition of success, the Study found that over 25% of the divestitures failed to achieve the proposed objective.19 The DG Competition’s 2005 study defined a divestiture to be successful if it remained viable and an effective competitor in the relevant market in 3 to 5 year period following the divestiture. With these criteria, the study found that the remedy was effective in only 56% and partially effective in 25% of the cases.20 The 2005 study also found that phase I remedies were far more effective than phase II remedies.21 As it emerges from the findings of these two studies, even with a very narrow definition of success, the divestitures failed to attain the stated objective in over 25% of the cases in the US and over 19% of the cases in the EU. To add to this already complicated definition of success, ‘continuity of a divested business’ alone may not be the best criteria to measure its success; instead a better indicator is the growth in market shares of the divested business over time.22 This criterion seems more appropriate, considering that the objective of remedies is to preserve the pre-merger level of competition. With this criterion, however, it appears that structural remedies fail even more frequently then indicated by these studies. On the reason for the failure of these divestitures, the above-mentioned studies identified that factors such as asymmetries of information between the merging parties, the competition authorities and the prospective buyers; strategic behaviour by the merging parties and the selection of marginally acceptable buyers were some of the key factors that impeded the successful implementation of remedies.23 Significant deterioration of the assets and the delayed appointment of managing trustee also led to a reduced probability of success for the remedies.24

Federal Trade Commission, ‘A Study of the Commission’s Divestiture Process’ [1999] accessed 06 January 2019. 20 DG Comp, European Commission, ‘Merger Remedies Study’ [October 2005] accessed 06 January 2019. 21 Ibid. 22 Penelope Papandropoulos and Alessandro Tajana, ‘The Merger Remedies Study- In Divestiture We Trust?’ (2006) 8 ECLR 446. 23 Federal Trade Commission, ‘A Study of the Commission’s Divestiture Process’ [1999] accessed 06 January 2019. 24 DG Comp, European Commission, ‘Merger Remedies Study’ [October 2005] accessed 06 January 2019. 19

11.3

11.3

What Is a Divestiture?

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What Is a Divestiture?

Depending on the nature, timing and extent of the divestment, a structural remedy or a divestiture can take many forms. The Merger Remedies Study 2005 conducted by the DG Competition classified them into the following sub-categories25: a. Transfer of market position b. Divestiture of a controlling stake in a company that was already a viable and stand-alone business c. Carve-out: Divestiture of a business unit that was well integrated in the company structure d. Mix and match: Divestiture of a package of assets of the merging parties e. Divestiture or grant of a long-term exclusive license with indefinite duration or until the end of patent protection Without explicitly classifying or categorising as structural or behavioural, the 2008 EU Merger Remedies Notice generally discusses different types of remedies. The first category of remedies is divestiture of a business to a suitable purchaser,26 wherein the Commission requires that certain pre-conditions be met. These include amongst others that the divested entity be a viable and competitive business capable of competing effectively in the relevant market.27 To ensure this, the Commission prefers divestment of an existing and stand-alone business. This may however, not always be possible as there may be certain business that have ‘strong links or [are] partially integrated’ with the retained business. In such circumstances, carve-out may be accepted as an alternative remedy.28 In the US, the 2011 Merger Remedies Guide classifies remedies as structural and conduct. Structural remedies are defined as those that involve the sale of physical assets or the creation of new competitors through the sale or licensing of intellectual property rights.29 Following are some of the typical structural remedies: divestiture of all the assets—tangible, non-tangible or both—that are necessary for the purchaser to be an effective and long-term competitor; divestiture of an existing unit that is already operating as an independent business unit and divestiture of critical intangible assets to one or more purchasers either through sale or licensing of the assets.30

25

Ibid. Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 22. 27 Ibid., at paras 23–31. 28 Ibid., at paras 35–36. 29 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division, §§ II [June 2011] accessed 06 January 2019. 30 Ibid. 26

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The European Commission may also consider divestiture of mere assets or particular brands and licenses as a remedy. This is possible in circumstances whereby either the asset was earlier not an inherent part of the business or an individual asset seems a viable and competitive business31 or certain brands and their related production and distribution assets32 suffice to restore the pre-merger level of competition.33

11.3.1 Crown Jewel In case it is difficult to divest the intellectual property rights or find a suitable purchaser, leading to uncertainty in the execution of the proposed divestiture, the parties need to propose a second alternative divestiture in case the first set of commitments are not executed within the proposed time frame.34 This second alternative divestiture is referred to as the crown jewel.35 In case the parties fail to divest the ‘identified assets’ within the proposed time frame, the crown jewel provision comes into operation.36 The scope of the crown jewel may be quite expansive and may ‘include’ an obligation to divest the acquired firm completely.37 The Commission may require divestiture of the crown jewel in cases where the first set of proposed remedies is either ineffective or for certain reasons, may not take place38 and would ‘clearly not allow the Commission to clear the case’.39 In the US, the enforcement of the provision is rather a rarity, with few reported cases wherein the FTC or the DOJ actually executed the crown jewel provision.40

31 Astra Zeneca/Novartis (Case COMP/M.1806) [2004] Commission Decision 2004/310/EC OJ L110/01. 32 Pernod Ricard/ Allied Domecq (Case COMP/M.3779) [2005] OJ C196/02; Nestle/ Ralston Purina (Case COMP/M.2337) [2001] OJ C 239/08. 33 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 37. 34 Ibid., at para 44. 35 Ibid., at para 45. 36 Federal Trade Commission, Frequently Asked Questions about Merger Consent Order Provisions, 24, 25 accessed 06 January 2019. 37 David Gelfand and Elaine Ewing, ‘“Be careful what you wish for”: U.S. government enforcement of merger consent decrees’ (Summer-Fall 2013) 58(2 & 3) The Antitrust Bulletin 225, 235. See also the crown jewel provision in Monsanto’s acquisition of Delta and Pine Land Co. discussed in therein. 38 Pfizer/Pharmacia (Case COMP/M.2922) [2003] OJ C110/24. 39 Hutchison 3G Ireland/ Telefónica Ireland (Case No COMP/M6992) [2014] OJ C264/6. 40 David Gelfand and Elaine Ewing, ‘“Be careful what you wish for”: U.S. government enforcement of merger consent decrees’ (Summer-Fall 2013) 58(2 & 3) The Antitrust Bulletin 225, 235. See the crown jewel provision in Monsanto’s acquisition of Delta and Pine Land Co. discussed in therein.

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One such rare case was the Aventis/Hoechst deal wherein because of the parties’ failure to execute a timely divestiture, the FTC exercised the crown jewel option.41 Infrequent exercise of the option has led the economists to argue that the actual benefits of the crown jewel provision be discounted by the low probability of its use and be valued against the immediate costs it imposes on the merging parties such as transaction costs and the potential loss of efficiencies.42 Simply put, it is the threat of the crown jewel provisions that prompts the parties to engage in quick and timely divestiture considering that a failure to execute a timely divestiture may mean that the parties end up paying significantly disproportionate costs for delayed implementation or non-implementation of the commitments.43

11.3.2 Upfront Buyer The Commission has used upfront buyer remedy in cases wherein it had concerns of degradation of assets during the divestiture period or wherein it had concerns that the divested business may fail to attract a suitable and appropriate buyer.44 In the EU, the remedy was used for the first time in Bosch/Rexroth. Bosch manufactured radial piston pumps and Rexroth made axial piston pumps. The parties proposed to divest Bosch’s radial piston pumps business. Bosch enjoyed a very good relationship with its customers in the market for industrial hydraulics. The Commission was of the opinion that irrespective of the identity of the buyer, the divestiture was insufficient to restore competition. To alleviate the Commission’s concerns, the parties proposed an upfront buyer remedy. This meant that the parties first proposed a buyer and following the Commission’s approval of the buyer, the parties could eventually consummate the deal.45 In the latest Western Digital/Hitachi merger, as the identity of the purchaser of the divested business was crucial to ensure the effectiveness of the remedy, the parties proposed a detailed upfront buyer clause and also clearly specified the qualities of a suitable purchaser.46

41

Ibid. Carl Shapiro and Michael Sohn, ‘“Crown Jewel” Provisions in Merger Consent Decrees’ (19971998) 12 Antitrust 27, 32. 43 Penelope Papandropoulos and Alessandro Tajana, ‘The Merger Remedies Study- In Divestiture We Trust?’ (2006) 8 ECLR 451. 44 Sarah Turnbull and Simon Holmes, ‘Remedies in Merger Cases: Recent Developments’ (2002) 10 ECLR 499. 45 Bosch/Rexroth (Case COMP/M.2060) Commission Decision 2004/123/EC [2004] OJ L43/01. 46 Western Digital Ireland/Viviti Technologies (Case COMP/M.6203) [2013] OJ C241/11, para 1074. 42

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Upfront buyer remedy has a positive multiplier effect in preserving competition in the relevant market.47 Certainty and timeliness of the divestiture to an identified ‘suitable’ buyer ensures that post-merger the relevant market continues to remain competitive. However, like crown jewel, upfront buyer remedy has been criticised for its excessive and disproportionate nature as it offers relatively greater advantages to the Commission.48

11.3.3 Carve-Outs and the Nature of Divested Business A structural remedy that proposes to create a new business through the transfer of tangible and intangible assets such as the IP rights and personnel is referred to as a carve-out. Carve-out can be extremely complicated as compared to an outright divestiture. In Boston Scientific/Guidant, for instance, the parties proposed a very complex carve-out. Abbott was identified as a ‘suitable buyer’ for Guidant’s carvedout cardio vascular business. The remedy was complicated and somewhat circular as the merged parties sold the carved business to Abbott and Boston Scientific was allowed to licence back the IPRs relating to the cardio-vascular business from Abbott. Abbott and Boston Scientific continued to compete against each other in the market for stents. While Abbott purchased the carved-out business from Guidant, post-merger, the merged entity licensed back from Abbott the IP rights on these stents.49 Considering the complex nature of the carve-out, Guidant was also required to implement firewall provisions such as non-communication of information between the employees working in the vascular and pacemaker departments.50 In NXP/Freescale, the Commission observed that although it had strong preference for divestitures of a standalone business, however, considering the principle of proportionality, it may be willing to accept divestiture of a carve out with ‘existing strong links’ or ‘partially integrated’ into the ‘business retained by the parties’.51 However, the Commission accepts the divestiture of carve-out only in case it is

David A Balto and Richard G Parker, ‘The Evolving Approach to Merger Remedies’ [1 May 2000] Antitrust Report accessed 06 January 2019. 48 William J Bayer and Ronald C Redcay, ‘Solving Competition Problems in Merger Control: The Requirements for an Effective Divestiture Remedy’ (2001) 5,6 The George Washington Law Review 69. 49 In re Boston Scientific Corp., Docket No. C-4164, Decision and Order (July 21, 2006), available at

accessed 06 January 2019. 50 In re Boston Scientific Corp., Docket No. C-4164, Decision and Order (July 21, 2006), available at

accessed 06 January 2019. 51 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, para 247. 47

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certain that the business is viable on a standalone basis.52 The business must be viable as a going concern and must include all the assets necessary to ensure its viability and competitiveness53 including the personnel that offer critical support functions such as group R&D and IT staff.54 In case the personnel are shared between the carve-out and another business unit, it must be ensured that the personnel allocated to the carve-out are sufficient to meet the ‘on-going needs of the divested business’.55 In the US, the consent decree is a document, identifying in detail all the tangible and intangible assets that must be divested to ensure that the buyer can ‘compete effectively’.56 Considering the ‘information asymmetry’ between the competition authorities, the buyer and the merging parties—the reviewing agencies undertake an in-depth investigation including sworn testimony from the employees, internal documents and market studies—before they can accept the terms of the decree.57 To further clarify the meaning of a carve-out and an upfront buyer remedy, the following paragraphs discuss the NXP Semiconductors/Freescale merger, wherein the commitments included both a carve-out as well as an upfront buyer remedy. With the globalisation of merger control, and simultaneous review by different competition authorities, ‘desirability to achieve consistency’ with the approaches of other competition authorities may put constrains on the available set of remedies.58 In NXP Semiconductors/Freescale Semiconductors, as the transaction was subject to approval by the US Committee on Foreign Investments (CFIUS),59 commitments submitted to the European Commission comprised of an ‘up-front buyer’ remedy.60 ‘Up front buyer’ or a ‘buyer up front’ requires identification of a specified buyer who has been approved by the competition authority before the merger is given conditional clearance (as referred to in the EU) or the consent decree is signed (as is 52

Ibid. Ibid., at para 248. 54 Ibid., at para 249. 55 Ibid. 56 David Gelfand and Elaine Ewing, ‘“Be careful what you wish for”: U.S. government enforcement of merger consent decrees’ (Summer-Fall 2013) 58(2 & 3) The Antitrust Bulletin 225, 230. 57 Ibid. 58 Competition Commission, CC8 - Merger Remedies: Competition Commission Guidelines, para 2.24 [November 2008] accessed 06 January 2019. 59 CFIUS is a US committee authorised by the president of United States to review mergers that lead to control of a US business by a foreign person. CFIUS studies the impact of such mergers on US national security. The first phase investigation may last up to 30 days. If required, a phase II investigation- lasting another 45 days, may follow. In case the CFIUS is unable to take a decision or decides that the transaction is against national interests, the matter is then referred to the President of United States who can take another 15 days to decide the outcome. In total, the investigation may last over 90 days. 60 Up-front buyer remedy involves a commitment from the merging parties to not to complete the proposed transaction before entering into a binding agreement with a purchaser that has been approved by the Commission. 53

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the practice in the US). The advantage of having an upfront buyer is that it ensures a quick completion of the divestiture—often within 10 days following the ‘closing [of] the main transaction’.61 The commitments in NXP Semiconductors/Freescale Semiconductors comprised of a carve-out by NXP of its semi-conductor business which included the entire RF Power business as a fix-it-first solution.62 The package included all the tangible and intangible assets required by the buyer to viably run the RF Power business. An exhaustive range of tangible assets ranging from NXP’s manufacturing facility in Philippines; wafer testing, sawing, assembling and testing in Germany; R&D assets in China, Netherlands and France; customer support equipment in Sweden, Finland, China, Korea and USA and raw materials required for the manufacturing and production in the RF Power business formed part of the carve-out business.63 Intangible assets included all the patents, technologies, trademarks and fully paidup licences required to effectively run the divested business and engage in R&D. It also included temporary licenses to use NXP’s trademark and brand name for a period of 9 months following the closing of the transaction.64 In addition, customer and supplier contracts, R&D contracts, records and related materials were also included.65 The assets were transferred to the holding company of the Divestment Business incorporated and registered in Eindhoven, Netherlands.66 Manufacturing RF Power transistors comprises of a long production and supply chain, which broadly speaking, can be grouped into front-end and back-end manufacturing.67 Front-end manufacturing involves printing the circuit on the wafers, thinning and their backside metallisation to increase its thermal connectivity and thus, heat dissipation capacity.68 Back-end manufacturing comprises of three steps: packaging, assembling and testing.69 NXP primarily used its plant in Netherlands and to some extent in Germany for front-end manufacturing.70 Back-end manufacturing took place only in Taiwan and Philippines.71 In the first commitments package, the parties proposed to outsource the front-end manufacturing to a pre-identified third party foundry72 and the back-end

David Gelfand and Elaine Ewing, ‘“Be careful what you wish for”: U.S. government enforcement of merger consent decrees’ (Summer-Fall 2013) 58(2 & 3) The Antitrust Bulletin 225, 227. Footnotes omitted. 62 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, para 201. 63 Ibid. 64 Ibid. 65 Ibid. 66 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, para 202. 67 Ibid., at paras 203–204. 68 Ibid., at paras 205–206. 69 Ibid., at para 207. 70 Ibid., at para 208. 71 Ibid., at para 209. 72 Ibid., at paras 213–14. 61

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manufacturing to the carve-out.73 NXP’s ‘existing contracts with third party foundries for the wafer supply of GaN RF Power manufacturing’, along with ‘GaN-on-SiC process engineers and relevant IP’ were to be assigned to the Divestment Business.74 Moreover, to facilitate smooth functioning of the Divestment Business during the transition period, NXP undertook to enter into a manufacturing services agreement (MSA) and a transitional services agreement (TSA) with the Divestment Business.75 As part of the final commitments, NXP entered into a Sale Purchase Agreement (SPA) with a Chinese asset management company, that was a subsidiary of the private equity JIC Capital, a state-controlled Chinese investment company.76 The deal was subject to the CFIUS’ regulatory approval.77 As in the Boston Scientific/ Guidant merger discussed above, firewalls were introduced to limit the transfer of ‘commercially sensitive information’ between NXP and the Divestment Business.78

11.3.4 Access Remedies: Structural or Non-Structural? Unlike remedies such as carve-outs, fix-it-first and crown jewels that are clearly structural in nature, access remedies can be sometimes difficult to classify. The substantive issue in classification of such remedies is whether post-licensing ‘a material link’ continues to exist between the licensor and licensee? The licensing of the IPRs, for instance, may be structural in nature when such a license is ‘exclusive, irrevocable and non-terminable with no ongoing royalties’; whereas a license with provisions for ‘upgrades, supplies etc.’ is classified as a ‘behavioural hybrid’.79 When the IP rights are divested to an independent industry body, as was the case in Cisco/Tandberg, the remedy is deemed to be structural in nature. Remedies in Intel/McAfee, Google/ITA, ARM/Gemalto/G&D/JV and Axalto/ Gemplus, as discussed in the following chapter, look more like a ‘behavioural hybrid’. For a suitable classification, the key question is whether the remedy leads to a ‘material ongoing link’ between the merging parties and how third parties may benefit from this access. In case of access to interoperability information, new

73

Ibid., at paras 215–17. Ibid., at para 217. 75 Ibid., at paras 218–20, 225. 76 Ibid., at para 233. 77 Ibid., at para 234–40. 78 Ibid., at para 242. 79 ICN Merger Working Group: Analytical Framework Subgroup, ‘Merger Remedies Review Project, Report for the fourth ICN annual conference’ (Bonn June 2005) 10 accessed 06 January 2019. 74

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releases and upgrades-all require ongoing contact with the merging parties. Such commitments, therefore, seem behavioural in nature. Ongoing monitoring and enforcement may in turn limit the effectiveness and appropriateness of non-structural (or behavioural) commitments, a challenge seldom encountered in case of clear-cut divestitures.80 In Cisco/Tandberg—a merger that effected the market for video conferencing solutions—the Commission was concerned that absent suitable remedies, the merger may increase incentives for Cisco to use its proprietary TIP to strategically restrict interoperability and raise barriers to market entry.81 To alleviate these concerns, the parties committed to divest its copyright in TIP within 120 days following the clearance decision to an independent industry body, whose independence was to be monitored by a trustee.82 Cisco was to first contact International Multimedia Teleconferencing Consortium (IMTC) and in case the IMTC could not take up the role, Cisco was to create a new independent organisation that was to be assigned the copyright to the TIP.83 During the interim period, any interested third party could download and license the TIP for free from Cisco’s website. Divestiture to a standard setting organisation (SSO), as suggested by the market test, may have been a more appropriate remedy84 for the following reasons. First, as the competition concerns related to developing inter-operability standards in the fast emerging VCS segment, an SSO that by its very definition is more neutral and more experienced in the process of standard setting, may have more effectively and efficiently performed the task. Second, as the SSOs are also subject to competition rules as stated in the Horizontal Cooperation Guidelines85—this would have ensured effective compliance with the standard setting process.86 Third, the SSOs have rich experience in dealing with the SEPs and by ensuring transparency and FRANDly policies, they play a particularly useful role in the standard setting process in the ICT sector, whereby a given technology may include thousands of standard essential patents.87 Finally, assigning the role to an SSO would have also minimised the transaction

80

Competition Commission, CC8 - Merger Remedies: Competition Commission Guidelines, recital 2.7 [November 2008] accessed 06 January 2019. 81 Cisco/Tandberg (Case COMP/M 5669) [2010] OJ C036/9 paras 61, 81, 85–87. 82 Ibid., at para 147. 83 Ibid. 84 Ibid., at para 154. 85 Commission Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements [2011] OJ C11/01, para 269. 86 Mark A Lemley, ‘Intellectual Property Rights and Standard Setting-Organizations’, (2002) 90 California Law Review, 1889. 87 Josef Drexl, ‘Zugang zu standardessenziellen Patenten als modern Regulierungsaufgabe: Wie reagiert das EU-Kartellrecht auf Patentkriege zwischen chinesischen Unternehmen?’, Max Planck Institut für Innovation und Wettbewerb, Discussion Paper No.5 at pp 9–14.

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Factors to be Considered in the Design of Structural Remedies

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costs, 88 considering that in Cisco/Tandberg, the monitoring trustee was expected to play an active role throughout the process and the industry-based proposal for the standard protocol developed during this process was to be submitted eventually to an SSO such as the IETF. It therefore seems, somewhat complicated to first involve an intermediate independent industry body and a monitoring trustee to oversee the independence of this independent body and finally submit this protocol to an SSO. Direct involvement of the SSO instead, would have been way simpler to execute and effectively ensure competition-friendly standard setting. The (undesirable) complications of the remedy notwithstanding, it did have a structural dimension, considering that it was clear-cut and expected to generate timely results, as Cisco was to divest its proprietary rights in the TIP to an independent industry body.89

11.4

Factors to be Considered in the Design of Structural Remedies

While remedying the competition concerns, structural remedies may generate additional concerns by altering the market structure. This is particularly true in case of divestitures. In case of oligopolistic markets for instance, the divestiture may aggravate the problem rather than contribute to an effective solution—as the potential buyer that meets the buyer requirements—may be a part of the existing oligopoly and divestment of assets to such a buyer, may further strengthen its position of dominance in the market. If divestiture leads to an oligopolistic market with similarly-sized competitors, making the industry more symmetric or creates multimarket contacts between the parties, then the remedy could generate additional competition concerns—collective dominance being a typical example, particularly in case of oligopolistic markets.90 It is therefore, recommended that the competition authorities should also assess whether the post-merger market conditions that is the resulting market structure may also significantly impede effective competition.91 To avoid such anti-competitive concerns, the remedial design must follow a ‘zero-delta’ approach, which means that implementation of remedies should not lead to a change in the HHI.92 The following section discusses some additional factors that 88 Commission Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal co-operation agreements [2011] OJ C11/01, para 269. 89 Cisco/Tandberg (Case COMP/M 5669) [2010] OJ C036/9, para 163. 90 Massimo Motta, Michele Polo and Helder Vasconcelos, ‘Merger Remedies in the European Union: An Overview’ in François Lévêque and Howard Shelanski (eds), Merger Remedies in American and European Union Competition Law (Edward Elgar 2004) 106. 91 Penelope Papandropoulos and Alessandro Tajana, ‘The Merger Remedies Study- In Divestiture We Trust?’ (2006) 8 ECLR 443, 449. 92 See for instance Alcan/Pechiney, where the Commission employed a zero-delta approach. Alcan/ Pechiney (Case COMP/ M.1715) [2000] OJ C 5/08.

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incorporate this ‘zero-delta’ approach and thus, merit consideration in the design of structural remedies.

11.4.1 Identity and Qualifications of the Buyer The identity and the qualifications of the buyer determine the effectiveness of the remedy and the amount of assets that need to be divested. Depending on the industry and the conditions of competition, different factors determine the choice of a buyer. There seems to be an inverse relationship between the existing resources and strength of the buyer and the amount of assets that need to be divested.93 In case the buyer is a competitor who is already present in the relevant market, s/he may have many of the relevant assets, relevant expertise and financial prowess to compete. Fewer assets may need to be divested in such a case. In case of tight oligopolies, where the competition authorities must pursue a ‘zero-delta approach’, a buyer who is currently not a participant in the relevant market may be a more preferable choice. The buyer in such a case, in the ICT industry for instance, can be someone who is present in the neighbouring market. The telecommunications sector presents an interesting example of an instance where the Commission may prefer new entrants as potential buyers.94 To ensure that the divestiture is able to effectively restore competition, the purchaser must be suitable—a fact that needs to be determined on a case-by-case basis.95 Some important guiding principles in the selection of a suitable purchaser are as follows: first, s/he should be independent and unconnected with the parties, second s/he should have the requisite financial resources and relevant expertise to generate effective competition and third, s/he should not give rise to new competition concerns such as a possibility of collusion.96 In Universal/EMI—a merger that concerned the market for recording music, artist management and merchandising— an acceptable purchaser was one who was ‘independent of and unconnected to the Universal Music Group’; had the requisite financial strength, expertise and incentives to develop the Divestment Business as a viable and effective competitive force; could quickly obtain all the required approvals from the concerned regulatory authorities and was either at the time or previously active in the business of music recording or publishing.97

Johan Ysewyn, ‘The Commission’s Commitment’ (2001) 7 ECLR 253. T-Mobile Austria/Tele.ring (Case COMP/M.3916) Commission Decision 2007/193/EC [2007] OJ C193/44. 95 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 49. 96 Ibid., at para 48. 97 Universal Music Group/EMI Music (Case COMP/M.6458) [2013] OJ C220/15, Commitments to the European Commission, Section E, para 19. 93 94

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In the innovation-led ICT sector, proven expertise such as an established presence in the sector, specialisation, presence of appropriate personnel and sufficient financial resources to sustain the ongoing R&D expenditure are some key indicators of a suitable buyer.98 In Western Digital/Hitachi, the Commission’s preferred buyer was someone who was ‘(i) committed to maintain the competitiveness of the Divestment Business including the development of 3.5” HDD technology in each of the relevant markets of concern; and (ii) had proven expertise and an ongoing track record as an R&D innovator within the HDD industry, and had proven expertise in a market neighbouring to the market of concern’.99 The competition authorities—the DOJ and the FTC—will not approve a buyer who does not intend to participate actively in the market. If the buyer merely wants to have a ‘cash flow stream at a discount’, the competition authorities may reject such a buyer.100 As for the approval of the purchaser and the approval of the SPA, the Commission makes a prima facie assessment, based on the available information and in the light of the commitments submitted by the parties, as to how they shall be able to restore conditions of effective competition in the relevant market within a short time frame.101 The European Commission requires the sellers to help prospective parties carry a proper due diligence by keeping the Monitoring Trustee and the Commission informed about all the data room documentation and due diligence procedure and submission of a copy of information memorandum before sending it to the potential buyers.102

11.4.2 Removal of Links with Competitors Removal of links with competitors means divestiture of minority shareholdings in a joint venture of a competitor to sever the structural links with the competitor.103 In Siemens/VA Tech merger, to sever any structural links, the parties sold the minority

DG Comp, European Commission, ‘Merger Remedies Study’, para 101–02 [October 2005]

accessed 06 January 2019. 99 Western Digital Ireland/Viviti Technologies (Case COMP/M.6203) [2013] OJ C241/11, para 1074. 100 David Gelfand and Elaine Ewing, ‘“Be careful what you wish for”: U.S. government enforcement of merger consent decrees’ (Summer-Fall 2013) 58(2 & 3) The Antitrust Bulletin 225, 230. 101 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 101–106. 102 Johnson & Johnson/Guidant (Case COMP/M.3687) Commission Decision 2006/430/EC [2006] OJ L 173/16. 103 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 58–60. 98

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stake in the competitor.104 In exceptional circumstances, the Commission may also consider mere waiver of rights from minority stakes sufficient to restore competition in the relevant market. This could for instance be the case where financial gains from the minority shareholding are a cause of potential concern.105

11.4.3 Managing a Successful Divestiture To ensure a successful divestiture, the 2008 EU Merger Remedies Notice suggests the following: first, the transfer of the business within a fixed time-limit; second, parties be allowed to consummate the merger, only after entering into a binding agreement with the purchaser, also called the ‘up-front buyer’ agreement and third, a ‘fix-it-first’ remedy, whereby parties enter into a binding agreement with a purchaser before the Commission offers its conditional approval.106 Fix-it-first remedy is particularly important, wherein the identity of the purchaser is critical for the remedy to be effective. In T-Mobile Austria/tele.Ring,107 the divestiture of mobile telephony sites and frequencies was not a viable business in itself. To ensure their viability, they were to be sold to a competitor, who was similar in size and operations to Tele.ring. In the Orange/T-Mobile merger however, the Commission did not demand a fix-it-first remedy for the sale of frequencies, considering that the spectrum available for sale, was viable in itself.108 In short, to ensure a successful divestiture, the divested business needs to be viable and competitive. Based on its learnings in the Remedies Study, the Commission realised that the devil is in the detail and thereby, now goes beyond the main SPA and looks into the details of ancillary transitional agreements.109

104

Siemens/VA Tech (Case COMP/ M.3653) Commission Decision 2006/899/EC [2006] OJ L353/ 19, paras 491, 493 ff. 105 Ibid., at paras 327 ff. 106 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 50–57. 107 T-Mobile Austria/Tele.ring (Case COMP/M.3916) Commission Decision 2007/193/EC [2007] OJ C193/44. 108 For a discussion on Orange/T-Mobile, see Chap. 13 Remedies in the Telecommunications Sector. 109 DG Comp, European Commission, ‘Merger Remedies Study’, paras 142–43 [October 2005]

accessed 06 January 2019.

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Factors to be Considered in the Design of Structural Remedies

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11.4.4 Period for Divestiture The divestiture needs to be completed within the period agreed between the Commission and the parties.110 Short divestiture periods minimise uncertainty and ensure the effectiveness of the remedy.111 The timeline for conducting a divestiture is the date of adoption of the Commission decision. There may be cases wherein a public bid needs to be undertaken or regulatory approval is required. In such cases, the Commission is more flexible with the divestiture time limits.112 As for the fix-it-first solution, considering that a framework agreement has already been concluded with the purchaser, subsequent execution of the agreement and transfer of assets is decided on a case-by-case basis.113 It is possible that the divestiture may require the consent of third parties. This may for example be the case, when the merging parties may need to exit an existing joint venture or may offer to the license the IP rights to the buyers. The third party may refuse to enter or exit a joint venture with the buyer (as the case may be) or license the IP rights. In such cases, divestiture may not be timely or the parties may even be forced to propose an alternative remedy.114 To avoid any hold-ups from a failure to divest in a timely manner, crown jewels—as discussed in Sect. 11.3.1 above—are a frequently incorporated alternative in the remedies package.

11.4.5 Interim Period and Preservation of Assets In the interim period, until the divestiture has been successfully executed, the parties have the responsibility to ensure interim preservation of the assets to maintain their viability,115 design and execute the carve-out, if the remedy so requires116 and take the necessary steps for divestiture.117 To preserve the quality and marketability of these assets, the parties need to propose an interim preservation and hold separate plan and specify with clarity, a timeline for the effective implementation of the commitments.118

110

Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 97. 111 Ibid., at para 98. 112 Ibid., at para 99. 113 Ibid., at para 100. 114 Luc Gyselen, ‘Merger Remedies in the EU and USA’ in Practical Law Company’s Cross-Border Competition Handbook (2006/07) accessed 06 January 2019. 115 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, paras 107–112. 116 Ibid., at paras 113–15. 117 Ibid., at para 116. 118 Ibid., at para 45.

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In NXP Semiconductors/Freescale Semiconductors, NXP had to ensure the ‘economic viability, marketability and competitiveness’ of the Divestment Business in ‘accordance with good business practice’ and ‘minimise as far as possible, loss of competitive potential of the Divestment Business’.119 The divesting parties are required to preserve the business during the interim period through obligations such as hold-separate provision, ring-fencing and non-solicitation of customers.120

11.4.6 Hold-Separate Obligations and Hold-Separate Manager As divestiture requires sale of high value assets to a suitable buyer, the process may take some time for completion. On an average, the entire process may last from 6 months to 2 years.121 During this interim period, the parties are under a holdseparate obligation that is they need to ensure that the divested business functions smoothly and effectively. To ensure this, the commitments often involve the appointment of a hold-separate manager. A hold separate manager is usually someone from middle management who understands and can well manage the divested business. In NXP Semiconductors/Freescale Semiconductors, NXP undertook to appoint a hold separate manager, a key personnel from the business who was knowledgeable with the business and whose function was to support the monitoring trustee in managing ‘the Divestment Business as a distinct and saleable entity’ separate from the NXP’s retained business.122 S/he had to manage the business independently and in its ‘best interests’ to ensure its ‘continued economic viability, marketability and competitiveness’.123 S/he could not be removed arbitrarily. The procedure for his/her appointment, removal and replacement was defined in the commitments.124 The hold separate manager reports directly to the monitoring trustee. In Western Digital/Viviti, the divestment manager was under an obligation to report only to the monitoring trustee and act independently with no involvement in the business retained by the merged entity. S/he was under an obligation to act in the best interest 119

NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, Commitments to the European Commission, Section B, para 10. 120 Johnson & Johnson/Guidant (Case COMP/M.3687) Commission Decision 2006/430/EC [2006] OJ L 173/16. 121 Ioannis Kokkoris and Howard Shelanski, EU Merger Control: A Legal and Economic Analysis (Oxford University Press 2014) 554. 122 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, Commitments to the European Commission, Section B, para 12. 123 Ibid. 124 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, Commitments to the European Commission, Section B, para 10.

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of the divestment business so as ensure its ‘viability, competitiveness and independence’ from the businesses retained by the company.125

11.5

Conclusion

Structural remedies have traditionally been the more preferred remedy as they alleviate the competition concerns at source and do not require continuous ex-post monitoring. Although under certain market conditions, such as in case of oligopolistic markets, structural remedies may lead to new competition concerns. The design and proper execution, therefore, plays a crucial role in ensuring their effectiveness. This chapter looked at different types of structural remedies and associated design and implementation issues. As for the oft-cited advantage that structural remedies do not require any ex-post monitoring costs, the chapter highlighted scenarios where such a generalisation may be grossly misleading. In case of divestiture for instance, there are associated requirements for ex-post compliance, such as hold separate obligations until the completion of the divestiture.126 These compliance mechanisms require substantial resources and costs. Moreover, once the divestiture is concluded, there may be an additional ongoing need to ensure ‘confidentiality’ of information and business secrets that now belong to the divested business and maintenance of ongoing contractual relationship, such as supply and service arrangements.127 An amendment of the supply and service agreements, as well as additional related acquisitions may require the approval of the competition agency.128 Submission of periodic reports specifying compliance with the commitments may also be required.129 Collectively, there are significant ex-post costs associated with structural remedies as well. In addition, as the following chapter highlights, structural remedies may be disproportionate to the competition concerns identified and may simply not be possible to implement. In such a case, non-structural remedies may merit consideration. These non-structural remedies are discussed next.

125

Western Digital Ireland/Viviti Technologies (Case COMP/M.6203) [2013] OJ C241/11, Commitments to the European Commission, Section B, paras 5–6. 126 David Gelfand and Elaine Ewing, ‘“Be careful what you wish for”: U.S. government enforcement of merger consent decrees’ (Summer-Fall 2013) 58(2 & 3) The Antitrust Bulletin 225, 230. 127 Ibid., pp. 225, 230–231. Footnotes omitted. 128 Ibid., pp. 225, 231. 129 Ibid., pp. 225, 231.

Chapter 12

Non-structural Remedies

Abstract This chapter presents different kinds of non-structural remedies that the parties may offer to receive a conditional clearance decision. As mentioned at the outset, classification of remedies into straightjacketed ‘structural’ and ‘non-structural’ terminology is a challenging exercise. The objective of this book is not to offer a basis for such a classification, the objective rather is to classify on some basis remedies that require monitoring and those that do not. Having discussed in the previous chapter remedies that do not require continuous ex-post monitoring that is structural remedies; this chapter discusses remedies that ‘require’ some form of periodic surveillance. The next chapter discusses case law from the telecommunications sector that involve a creative deployment of structural and non-structural remedies.

12.1

Introduction

The 2011 US Merger Remedies Guide defines conduct remedies as ‘provisions that prescribe certain aspect of the merged firm’s post-consummation business conduct’.1 They may include firewall provisions, non-discrimination provisions, mandatory licensing, transparency, anti-retaliation, prohibitions on certain contracting parties and other miscellaneous remedies such as a commitment to report to the competition authorities’ any subsequent, otherwise non-reportable mergers; supply contracts; restriction on re-acquisition of scarce personnel assets and arbitration.2 Hybrid remedies that involve a combination of structural and conduct remedies are classified as a separate class of remedies.3

1 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division [June 2011] accessed 06 January 2019. 2 Ibid. 3 Ibid.

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_12

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In the EU, until the year 2000, the Commission was highly averse to accepting any kind of behavioural commitments.4 In Gencor/Lonrho, the parties proposed behavioural commitments which the Commission refused to accept as they required on-going ex-post monitoring.5 On appeal, the Court of First Instance (now the General Court) held that the type of remedies, that may be most appropriate, need to be determined on a case-by-case basis. It is not the categorisation of remedies as structural or behavioural that is material, instead it is the ability of the commitments to deter the ‘emergence or strengthening of a dominant position’, that is of significance.6 Although Gencor/Lonrho concerned metal and mining sector, the General Court’s decision left a very profound legacy for the merger review in the ICT sector. As ex-post econometric studies indicate, behavioural remedies have over time, been more frequently employed in innovation-led sectors such as the ICT.7 Behavioural remedies may range from price caps to the more complicated access commitments that require the merged entity to allow competitors have access to their intellectual property rights or network on an ongoing basis. In addition to the frequent employment of non-structural remedies, remedial design has also become sophisticated over time, such that in certain cases it may seem difficult and even altogether irrelevant to attempt such a classification. Moreover, there may be two ways in which non-structural remedies can be employed. Either a conditional clearance decision may rely exclusively on behavioural remedies, or they may be used along with structural remedies. Discussion on telecom mergers in the next chapter offers an interesting insight into the competition authorities’ practice of using mixed remedies in innovation-led sectors, such as the telecommunications sector. Considering the complexity and novel nature of their design, as well as somewhat technical nature of the telecommunications sector, these remedies are discussed in the following chapter.

4 As already mentioned at the outset, the term ‘behavioural’, ‘conduct’ and ‘non-structural’ shall be used interchangeably throughout this book. The rationale for such an approach is that whereas in this study, I approach remedies from the perspective of structural and non-structural, many of the case laws, ex-post studies, as well as competition authorities use the expression ‘behavioural’ or ‘conduct’ for remedies that are in fact non-structural in nature. 5 In its decision, the Commission stated “The commitment offered is behavioural in nature and cannot therefore be accepted under the Merger Regulation. In any event this commitment does not meet the Commission’s competition concerns.” Gencor/Lonrho (Case No IV/M.619) Commission Decision 1997/26/EC [1997] OJ L 11/30, para 216. The case was decided under the old merger regulation Council Regulation (EEC) 4064/89. 6 Case T-102/92 Gencor v. Commission [1999] ECR II-753, paras 318–320. 7 Patrice Bougette and Stéphane Turolla, ‘Merger Remedies at the European Commission: A Multinomial Logit Analysis’ LAMETA Working Paper 2006-08, accessed 06 January 2019. The database comprised of phase I and phase II merger cases in Europe from the 1990 to 2005.

12.2

12.2

When Non-structural Remedies Are More Preferable

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When Non-structural Remedies Are More Preferable

The challenge of making predictions about future evolution of the markets8 and the associated uncertainty implies that in certain cases, structural remedies may disproportionately impact the ongoing R&D efforts. In cases that involve control over ‘infrastructure, networks and essential facilities’ such as control over key technologies like patents and other intellectual property rights, structural remedies are ‘unavailable, or unrealistic, or otherwise ineffective’ to alleviate the identified competition concerns.9 In such cases, non-structural remedies may be more suited to preserve the conditions of competition in the relevant market. In the Glaxo/ Welcome merger for instance, the Commission found that the structural remedy of divestiture could negatively impact dynamic competition by ‘impeding efficient and ongoing pharmaceutical research’ and therefore, licensing was identified as a more appropriate remedy.10 Likewise, in cases that involve control over a portfolio of patents including standard essential patents, divestiture may be disproportionate and disrupt ongoing R&D activities. In many recent conditional clearances such as ARM/G&D/Gemalto/JV and Google/ITA, all discussed along the course of this book, the competition authorities offered conditional clearances based on a set of non-structural commitments. The challenge in remedial design also emerges from the fact that in the ICT sector, product life cycles are short and market power is transient, which implies that any attempt to alter the structure of the markets is undesirable and disproportionate. What is more desirable is the lowering of entry barriers that arise on account of the special nature of the sector. Considering the dynamics of the industry, behavioural remedies are more suitable as they impact the structure of the market by influencing the behaviour of the firms.11 To make the structural remedies more effective, behavioural remedies are also often employed as a useful complement to the structural remedies.12 Non-structural (or behavioural) remedies may be particularly suitable to alleviate the competitive harm in dynamic industries that experience a rapid pace of innovation and mergers that involve significant merger-specific

Josef Drexl, ‘Real Knowledge is to Know the extent of One’s Own Ignorance: On the Consumer Harm Approach in Innovation-related Competition Cases’ (2009–2010) 76 Antitrust Law Journal 677. 9 Marc Blessing, Arbitrating Antitrust and Merger Control Issues (Basel: Helbing Lichtenhahn Verlag 2003) 76. 10 Glaxo Wellcome/Smithkline Beecham (Case IV/M.1846) [2000] OJ C170/6. 11 Emmanuel Combe, Economie et la politique de la concurrence (Paris: Dalloz 2005) 319. 12 Ioannis Kokkoris and Howard Shelanski, EU Merger Control: A Legal and Economic Analysis (OUP 2014) 545; Ioannis Kokkoris (ed.), Competition Cases from the European Union. The Ultimate Guide to Leading Cases from EU, EFTA and Member States (London: Sweet & Maxwell, 2010). 8

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efficiencies as is usually the case with non-horizontal mergers.13 Grant of access to competitors through access to infrastructure, networks, key technology and essential inputs facilitates entry, as well as prevent the foreclosure of competitors.14 In the recent high-tech mergers of Cisco/Tandberg,15 Intel/McAfee16 and ARM/Gemalto/ G&D/JV17, discussed further in this chapter, the commitments required parties to keep their systems interoperable with those of their competitors. Network effects, a commonly identified feature in the ICT sector, may also significantly impact the remedial design. Network effects lead the users of a network to generate positive and sometimes negative externalities.18 A structural remedy such as divestiture may not only be disproportionate to the theory of harm identified, it may also destroy the resulting synergies. This can lead to a reduction of consumer welfare as divestiture would disproportionately take away the positive externalities exerted by the users. The MCI/WorldCom merger presents an interesting illustration where the merger failed because of an onerous and complex set of remedies, as the remedies amongst others, prevented the merged entity to benefit from the resulting synergies.19 There is also a possibility that divesture may be insufficient to restore the conditions of competition. This may for instance be the case, when no suitable buyer is available to purchase the divested business and it is not possible to restore the conditions of competition fully and effectively. In case of Wolters Kluwer/Reed Elsevier for instance, divestiture was found to be insufficient, as the merged entity was much larger than any of its competitors.20 Following sections present different types of non-structural remedies employed frequently in the ICT sector.

ICN Merger Working Group: Analytical Framework Subgroup, ‘Merger Remedies Review Project, Report for the fourth ICN annual conference’ (Bonn June 2005) 12 accessed 06 January 2019. 14 Johannes Lübking, ‘Revision of the Notice on merger remedies’ (2007) Competition Policy Newsletter 2, 8 accessed 06 January 2019. 15 Cisco/Tandberg (Case COMP/M 5669) [2010] OJ C036/9, paras 164–68. 16 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, paras 333–356. 17 ARM/Giesecke & Devrient/Gemalto/JV (Case COMP/M 6564) [2012] OJ C368/9, paras 210–35. 18 See Chap. 3. 19 Gilles Le Blanc and Howard Shelanski, ‘Telecommunications Mergers in the EU and US: A Comparative Institutional Analysis’ in François Lévêque and Howard Shelanski (eds), Merger Remedies in American and European Union Competition Law (Edward Elgar 2004) 202–03. 20 Eleanor Morgan, ‘Steering Mergers through the EU’s Regulatory Blocks: Remedies under the EU Merger Control Regulation’ (October 2002) 20(5) European Management Journal 549, 554. 13

12.3

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Access Remedies

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Access Remedies

Commitments to grant access to key assets help reduce barriers to market entry. The innovation-led nature of the ICT sector means that firms, especially the ones with less popular brands, attempt to compete through differentiation. However, such an effort to differentiate can be overwhelmed by strong network effects.21 This in turn has implications for standard setting and compatibility.22 As compatibility is a vital dimension of industry structure and conduct23, the significance of compatibility and interoperability in the sector is well-recognised. In case of conditional clearances, one observes that access and interoperability are the more frequently employed remedies. Access remedies include remedies such as the provision of access to ‘key infrastructure, networks, key technology, including patents, know-how or other intellectual property rights, and essential inputs’.24 The Merger Remedies Study, 2005, classified access remedies into three categories25: a. Access to infrastructure and technical platforms b. Access to technology via licenses and other IPRs c. Termination of exclusive vertical agreements Access remedies that offer access to intellectual property through licensing or the assignment of IPRs such as patents and brands are defined by the UK’s Competition and Markets Authority (CMA) as a ‘specialised form of asset divestiture’.26 Access to technology through licensing of intellectual property rights is a frequently employed behavioural commitment in mergers involving high technology sectors. Granting of licences for IP rights is deemed to be a transfer of the market position when the remedy seeks to transfer the business to a suitable competitor and when the duration of the remedy is sufficiently long to facilitate such a transfer. In

Joseph Farrell and Paul Klemperer, ‘Coordination and Lock-in: Competition with Switching Costs and Network Effects’ in Mark Armstrong and Robert H Porter (eds), Handbook of Industrial Organization, Volume 3 (North Holland 2007). 22 Michael L Katz and Carl Shapiro, ‘Antitrust in Software Markets’ in Jeffrey A Eisenach and Thomas M Lenard (eds) Competition, Innovation and the Microsoft Monopoly (Kluwer Academic Publishers 1999)

accessed 06 January 2019. 23 ibid. 24 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 62. 25 DG Comp, European Commission, ‘Merger Remedies Study’, para 30 [October 2005] accessed 06 January 2019. 26 Competition Commission, CC8—Merger Remedies: Competition Commission Guidelines, recital 2.7 [November 2008] accessed 06 January 2019. 21

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other situations, wherein the IPR licenses are offered to resolve foreclosure concerns—the license is identified as an access remedy.27 Although licensing as a remedy presents significant challenges, it nonetheless, is particularly useful in situations whereby the market power arises from control over the IP rights. In such cases, the divestiture of IP rights or licensing, depending on how the remedy is designed, may be the preferred remedy, as this ensures that postmerger market remains competitive and any possible links between the merging parties and its competitors are severed.28 Fostering conditions that promote ‘competition in innovation’ are an important factor to be considered in the design of remedies. In cases where the parties can show that a divestiture may disrupt ongoing R&D efforts or because of the very nature of the business, divestiture of IP rights may be an inefficient remedy, licensing may be considered as a viable alternative.29 In Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio, for instance, the parties committed to ‘sell a technology license’ that included their know-how and IP rights in radar altimeters to ‘an existing supplier of space subsystems and equipment’.30 Divestiture was found infeasible and the licensing of TTC equipment and radar altimeters for an unlimited duration was accepted as a suitable alternative.31 Divestiture was unfeasible as the assets that used to produce the TTC equipment were not sufficient to form an effective, stand-alone business.32 The assets were ‘too intricately linked to the company’s other assets’, which meant that carve out would have been complicated and ‘disproportionate’.33 The remedy was seen as ‘patently disproportionate to the narrow competition issues identified’34; instead the sale of ‘comprehensive license [including] know-how, designs, manufacturing processes and intellectual property rights’ was found adequate to assuage the competition concerns identified.35 As the ‘development of an alternative supplier’ was expected to take time, an ‘interim safeguard remedy’ required the parties’ to offer supply obligations and price benchmark to protect consumers from any supply disruptions and supra-competitive pricing.36 On the radar altimeter, the

DG Comp, European Commission, ‘Merger Remedies Study’, para 33 [October 2005] accessed 06 January 2019. 28 DSM/Roche Vitamins (COMP/M.2972) [2004] Commission Decision 2004/238/EC OJ L 82/73.; Hoechst/Rhône Poulenc (Case IV/M 1378) [2004] C42/22; Dow Chemical/Union Carbide (Case COMP/M 1671) [2001] Commission Decision 2001/684/EC OJ L 245/01. 29 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 38. 30 Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M.3680) [2005] OJ/C 139/37, para 119. 31 Ibid., Commitments Annex 1 TTC and Annex 2 Radar Altimeters. 32 Ibid., at para 120. 33 Ibid. 34 Ibid., at paras 124–25. 35 Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M.3680) [2005] OJ/C 139/37, para 125. 36 Ibid., at para 126. 27

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‘very specific’ product characteristics disallowed a successful divestiture; instead a ‘licensing arrangement’ wherein the parties undertook to offer ‘complete technical information and assistance’ to another space supplier to develop competence in radar altimeter was seen as more effective in safeguarding the conditions of competition.37 Detailed access and interoperability remedies were also offered in the latest mergers of Intel/McAfee, Google/ITA and Comcast/NBCU/JV. The associated theories of harm have already been discussed in Chaps. 4–6. Following sections discuss the remedial design in these mergers.

12.3.1 Intel/McAfee: Interoperability Remedies in a Conglomerate Merger Behavioural commitments have been found to be particularly useful for competition concerns resulting from conglomerate effects. In case of conglomerate mergers the more frequently identified challenge is the foreclosure of competitors as the merged entity controls key technology and related IP rights.38 Competitors’ products absent access remedies may fail to interoperate with the products of the merged parties.39 A non-exclusive license or the disclosure of information to all third parties that may require this access—as was allowed by the European Commission in Intel/ McAfee—may therefore, be a suitable remedy to preserve conditions of competition, as well as to maintain the ongoing R&D efforts.40 In the ICT sector, ‘access is often dependent upon seamless interoperability’.41 In Intel/McAfee, Intel committed to offer in a ‘timely manner’, all the ‘Instruction, Interoperability and Optimization Information’ (hereinafter, interoperability information) for use by third party vendors of endpoint security software (hereinafter, security solutions) on a ‘royalty-free’ basis.42 Intel also committed that it would not actively engineer its microprocessors or chipsets to degrade the performance of other security solutions.43 It offered ‘not’ to degrade its security solutions when they operated on a ‘Personal Computer containing a microprocessor “not” supplied by

37

Ibid., at para 130. Case C-13/03 P, Commission v Tetra Laval BV [2005] ECR I-1113 para 85, 89. 39 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, para 306, GE/Instrumentarium (Case COMP/M 3083) [2004] Commission Decision 2004/322/EC OJ L 109/01; Siemens/Drägerwerk/ JV (Case COMP/M2861) [2003] Commission Decision 2003/777/EC OJ L291/01. 40 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, para 307. 41 Spencer Weber Waller, ‘Access and Information Remedies in High Tech Antitrust’ (2012) 8 (3) Journal of Competition Law and Economics 575, 575–76. 42 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, Commitments to the European Commission Section B. Commitments, para 4. 43 Ibid., at para 7. 38

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Intel’.44 However, Intel was ‘not’ required to optimise its products with others.45 In short, the commitment provided for the sharing of interoperability information and a commitment not to actively degrade the performance of the system. This information was to be provided under the framework of a ‘Non-Disclosure and Permitted Use Agreement’ that was to be made available on Intel’s website and prepared in close cooperation with the monitoring trustee. The agreement was implementable subject to the approval of the Commission.46 To alleviate concerns relating to technical tying, Intel undertook that if it chose to tie its security solution with its processors and this in turn adversely impacted the performance of competing security solutions on its processors, then Intel was under an obligation to disclose technological means through which its security solutions could be disabled by the OEMs.47 This commitment was to last 5 years.48 This commitment to alleviate concerns relating to technical tying of Intel hardware and McAfee security solutions, as can be seen, did not intend to fully or even partially prohibit bundling. The objective instead was to offer the OEMs an option to ‘switch-off’ the tied features and if the OEMs so desired, there remained a possibility to replace Intel’s security solutions with those of its competitors.49 The Commission accepted the commitments taking into due consideration the well-established EU doctrine of proportionality. Intel/McAfee by providing an option to ‘switch-off’ ensured that while on one hand the risk of monoculture was prevented and competition in innovation through competing security solution providers continued, on the other hand, there remained sufficient incentives for Intel to continue to introduce new product launches with innovative features.50 The US DOJ too reviewed the Intel/McAfee merger and following its brief phase I enquiry offered unconditional clearance.

12.3.2 Google/ITA: Non-structural Remedies in Potential Vertical Mergers In mergers that may lead to change in incentives of the merged entity, such as is the case in vertical mergers and potential vertical mergers, the concern may not be so much as the loss of a competitor, as is the challenge that the merged entity may exploit and leverage post-merger market power. Dominance of the parties in neighbouring markets offers them a competitive advantage that can be leveraged 44

Ibid., at para 8. Ibid., Commitments to the European Commission Section B. Commitments, para 7–8. 46 Ibid., Commitments to the European Commission Section B. Commitments, para 9. 47 Ibid., Commitments to the European Commission Section B. Commitments, para 6. 48 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, para 341. 49 Ibid. 50 Ibid., at paras 341–42. 45

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in ‘nascent’ and ‘emerging’ product markets. In such cases, non-structural commitments may be particularly useful to alleviate concerns emerging from such distinct competitive advantages, as was the case in Google/ITA—a merger that had a ‘potential vertical’ dimension. The merger was not a typical vertical transaction, as Google was not active in the market for travel websites; instead it had a ‘definite plan’ to enter the market. The DOJ identified possible access issues from the ‘potential’ vertical dimension of the transaction.51 It cleared the merger only after Google undertook to license the QPX and InstaSearch software and respect the accompanying firewalls.52 These conditions are discussed next. 12.3.2.1

Licensing of QPX53

Google committed to honour all the prevailing QPX Agreements that were in effect at the time of the clearance. Google also undertook to license existing clients and interested third parties a QPX license on commercial terms ‘substantially similar’ to the existing agreements governing the OTA’s use of QPX.54 The commercial terms were to be ‘fair, reasonable and non-discriminatory’. The minimum duration for such an Agreement was 1 year with a maximum limit of 5 years following the transaction. Google also undertook to devote at least an equivalent (or more) engineering resources, support financially and involve its R&D staff to undertake further research and development and ensure continued maintenance of QPX and InstaSearch Services to the benefit of existing customers. The R&D budget was to be a sum equivalent to the average of ITA’s R&D budget in the two preceding financial years.

12.3.2.2

Licensing of InstaSearch55

To protect future competition and ensure continued innovation by the OTAs, Google also undertook to licence InstaSearch, ITA’s pipeline flight search technology, to the OTAs on ‘fair, reasonable and non-discriminatory’ terms. InstaSearch promised to Spencer Weber Waller, ‘Access and Information Remedies in High Tech Antitrust’ (2012) 8 (3) Journal of Competition Law and Economics 575, 583–84. 52 United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment (D.D.C. Apr. 8, 2011), 33 available at http://www.justice.gov/atr/cases/f269600/269632.pdf accessed 06 January 2019. 53 Ibid., at IV (B), 13–17. 54 QPX was defined as the ‘airfare pricing and shopping engine and Related Software deployed in production by ITA’ for its customers at the time of the complaint. See United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment at IV (B) (D.D.C. Apr. 8, 2011), 9–10 available at http://www.justice.gov/atr/cases/f269600/269632.pdf accessed 06 January 2019. 55 United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment (D.D.C. Apr. 8, 2011), 17–21 available at http://www.justice.gov/atr/cases/f269600/269632.pdf accessed 06 January 2019. 51

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be a next generation improved online experience in pricing and shopping services, through use of pre-computed results using QPX, that were to be stored in the shortterm memory cache.56 Google undertook to make ‘commercially reasonable efforts’ to ensure that the InstaSearch Service conformed to the technical specifications as defined in the InstaSearch POC Solution Document.57

12.3.3 Interoperability Remedies for Vertical Concerns in ARM/G&D/Gemalto/JV In mergers where gatekeeper effects and barriers to entry are a key competition concern, access remedies may be more appropriate to alleviate the harm identified. In ARM/G&D/Gemalto/JV, the parties submitted commitments to alleviate concerns in the market for IP licensing.58 The parties undertook to make ‘TrustZone Secure Monitor Code’, required for ‘a TEE solution to run on ARM’s architecture V6 and V7 processors’, freely downloadable on its ARM website. ARM also offered to share any further related information or any new version of the TrustZone Secure Monitor Code and other relevant information. All the information was to be provided on equivalent terms and conditions and no later than, as was available to the joint venture or joint venture’s parent companies. The parties also undertook not to incentivise customers to use the joint venture’s TEE solution by tying ARM’s IP license with the venture’s TEE solution.59 In the commitments, the parties clearly defined the scope and the meaning of the expression ‘TrustZone Information’.60 The commitments clarified the point of time by which ARM would offer new versions of TrustZone Secure Monitor Code and the relevant TrustZone Information to the joint venture and its competitors.61 To prevent any unfair advantage to the joint venture or its parent companies through the early disclosure of the code, the parties undertook ‘not’ to offer the software code (ARM architecture V8) to the joint venture or its parent companies earlier then it offered it to the competing TEE providers.62 ARM also undertook to offer versions subsequent to V8 to third parties,

56

Ibid., p. 6. The document specified how the InstaSearch was to be implemented—incorporating a QPX cache and associated interfaces that ITA had before the merger promised to deliver as a proof-of-concept to its customers. United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment (D.D.C. Apr. 8, 2011), 6 available at http://www.justice.gov/atr/cases/f269600/269632.pdf accessed 06 January 2019. 58 ARM/Giesecke & Devrient/Gemalto/JV (Case COMP/M 6564) [2012] OJ C368/9, paras 185–186. 59 Ibid., at para 191. 60 Ibid., at para 211. 61 Ibid., at para 223. 62 Ibid., at para 224. 57

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no later than it was released to the joint venture partners.63 Parties also undertook to license ARM’s forthcoming architecture V864 and publish the terms and conditions relating to licensing on its website65—a set of measures that enhanced the transparency and effective monitoring—in order to prevent any subsequent deviation from the commitments by ARM. Competing TEEs were offered unrestricted use of information to commercially exploit the interoperability information and ARM undertook not to intentionally design its IP such that it would degrade the performance of third-party TEEs.66 A Commission-approved monitoring trustee was to be appointed shortly after the clearance decision. The trustee’s main task was to ensure effective implementation of the commitments. In case of disputes arising following the implementation of the commitments, detailed dispute settlement procedure including fast-track arbitration was made available to third parties.67 The commitments were to last for a period of 8 years, considering that the average life cycle of an ARM product ranged from five to eight years.68

12.3.4 Comcast/NBCU/JV: FRANDly Access to the OVDs In the Information and Communications sector, the key is access to content—for distribution (in the upstream market), as well as for the final consumer (in the downstream market).69 To eliminate foreclosure concerns, access remedies may be highly desirable. In fact, access remedies have been found to be the most frequently employed remedies in the sector, not only by the European Commission, but also by the National Competition Authorities (NCAs).70 The European Commission in the Newscorp/Telepiù merger, accepted commitments that Newscorp would share the elements of its Pay-tv network with its competitors.71 The commitments also provided for arbitration to resolve any disputes over the sharing of the network. As discussed at length in Chap. 15, this led to RTI v Sky—the first ever reported case of merger remedy-related arbitration. 63

Ibid., at para 224. Ibid., at para 225. 65 Ibid., at para 226. 66 Ibid., at paras 227–28. 67 Ibid., at para 213. 68 Ibid., at para 229. 69 Institute of Competition Law research sponsored by Clifford Chance and PricewaterhouseCoopers LLP (the UK firm), ‘The Merger Remedies Matrix’ Concurrences

accessed 06 January 2019. 70 Ibid. 71 Newscorp/Telepiù (Case COMP/M 2876) Commission Decision 2004/311/EC [2004] OJ L110/ 73, para 225ff. 64

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In more recent mergers such as Liberty Global/Ziggo and Liberty Global/Corelio/ De Vijver Media/LG, the European Commission once again cleared these mergers only following the submission of substantial access remedies. Although in Liberty Global/Ziggo, the relief was structural in nature as the parties were required to divest the Film Divestment Business that consisted of Flim1’s (owned by Liberty Global at the time of the merger) activities in the Netherlands which included the ‘provision of movies, series and documentaries to customers through a package of Premium Pay-tv channels and related video on demand services’.72 In Liberty Global/ Corelio/W&W/De Vijver Media, the parties offered commitments to ensure access to the channels ‘Vier’ and ‘Vijf’ to third party distributors on fair, reasonable and non-discriminatory terms.73 To be fair, reasonable and non-discriminatory, the terms offered regarding tariff and the quality of the signal to interested third parties were to be comparable to the existing terms and conditions offered to distributors such as Telenet.74 To resolve any possible access-related disputes, a detailed fast-track arbitration mechanism was provided.75 The commitments in Liberty Global/ Corelio/W&W/De Vijver Media in the EU were quite similar in design to those offered in the Comcast/NBCU/JV in the US. In Comcast/NBCU/JV—discussed in Chap. 5—the parties undertook to ‘license its broadcast, cable, and film content to OVDs’ on ‘economically equivalent terms’ on which it licensed programmes to its then customers, the MVPDs.76 The parties did not offer the exact licensing conditions; instead they were required to ‘reasonably approximate, in the aggregate, an existing licensing agreement’.77 The flexibility to ‘reasonably approximate’ allowed the joint venture to consider the special nature of the OVDs such as the nature of advertising on multi-sided platforms, as well as their distinct technical and economic nature.78 The scope and the quality of the content that the OVDs received from the joint venture was to equal with what they were already receiving from the programming peers of the joint venture.79 In this case, to design an effective relief that considered all the competition and relevant non-competition concerns, the DOJ worked in close cooperation with the US FCC. The DOJ took into consideration the FCC’s requirement for the joint venture to ‘license content on reasonable terms to OVDs’ along with an arbitration clause for

72 Liberty Global/Ziggo (Case COMP/M 7000) [2014] OJ C147/1, Commitments to the European Commission, Section B, para 5. 73 Ibid., at paras 624–626, 658–662. 74 Ibid., at para 625. 75 Ibid., at para 627. 76 United States v. Comcast Corp., No. 1:11-cv-00106, Competitive Impact Statement 30 (D.D.C. Jan. 18, 2011), accessed 06 January 2019. 77 Ibid., pp. 30–31. 78 Ibid., p. 31. 79 Ibid.

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dispute resolution over access issues. The department accepted the FCC’s commercial arbitration process to resolve any subsequent access-related issues.80

12.3.5 Axalto/Gemplus: FRANDly Access to the OTA SIM Platforms In Axalto/Gemplus, the merged entity were to have a large portfolio of IP rights including many ‘essential’ patents.81 As the parties were active in the market for smart cards wherein the intellectual property rights offered a major competitive advantage to the portfolio holder, the presence of a large patent portfolio created incentives for the merged entity to engage in exclusionary conduct.82 Post-merger, there was also a possibility of coordinated conduct between the merged entity and the other significant players in the market.83 Market for wireless communications applications for the SIM cards, especially Over-the-Air (OTA)-based solutions were adversely affected. OTAs enables a network operator to communicate with the SIM card without any actual physical contact to update, alter or modify its contents in real time.84 The dominance in the OTA market would have helped the merged entity control the acceptance and the usage of new SIM cards and, thereby, eventually offer it the possibility to leverage dominance in the market for the supply of these cards.85 As OTA SIM platforms have a longer life than the SIM cards, it meant that the anticompetitive conduct would have lasted over a longer duration of time, then acceptable within the framework of EU merger control.86 To alleviate the Commission’s competition concerns, Axalto undertook to offer for a period of 10 years following the decision, on written request, a non-exclusive license for any or all of the patents in its portfolio to ‘make, use, sell and import [and] export’ the Licensed Products in the EEA on ‘fair, reasonable, and non-discriminatory’ terms and conditions.87 Axalto undertook for a period of 8 years following the decision to disclose interoperability information to interested

80

Ibid., p. 32. Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34, paras 57–66. 82 Ibid., at para 64. 83 Ibid., at para 65. 84 Gemalto, ‘What is OTA?’ 06 January 2019. 85 Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34, para 75. 86 Ibid. 87 Ibid., at para 82. 81

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third parties88 that were qualified to supply SIM cards to customers.89 Third Party was defined as an intermediary who had purchased an OTA Platform from the merged entity.90 The objective of the commitments was to ensure that the SIM cards by Third Party were interoperable with the OTA Platform offered by the merged entity.91 The contact details of the relevant person, who could offer access to this interoperability information was to be published on the Commission’s website.92 The commitments also contained a detailed provision for the appointment of a monitoring trustee, his functions and a fast-track arbitration procedure.93

12.4

Other Non-structural Remedies

This section presents other non-structural remedies such as exclusive long-term clauses (Sect. 12.4.1), restrictive licensing practices, non-discrimination clauses and anti-retaliation provisions (Sect. 12.4.2) and firewall provisions (Sect. 12.4.3). Firewall provisions are discussed in detail, as they have been employed frequently in recent high-tech mergers. Remedies such as re-branding have not been discussed as to the best knowledge of the author it seems that there has not been a single ICT conditional clearance decision whereby the European Commission employed re-branding as a merger remedy. Rather re-branding is a more popular remedy for the consumer goods and the pharmaceuticals sector.

12.4.1 Exclusive Long-Term Clauses When a proposed concentration makes some of the existing contractual obligations anti-competitive, the commitments may include a provision to change such exclusive long-term contracts.94 However, such a change in terms of the contract is suitable only as a part of the remedies package.95 In Newscorp/Telepiù, Newscorp offered to waive exclusive rights with respect to TV platforms, other than Direct-to-

88 Interested Third Party are the suppliers of SIM cards, who are competitors of the merged entity in the market for supply of SIM cards. 89 The term ‘customer’ here refers to the intermediary in the chain that is the telecommunications operator. 90 Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34, para 82. 91 Ibid. 92 Ibid., at para 88. 93 Ibid., at para 82. 94 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 67. 95 Ibid., at para 68.

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Home (DTH), allow Film Studios and Football clubs a right to unilaterally terminate the existing contracts with Stream and Telepiù without any penalties and undertook not to enter into long-term contracts with football clubs and film studios or acquire any protection rights for the DTH.96 These contractual obligations were offered in addition to an offer for cost-based non-discriminatory access to its application program interface (API), non-discriminatory price-based licence to its conditional access system (CAS) and the divestiture of its digital and analogue terrestrial broadcasting assets and commitments.97 In Thomson/Reuters, discussed in more detail in Chap. 17, in order to facilitate effective implementation of the remedies package, the parties undertook to allow an early penalty-free termination of the contracts by the customers and restrain from any subsequent negotiation between the purchaser of its divested business and the customers.98 As for the appropriate time limit for these kind of commitments, it is fact-specific and depends on the facts of each individual case.99

12.4.2 Restrictive Licensing Practices, Non-discrimination Clauses and Anti-retaliation Provisions Some of the other frequently and often simultaneously employed remedies include an undertaking to remove restrictive licensing practices, anti-retaliation provisions and introduce non-discrimination clauses. Depending upon the facts and circumstances of the case, these non-structural remedies may or may not be employed simultaneously. The following section first defines each one of these remedies, followed by a discussion of some recent conditional clearances that employed these remedies. Non-discrimination clauses are an undertaking from the merged entity that it will offer similar terms and conditions to its competitors that it offers to its subsidiary for access to content, to network and other resources. Restrictive licensing practices are agreements between the parties that restrain one of the parties from undertaking a particular task such as the sharing of information or undertake any activity that may competitively disadvantage the other party. The party with a superior bargaining power may be in a position to react and discipline the deviating party for non-compliance with these restrictive clauses. Following a breach of such conditions, the party that demanded these clauses may

96

Newscorp/Telepiù (Case COMP/M 2876) Commission Decision 2004/311/EC [2004] OJ L110/ 73, para 225. 97 Ibid. 98 Thomson Corporation/Reuters Group (Case COMP/M.4726) [2008] OJ C212/5, para 480. 99 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/1, para 70.

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retaliate by punishing the deviating party. For such restrictions to be effective, following three conditions must be met cumulatively—incentives to ensure compliance, ability to monitor deviation and possibility to discipline through punishment. These conditions, although similar to the case of coordinated effects as discussed in Chap. 4, have a pro-competitive effect as they concern the remedial design. This implies that mostly, and not necessarily, the parties may be in a non-horizontal relationship where one entity may depend on the others for access and interoperability issues. These conditions will also, usually be employed along with other non-structural commitments such as access remedies. In each of the three leading cases discussed below—that in a certain sense, set the tenor for the use of non-structural remedies in high technology mergers—these remedies were employed along with onerous access conditions. In Google/ITA, Google committed to refrain from entering into restrictive agreement with airlines that restricted their right to share any ‘availability information’ with the other OTIs.100 In the Comcast/NBCU/JV, the parties promised not to use Comcast’s influence ‘either as the nation’s largest MVPD or as the licensor [of video programming]’ to enter into agreements comprising of restrictive contractual conditions that could hinder the development of the OVDs.101 Striking a balance between the possible pro-competitive and anti-competitive effects of these exclusivity provisions, the conditions allowed a ‘reasonable and customary exclusivity provision’ that promoted competition and prohibited those that hindered the development of the OVDs.102 The Comcast/NBCU/JV was also prohibited from discriminating unreasonably while offering internet broadband access. The conditions required Comcast to treat equally all the Internet traffic and ensure that the OVD traffic was treated no worse than any other traffic on its Internet access service.103 In Ticketmaster/Live Nation, the DOJ conditionally cleared the merger, subject to a range of structural and conduct (non-structural) remedies to protect competition in ticketing for entertainment events.104 To alleviate concerns that the defendant could leverage its position in the primary ticketing market to the disadvantage of promoters and managers, the merged entity undertook ‘not’ to engage in conduct that injured equally competitive but vertically non-integrated competitors. They could also not

100

United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment 27, 28 (D.D.C. Apr. 8, 2011), accessed 06 January 2019. 101 United States v. Comcast Corp., No. 1:11-cv-00106, Competitive Impact Statement 34–35 (D.D.C. Jan. 18, 2011), accessed 06 January 2019. 102 Ibid., at pp. 34–36. 103 Ibid., at p. 38. 104 United States v. Ticketmaster Entertainment, Inc., No. 1:10-cv-00139, 2010 WL 5699134, Final Judgment (D.D.C. July 30, 2010), accessed 06 January 2019.

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Other Non-structural Remedies

201

force a venue using its primary ticketing services to also subscribe to concerts that it promoted or artists that it managed.105

12.4.3 Firewall Provisions Firewalls prohibit the merged entity from sharing information with the acquired firm or third parties. This remedy has been a particular recent favourite with the competition authorities. Firewall provisions may also be referred to as Chinese Walls or ring-fencing. In the NXP Semiconductors/Freescale Semiconductors merger, the commitments included a ring-fencing provision, according to which NXP was prohibited to access any kind of confidential information in relation to the divested business.106 Further, any related confidential information that was already in its possession was to be deleted promptly.107 Ring-fencing was to be executed through severance of participation of the divested business in the central information technology network to the greatest extent possible, without compromising on its viability and the removal of NXP’s appointees on the supervisory board and the board of Directors of the divested business.108 In Google/ITA, Google committed to refrain from using OTI Confidential Information, for purposes other than marketing, raising invoices and R&D and product improvements of QPX and the InstaSearch under the pre-merger practices of ITA.109 It also committed to firewall its employees from the OTI Configuration Information or the OTI Plan Information, except for the fulfilment of commitments or compliance purposes, subject to the written consent of the concerned OTI.110 In the Comcast/NBCU/JV, the joint venture was required to implement a firewall to ensure that competitively sensitive information was not transmitted from Hulu to the joint venture.111 Interestingly, Commissioner Harbour in her dissenting statement in the Google/ DoubleClick merger also suggested firewall as a possible remedy to alleviate competition concerns from data mergers. In her opinion, in case of data mergers issues about ‘data integration are as relevant to antitrust analysis as they are to the 105

Ibid. NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2, sec B, para 13. 107 Ibid. 108 Ibid. 109 United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment 28, 29 (D.D.C. Apr. 8, 2011), accessed 06 January 2019. 110 Ibid. 111 United States v. Comcast Corp., No. 1:11-cv-00106, Competitive Impact Statement 20 (D.D.C. Jan. 18, 2011), accessed 06 January 2019. 106

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consumer protection review’.112 The Commissioner also added a word of caution in drafting such remedies to ‘avoid gamesmanship’ and strategic breach of the remedies. In light of Commissioner Harbour’s remark that underscores the relevance while highlighting the opportunities of ‘strategic gamesmanship’ in implementing firewalls, the following paras intend to highlight the limitations of firewalls or ringfencing. Firewalls are harder to implement in practice, then envisioned in the latest conditional clearance decisions in the EU, the UK, and the US competition authorities. Ring-fencing creates opportunities for the merging parties to act against their own interests while simultaneously offering the possibility to evade their responsibilities. In NXP Semiconductors/Freescale Semiconductors, for instance, the ring-fence provided NXP the approval to ‘obtain or keep information’ concerning the divested business which was ‘reasonably necessary’ for the divestiture process or which NXP was required to make a legal disclosure.113 The issue is that what is ‘necessary’ to keep and what needs to be ‘destroyed’ required a factual analysis on the part of NXP. For an outsider, asymmetries of information between itself and the merging parties may mean that it is difficult to monitor effective compliance. Second, it may also involve substantial monitoring costs, a resource that may not always be available with the competition authorities. Even if available, the authorities may find it more desirable to allocate these resources to the more pressing competition issues at hand. Second, firewalls clearly create ‘countervailing incentives’ as compliance with the commitments means that the merging parties are leaving the ‘money on the table’.114 This in turn may motivate the firms to ‘crowd the boundaries’ and look for alternative ways to attain the same objective.115 The economics of regulation suggests that the challenges from ‘countering firm’s natural incentives’ to engage in profit maximisation while simultaneously implementing the equal access system explain as to why firewall provisions may after all not be an effective remedy.116 Key examples of these conflicting interests include the US telecommunications and the US electricity industry that sought to enforce wholesale open access regime, as well as the liberalisation of the telecommunications market in the EU. In both these

112

Dissenting Statement of Commissioner Pamela Jones Harbour, Google/DoubleClick, FTC File No. 071-0170, 9 (Dec. 20, 2007), accessed 06 January 2019. 113 NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2, sec B, para 13. 114 The expression ‘money on the table’ refers to the value of the information about competitors in the hands of the vertically integrated enterprise. The latter has economic interests to use this information in deciding about important strategic decision such as output and price. John E Kwoka and Diana L Moss, ‘Behavioral Merger Remedies: Evaluation and Implications for Antitrust Enforcement’ [November 2011] American Antitrust Institute, 26 accessed 06 January 2019. 115 Ibid., pp. 26, 27. 116 Ibid., 27

accessed 06 January 2019.

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Impediments to Effective Implementation of Remedies

203

cases, the concerned authorities encountered significant strategic behaviour by the incumbent players on several occasions. To appreciate the challenges in implementing the firewall, it is noteworthy to mention a paragraph from the final order in the Google/ITA decision: [A]n employee shall not be deemed to have “used” OTI Confidential Information solely on account of his or her prior access to OTI Confidential Information, absent evidence of intentional reliance on information other than information that is retained in the unaided memory of such employee (provided that memory is “unaided” if the employee has not intentionally memorized the information for the purpose of retaining and subsequently using or disclosing it) or an affirmative intention to violate or evade the terms of the Final Judgment.117

The question that emerges in light of the above paragraph is how does one find what is ‘intentional reliance’ as distinguished from unintentional reliance and what is ‘affirmative’ as distinguished from non-affirmative reliance? These are questions of fact that require a subjective analysis of the situation at hand, whereby an employee relied on the information that stayed on in his ‘unaided memory’ to take a certain decision or refrained from undertaking some action. Moreover, some employees may have sharper memory than others, which in turn means that more information may stay on in their ‘unaided memory’ that can help them take better decisions. In practice, therefore, it seems unrealistic and unreasonable to practically implement such a firewall, as it militates against sheer commercial sense of a rational individual.

12.5

Impediments to Effective Implementation of Remedies

Non-structural remedies involve greater enforcement and monitoring costs and thereby, effective ‘design and implementation’ are the tour de force of a successful remedial framework.118 This is not to say that the structural remedies involve no ‘monitoring costs’. Even a divestiture, which is clearly structural, irrespective of the basis of classification—may require at least 6 months to 2 years before it actually materialises.119 Thus, monitoring trustees are employed frequently in case of both kinds of remedies. The DG Competition in its 2005 Merger Remedies Study found that behavioural remedies were ‘ineffective or partially effective’ in comparison to their structural counterparts. However, the erstwhile Competition Commission in the

117

United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment (D.D.C. Apr. 8, 2011), 30 accessed 06 January 2019. Emphasis added. 118 Peter Angelov, Stephanie Rosenkranz and Hans Schenk, ‘Competitive Effects of Merger Remedies in Europe’s High-Tech Industry’ (October 2012) Discussion Paper Series 12–16, Tjalling C. Koopmans Research Institute, 23 accessed 06 January 2019. 119 Ioannis Kokkoris and Howard Shelanski, EU Merger Control: A Legal and Economic Analysis (Oxford University Press 2014) 554.

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UK (since replaced by the CMA) in its study titled ‘Understanding past merger remedies’120 found that behavioural remedies could be just as effective as the structural remedies.121 This dichotomy of the results may partly be explained by the fact that the UK Competition Authority has more resources to monitor compliance122 than its EU counterpart.123 This advantage may potentially change postBrexit as more mergers are notified to the CMA. Mergers selected for an ex-post review in the two cases may also explain the difference in outcomes.124 In cases, wherein the Commission requires some certainty that the access commitments be implemented, the Commission may require an up-front or fix-it-first provision.125 If the concern is ‘only’ implementation and monitoring costs, then as suggested by Kokkoris and Shelanski, these remedies can be ‘backed up with “crown-jewel” divestiture provisions to motivate compliance’.126 The non-structural commitments in Comcast/NBCU/JV discussed above were breached shortly after the joint venture commenced operations. Interestingly the FCC and the competition authorities came across this non-adherence in a subsequent merger filing, requesting clearance for a merger between Comcast and Time Warner.127 Amongst others, Comcast apparently deteriorated the performance of Hulu, the ‘maverick’ that it had earlier acquired from NBCU.128 Comcast also miss-

UK Competition Commission, ‘Understanding past merger remedies: report on case study research’ [August, 2008] accessed 06 January 2019. 121 Ioannis Kokkoris and Howard Shelanski, EU Merger Control: A Legal and Economic Analysis (Oxford University Press 2014) 553. 122 UK Competition Commission, ‘Understanding past merger remedies: report on case study research’ [August, 2008], para 71 accessed 06 January 2019. 123 Ioannis Kokkoris and Howard Shelanski, EU Merger Control: A Legal and Economic Analysis (Oxford University Press 2014) 553. 124 Ibid. 125 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 64. 126 Ioannis Kokkoris and Howard Shelanski, EU Merger Control: A Legal and Economic Analysis (Oxford University Press 2014) 553–54. 127 Karl Bode, ‘Comcast was so incredibly full of crap during its Merger Sales Pitch, The Government is Considering Additional Punishment’ Tech Dirt (Online, 2 June 2015) accessed 06 January 2019. 128 Claire Atkinson, ‘Regulators eyeing Comcast for possible NBCU deal violation’ NY Post (Online, 28 May 2015) accessed 06 January 2019; Karl Bode, ‘Comcast was so incredibly full of crap during its Merger Sales Pitch, The Government is Considering Additional Punishment’ Tech Dirt (Online, 2 June 2015) accessed 06 January 2019; Karl Bode, ‘Comcast Applauds Itself for Barely Adhering to NBC Merger Conditions, Most of Which Comcast Created’ Tech Dirt (Online, 120

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Impediments to Effective Implementation of Remedies

205

advertised its services—a claim that was later resolved in a subsequent settlement decision with the FCC.129 Despite all these limitations, for reasons discussed in Sect. 12.2 above, these non-structural remedies retain their significance and if anything, the coming years would see more frequent conditional clearance decisions subject to a range of non-structural or a mix of non-structural and structural commitments. In the chapters that follow, merger remedy-related arbitration and monitoring trustees are discussed at lenght. The two are frequently employed by the competition authorities to minimise their ex-post monitoring costs. But before moving to these ex-post self monitoring mechanisms, a discussion of the recent 4-to-3 telecommunications mergers may be very insightful. The remedial design in these telecom mergers, particularly the clearance decisions between 2010 and 2015, are a chefd’oeuvre as they well balance the need to promote both—static and dynamic innovation-led competition.

6 March 2014) accessed 06 January 2019. 129 Federal Communications Commission, ‘FCC Resolves Comcast NBCU Investigation’ Commission Document (Washington, 27 June 2012) accessed 06 January 2019.

Chapter 13

Remedies in the Telecommunications Sector

Abstract This chapter looks at merger control in the innovation-led telecommunications sector. The discussion merits special attention considering that merger review and the design of remedies in the telecom sectors has lately been very innovative and it sets a good guiding framework for merger control in the ICT sector in general. Second, the more recent telecom mergers when compared with the earlier conditional clearance decisions in the sector—highlight the novelty with which some of the more recent mergers have diligently-crafted remedies that seek to create a competitor over a period of time, as opposed to a clear-cut divestiture that seeks to influence the structure of the markets in the short to medium term.

13.1

Introduction

Having discussed the classification of remedies as structural and non-structural, accompanied by an analysis of the relevant cases, where by classification was relatively straightforward exercise, this chapter now turns to remedies in the telecommunications sector, where the remedies were crafted thoroughly, keeping under due consideration the need to promote price-based, as well as dynamic competition and create an effective Mobile Network Operator (MNO) over time. To truly appreciate the distinct relation between competition and access in the telecoms sector, this section briefly discusses the very special relationship between the MNOs and the Mobile Virtual Network Operators (MVNOs). Whereas the MNOs have their own infrastructure; for MVNOs to be able to compete effectively at the retail level, they need access to the network of the MNOs (see Fig. 13.1). As will be seen in the following sections, one of the Commission’s key concerns in the mobile telecom mergers deals with the preservation of incentives of the MNOs to continue offering wholesale access to the MVNOs. An alternative way to ensure this upstream access is through regulation.1 In all of the 4-to-3 mergers discussed in this 1 For a critical assessment of how regulation impacts investment in infrastructure, particularly, under the European Electronic Communications Code, see Wolfgang Briglauer, Carlo Cambini, Thomas

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_13

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Upstream Market: Wholesale Access for access and call origination on mobile networks - Own infrastructure, including valubale spectrum

Mobile Network Operators (MNOs)

MVNOs and other service providers need access from MNOs to compete at the retail level Mobile Virtual Network Operators (MVNOs) need access from MNOs

MNOs - use their own networks

Retail level Final customer: Depending on his/ her needs and requirements

May subscribe to either an MNO or an MVNO

Fig. 13.1 Overview of the telecoms market: complex relationship between the MNOs and the MVNOs

chapter, the Commission closely co-operated with the NRAs and relied on remedies that promised to promote wholesale competition. The momentum towards the design of complex remedies—remedies that over a period prompt the MVNOs to effectively replace the competitive pressure previously exercised by acquired MNO—are somewhat complicated as they involve a mix of structural and non-structural remedies with a strong structural dimension. The objective of the remedial design is to shape the conditions of access and incentives such that they encourage the MVNOs to mature into MNOs over time. Following cases are discussed next, with a special focus on Telefónica/E-Plus Deutschland (Sect. 13.3)—a high watermark in terms of the design of remedies. Section 13.2 discusses the T-Mobile/Orange UK merger (Sect. 13.2). Section 13.4 discusses fourto-three mergers in the Austrian and Irish market respectively—the H3G Austria/ Orange merger in Austria and the H3G Ireland/Telefónica Ireland in Ireland. A comparison of the two cases highlights the rapid evolution of the Commission’s approach in the investigation of telecom mergers and the design of remedies. A comparison of the remedies in the two cases underscores the approach in designing remedies in such a manner that they promote post-merger incentives to innovate. To

Fetzer and Kai Hüschelrath, ‘The European Electronic Communications Code: A critical appraisal with a focus on incentivizing investment in next generation broadband networks’, Telecommunications Policy Vol 41 Issue 10 (Nov 2017) pp 948–961, available at https://doi.org/10.1016/j.telpol. 2017.07.011.

13.2

T-Mobile/Orange UK

209

make the discussion complete and well-rounded, Sect. 13.5 discusses the most recent H3G Italy/Wind joint venture.2

13.2

T-Mobile/Orange UK

In T-Mobile/Orange,3 France Télécom (FT) and Deutsche Telekom (DT) acquired joint control of a newly formed undertaking that was a joint venture between Orange UK (Orange) and T-Mobile UK (T-Mobile).4 The parties offered telecommunications and information technology services.5 3UK was considered a maverick in the UK telecommunications market. However, it owned only a 3G network6 and had two network agreements: ‘a 3G RAN sharing agreement with T-Mobile’ and a ‘2G national roaming agreement with Orange’.7 Under the terms of the ‘RAN sharing joint venture’, existing RANs were to be merged to create a single 13,000 site network and a joint venture was set-up to manage this integration.8 The proposed transaction, it was feared, could alter T-Mobile’s incentives to honour the continuity of the 3G RAN sharing agreement and by strategically using provisions such as the ‘deadlock provision’ in the RAN sharing agreement, T-Mobile could hinder the successful implementation of the 3G RAN’s development to the disadvantage of 3UK.9 As the merger would have led to further integration of the T-Mobile’s and Orange’s networks, the integration of T-Mobile with 3UK’s RAN on the one hand and the integration of T-Mobile with Orange’s on the other, generated conflict of interests.10 Foreclosure of 3UK was a profitable commercial strategy, as it was expected to divert some of the lost sales to T-Mobile/Orange.11 An unconditional clearance was expected to marginalise 3UK and therefore, the merger was in effect a ‘5-to-3’ merger (and not a ‘5-to-4’ merger).12

2

Hutchison 3G Italy/Wind/JV (Case M.7758) [2015] OJ C 391/05. For a comprehensive and critical discussion on recent mergers in the mobile telecommunications sector, see Kalpana Tyagi, Four-toThree Telecoms Mergers: Substantial Issues in EU Merger Control in the Mobile Telecommunications Sector, International Review of Intellectual Property and Competition Law 49(2) (2018), pp 185–220, available at https://doi.org/10.1007/s40319-018-0677-3. 3 T-Mobile/Orange (Case No COMP/M.5650) [2010] OJ C108/03. 4 Ibid., at para 1. 5 Ibid., at paras 4–6. 6 Ibid., at para 81. 7 Ibid., at para 82. 8 Ibid., at para 83. 9 Ibid., at para 94. 10 Ibid., at para 95. 11 Ibid., at para 99. 12 Ibid., at para 106.

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Second challenge related to resulting concentration of the spectrum.13 Considering that there was a possibility that the merged entity was the ‘only full-speed national LTE network in the short to medium term’, the proposed transaction raised significant concerns about the concentration of spectrum.14 At the time, there were three frequency bands in use in the UK: 900 MHz, 1800 MHz and 2100 MHz—whereas the first two were primarily used for 2G mobile services, the 2100 MHz band was predominantly used for 3G services.15 The merged entity held a ‘combined amount of contiguous spectrum at the 1800 MHz frequency level’- which was much larger than any of its competitors, a fact that raised significant competition concerns.16

13.2.1 Remedies in T-Mobile/Orange The commitments addressed the following two concerns: first, 3UK’s position on the UK mobile telecoms market and second, concentration of the spectrum in the 1800 MHz band.17

13.2.1.1

T-Mobile/3UK’s RAN Sharing Agreement

While the Commission was reviewing the transaction & the first set of proposed remedies, the parties entered into a new agreement with 3UK that was an improvement over the existing agreement in the following respects. The amended agreement offered clarity regarding the integration of the networks and the sequence in which it was to be pursued. The agreement no longer contained the early termination clause—this ensured the certainty and durability of the venture. In case of disputes, a fast track dispute resolution mechanism was proposed. Appointment of an expert, who along with the trustee was expected to ‘fairly and impartially’ resolve the disputes—was also proposed.18

13.2.1.2

Spectrum

The parties proposed to divest, either through private sale or in the upcoming OFCOM auction—2  15 MHz of the JV’s 1800 MHz spectrum band (the Divestment Spectrum).19 This Divestment spectrum comprised of : (1) 2  10 MHz of the 13

Ibid., at para 118. Ibid., at para 122. 15 Ibid., at paras 112–113. 16 Ibid., at paras 111, 138. 17 Ibid., at para 187. 18 Ibid., at paras 204–213. 19 Ibid., at para 191. 14

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T-Mobile/Orange UK

211

joint venture’s 1800 MHz spectrum (Divestment Spectrum I) and (2) 2  5 MHz of the joint venture’s 1800 MHz spectrum (Divestment Spectrum II).20 Under the UK laws, it was not possible to sell privately the divestment spectrum in respect of spectrum licenses for frequencies in the 1800 MHz band. However, the OFCOM, in a letter dated 26 February 2010, confirmed its intention to amend the law and enable lawful trading of licenses.21 The Commission while expressing its apprehension about the certainty of the private sale22 stated that even absent private sale, considering that the parties were to submit their licenses by a certain date to the OFCOM which could then proceed with an auction for the same,23 the amended commitments offered clarity about the ‘time-line for the different alternative divestment processes for the divestment spectrum’.24 The commitments provided for a single purchaser for the two divestment spectrums. This ensured that the purchaser were to have sufficient amount of spectrum to ensure ‘an independent deployment of a competitive LTE network’.25 A clause requiring over-sight of the process by the monitoring trustee and the acceptance of the successful bidder subject to the Commission’s approval ensured that the Commission had sufficient degree of control over the process.26 The proposed amount of spectrum was found appropriate as any further divestment would have required a longer period for regulatory approval and hindered the merged parties’ plans to develop its own LTE network, which in turn would have constrained its capacity to offer access to MVNOs at the wholesale level.27 The Commission found the proposed amount of divested spectrum was satisfactory, as the amended commitments specified exactly the part of the spectrum that was to be divested, which incidentally was also contiguous to Vodafone’s spectrum.28 Moreover, even if the potential purchaser did not hold any 1800 MHz spectrum, the divested spectrum alone was sufficient to deploy an LTE network.29 The timing of divestment30 was found reasonable on grounds of technical features of the

20

T-Mobile/Orange (Case No COMP/M.5650) [2010] OJ C108/03, para 192. Ibid., at para 217. 22 Ibid., at para 218. 23 Ibid., at paras 219–221. 24 Ibid., at para 222. 25 Ibid., at para 223. 26 Ibid., at para 224. 27 Ibid., at para 225. 28 Ibid., at paras 226–228. 29 T-Mobile/Orange (Case No COMP/M.5650) [2010] OJ C108/03, para 228. 30 Divestment Spectrum I was to be cleared by no later than 30 months from the date of OFCOM auction and no later than 30 September 2013, whichever was earlier and divestment spectrum II was to be cleared latest by 30 September 2015 See T-Mobile/Orange (Case No COMP/M.5650) [2010] OJ C108/03, para 194. 21

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integration plans, migration process following divestiture and the characteristics of the customers.31 Overall, it was expected that the loss of competition from the merger would subsequently be replaced by preserving the incentive of 3UK to continue to be a maverick and the divested spectrum would possibly be purchased by Vodafone, considering that the divested spectrum was contingent to the latter’s own spectrum and thereby it made commercial sense for it to acquire the same. Remedies in the latest telecom mergers, although broadly speaking along the lines of remedies in T-Mobile/Orange, are somewhat more complex as they aim to explore the possibility of strengthening the position of the MVNO’s and offer them an opportunity to upgrade as an MNO over time. Remedies in Telefónica/E-Plus Deutschland32—well highlights this innovative approach to remedial design.

13.3

Telefónica/E-Plus Deutschland

In the telecommunications sector, high sunk costs for spectrum acquisition and rollout of the requisite physical infrastructure limit the possibility of a successful MNO entry.33 Existing fringe players such as MVNOs and Service Providers instead offer higher potential to upgrade as MNOs and offer aggressive retail competition.34 In Telefónica/E-Plus Deutschland, the Commission identified the inability of the MVNOs and Service Providers to compete with MNOs with the same level of vigour considering their dependency on the MNOs to get access to the infrastructure.35 Another identified concern of this apparent lack of competitive spirit was the absence of incentives to compete. The rationale was that as the MVNOs and Service Providers did not invest in the fixed costs to the same extent as an MNO, they, therefore, had lower incentives to recover the fixed (sunk) costs.36 The commitments comprised of three key elements—an MNO remedy,37 an MBA remedy38 and a non-MNO remedy39—all designed and collectively implemented with the objective of strengthening the ability and the incentives of non-MNOs to compete on the retail market.40

31

T-Mobile/Orange (Case No COMP/M.5650) [2010] OJ C108/03, paras 229–231. Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7. 33 Ibid., at para 846. 34 Ibid., at para 845. 35 Ibid., at para 1303. 36 Ibid., at paras 1303, 568. 37 Ibid., at paras 1359–1367. 38 Ibid., at paras 1368–1377. 39 Ibid., at para 1378. 40 Ibid., at para 1304. 32

13.3

Telefónica/E-Plus Deutschland

213

13.3.1 The MNO Remedy As per the MNO Remedy, Telefónica was to enter into an MNO Agreement with a new MNO entrant in a stipulated time frame and in case by the end of 2014 no third party showed interest, then Telefónica undertook to sign such an agreement with an Upfront MBA MVNO.41 The proposal comprised of an offer to lease the entrant 10 MHz of paired spectrum in the 2.6 GHz band,42 a national roaming offer,43 a divestiture offer to sell sites for developing network in the urban areas,44 an offer to sell operational shops along with existing rental contracts and existing staff45 and a passive radio access network sharing offer, according to which the entrant could have a nation-wide agreement with Telefónica (and not E-Plus) to share passively its legacy network.46 Even though the Commission recognised that this MNO Remedy component was unlikely to be implemented, the Commission did accept this commitment along with the ‘upcoming frequency auction’ to be organised by the BNetzA, the German network regulator. The Commission anticipated that together this could be ‘potentially helpful’ to promote competition and also, ‘keep the doors open’ for potential future entry of a new MNO in the German telecoms market.47

13.3.2 The MBA Remedy The MBA48 Remedy comprised of two elements—an Obligatory Purchase Commitment and an Optional Capacity Commitment. Under the Obligatory Purchase Commitment, Telefónica was to enter into an agreement with at least one Upfront MBA MVNO49 to sell 20% of the total capacity (for each data, voice and SMS) of its network under a specified glide path.50 The merged entity further committed to offer

41

Ibid., at paras 1359–1360. Ibid., at paras 1361–62. 43 Ibid., at para 1363. 44 Ibid., at para 1364. 45 Ibid., at para 1366. 46 Ibid., at para 1365. 47 Ibid., at para 1382. 48 The Mobile Bitscreen Access (MBA) model comprised of three elements—Bitstream Component 1 which referred to the data throughput capacity; Bitstream Component 2 which was the data volume capacity and Bitstream Component 3 comprising of the voice capacity and SMS. Basically, the MBA model defined how the potential entrant MVNOs or service providers would be offered access to data, voice capacity and SMS. 49 Upfront MBA MVNO in the commitments was defined as a MVNO or a service provider that entered into an agreement with Telefónica to get access to the MBA Model. 50 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 1368. 42

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an additional 10% of the consolidated network to the Upfront MBA MVNO on the same terms and conditions as under the Obligatory Purchase Commitment.51 If the Upfront MBA MVNO was carrying subscribers on the merging parties network, the Obligatory Purchase Commitment could not be used to serve these existing customers. The capacity required to serve the existing customers was to be deducted from the capacity purchased under the Optional Purchase Commitment.52 To calculate these purchase commitments, Telefónica was to provide a regular network forecast of its consolidated network to the monitoring trustee and to the Upfront MBA MVNO.53 This adjusted capacity mechanism ensured that the capacity available to the Upfront MBA MVNOs increased over time and they had access to equal competitive opportunities as the merged parties.54 Taking into due account the MVNO’s prior experience in the sector, the definition of the commercial terms of the MBA agreement was left open to negotiation between the parties. In any case, Telefónica committed ‘not’ to price its Bitstream component 255 and future technologies beyond a certain pre-specified level.56 The MBA remedy also included a commitment to offer ancillary and additional services to the MVNOs to facilitate the effective functioning of the Upfront MBA MVNO(s). The commitments were also made ‘future proof’ as the MBA MVNO remedy offered MNVOs wholesale access to 4G services, something that they were unable to offer earlier as ‘4G differentially priced retail tariffs’ under their own brand names.57 The objective of the foregoing commitments, that also included a non-discriminatory clause, was to eliminate the usage-based variable component in the MBA agreements and create incentives for the MVNOs to be an effective competitor.58 [T]he Upfront MBA MVNO(s) will pay a fixed price on a periodic basis for access to a fixed capacity on the consolidated network of the merged entity, as opposed to paying wholesale access fee per subscriber under the retail-minus model or per usage under the price-per-unit or revenue sharing models.59

The agreement was initially valid for a period of 5 years with a unilateral call option available to the Upfront MBA MVNO(s) to extend it for an additional 5 years.60 The ‘fixed price/fixed capacity’ model was designed to create compelling incentives for upfront MBA MVNO(s) to engage in intensive competition for customer 51

Ibid., at para 1369. Ibid., at para 1370. 53 Ibid., at paras 1371–1372. 54 Ibid., at paras 1391–1393. 55 See footnote 48 and 49, supra, for a definition of Mobile Bitcream Access (MBA) model and Bitstream component which was a part of the MBA model. 56 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 1375. 57 Ibid., at para 1387. 58 Ibid., at para 1374. 59 Telefónica Deutschland/E-Plus (Case M.7018) [2015] OJ C086/7, para 1389. 60 Ibid., at para 1377. 52

13.4

Remedies in H3G Austria/Orange and H3G Ireland/Telefónica Ireland

215

acquisition.61 The network capacity made available by Telefónica to the Upfront MBA MVNOs intended to push Upfront MBA MVNO(s) to grow over time and effectively replace the loss of E-Plus and competitive constraint exercised by the latter.62 The Commission anticipated that the ‘aggressive competition’ from the Upfront MBA MVNO would offset the loss of competition resulting due to the elimination of E-Plus.63

13.3.3 The Non-MNO Remedy The non-MNO remedy had three components. First, it contained a commitment to extend all wholesale contracts including the existing 2G, the 3G and the 4G contracts to interested MVNOs and Service Providers. Second, it offered the wholesale partners of the merging parties an opportunity to alter the prevalent business models without imposing any penalties. Third, the merging parties committed to remove the contractual clauses in wholesale agreements that prevented customer migration from one MNO to another. The non-MNO remedy component sought to enhance the ‘ability and incentive’ of the MVNOs and Service Providers that had an existing wholesale agreement with the merging parties to compete more effectively with them, as well as improve their negotiation position vis-à-vis other MNOs.64

13.4

Remedies in H3G Austria/Orange and H3G Ireland/ Telefónica Ireland

Hutchison 3G Austria/Orange (H3G Austria/Orange) and Hutchison 3G Ireland/ Telefónica Ireland (H3G Ireland/Telefónica Ireland) were two 4-to-3 mergers in the Austrian and the Irish market respectively. The remedies were exhaustive and designed along similar lines as in the Telefónica Deutschland/E-Plus merger discussed above.

13.4.1 Hutchison 3G Austria/Orange In H3G Austria/Orange, H3G Austria acquired sole control over Orange, excluding Yess! that was to be sold to Telekom Austria.65 The Austrian mobile 61

Ibid., at para 1389. Ibid., at para 1390. 63 Ibid., at para 1397. 64 Ibid., at paras 1399–1400. 65 Hutchison 3G Austria/Orange Austria (Case COMP/M.6497) [2013] OJ C224/12, paras 5–11. 62

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telecommunications market at the time of the transaction had four major MNOs— Telekom Austria (through its subsidiary A1), T-Mobile, Orange and H3G.66 This 4-to-3 merger was a merger between the second and third largest MNOs in Austria and second major consolidation in the market since the 2006 T-Mobile/Tele.ring merger.67 In addition to these MNOs, two other MVNOs and a significant number of independent re-sellers were also active at the retail level.68 H3G exercised an important competitive constraint in the mobile telecommunications market as it competed aggressively with the other MNOs to attract new customers and retain the existing ones.69 Presence of substantial regulatory barriers, non-availability of spectrum for further allocation and significant costs in setting up an MNO meant that post-merger a timely market entry of an MNO or an MVNO was highly unlikely.70 To alleviate the Commission’s competition concerns, the parties committed to enter into an ‘upfront MVNO agreement’ based on the ‘Reference Offer’.71 The parties accordingly, signed an MVNO access agreement with UPC, an MVNO.72 A second set of commitments related to the availability of wholesale access. The parties offered to make 30% of the H3G’s network available for wholesale access for up to 16 MVNOs.73 This set of commitments was to remain in effect for 10 years, except in case H3G had ‘transferred the Divestment Spectrum’ to a suitable buyer and the auction Spectrum was ‘transferred to a Purchaser’ (an MNO) during this period. As part of this transfer, H3G offered to sell 2  10 MHz of contiguous spectrum in the 2.6 GHz frequency band (the Divestment Spectrum). In the meanwhile, if a new entrant made a successful entry as a full-fledged MNO in the Austrian telecommunications market, H3G was to be relieved from these set of commitments and required to only comply with pre-existing MVNO Agreements including an option with those MNVOs to prolong the pre-existing contracts.74 To help H3G manage its network effectively and prevent any possible anti-competitive effects resulting from the exchange of information, competing MVNOs were required to share only a minimum reasonable amount of information with H3G, taking guidance from the ‘Reference Offer’ specified in the commitments.75 Further, H3G also offered to make available the ‘Divestment Spectrum, 2  10 MHz of spectrum in the 2600 MHz frequency band’ for a new entrant.76

66

Ibid., at para 101. Ibid., at paras 102–108. 68 Ibid., at paras 109–114. 69 Ibid., at paras 254–284. 70 Ibid., at paras 285–300. 71 Ibid., at para 520. 72 Ibid., at para 521. 73 Ibid., at para 523. 74 Hutchison 3G Austria/Orange Austria (Case COMP/M.6497) [2013] OJ C224/12, para 523. 75 Ibid., at para 525. 76 Ibid., at para 526. 67

13.4

Remedies in H3G Austria/Orange and H3G Ireland/Telefónica Ireland

217

This band was to be sold along with the spectrum in the 800 MHz frequency band, the ‘Auction Spectrum’ that had been reserved by TKK, the Austrian telecommunications authority for a new entrant in the upcoming 2013 TKK Auction.77 These two spectrums—the Divestment Spectrum and the Auction Spectrum—were to be sold to the same new MNO entrant.78 In case no new entrant purchased agree to purchase the two spectrums together, H3G was automatically relieved of its obligation to divest the Divestment Spectrum.79 H3G also committed to offer all incidental support for successful entry by offering ‘national roaming, preferred colocation rights’ and new sites to the entrant.80

13.4.2 Hutchison 3G Ireland/Telefónica Ireland H3G Ireland/Telefónica Ireland was a 4-to-3 merger, where Hutchison 3G Ireland (H3G Ireland), the second largest MNO, proposed to acquire sole control over Telefónica Ireland (O2), the fourth largest MNO in the Irish mobile telecommunications market.81 The other two MNOs were Vodafone, the largest and Eircom, the third largest MNO in Ireland.82 ‘Three’ was a maverick in the Irish market that offered attractive pricing and mobile broadband offers to attract customers.83 The commitments sought first, to ensure the successful entry of at least two MVNOs; second, safeguard continued competitiveness of Eircom as an MNO and third, guarantee Eircom’s development as a credible MVNO host in the Irish market.84 To be an effective competitor, MNOs requires ‘a mobile network’ and a rich spectrum band.85 The commitments accordingly had two sets of components: the MVNO entry commitment and the Eircom commitment. Under the MVNO entry commitment, the parties offered to enter into an ‘Upfront MVNO’ capacity agreement with an MVNO to offer minimum capacity of its network ‘in consideration for

77

Ibid. Ibid. 79 Ibid. 80 Ibid., at paras 527–531. 81 Hutchison 3G Ireland/Telefónica Ireland (Case No COMP/M6992) [2014] OJ C264/6, paras 1–16. 82 Hutchison 3G Ireland/Telefónica Ireland (Case No COMP/M6992) [2014] OJ C264/6, paras 39–60. 83 Ibid., at para 65. 84 Ibid., at paras 899–219. 85 Ibid., at paras 67. 78

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a fixed price’. This Upfront MVNO also had the possibility to acquire O2’s sub-brand ‘48’ and/or its customer base.86 Under the second component of this MVNO commitment, the parties were to enter into ‘good faith negotiations for a capacity agreement’ with a second MVNO during the MVNO Entry Period. In case the parties failed to enter into a successful arrangement with another MVNO, the commitments offered for the appointment of a divestiture trustee who could then offer a given minimum capacity to potential MVNO entrants at pre-defined capacity unit price.87 The merger was conditional upon due compliance with this Second MVNO capacity agreement.88 To ensure that over time, a full-fledged MNO could replace the loss of competition, the final MNO commitment offered the Upfront MVNO or the Second MVNO, the possibility to purchase the Divestment Spectrum that consisted of two blocks of 1800 MHz spectrum, two blocks of 2100 MHz spectrum and one block of the very valuable 900 MHz spectrum.89 To ensure the continued effectiveness of Eircom as an MNO and develop it as a credible MNVO host over time, the parties committed to amend the existing network sharing agreement (NSA) between Eircom and O2 based on a draft Memorandum of Understanding (MoU) submitted to the Commission.90

13.4.3 H3G Italy/Wind/JV At the time of the notification, Italian telecommunications market had four MNOs— H3G Italy, Wind, Vodafone and TIM alongside a number of MVNOs.91 The Commission assessed the adverse impact on competition in the market for retail provision of mobile telecom services and wholesale services for access and call origination on mobile networks.92 Being the smaller amongst the four players, Wind and H3G Italy had been particularly aggressive in their pricing policies. This in turn generated immense competitive pressure on the other MNOs to match with equally attractive offers. Removal of H3G as an independent competitor was expected to align the incentives of the remaining MNOs and increase their ability to engage in coordinated conduct on a sustainable basis.93

86

Ibid., at para 976. Ibid., at para 976. 88 Ibid., at para 976. 89 Ibid., at para 977. 90 Ibid., at paras 900–01, 1008, 1023–26. 91 Hutchison 3G Italy/Wind/JV (Case M.7758) [2015] OJ C 391/05, at paras 27–67. 92 Ibid., at paras 228. 93 Ibid., at paras 981. 87

13.5

Conclusion

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The Commission found that the Italian retail market being an oligopolistic market with high barriers to entry, loss of competition between H3G Italy and Wind would eventually result in ‘market repair’—meaning H3G Italy/Wind JV, as well as the remaining MNOs, TIM and Vodafone, would post-merger, ‘compete less aggressively’ against one another.94 Dependence of the MVNOs on the MNOs for access and restrictive MVNO clauses meant that they could not effectively replace the loss of an MNO.95 The merger was also likely to lead to non-coordinated effects on competition in the wholesale market for access.96 To alleviate the Commission’s competition concerns, the parties proposed a fix-itfirst remedy, wherein Iliad, an active MNO in the French market, agreed to purchase the divested assets and spectrum. The MNO Commitment specified in detail the spectrum to be divested, the procedure and timeline for divestment and the sites to be divested and the pricing model employed for offering access to the network.97 It also offered the new MNO entrant, an option to enter into a RAN sharing agreement, which ensured immediate coverage of the least populated areas in a cost-effective manner.98 There were no contractual restrictions on the new MNO to offer wholesale access to the MVNOs.99 In the short run, the new MNO was offered an attractive pricing model, which ensured that it could offer wholesale access to MVNOs at highly competitive terms right from the outset.100 In the long run, it was expected, that the new MNO would make ‘significant progress in rolling out its own network’.101

13.5

Conclusion

As the discussion on the design of remedies in the telecoms sector highlights, design of remedies is as much a question of science as it is an art. The remedies were crafted thoroughly, keeping under due consideration the need to promote price-based, as well as dynamic competition that offered the possibility of MNO entry over time. In each one of the above-referred telecoms mergers, dynamic aspects of competition, particularly as regards spectrum allocation and the provision of data-based services and attractive multiple-play offers were thoroughly assessed. Starting with the Austrian H3G Austria/Orange’s conditional clearance, followed by the Irish Hutchison 3UK/Telefónica Ireland to the German Telefónica/E-Plus Deutschland

94

Ibid., at paras 813–55. Ibid., at paras 865–99. 96 Ibid., at paras 1348–49. 97 Ibid., at paras 1739–99. 98 Hutchison 3G Italy/Wind/JV, ibid, at para. 1767. 99 Ibid., at para 1786. 100 Ibid., at paras 1789–91. 101 Ibid., at paras 1788, 1792. 95

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4-to-3 merger, the design and implementation of remedies in this highly innovationled sub-sector of ICT offers an interesting insight into the design and to a limited extent, the need to focus on the impact, rather than the classification of remedies. Considering the very special and complex nature of merger review and remedies in the telecommunications sector, this chapter accordingly focussed only on the telecommunications mergers. As noted by the former Director General Italianer, European Commission, the most significant innovation in the design of remedies is making them more effective in attaining the desired objective of ‘promoting competition and innovation’.102 The novelty and approach in the remedial design highlights these key considerations of the Commission. Perusal of the more recent telecom mergers, however, indicates that the Commission has gone a step backwards and instead pursued the more traditional preference for structural remedies.103 This is well-illustrated by the H3G Italy/WIND/JV, whereby the Commission conditionally cleared the merger, only after Iliad, an MNO in the French telecommunications market was identified as an upfront buyer.

Alexander Italianer, ‘Legal certainty, proportionality, effectiveness: the Commission’s practice on remedies’ (Charles River Associates Annual Conference, Brussels, 5 December 2012) accessed 06 January 2019. 103 For a criticism of this approach, see Kalpana Tyagi, Four-to-Three Telecoms Mergers: Substantial Issues in EU Merger Control in the Mobile Telecommunications Sector, International Review of Intellectual Property and Competition Law 49(2) (2018), pp 185–220, available at https://doi.org/ 10.1007/s40319-018-0677-3. This article uses an inter-disciplinary approach to criticise the approach of the Commission. 102

Chapter 14

Merger Remedy-Related Arbitration: une innovation suprenante

Abstract This chapter presents an overview of merger remedy-related arbitration, a novel and supranational paradigm in the making. The chapter maps the evolving and novel nature of arbitration in merger control and offers recommendations to better the practice.

14.1

Introduction

A formal complaint to the courts and competition authorities following non-compliance by the parties has positive externalities and spill-over effects for other competitors. Although all the competitors tend to benefit from this reporting of non-compliance, the costs are incurred ‘only’ by the complaining party.1 As reporting generates positive externalities, it tends to suffer from the tragedy of commons. This means that whereas only the complaining party incurs the transaction cost of making a complaint, everyone in the market tends to benefit from the

This chapter and Chap. 15 offer a detailed discussion on merger remedy-related arbitration and RTI v. Sky, the first reported case of merger remedy-related arbitration in the EU. Merger remedyrelated arbitration is an erga omnes offer to arbitrate, meaning it is a binding offer by the merged entity to third parties such as consumers and competitors. As this offer to arbitrate emerges from a commitment in merger control, it creates a complex relationship between the merging parties, the third parties, the arbitrators and the Commission. This raises complex questions related to the public policy dimension of competition law and the private nature of arbitration. Issues such as the role and the extent of intervention by the Commission in case of merger remedy-related arbitration are discussed in detail. Moreover, considering that such an arbitration may concern complex issues of competition law, the arbitrators may occasionally need to refer the question to the Commission for interpretation. The two chapters together, using RTI v. Sky as a case study, seek to highlight the innovative nature of this innovation surprenante and offer some recommendations to further improve these arbitration clauses. 1 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 69.

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_14

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exercise of this remedy. Resort to national courts, which is a lengthy and expensive exercise is even more impractical. In Italian Colours,2 for instance, whereas the plaintiffs had suffered a damage of only $50,000-to recover these costs they entered litigation that cost them over $1 million in total!3 Additionally, resort to courts also involves complicated issues of forum selection and private international law. In the EU, where the relationship between the merged parties and the EU Commission is governed by the EU law, the resulting ‘private law relationship’ between the merged parties and the third parties is subject to national law, which needs to be identified based on ‘conflict of law principals’, especially the Regulation ‘Rome I’(Reg. EC 593/2008).4 Foregoing complexity creates a need for an alternative and more cost-effective5 way to enforce non-strucutral (behavioural) remedies, without actually resorting to the Commission or the Courts. Proliferation of non-structural commitments too, as discussed in Chaps. 12 and 13, has led to more frequent employment of arbitration and monitoring trustees by the competition authorities on the two sides of the Atlantic. Although in the US, it is the FCC, the regulatory body that has imposed baseball-style arbitration more frequently and the DOJ in turn has relied on these remedies imposed by the FCC. These complex behavioural remedies, just like in case of regulated industries, demand on-going monitoring by a trustee or some other third party, as well as an effective mechanism for dispute resolution.6 In non-strucutral (behavioural) commitments, issues such as ‘access pricing’ can be settled amicably through a dispute resolution mechanism.7 Such a remedy-related dispute resolution mechanism is referred to as merger remedy-related arbitration. This chapter and the next discuss the novel and the evolving nature of this merger-remedy related arbitration and make some recommendations to improve the current practice.

2

American Express Co. et al v. Italian Colors Restaurant et al., Decided June 20, 2013. Mark A Lemley and Christopher R Leslie, ‘Antitrust Arbitration and Merger Approval’ (2015) 110 Northwestern University Law Review 1, 54. See also the footnotes therein. 4 Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223, 226. 5 Cost-effective not only in terms of monetary value but also non-monetary terms such as relationship with the competitors, reputation and ongoing business interactions. 6 Fabiana Di Porto, ‘Abuses of information and informational remedies: rethinking exchange of information under competition law’ in Josef Drexl and Fabiana Di Porto (eds.) Competition Law as Regulation (Edward Elgar 2015) 322. The author presents this challenge in the framework of Article 102 TFEU behavioural commitments. The generalisation on the monitoring costs is equally applicable for merger remedies in the high technology sector where the remedies employed are largely behavioural in nature. 7 ICN Merger Working Group: Analytical Framework Subgroup, ‘Merger Remedies Review Project, Report for the fourth ICN annual conference’, para 4.8 (Bonn June 2005) accessed 06 January 2019. 3

14.2

14.2

Arbitration Clause in Merger Commitments

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Arbitration Clause in Merger Commitments

To facilitate an in-built monitoring mechanism for non-structural remedies, the commitments often incorporate an arbitration clause. Although the merits of ‘outsourcing compliance’ with highly complex behavioural remedies is highly debatable,8 the economies of profits, nonetheless leads one to conclude that absent spill-over effects, an aggrieved third party will have incentives to ensure compliance with the commitments. Arbitration clause smoothen this strategy of outsourcing compliance. The 2008 EU Merger Remedies Notice encourages self-monitoring by interested market participants through the incorporation of alternative dispute resolution mechanisms, so that the Commission does not need to intervene ex-post for ensuring compliance with the commitments.9 From 1992 until 2009, approximately 20% of phase I and 22% of phase II conditional clearances in the EU incorporated arbitration commitments.10 Perusal of the more recent decisions indicates that the arbitration clauses are more frequently employed than ever. On the other side of the Atlantic as well, recent consent decisions such as the Google/ITA and the Comcast/NBCU/JV indicate an ever increasing acceptance of merger remedy-related arbitration.11 Overall though, it seems that the Commission in the European Union is much more willing to accept arbitration than its US counterpart. In the NXP Semiconductors/Freescale Semiconductors for instance, even though the two competition authorities cooperated throughout the review process and similar commitments relating to divestiture of the RF Power Business, as discussed in Chap. 10 were accepted by the two authorities—whereas the EU commitments incorporated an arbitration clause, the US commitments offered no such provision to arbitrate.12 Does Commission’s willingness to incorporate arbitration clauses indicate its desire to ensure smooth execution of the commitments or does it reflect its preference to outsource enforcement? Whatever the rationale, the use and the utility of arbitration clauses is undebatable. The first ever reported arbitration case of merger remedy related-arbitration RTI v. Sky, discussed as a case study in the following chapter, highlights the significance of this supra-national paradigm in the making. Merger remedy-related arbitration offers another valuable advantage. Arbitral awards in certain instances can be easier to enforce than the court judgments. This Fabiana Di Porto, ‘Abuses of information and informational remedies: rethinking exchange of information under competition law’ in Josef Drexl and Fabiana Di Porto (eds) Competition Law as Regulation (Edward Elgar 2015) 322. 9 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 66. 10 Gordon Blake and Philip Landolt (eds), EU and US Antitrust Arbitration A Handbook for Practitioners Volume 2 (Wolters Kluwer 2011) 1615–18. 11 United States v. Google Inc., No. 1:11-cv-00688, Proposed Final Judgment at IV (B) (D.D.C. Apr. 8, 2011), available at http://www.justice.gov/atr/cases/f269600/269632.pdf accessed 06 January 2019. 12 NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2. 8

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is due to the United Nations New York Convention, 1958 on the recognition and enforcement of foreign arbitral awards, in force in more than 140 countries and territories. The Convention ensures expedited enforcement of arbitral awards in the signatory member states. The Commission accepted arbitration to ensure compliance with behavioural remedies for the first time in Elf Aquitaine,13 wherein it was stated: [A]rbitration by mutually agreed independent experts will be provided in case of disputes relating to the application of the agreement.14

No details as to the place of arbitration, the language of the arbitration, the confidentiality of the proceedings, the beneficiaries etc. were offered. From the first arbitration clause in Elf Aquitaine, to the latest NXP Semiconductors/ Freescale Semiconductors decision, one observes tremendous evolution and refinement in arbitration clauses. Simply put, frequent employment of merger remedyrelated arbitration in the EU has led to increased sophistication on account of the learning-by-doing effect. Today the clauses are much more elaborate, reflecting in particular the special nature of merger remedy-related arbitration. The parties, for instance, do not enjoy the same level of confidentiality as is the case with commercial arbitration. These arbitrations have a somewhat ‘supranational’ character considering how they have been adapted to fit within the framework of competition law.15 On the effectiveness of merger remedy-related arbitration, the CFI (now the GC) in ARD observed [T]he commitments provide in detail for an arbitration procedure enabling inter alia the adoption of binding measures to resolve [problems of non-compliance with access commitments and] if, following such proceedings, it were to appear that Kirch is failing to perform its commitments, the Commission would have the possibility of revoking the contested decision [ ].16

14.3

Arbitration: An erga omnes Offer to Arbitrate

When merging parties make an offer to arbitrate, it creates certain obligations towards third parties, such as the consumers and the competitors. An merger remedy-related arbitration clause is essentially an ‘offer to arbitrate’ that is binding upon the merged entity. It is an erga omnes offer to arbitrate, that offers third parties an

13

Elf Aquitaine-Thyssen/Minol AG (Case No IV/M235) [1992] OJ C232/14. Elf Aquitaine-Thyssen/Minol AG (Case No IV/M235) [1992] OJ C232/14, Ibid., at para 13. 15 Gordon Blanke, The Use & Utility of International Arbitration in EC Commission Merger Remedies: A Novel Supranational Paradigm in the Making? (Groningen: European Law Publishing 2006). See in particular the last chapter wherein Blanke highlights and summarises the supranational nature of merger remedy-related arbitration. 16 Case T-158/00 ARD v Commission [2003] ECR II-3825. 14

14.3

Arbitration: An erga omnes Offer to Arbitrate

225

alternative to otherwise lengthy and expensive court litigation.17 The aggrieved party may subsequently choose to accept or refuse the offer. [u]n véritable arbitrage suppose une convention d’arbitrage entre les parties du litige. Il est évident que ces mécanismes sont inopposables aux tiers qui sont supposés en bénéficier libre à eux d’y avoir recours. Ils conservent leur entière liberté de saisir les juridictions étatiques. L’autorité de concurrence peut seulement imposer à la partie notifiant de s’engager à proposer au tiers un mécanisme rapide de règlement des différends en cas de difficulté.18

Arbitration clauses in merger clearances have an effect equivalent to arbitration commitments in the Bilateral Investment Agreements wherein the states consent to arbitrate in case the investor believes that s/he has been treated unreasonably and discriminated against by the Host State.19 The commitments with an arbitration clause are meant to ensure that third parties are ‘protected’ from potential postmerger anti-competitive conduct of the merged entity.20 Brozolo views these arbitration clauses, as a ‘procedural complement to the substantive protection which the commitments aim to grant third parties and the procedural antidote to the increase in the merging firm’s power’ that offers a ‘typical instrument for the private enforcement of competition law’.21 In merger control, however, depending on the exact wording of the arbitration clause, the expression ‘aggrieved party’ can have a more expansive meaning.22 It is also possible that a party that was not even present at the time of the merger and entered the market only subsequently can benefit from the clause. To ‘effectively’ ensure this, the arbitration clauses, as the following sections discuss in more detail, are generally ‘openly worded’23 such that all those effected by non-compliance with the commitments have an open option to resort to merger remedy-related arbitration.

17

Marc Blessing, Arbitrating Antitrust and Merger Control Issues (Basel: Helbing Lichtenhahn Verlag 2003) 92. 18 Laurence Idot, ‘Une innovation surprenante : l’introduction de l’arbitrage dans le contrôle communautaire des concentrations’ [2000] Revue de l’arbitrage 591, 598–99. 19 Marc Blessing, Arbitrating Antitrust and Merger Control Issues (Basel: Helbing Lichtenhahn Verlag 2003) 85–86. 20 Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223, 226. 21 Ibid., pp. 223, 227. 22 For a detailed discussion, see infra Sect. 14.5 Subject Matter of Arbitration Clauses. 23 Siegfried H Elsing, ‘Performance as a Remedy: Non-Monetary Relief in International Arbitration’ in Michael E. Schneider and Joachim Knoll (eds.) Performance as a Remedy: Non-Monetary Relief in International Arbitration: ASA Special Series No. 30 (Juris 2011) 248.

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Merger Remedy-Related Arbitration: une innovation suprenante

Interpretation of Commitments

While interpreting merger remedy-related commitments, the arbitrators are expected to apply at least the EU competition law, a well-accepted part of the public policy,24 transgression of which would mean that the award runs the risk of unenforceability on grounds of the infringement of public policy. Although expected to apply the principles of competition law, an arbitrator cannot directly refer a question for interpretation to the CJEU. This is for the National Court selected to decide on the enforceability of the award that can refer the case to the CJEU. Formerly Article 10 of the EC Treaty, now Article 4(3) TEU, casts two duties on the Member States— first, a positive duty to take suitable measures to ensure that all the obligations arising from the Treaty are fulfilled and second, a negative duty to abstain from taking steps that may jeopardise the attainment of the objectives of the Treaty or hinder the process of market integration.25 As the arbitrators are not seen as a ‘judicial organ of the State’, they are bound neither by the provisions of Article 10 nor by Article 267 TFEU.26 Whether an arbitral tribunal falls within the scope of the Article, was considered in the MasterCard decision, where the Court of Justice opined that it did not.27 A related question is what happens in case the arbitrators’ findings differ from those of the Commission. The Commission may be of the opinion that the merged party is acting anti-competitively whereas the arbitrators find that the parties are in compliance with the commitments.28 If the tribunal finds in favour of the third party competitor, even though the Commission is of a different opinion, such a false finding of liability of the merged entity is a false negative by the arbitral tribunal. Finding in favour of the merged entity, wherein the Commission is of the opinion that the merged entity has violated its commitments is a false positive by the tribunal.29 Both false negative, as well as false positive errors can adversely impact competition.30 Moreover, it can lead to a conflicting situation, wherein arbitrators

24

Case C126/97, Eco Swiss China Time Ltd. v. Benetton International NV [1999] ECR I-3055. Linda Senden, Soft Law in European Community Law (Hart Publishing 2004) 95. 26 Formerly Article 234 of the EC Treaty under the Treaty of Amsterdam, the relevant article, following the Treaty of Lisbon entering force, is now re-numbered as Article 267 TFEU. 27 Claus-Dieter Ehlermann and Isabela Atanasiu (eds), European Competition Law Annual: 2001 Effective Private Enforcement of EC Antitrust Law (Hart Publishing 2003). 28 Patrick Wautelet, ‘Arbitration in EU Commission Cleared Merger Transactions’ (November 2004), 10

accessed 06 January 2019. 29 False Positive or Type I error result in direct welfare loss as authority approves a merger that has negative welfare effects. See Arndt Christiansen and Wolfgang Kerber, ‘Competition Policy with Optimally Differentiated Rules: Instead of Per Se Rules v. Rule of Reason’ (2006) Marburger Volkwirtschaftliche Beiträge No. 06-2006, p.9 accessed 06 January 2019. 30 False Negative or Type II error result in welfare loss as authority prohibit a merger that has a positive welfare effect. See Arndt Christiansen and Wolfgang Kerber, ‘Competition Policy with 25

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who derive their authority from the Commission are in dissent with the observations of the Commission. This in turn can damage the credibility of arbitration clauses. In case of such a conflict, who has the final word?31 A possible special review of the arbitral awards by the Commission is also impractical as it will put to challenge the benefits of arbitration and raise questions about the very nature of arbitration.32 Overall, this implies that the arbitrators have an even higher level of responsibility to correctly assess the situation and pronounce an award. This requires an active cooperation between the Commission and the arbitrators. To effectively ensure compliance and avail the benefits of arbitration, the powers of the Commission as defined in the arbitration clause play a crucial role. The mandate of the arbitral tribunal flows from the merger commitments approved by the Commission. Viewed from this perspective, unlike commercial arbitration, which is largely bilateral, a relationship between the parties and the arbitrators in case of merger remedy-related arbitration is trilateral—meaning that it is a relationship between the merging parties, the Commission and the arbitrators. This relationship lasts for the duration of the commitments only. This puts merger remedy-related arbitration in a very unique position operating at the interface of two specialised divisions of law—arbitration and competition law—with the latter adding a complex and additional third dimension of public policy. Against the backdrop of this very special relationship, the specific provisions of this arbitration clause play a crucial role in specifying the boundaries of this tri-dimensional relationship. The role and powers of the Commission for instance, can vary along a spectrum—from periodic reporting by the parties about arbitration procedures to a request for the interpretation of commitments in case of doubt. Power of the Commission such as the ability to submit briefs, appear as amicus curaie and offer interpretation on any competition law issue referred by the arbitral tribunal to the Commission are all effective safeguards that can prevent any subsequent public policy hazard on account of transgression of the well-established principles of competition law. From the observations of the arbitral tribunal in RTI v. Sky, the first reported case of merger remedy-related arbitration in the EU, it is to be noted that [t]he Commitments provide for an effective system of monitoring of the Commitments, namely a dispute settlement mechanism involving [. . . .] a private arbitration [and] it is undisputed that the Commission has the power to identify issues that can be subject to arbitration(§ 259).33

Optimally Differentiated Rules: Instead of Per Se Rules v. Rule of Reason’ (2006) Marburger Volkwirtschaftliche Beiträge No. 06-2006, p. 9 accessed 06 January 2019. 31 Patrick Wautelet, ‘Arbitration in EU Commission Cleared Merger Transactions’ (November 2004), 10–11

accessed 06 January 2019. 32 Ibid. 33 Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223, 230.

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The arbitration clause in recent merger decisions often contain a paragraph stating that the Arbitral Tribunal can request the Commission for an interpretation of the commitments and that such an interpretation shall be binding on the Tribunal.34 It seems that the scope for reference includes not only the ‘interpretation of the Commitments’, the Arbitral Tribunal may also request for interpretation on the issue of law. To bring more clarity and certainty, it is recommended that arbitration clauses henceforth, clearly specify that in case of doubt, the Arbitral Tribunal may refer to the Commission, any question of law or fact. Such a clause, may for instance be phrased as follows In case of doubt or uncertainty regarding the application or interpretation of competition law, the Arbitral Tribunal may seek the Commission’s interpretation and the Tribunal shall be bound by that interpretation.

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Subject Matter of Arbitration Clauses

As for the subject matter of arbitration clauses, unlike the ‘Model Text for Divestiture Commitments’ and the ‘Model Text for Trustee Mandates’ that offer an outline for drafting the divestiture clauses and trustee mandates respectively, there is no standard pre-defined text for merger remedy-related arbitration. Accordingly, differences exist in the substantial, as well as procedural clauses in different merger commitments. In particular, commitments differ on whether the offered arbitration is institutional or ad hoc; the seat of arbitration; the arbitrators—their appointment, fees, number and qualification; procedural issues—such as an alternate dispute settlement procedure prior to the initiation of arbitration proceedings and the language of arbitration; rules of evidence; the right to request information; confidentiality; power of the arbitral tribunal to issue interim measures; timelines; scope of arbitration such as the kind of disputes that can be submitted to arbitration and who can initiate arbitration; notification requirements and the level of involvement of the Commission.35 Following section analyses the ICT conditional clearances from 2000 until 2015 along these parameters.

34

See for instance, Orange/Jazztel (Case COMP/ M7421) [2015] OJ C407/26, Commitments to the European Commission para 83; NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2, Commitments to the European Commission para 54. 35 For a survey of some earlier merger commitments involving arbitration clauses see Christoph Liebscher, ‘L’arbitrage dans les procedures de contrôle des concentrations: des perspectives’ (2003) 1 Les cahiers de l’arbitrage 24; Dieter A Hofmann and Oliver M Kunz, ‘Arbitration Clauses proposed by the EU Commission in Antitrust and Merger Procedures - Current Approach and Deficiencies in Practical Aspects of Arbitrating EC Competition Law’ in Dieter A Hofmann and Oliver M Kunz, Practical Aspects of Arbitrating EC Competition Law (Zürich-Basel-Genf: Schulthess Juristische Medien AG 2007) 149.

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14.5.1 Type of Arbitration: Institutional or Ad Hoc? The first and the most fundamental question is whether the type of arbitration offered is institutional or ad hoc. Institutional arbitration refers to arbitration conducted by a specified institution in accordance with its rules of arbitration. Examples include London-based International Court of Arbitration or Paris-based International Chamber of Commerce (ICC). Ad hoc arbitration refers to an arbitration submitted to an arbitrator or arbitral panel which is to be governed by a set of non-institutional rules. Ad hoc arbitration offers the flexibility to adapt the rules, such as the procedure for the appointment of arbitrators, rules of evidence etc., as per the requirements of the parties. In Alcatel,36 as well as in Elf Acquitaine,37 for instance, the parties committed to ad hoc arbitration. Prescribing detailed guidance on rules relating to the appointment of an arbitrator, evidence and confidentiality is important in such cases. Ad hoc arbitration may also incorporate pre-defined set of rules such as UNCITRAL Rules or the CPR Rules for Non-Administered Arbitration and clearly specify that they are not subject to the governance of some arbitral institution. The parties may alternatively select institutional arbitration. In Liberty Global/ Ziggo,38 the parties submitted to the institutional arbitration of the ICC. In Axalto/Gemplus too, the Requesting Party could request an arbitration to the ICC. The Requesting Party and the merged entity were free to offer to the ICC suggestions as to the procedure for the arbitration. In NXP Semiconductors/Freescale Semiconductor, the parties could request an arbitration to the ICC.39 The Notice was to contain the details of the dispute—on issues of fact and of law; including suggestions as to the procedure to be followed; the course of action that the requesting party expected from NXP and the proposal of the trustee for a quick resolution of the dispute.40 In Orange/Jazztel,41 failing all efforts to resolve the dispute through the intervention of the CEOs and the monitoring trustee, the parties were to request an arbitration to Corte Española de Arbitrage (Spanish Court of Arbitration) along with a notice of arbitration to Orange.42

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Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M 3680) [2005] OJ/C 139/37, Commitments to the European Commission D3, para 46–59. 37 Elf Aquitaine-Thyssen/Minol AG (Case No IV/M235) [1992] OJ C232/14, para 13. 38 Liberty Global/Ziggo (Case COMP/M 7000) [2014] OJ C147/1, Commitments to the European Commission, Section 6. 39 NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2, Commitments to the European Commission, Section F, para 46. 40 Ibid., Commitments to the European Commission, Section F, paras 46–47. 41 Orange/Jazztel (Case COMP/ M7421) [2015] OJ C407/26, Commitments to the European Commission. 42 Ibid., Commitments to the European Commission para 68.

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14.5.2 Appointment of Arbitrators In Alcatel, the commitments prescribed a detailed procedure for the appointment of arbitrators. The ESA (European Space Agency) was responsible for the appointment of the arbitrator and the deputy arbitrator. In case this was not acceptable to the purchaser, the arbitrator could be jointly appointed by the Chief of Staff of NASA and Director General of ESA. In case an arbitrator was still not appointed within 15 calendar days of the request, the arbitrator was to be appointed by the President of the ICC, Paris.43 In Liberty Global/Ziggo,44 the parties submitted to the jurisdiction of an institutional arbitration, but prescribed a detailed set of rules for ‘nomination’ of arbitrators or a single arbitrator, subject to the mutual will of the parties. Such an appointment was to be made by the Requesting Party in the Notice and by Liberty Global within five working days of the receipt of the Notice. In case of failure to nominate, the Arbitral Institution had the power to appoint an arbitrator. In Axalto/Gemplus,45 the Arbitral Tribunal was to comprise of three persons with experience in intellectual property related matters. Both the Requesting Party and the Combined Entity were to nominate an arbitrator each, with the Chairman being appointed collectively by the two arbitrators. The nomination of the Chairman was to be made within five working days of the appointment of the arbitrators, and the same was to be informed to the Arbitral Institution, which was to confirm these appointments. In case of failure of the parties to nominate or the failure of the arbitrators to nominate the Chairman, the Arbitral Institution had the authority to make an appointment. In Orange/Jazztel,46 the Purchaser was to nominate one arbitrator in the Notice and Orange in its response, was to recommend the other Arbitrator.47 Within five days of appointment by Orange, the third arbitrator, the Chairman of the arbitral tribunal was to be appointed by the two arbitrators.48 The parties could challenge the appointments under the procedural rules of the Arbitral Institution.49 The Parties could also subject to mutual consent appoint a sole arbitrator.50 In case Orange failed to nominate an arbitrator, the Arbitral Institution had the residual powers to make an

43

Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M 3680) [2005] OJ/C 139/37, Commitments to the European Commission D3 paras 44–45. 44 Liberty Global/Ziggo (Case COMP/M 7000) [2014] OJ C147/1, Commitments to the European Commission sec 6, para 68. 45 Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34. 46 Orange/Jazztel (Case COMP/ M7421) [2015] OJ C407/26, Commitments to the European Commission. 47 Ibid., Commitments to the European Commission para 71. 48 Ibid. 49 Ibid. 50 Orange/Jazztel (Case COMP/ M7421) [2015] OJ C407/26, Commitments to the European Commission para 72.

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appointment.51 Similar rules as to the nomination of an Arbitral Tribunal or a sole arbitrator were provided in the NXP Semiconductors/Freescale Semiconductor.52

14.5.3 Confidentiality in Arbitration Proceedings In RTI v. Sky, the arbitral tribunal held that an ICC arbitration pursuant to an alleged breach of rights of third parties in merger commitments is ‘not’ subject to confidentiality in the absence of any such agreement by the parties.53 The parties in Alcatel were under an obligation to provide ‘full and complete access to information’ to the arbitrator within five business days following the request.54 The level of confidentiality awarded to these business secrets and information was equivalent to the one set under the European Community (now the European Union) competition law.55 In Axalto/Gemplus, the Arbitral Tribunal was under an obligation not to disclose confidential information and the standard attributable to confidentiality was the one available within the framework of the 2004 Merger Regulation. The Tribunal also had the power to take requisite measures to protect confidential information such as by restricting access to confidential information to itself, to the Trustee, and outside counsel and experts of the opposite party. In NXP Semiconductors/Freescale Semiconductors, the Arbitral Tribunal was under an obligation to protect confidentiality as per the standards in the 2004 Merger Regulation and take any measures necessary to protect confidentiality by ‘restricting access to confidential information’ to the ‘Arbitral Tribunal, the Trustee, outside counsel and experts of the opposing party’.56 Similar clauses on confidentiality can be seen in Orange/Jazztel.57

51

Ibid., Commitments to the European Commission, para 73–74. NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2, Commitments to the European Commission Section F, para 48. 53 Award in Reti Televisive Italiane v. Sky Italia, ICC Case No. 16974/FM/GZ § 484–486. Source: Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223. 54 Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M.3680) [2005] OJ/C 139/37, Commitments to the European Commission D3, paras 44–45. 55 Ibid. 56 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, Commitments to the European Commission sec F, para 52. 57 Orange/Jazztel (Case COMP/ M7421) [2015] OJ C407/26, Commitments to the European Commission para 79. 52

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14.5.4 Burden of Proof In Newscorp/Telepiù, in case the complaining party presented a prima facie case, the arbitrator was to decide in its favour, unless the committed group offered evidence to the contrary.58 In case of Axalto/Gemplus too, the Arbitration Procedure prescribed a prima facie rule wherein following a prima facie case by the Requesting Party, the Arbitral Tribunal was to find in its favour, unless the Combined Entity offered evidence to the contrary. In Orange/Jazztel, each of the parties had to present proof for facts on which they relied to substantiate their ‘claim, counter-claim or defence’.59 In NXP Semiconductors/Freescale Semiconductor,60 in Intel/McAfee61 and in Vivendi/Canal+/Seagram62 too prima facie evidence rule was used. As can be seen, the ‘burden of proof’ generally follows the ‘prima facie evidence rule’.63 According to the rule, the third party has to present a prima facie case substantiating its claim of violation of commitments and in case the merging party is unable to produce evidence to the contrary, the arbitrator(s) find in favour of the requesting party. The rationale for such an approach is that the merging party has access to and control over all the relevant material.64

14.5.5 Powers of the Commission The Treaty competition rules are part of ‘mandatory public law’ whose objective is to safeguard the public interest65 and therefore, by their nature, they are jus cogens or zwigende Bestimmungen. In Eco Swiss, the General Court held that article 81 EC (now Article 101 TFEU) is a matter of ‘public policy within the meaning of the

58 Newscorp/Telepiù (Case COMP/ M 2876) Commission Decision 2004/311/EC [2004] OJ L110/ 73, Commitments to the European Commission article 15.1(b) (iv). 59 Orange/Jazztel (Case COMP/ M7421) [2015] OJ C407/26, Commitments to the European Commission para 80. 60 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, Commitments to the European Commission sec F, para 52. 61 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, para 38. 62 Glaxo Wellcome/Smithkline Beecham (Case IV/ M.1846) [2000] OJ C170/6, para 77. 63 Marc Blessing, Arbitrating Antitrust and Merger Control Issues (Basel: Helbing Lichtenhahn Verlag 2003) 106. 64 Ibid. 65 Helmuth Schröter, Thinam Jakob, Robert Klotz and Wolfgang Mederer (eds), Europäisches Wettwerbsrecht: Kommentar zum Europäischen Wettbewerbsrecht (Nomos 2003) 98.

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New York Convention’.66 The position on merger control is no different. However, a frequently raised question concerning merger remedy-related arbitration clauses is that with such a clause, is the Commission essentially outsourcing its function of monitoring commitments, for which there does not exist sufficient legal basis?67 To assess whether it is true, a perusal of the tribunal’s approach in RTI v Sky, as well as a discussion of the commitments that led to this arbitration may be useful. In RTI v Sky,68 the first ever reported merger remedy-related arbitration, the Arbitral Tribunal had the opportunity to interpret the powers of the Commission. The arbitration clause in Newscorp/Telepiù provided that nothing in the arbitration clause effected the power of the Commission to take decisions with respect to the commitments ‘in accordance with its power under the Merger Regulation and the EC Treaty’.69 Affirming the complementary role of the Commission and Arbitral Tribunal in the enforcement of remedies, the Tribunal held, that ‘in reality the Arbitral Tribunal and the Commission’s powers do not impede’ one another instead they ‘complement each other’ (§ 224).70 In Alcatel, as part of the merger commitments, the parties offered to inform the Commission at every stage including forwarding a written copy of the notices, appointment of arbitrators and the settlement reached between the parties.71 In Axalto/Gemplus,72 the parties were to offer all relevant information, especially, an overview of the terms and conditions of the licenses entered into last three years73 along with the details of the licensed patents and terms and conditions at which the Third Parties74 had been earlier offered a similar license. The more recent commitment decisions contain very exhaustive clauses specifying in detail the powers of the Commission. In Liberty Global/Ziggo,75 the 66 Case C126/97, Eco Swiss China Time Ltd. v. Benetton International NV [1999] ECR I-3055, para 39. 67 Van Houtte Hans, ‘Arbitration and Article 81 and 82 EC Treaty: A State of Affair’ (2005) 3 ASA Bulletin 431, 436. 68 The arbitration in RTI v Sky resulted from the breach of commitments in Newscorp/Telepiù, a conditional clearance decision by the European Commission in 2004, under the 1989 Merger Control Regulation. 69 Newscorp/Telepiù (Case COMP/ M 2876) Commission Decision 2004/311/EC [2004] OJ L110/ 73, Commitments to the European Commission article 15.1(b) (vii). 70 Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223, 231. 71 Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M.3680) [2005] OJ/C 139/37, Commitments to the European Commission D3 paras 44–45. 72 Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34. 73 Last three years referred to the period preceding immediately the closing of the merger between Axalto and Gemplus. 74 Third Parties referred to licensing firms in which neither Axalto nor Gemplus had any controlling interest and that licensed their patents from Axalto or Gemplus in three years immediately preceding the transaction. 75 Liberty Global/Ziggo (Case COMP/M.7000) [2014] OJ C147/1, Commitments to the European Commission, Section G.

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commitments mention that the Commission has the right to participate at all the stages of the arbitration including a right to receive without delay, a copy of all the written submissions made by the parties, as well as any awards made by the tribunal—whether interim or final. The Commission also retains the right to file amicus curiae briefs and be present at all the stages of hearing and raise questions from the parties, witnesses and experts. The Arbitral Tribunal can also ask the Commission for an interpretation of the OTT commitments and is bound by the interpretation provided upon request. Provisions containing similar clauses are found in the NXP Semiconductors/Freescale Semiconductor76 and in the Intel/McAfee77 commitments. In each one of these commitments, the Commission has reserved its right to take action under the Merger Regulation and the EU Treaties.

14.5.6 Pre-arbitration Dispute Settlement In Alcatel, the parties and the potential purchaser were under an obligation to reasonably and amicably settle the dispute within 15 days from the receipt of the notice. In case they reached an agreement during the course of negotiations, the Commission was to be informed in writing and without delay. In case of failure to settle, either of the parties could proceed further and initiate arbitration.78 In Axalto/Gemplus, the requesting party had to first send a copy to the combined entity and the monitoring trustee, stating in detail, the grounds of the complaint. The parties were then to use their ‘best efforts to resolve all differences of opinion’ within 15 working days and in case the dispute concerned ‘interoperability information’, then within 10 working days. The monitoring trustee was expected to participate in the process of dispute resolution by offering a ‘Trustee Proposal’ within eight working days following the receipt of the complaint. The Trustee Proposal was to contain actions, if any, required to ensure compliance with the commitments. Further, if requested by the parties, the trustee was expected to actively participate in the quick settlement of disputes.79 Liberty Global/Ziggo80 offered a detailed mechanism for fast track dispute resolution before the commencement of the arbitration. To avail the fast track dispute resolution, the Requesting Party was to send a written request along with a copy to 76

NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2, Commitments to the European Commission, Section F, para 54. 77 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, paras 39–40. 78 Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M3680) [2005] OJ/C 139/37, Commitments to the European Commission D3, paras 44–45. 79 Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34, Commitments to the European Commission, Section F. 80 Liberty Global/Ziggo (Case COMP/M 7000) [2014] OJ C147/1, Commitments to the European Commission, Section G.

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the trustee stating reasons for its grievance. The Requesting Party and Liberty Global, in turn had to exercise all ‘commercially reasonable efforts’ to resolve the disputes within fifteen working days of the receipt of notice. The trustee too was assigned an active role in facilitating the settlement by presenting a written proposal within eight working days after the receipt of the complaint and facilitate quick resolution of the dispute. It was only following the exhaustion of this mechanism in the consulting phase that the parties could resort to arbitration.81 In NXP Semiconductors/Freescale Semiconductor, the Requesting Party and NXP, had to first use their ‘best efforts’ through ‘cooperation and consultation’ within 15 days. The trustee too had to present its proposal, the Trustee Proposal, in writing within 8 working days.82 Having exhausted all these alternatives, the Requesting Party could resort to institutional arbitration at the ICC.83 The request for arbitration, amongst others, required a Trustee Proposal that included a remark on the suitability of the dispute for resolution through arbitration.84 What happens in case the parties fail to exhaust all these pre-arbitration alternatives to amicably resolve their disputes? Does direct recourse to the tribunal make the submission inadmissible? From the decision of the Arbitral Tribunal in RTI v. Sky, it seems that the Tribunal does not view direct recourse as irregular. In RTI v. Sky, the Arbitral Tribunal held that a dispute is not inadmissible merely because the third party failed to amicably resolve the dispute before resorting to arbitration. It held that an aggrieved party is ‘entitled to start arbitration as soon as the circumstances of the case show no realistic chance of success of an amicable settlement’ (§ 269).85 However, considering the substantial costs of arbitration, it is advisable that the mechanisms such as amicable dispute settlement with the help of monitoring trustee be explored before the parties engage in formal arbitration proceedings. It also means a more active role for the monitoring trustee, an issue discussed in more detail in the following chapter.

81 Liberty Global/Ziggo (Case COMP/M 7000) [2014] OJ C147/1, Commitments to the European Commission, Section G. 82 NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2, Commitments to the European Commission, Section F, para 45. 83 Ibid., Commitments to the European Commission, Section F, para 46. 84 Ibid., Commitments to the European Commission, Section F, paras 46, 47. 85 Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223, 235.

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14.5.7 Scope of Arbitration Clause: What Is Arbitrable and Who Can Initiate Arbitration? In Alcatel, a potential purchaser aggrieved by the breach of the ‘TTC Supply Obligation’ or the ‘TTC Reasonable Price Obligation’ of the parties (both of which were defined in the commitments) could resort to arbitration.86 The possibility to initiate arbitration was to be mentioned in the ‘general terms and conditions of sale’ of the TTC Equipment.87 The parties were under a duty to promptly enforce the award.88 The arbitrators were to determine their fees and all the incidental costs that were payable by the respective parties and in case the plaintiffs made certain unsubstantiated demands, they were to be borne by the plaintiffs themselves.89 In Axalto/Gemplus, any aggreived Third Party could request for arbitration. Third Party was defined as any actual or potential smart card competitor of the combined entity operating in the EEA.90 In Liberty Global/Ziggo, the request for arbitration and fast track dispute resolution could be raised by any Third Party that was aggrieved by Liberty Global or its Affiliated Undertaking’s non-compliance with the OTT Commitments.91 In Intel/McAfee, a third party with ‘sufficient legitimate interest’92 could refer the dispute for resolution in case Intel failed to ‘comply with its obligations arising from [the] Commitments’.93 Whereas the expression ‘Commitments’ is self-explanatory, the term ‘sufficient legitimate interest’, it appears may be a subject matter of interpretation, in case an arbitral dispute arises in the future. In Thomson/Reuters, the parties could seek arbitration following a ‘material breach’ of the commitments.94

86 This implied that a potential purchaser who could not receive a commitment from the merged entity to offer it the product on the reasonable prices as specified in the commitments, could make a request for arbitration to resolve any supply or price-related disputes. Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M 3680) [2005] OJ/C 139/37, Commitments to the European Commission, Section D3, paras 44–45. 87 Ibid. 88 Ibid. 89 Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M 3680) [2005] OJ/C 139/37, Commitments to the European Commission, Section D3, paras 44–45. 90 Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34, Commitments to the European Commission, Section F. 91 Liberty Global/Ziggo (Case COMP/M 7000) [2014] OJ C147/1, Commitments to the European Commission, Section G. 92 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, para 344 and Commitments to the European Commission, Section D, para 28. 93 Ibid., at paras 344–45 and Commitments to the European Commission, Section D, para 28. 94 Thomson Corporation/ Reuters Group (Case COMP/M.4726) [2008] OJ C212/5, Commitments to the European Commission.

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14.5.8 Substantive Law It is important that the parties specify a ‘choice of law’ in the arbitration clause. A failure to specify the applicable law will mean that the rules of private international law are used to determine the applicable law, a process that may lead to complicated and unhelpful outcome for both the parties. In case there is no mention of the lex arbitri,95 the law applicable to arbitration; lex loci arbitri may be used to determine the outcome of the case. In Alcatel, the commitments specified that the law applicable was the French law and the arbitrator was expected to act under the framework of Article 1442 et seq. of the French Nouveau Code de Procédure Civile.96 In Liberty Global/Ziggo,97 the arbitration was subject to the rules of arbitration of the Arbitration Court of the International Chamber of Commerce. There was no reference to lex arbitri. In Intel/McAfee too, there was no reference to the lex arbitri. The case, it was stated, was to be decided based on the commitments made and the decision rendered.98 The Tribunal was directed to interpret the commitments and render a decision under the ‘Merger Regulation, EU law and general principles of law common to the legal orders of the Member States without a requirement to apply a particular national system’.99 Similar wording may be seen in the more recent decisions such as the NXP Semiconductors/Freescale Semiconductor merger.100 It emerges from the foregoing that while accepting commitments, the Commission is more concerned about the public policy nature of competition law. From the perspective of arbitration, an omission to mention the lex loci arbitri has been described by some as an ‘absurdity’101 that may lead to undesirable outcome for both the parties.

95 The lex arbitri refers to the procedural rules governing a given dispute. This may refer to the procedural rules of the arbitration institution or the arbitration rules and/or conflict of law rules applicable at the place of arbitration. 96 Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M.3680) [2005] OJ/C 139/37, Commitment to the European Commission, Section D3, para 53. 97 Liberty Global/Ziggo (Case COMP/M.7000) [2014] OJ C147/1 Commitments to the European Commission, Section G. 98 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, para 344 and Commitments to the European Commission, Section D, para 41. 99 Ibid. 100 NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2, Commitments to the European Commission, Section F, para 55. It reads: “The Arbitral Tribunal shall decide the dispute on the basis of the Commitment and the Decision. Issues not covered by the Commitment and the Decision shall be decided(in the order as stated) by reference to the Merger Regulation, EU law and general principles of law common to the legal order of the Member States without a requirement to apply a particular national system.” 101 Marc Blessing, Arbitrating Antitrust and Merger Control Issues (Basel: Helbing Lichtenhahn Verlag 2003) 83.

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Merger Remedy-Related Arbitration: une innovation suprenante

To avoid any undesirable complexity or unwanted outcomes, it is recommended that the arbitration clauses should clearly specify the lex loci arbitri. The following chapter discusses in detail the impact of lex loci arbitri on various issues such as the enforcement of the award and interim relief.

14.5.9 Interim Awards and Preliminary Rulings In case the dispute concerns an essential facility, non-availability of the facility, even if for a short period only, may adversely impact the competitive position of the aggrieved party. It is therefore important that the arbitral tribunal has powers to grant some form of interim relief. To facilitate this, ‘reference to the lex arbitri’ that allows the tribunal to grant such measures may be highly useful.102 The procedural law applicable as the lex loci arbitri of certain jurisdiction may exclude interim relief. This can be particularly detrimental to the ongoing R&D efforts. Moreover, considering the short product life cycles in the ICT sector, unavailability of the product or service for even a short duration may have a significant adverse impact on its market value. In Intel/McAfee, the commitments called for the availability of interim relief within one month of the confirmation of the Arbitral Tribunal.103 The preliminary ruling was to be applicable with immediate effect and remain in force until the Tribunal rendered its final decision.104 The ruling was to specify the actions to be taken by Intel and if required, the Tribunal had the discretion to state in the preliminary ruling that the final decision would be applicable with retrospective effect.105

14.5.10

Place and Language of Arbitration

In both Axalto/Gemplus and Alcatel the place of arbitration was Paris, France and the arbitration was to be conducted in English.106

Ferdinando Emanuele, Milo Molfa et Pierantonio d’Elia, ‘L’arbitrage relative aux engagements en matiere de concentrations au sein de l’union européenne : Principales Caractéristiques et enjeux stratégiques a la lumière de la première sentence arbitrale’ (2013) 5 Revue de Droit des Affaires Internationales 445, 457. 103 Intel/McAfee (Case COMP/M.5984) [2011] OJ C98/1, para 344 and Commitments to the European Commission, Section D, para 42. 104 Ibid., at para 344 and Commitments to the European Commission, Section D, para 42. 105 Ibid., at para 344 and Commitments to the European Commission, Section D, para 43. 106 Alcatel/Finmeccanica/Alcatel Alenia Space & Telespazio (Case No COMP/M.3680) [2005] OJ/C 139/37, Commitment to the European Commission D3 paras 44–45. 102

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Subject Matter of Arbitration Clauses

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In Liberty Global/Ziggo, the place of arbitration was specified as Amsterdam and the language of arbitration was English.107 In Newscorp/Telepiù, arbitration was to be conducted in English and the seat of arbitration was Milan.108 In Intel/McAfee, the language of arbitration was specified as English with its seat in London, England.109 In Orange/Jazztel, the language of arbitration was Spanish with its seat in Madrid, Spain.110 In the majority of the cases, the lingua franca is English, with the preferred seat of arbitration being the place where the merged entity is headquartered. Having discussed in detail the subject-matter of the clauses, the following chapter discusses RTI v. Sky, the first ever reported case of merger remedy-related arbitration in the EU.

107

Liberty Global/Ziggo (Case COMP/M 7000) [2014] OJ C147/1, Commitments to the European Commission, Section G. 108 Case No COMP/M.2876 NEWSCORP/ TELEPIÙ, Commitments to the European Commission, Article 15.1(b)(vi). 109 Case No COMP/M. 5984 Intel/McAfee, para 344 and Commitments to the European Commission Section D, para 33. 110 Orange/Jazztel (Case COMP/ M7421) [2015] OJ C407/26, Commitments to the European Commission.

Chapter 15

RTI v. Sky: The First Reported Case of Merger Remedy Related Arbitration

Abstract This chapter discusses RTI v Sky, the first available merger remedyrelated award in the EU, followed by a summary on the subject and possible roadmap for future merger remedy-related arbitration cases.

15.1

Introduction

This chapter discusses in detail the RTI v Sky case, the first ‘available’ award from the EU merger control commitments.1

15.1.1 Background and Facts of the Case The first reported merger decision incorporating an arbitration clause dates back to the year 1992. Beginning 2000, such clauses became a regular feature of the Commission decisions.2 Although frequently offered, the practical use of the clause has rather been an exception. RTI v. Sky, is the first and, to date, the only reported case of merger remedy-related arbitration.3

Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223, 228; Ferdinando Emanuele, Milo Molfa et Pierantonio d’Elia, ‘L’arbitrage relative aux engagements en matiere de concentrations au sein de l’union européenne : Principales Caractéristiques et enjeux stratégiques a la lumière de la première sentence arbitrale’ (2013) 5 Revue de Droit des Affaires Internationales 445, 445–46. 2 Laurence Idot, ‘Une innovation surprenante : l’introduction de l’arbitrage dans le contrôle communautaire des concentrations’ [2000] Revue de l’arbitrage 591. 3 Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223; Roberto Cisotta and Mel Marquis, ‘Litigation and arbitration in EU competition law’ in Mel Marquis and Roberto Cisotta (eds), Litigation and Arbitration in EU Competition Law (Edward Elgar 2015) 28. 1

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_15

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The arbitration in RTI v. Sky resulted from the breach of commitments in Newscorp/Telepiù. Article 8.1 of the merger commitments related to world-wide sports rights and stated that the ‘the combined platform’ could not ‘acquire any such exclusive rights and protections for means of transmission other than DTH’ in subsequent agreements that concerned ‘World-wide rights’ for a sports programme.4 RTI, an Italian television broadcaster, a subsidiary of the Mediaset group claimed that Sky Italia, part of the Newscorp breached the commitments in the 2003 Decision, especially the above-mentioned Article 8.1 by first, illegally acquiring and then refusing to license RTI, ‘the encrypted pay-tv rights to the 2010 FIFA soccer World Cup’. Pursuant to Article 15.1(b) of the commitments in the 2003 Decision, the RTI took the dispute to arbitration. Article 15.1(b) of the commitments stipulated that any dispute on the implementation of the disputes (that was not an ICA dispute5) would be subject to the following arbitration procedure: first, the complaining party and the Committed group were to undertake ‘their best efforts to resolve the dispute through negotiation’6 and in case, the efforts failed, they were to enter arbitration under the procedure specified in Article 15.1(b) of the commitments. The arbitration was subject to the Rules of the Arbitration Court of the ICC (ICC Rules).7 The arbitration was to be conducted in English and the seat of arbitration was Milan.8

15.1.2 Jurisdiction of the Arbitral Tribunal Newscorp argued that RTI’s claim fell within the ‘exclusive jurisdiction of the European Commission’ and was therefore, beyond the jurisdiction of the Arbitral Tribunal.9 The Tribunal disagreed and held that whether the Disputed Rights fell within the scope of the commitments, ‘was “the core issue of the dispute” and “closely intertwined with the merits” of the Award (§182)’.10 The Tribunal held that all the disputes about the commitments that fell neither ‘under the definition of

4 Newscorp/Telepiù (Case COMP/ M 2876) Commission Decision 2004/311/EC [2004] OJ L110/ 73, Commitments to the European Commission, Section 8.1. 5 ICA disputes referred to the disputes that fell under the competence of the Italian Communications Authority under Italian or Community law and were subject to the ICA dispute resolution. See Newscorp/Telepiù (Case COMP/ M 2876) Commission Decision 2004/311/EC [2004] OJ L110/ 73, Commitments to the European Commission, article 15.1(a). 6 Newscorp/Telepiù (Case COMP/ M 2876) Commission Decision 2004/311/EC [2004] OJ L110/ 73, Commitments to the European Commission, article 15.1(b)(i). 7 Ibid., Commitments to the European Commission, article 15.1(b)(vi). 8 Ibid. 9 Award in Reti Televisive Italiane v. Sky Italia, ICC Case No. 16974/FM/GZ. Source: Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223, 230. 10 Ibid.

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Introduction

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ICA Disputes nor under the exclusive jurisdiction of ICA and/or the Commission under Italian or EU law’ were subject to arbitration (§ 187).11 It further stated that as the Commission had delegated all its powers for implementation of the substantive obligations in part II of the commitments to the ICA and arbitration meant that its exclusive jurisdiction was un-effected (§188–189).12 The Tribunal opined that RTI did have a right flowing from Article 8.1 and was a third party affected on account of the Respondent’s failure to implement the commitments. According to the Tribunal, ‘the arbitration clause’ was to be interpreted as ‘covering all breaches of the substantive obligations contained in the commitments’ and the notion of third parties, referred to all those parties whose rights were violated by the breach of the commitments.13

15.1.3 The Interpretation of the Commitments On the issue of the interpretation of the commitments, the Tribunal noted that the commitments could not be interpreted in isolation from the concerns first identified by the Commission in its competitive assessment of the impact of the Newscorp/ Telepiù merger (§ 413).14 The commitments in Newscorp/Telepiù formed an integral part of and belonged to the EU legal system and must be interpreted ‘in compliance with the hierarchy of EU sources of law’, since the decision, it was stated, was also ‘a form of legislation’ (§ 414).15 The Tribunal then performed a detailed analysis of the 2003 Newscorp/Telepiù decision for identifying the relevant markets and performing a competitive analysis (§ 416–446).16 It reached the conclusion that ‘non-annual football events’, as mentioned in the merger commitments did not anticipate the market for the World Cup.17 Thus, the ‘necessary conclusion’ was that the world-wide sports rights under Article 8.1 did not include the World Cup (§ 424 and 428)18 and thus, Newscorp was under no obligation to ‘not’ to acquire exclusive broadcasting rights for the World Cup or sub-license them to RTI. On the merits, therefore, there was no breach of commitments by Newscorp.

11

Ibid. Ibid. 13 Award in Reti Televisive Italiane v. Sky Italia, ICC Case No. 16974/FM/GZ. Source: Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223, 232. 14 Ibid., pp. 223, 236. 15 Ibid. 16 Ibid. 17 Ibid. 18 Ibid. 12

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15.1.4 Can the Tribunal Amend the Scope of the Commitments? On the issue whether the Arbitral Tribunal can offer relief to the aggrieved parties in markets not initially effected by the concentration, the Tribunal held that is was beyond the scope of the jurisdiction of the Arbitral Tribunal. In case the third parties found that any such market was experiencing diminished competition, then the right forum to raise those concerns was the competition authorities of the effected Member State (§ 438). Although it is somewhat surprising that the Tribunal did not mention the possibility of recourse to the European Commission as a possible alternative, considering that it is the more natural forum.19 The rationale for mentioning ‘only’ the national competition authorities could perhaps be accounted for by the fact that even today allocation of licenses takes place on a national basis and the presence of significant linguistic barriers keeps information, communications and entertainment markets largely national in scope. Whatever be the rationale, the reference was ‘only’ a recommendation, and it did not bar the aggrieved parties from directly approaching the Commission. On the issue whether the Arbitral Tribunal could look at competition markets that although ‘not’ initially ‘affected by the concentration did change over time’, the Tribunal responded in the negative, as this would have undermined ‘the Commission’s exclusive decision making power’ (§ 436).20 Accordingly, the Tribunal refused to analyse whether the ‘World Cup’ had become relevant for the pay-tv market over time (§ 445).21

15.2

Resolution of Ambiguities in the Arbitration Agreement

A given arbitration clause may contain conflicting points. In Newscorp/Telepiù, the arbitration clause mentioned that the arbitration was subject to the ICC Rules. Under the ICC Rules, when a given arbitration is subject to its rules, it is the ICC that ‘appoints’ the arbitrators. The parties can only ‘nominate’ the arbitrators and inform the ICC.22 The ICC, then evaluates the qualification of the arbitrators especially as regards their independence and impartiality,23 and only upon its satisfaction, Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223, 237. 20 Ibid. 21 Ibid. 22 International Chamber of Commerce, Arbitration Rules: Rules of Arbitration of the International Chamber of Commerce, in force as from 1 January 2012, article 4, 13 accessed 06 January 2019. 23 Ibid, article 13(2). 19

15.2

Resolution of Ambiguities in the Arbitration Agreement

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confirms his/her appointment. In Newscorp/Telepiù, however, the parties under Article 15(1) (b) of the commitments could ‘appoint’ an arbitrator. The complaining party was to provide to the Committed Group a written notice stating the nature of the claim, as well as relief sought along with the name of an appointed arbitrator. The Committed Group in turn was supposed to appoint an arbitrator within 14 days of receipt of the written notice. The President of the tribunal was to be appointed by the two appointed arbitrators within seven days.24 In the arbitration under consideration, there were no conflicts as the arbitrators ‘nominated’ by the parties were confirmed by the ICC. But what happens in case of a conflict? Consider for instance in the said case, the arbitrators appointed by the parties were not acceptable to the ICC. Or there could be a scenario wherein the default arbitrators appointed by a neutral third party such as the ICC was not acceptable to the Commission.25 Either of these scenarios can lead to a deadlock or at least an inordinate delay. How is such a conflict to be resolved quickly and effectively such that the benefits of arbitration are not lost? Moreover, the generally pre-specified short deadline of seven days for appointment of arbitrators seems impractical considering that the Institution requires time to fulfil its administrative formalities. In that respect, short deadlines may be perceived as a contradiction to the institutional obligations arising from an institutional arbitration. Second, in Newscorp/Telepiù, Milan was the specified place of arbitration. Although disputes were subject to the institutional arbitration rules of the ICC,26 the lex loci that is the rules applicable to arbitration in Italy prevented arbitrators from offering any interim measures. Article 23 of the ICC rules (now Article 28(1)) offered the Arbitral Tribunal the power to order any interim or conservatory measures.27 However, the seat of the arbitration that is the Italian law under Article 818 of the Code of Civil Procedure did not allow the arbitrators the possibility to offer such a relief. There was therefore, a conflicting situation—although the choice of institutional rules allowed interim measures, the lex loci prevented the arbitral tribunal from offering the same. In RTI v. Sky, this apparent conflict was avoided as RTI, the claimant who initially made a request for interim measures subsequently withdrew it and the issue went undecided.28 The question is what would have happened in case the claimant persisted with his demand for interim relief?

24 Newscorp/Telepiù (Case COMP/ M 2876) Commission Decision 2004/311/EC [2004] OJ L110/ 73, Commitments to the European Commission, clause II, article 15.1(b)(i) and (ii). 25 Gordon Blanke, The Use & Utility of International Arbitration in EC Commission Merger Remedies: A Novel Supranational Paradigm in the Making? (Groningen: European Law Publishing 2006) 143. 26 Newscorp/Telepiù (Case COMP/ M 2876) Commission Decision 2004/311/EC [2004] OJ L110/ 73, Commitments to the European Commission, clause II article 15.1 (b) (vi). 27 International Chamber of Commerce, Arbitration Rules: Rules of Arbitration of the International Chamber of Commerce, in force as from 1 January 2012 accessed 06 January 2019. 28 Luca G Radicati Di Brozolo, ‘EU Merger Control Commitments and Arbitration: Reti Televisive Italiane v. Sky Italia’ (2013) 29(2) Arbitration International 223, 238.

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If the intention is to offer such interim measures pending dispute, an error such as the one described above, prevents a timely offer of such a relief. It seems that the problem in such cases is not so much one of intention, the challenge rather emerges from inadvertently drafted arbitration clauses. The interesting fact that merits attention is that this inconsistency is a rule rather than an exception. Blessing studies over 30 Commission Decisions under Article 81(3) EC (now Article 101 TFEU) and under Merger Regulation (Reg. 4064/89) (now the 2004 Merger Control Regulation) from the year 1977 to 2001 and finds many such errors in inadvertently drafted merger remedy-related arbitration clauses.29 There are many typical ‘pathological clauses’ in an arbitration agreement that instead of offering clarity, render its terms ambiguous.30 Clauses such as those that demand the arbitrators to ‘produce an amicable settlement’ or ‘arbitration by independent experts’,31 or the conflicting provisions on interim measures as in the Newscorp/Telepiù discussed above—are some such clauses that can make an arbitration clause substantially and procedurally defective and in a worst case scenario, raise questions about the ‘validity and enforceability of the commitments’ and make the award unenforceable.32 Vivendi/Canal+/Seagram offers another such interesting instance—on the one hand, the arbitration was clearly subject to the ICC Rules and, on the other hand, it specified a clear-cut procedure for the fixation of deposits.33 The former was irrelevant or ‘pathological’ considering that under the ICC rules, it was an issue that was to be determined by the ICC Court of Arbitration. Foregoing challenges emerge as arbitration is a discipline quite different from competition law and requires a certain level of expertise in drafting in order to ensure their effectiveness. To ensure that the benefits of arbitration are truly appropriated, the drafter needs to consider the various national and international rules of arbitration.34

29 Marc Blessing, Arbitrating Antitrust and Merger Control Issues (Basel: Helbing Lichtenhahn Verlag 2003) 83. 30 Frédéric Eisemann, ‘La clause d’arbitrage pathologique’ in Eugenio Minoli (ed) Arbitrage Commercial, Essays in memoriam (Torino 1974) 129 ff. 31 Ibid. 32 Gordon Blanke, The Use & Utility of International Arbitration in EC Commission Merger Remedies: A Novel Supranational Paradigm in the Making? (Groningen: European Law Publishing 2006) 138–139. 33 Glaxo Wellcome/Smithkline Beecham (Case IV/ M.1846) [2000] OJ C170/6, para 77. 34 Nigel Blackaby, Constantine Partasides, Alan Redfern, and Martin Hunter (eds), Redfern & Hunter on International Arbitration (Sixth Edition OUP 2015).

15.4

15.3

Conclusion

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Baseball Arbitration

As discussed in this chapter and in the preceding Chap. 14, the commitments usually contain a prima facie rule and follow baseball style arbitration. The proposed mechanism in Comcast/NBCU/JV, as well as in Google/ITA, two recent conditional clearances by the US DOJ called for baseball-style arbitration. In baseball arbitration, both the parties present to the arbitrator their best offer. The arbitrator then selects from amongst the two submissions, the one that is more reasonable. In case of a licensing dispute for instance, both the parties are required to submit what in their opinion is an acceptable rate of royalty. From the two, the arbitrator will select the one that may best reflect the market realities and is thus, a more reasonable rate of royalty. The arbitrator does not have a discretion to adopt an average of the two rates or propose an alternate more reasonable rate. S/he must choose the ‘more’ reasonable amongst the two proposed rates. As the objective of merger remedy-related arbitration is a quick identification and resolution of non-compliance with the commitments, this base-ball style arbitration, also known as ‘pendulum arbitration’ or Russian roulette or Texas auction, being both quick and highly efficient, seems most effective in achieving the desired objective.35 It is like a Russian roulette or like a 50-50 joint venture, wherein in case of dispute, each party offers a price to buy the other party’s stake (or sell to the other party) and then it is up to the other party or a third party to accept the offer or make a counter offer.36 The approach is advantageous from a commercial and competition law perspective as it ensures quick and efficient dispute resolution. The ‘inspiration’ for such pendulum clauses comes from the U.S. baseball arbitration, and hence, the more commonly used name ‘baseball arbitration’. In commercial arbitration, such a process is referred to as MEDALOA (that is mediation and last offer arbitration), or LOA (last offer arbitration).37 The underlying principle and objective remains the same—that is the quick resolution of disputes and minimisation of the transaction costs.

15.4

Conclusion

When merger remedy-related arbitration clauses were first introduced, many recommended a model arbitration clause. Blessing for instance proposed a ‘Notice on Best Practice for the Use of Arbitral Tribunals Monitoring Behavioural and

35

Marc Blessing, Arbitrating Antitrust and Merger Control Issues (Basel: Helbing Lichtenhahn Verlag 2003) 103. 36 Ibid. 37 Marc Blessing, Arbitrating Antitrust and Merger Control Issues (Basel: Helbing Lichtenhahn Verlag 2003) 103; Comments on Baseball Antitrust Litigation in ABA Section of Antitrust Law (2nd edn, Chicago: ABA Publishing 1997) 342–350; March Blessing, Introduction to Arbitration-Swiss and International Perspectives Volume 10 (Swiss Commercial Law Series 1999) 312.

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Structural Commitments’ and an ‘Explanatory Note’ along with a ‘Model Text for the Use of an Arbitrator or Arbitral Tribunal for Monitoring Commitments under the EC Treaty’.38 The note was designed along the lines of the ‘Explanatory Note on the Commission’s Model Texts for Divestiture Commitments and the Trustee Mandate under the EC Regulation’.39 Blanke too proposed a ‘Standard Model Arbitration Commitment for EC merger remedy-related arbitration’40 that sought to meet the specific requirements of the EC (now EU) merger remedy-related arbitration.41 This study refrains from drafting any such Model Clause. Instead, the attempt has been to highlight the emerging de facto standardisation on certain critical aspects of merger remedy-related arbitration. It pursues such an approach, considering that, as is evident from a bare perusal of the recent Commission decisions, the Commission has embraced the ‘wait and watch’ approach and let the arbitration clauses undergo natural evolution. In some respects, such as the type of institution, level of confidentiality, the role of the Commission and the appointment of arbitrators, the practice seems to be crystallised and well-settled. However, issues such as pre-arbitration dispute resolution—that involve the senior management and the monitoring trustees—the clauses are gravitating towards more elaboration and further refinement. One sees an innovation-led approach in these arbitration clauses rather than quick codification and stymieing any potential opportunity for further improvement. It is also recommended that, to facilitate further evolution, the parties should submit a ‘non-confidential’ version of awards made, if any, in future merger remedyrelated arbitrations. These awards can then be put on the Commission’s website for future reference. The EU merger remedy-related arbitration truly contributed to the effet utile as seen from the frequent employment of such clauses in recent Commission decisions and the first ever reported case of merger remedy-related arbitration, RTI v Sky. Concerning any pathological clauses that render the terms ambiguous or ineffective, it may not be a good idea to fix them by rendering a standard draft text. Merger remedy-related arbitration, considering its very unique nature of acting at the interface of competition and arbitration law—it is both desirable, as well as necessary that arbitration law is flexible to accommodate the requirements of competition law and its public policy dimension.42 It may rather be more useful to let the clauses undergo the process of natural evolution. Just as arbitration law’s flexibility to show 38

Marc Blessing, Arbitrating Antitrust and Merger Control Issues (Basel: Helbing Lichtenhahn Verlag 2003) 77. 39 Ibid. 40 Gordon Blanke, The Use & Utility of International Arbitration in EC Commission Merger Remedies: A Novel Supranational Paradigm in the Making? (Groningen: European Law Publishing 2006). 41 Ibid., p. 141. 42 This has led some authors to phrase merger-remedy related arbitration as a supra-national paradigm in the making. See Gordon Blanke, The Use & Utility of International Arbitration in EC Commission Merger Remedies: A Novel Supranational Paradigm in the Making? (Groningen: European Law Publishing 2006).

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Conclusion

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respect for privacy and confidentiality and speed led to its acceptance in commercial arbitration; respect for the special needs of competition law will strengthen and further legitimize the use of arbitration in merger commitments.

Chapter 16

Monitoring Trustee

Abstract This chapter discusses the qualifications and the role of the monitoring trustee. It also maps the evolution of the role of the trustee from the first conditional clearance in the EU that used monitoring trustee to his/her role as specified in the more recent Commission decisions. This is then contrasted with the practice in the US, where the use of trustees is relatively infrequent. The chapter evaluates the challenges and pitfalls of an expansive trustee mandate that permit him/her to transgress the basic role of monitoring the implementation of commitments to a more proactive role that literally involves managing the divested business.

16.1

Monitoring Trustee: The ‘Eyes and Ears’ of the Commission

Considering the complexity, long duration and ex-post monitoring required for non-divestiture commitments, the Commission can demand an arbitration clause, as well as it may also ask for the appointment of a managing trustee.1 The merging parties appoint a ‘monitoring trustee’ who acts as the ‘eyes and ears’ of the Commission and ensures that the parties meaningfully execute the commitments, properly maintain the assets in the interim period and during the divestiture process.2 The scope of the function and the duties of the trustee are laid down in the Trustee Mandate in the commitments. The Commission Notice on Remedies distinguishes between two types of trustees—a monitoring trustee and a divestiture trustee. The monitoring and the divestiture trustees may be two separate persons, but as is the more frequent practice, the same trustee is appointed to perform both the functions. There are two important rationales for the appointment of a trustee. First, considering that there are asymmetries of information between the merging parties, the competitors and the Commission, the monitoring trustee by acting as the ‘eyes and 1 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01. 2 Ibid., at paras 117–18.

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_16

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Monitoring Trustee

the ears’ of the Commission, eliminates this asymmetry and ensures that the remedies are correctly implemented. Second, as the Commission does not have unlimited resources at its disposal, a monitoring trustee performs a function similar to merger remedy-related arbitration as he eases the burden of ex-post monitoring from the shoulders of the Commission.3 The 2008 EU Merger Remedies Notices describe in detail the role and importance of the monitoring trustee. In addition, the EU merger legislation has three other important texts that deal with the appointment of a trustee—the first being the Commission Model Text for Divestiture Commitments, the second the Model Trustee Mandate and the third being the Explanatory Note on the Best Practices Guidelines: The Commission’s Model Texts for Divestiture Commitments and the Trustee Mandate under the EC Merger Regulation (dated 5 December 2013). The appointment of a Trustee is a very important process, as the Commission identifies the Trustee as its ‘eyes and ears’ who is responsible for regular reporting regarding compliance/non-compliance with the commitments. The Commission, therefore, takes the process very seriously and actively participates in the process of his appointment.4 In fact, the Commission meets the trustee before the appointment and frequently rejects the parties’ choice based on issues such as the trustee’s lack of relevant specialisation, his/her insufficient expertise and resources or his/her lack of independence from the parties.5 The significance of the trustee can be gauged from the fact that even after the trustee has fulfilled his mandate and has been lawfully discharged, the Commission reserves the right to reappoint the trustee if it is of the opinion that the commitments have not been implemented fully and effectively.6

16.2

Appointment, Conflict of Interest and the Independence of Trustee

The appointment of the managing trustee is a challenging task. Considering the level of expertise and the amount of experience required, there is generally a limited pool of trustees available for appointment. This may be particularly true in case the desired trustees be ‘investment, banking, consulting and auditing firms’.7 The

Penelope Papandropoulos and Alessandro Tajana, ‘The Merger Remedies Study - In Divestiture We Trust?’ (2006) 8 ECLR 443, 447–448. 4 Jonas S Brueckner and Thomas Hoehn, ‘Monitoring Compliance with Merger Remedies- The Role of the Monitoring Trustee’ (September 2010) 6 Competition Law International, 73, 74. 5 Ibid. 6 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 127. 7 Jonas S Brueckner and Thomas Hoehn, ‘Monitoring Compliance with Merger Remedies- The Role of the Monitoring Trustee’ (September 2010) 6 Competition Law International, 73, 75. 3

16.2

Appointment, Conflict of Interest and the Independence of Trustee

253

commitments, usually contain very detailed provisions for the appointment of managing trustees. In Axalto/Gemplus for instance, the parties were to propose a monitoring trustee to the Commission within 30 calendar days after the closing date. The proposal was to contain sufficient information about the suitability of the Trustee with respect to necessary qualification including that s/he did not have any conflict of interest. The proposal was also to contain a provision for the remuneration of the trustee. The mandate was expected to consider the Commission’s Standard Trustee Mandate and include all the ‘provisions necessary’ to help him/her fulfil his/her duties.8 The Commission had the discretion to approve or reject the proposed monitoring trustee and approve or propose changes to the mandate.9 The trustee was to be appointed by the parties within one week following the Commission’s clearance decision.10 In case none of the proposed Trustees were acceptable to the Commission, the parties were to submit names of at least two more individuals or institutions, within two weeks of being informed of the rejection decision.11 The commitments in ARM/G&D/Gemalto/JV contained a provision for the appointment of a monitoring trustee who was to be appointed within 2 weeks following the clearance decision.12 In Intel/McAfee, the Monitoring Trustee was to be ‘independent of Intel’ and have no conflict of interests that prevented him/her from effectively performing the assigned duties.13 As for the qualifications, s/he was expected to be ‘familiar with the design and implementation of the microprocessor technology’.14 The Commission had the discretion to approve or reject the trustee and approve the proposed mandate by Intel, subject to any modifications that it found desirable to ensure that the trustee fulfilled his/her obligations.15 Additionally, considering the challenges associated with the late appointment of trustees,16 the clearance may preclude the parties from closing the deal until the appointment of the trustee. In Intel/McAfee for instance, Intel committed not to close the transaction until ‘twenty days’ after the adoption of the decision, to ensure that a

8

Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34, Commitments to the European Commission, section D, part I. 9 Ibid. 10 Ibid. 11 Ibid. 12 ARM/Giesecke & Devrient/ Gemalto/ JV (Case COMP/M.6564) [2012] OJ C368/9, paras 230–35. 13 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, Commitments to the European Commission, section C, para 10. 14 Ibid. 15 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, Commitments to the European Commission, section C, para 12–16. 16 DG Comp, European Commission, ‘Merger Remedies Study’ [October 2005] accessed 06 January 2019.

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reasonable amount of time was available for the appointment of the monitoring trustee.17 The commitments contain multiple safeguards to ensure operational independence of the trustees. The parties, for instance, cannot instruct the trustee, without the approval of the Commission.18 The merging parties are responsible for the remuneration of the trustee. However, the remuneration should be such that it does not impede the trustee’s independence or his effective functioning.19 To ensure independence of the trustee it is important that his/her appointment cannot be revoked on arbitrary grounds. The appointed trustee may be removed only with the approval of or a request from the Commission.20

16.3

Qualifications and Skill Set of the Trustee

The qualifications of the trustee are assessed on a case-by-case basis, geographic area and the sector concerned. Investment banks for instance are particularly suited to act as divestiture trustees.21 In case of structural commitments, a thorough understanding of the process of M&A, corporate finance, management skills and change management is a highly desirable skill set.22 Behavioural or non-structural commitments involve a continuous on-going relationship between the trustee, the Commission and the parties and accordingly require reporting market developments and evaluating the effectiveness of remedies, pricing of supply and distribution contracts (equally applicable to divestments), licensing of IP terms and mediation.23 Accordingly, the commitments in Axalto/Gemplus required that the trustee had the requisite set of qualifications to conduct its work, such as s/he was a qualified consultant or an auditor.24 In Cisco/Tandberg, the monitoring trustee was expected to be someone well-familiar with the standard setting procedure in the IT sector and someone who had the relevant ‘experience, competence and independence’ required for the role.25

17

Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, Commitments to the European Commission, section C, para 16. 18 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 118. 19 Ibid., at para 126. 20 Ibid., at para 125. 21 Ibid., at para 125. 22 Jonas S Brueckner and Thomas Hoehn, ‘Monitoring Compliance with Merger Remedies- The Role of the Monitoring Trustee’ (September 2010) 6 Competition Law International 73, 77. 23 Ibid., pp. 73, 76. 24 Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34, Commitments to the European Commission, section D, part I. 25 Cisco/Tandberg (Case COMP/M 5669) [2010] OJ C036/9, para 161.

16.4

Monitoring Trustee and Confidential Information

255

Moreover, as access to inputs, infrastructure and customers are often central to the commitments in the information technology and the telecommunications sector— these commitments may often require complex supervision and the involvement of the sector regulator.26 In each one of the telecommunications mergers discussed in Chap. 13 of this book, the Commission identified the role of the sector regulator in the effective implementation of the merger commitments. In addition, in Hutchison 3G Ireland/Telefónica Ireland, the trustee was expected to have the requisite telecom sector expertise.27

16.4

Monitoring Trustee and Confidential Information

To perform his/her functions effectively, a trustee may need access to commercially sensitive and confidential information. The commitments contain a detailed clause that offers the trustees access to this information. In Axalto/Gemplus for instance, the parties were under an obligation to provide the monitoring trustee with all such assistance and information, including copies of all the relevant documents, license agreements and interoperability information so that s/he could effectively perform his/her tasks.28 In Intel/McAfee, Intel was under an obligation to appropriately remunerate the trustee without impeding ‘independent and effective fulfilment’ of his/her mandate.29 Intel had to provide the trustee and the accompanying staff, all assistance and information that was reasonably required for the trustee to carry out his/her mandate.30 Intel also had to indemnify the trustee and his/her agents for any liabilities that arose from the performance of the duties, except if those liabilities arose from ‘wilful default, recklessness, gross negligence or bad faith’ of the trustee him/herself.31 Intel was also responsible for the appointment and remuneration of advisers required by the trustee.32 Access to information must have sufficient safeguards to protect the legitimate business interests of the merged parties. In Intel/McAfee for instance, the monitoring trustee was expected to perform his/her duties having due respect for the 26 Thomas Hoehn and Suzanne Rab, ‘UK Merger Remedies: Convergence or Conflict with Europe? A Comparative Assessment of Remedies in UK mergers’ (2009) 2 ECLR 74. 27 Hutchison 3G Ireland/ Telefónica Ireland (Case No COMP/M6992) [2014] OJ C264/6, Commitments to the European Commission, para 25. 28 Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34, Commitments to the European Commission, section D, part III. 29 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, para 344 and Commitments to the European Commission, section C, para 11. 30 Ibid., at para 344 and Commitments to the European Commission, section C, para 21. 31 Ibid., at para 344 and Commitments to the European Commission Section C, para 23. 32 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, para 344 and Commitments to the European Commission, section C, para 24.

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confidentiality of information shared by Intel.33 S/he was also under an obligation to take due consideration of Intel’s ‘legitimate interests’ and ‘avoid unjustified burden and interference in Intel’s business operations’.34

16.5

Monitoring Trustee or a Divestiture Trustee?

In the model text, the Commission views the monitoring trustee as a natural and legal person who is approved by the Commission and appointed by the merging parties. The monitoring trustee’s principle duty is to ‘monitor compliance with the conditions and obligations’. A divestiture trustee, just like the monitoring trustee, is a natural and legal person approved by the Commission and appointed by the parties. The divestiture trustee has an ‘exclusive mandate’ from the parties to sell the divestment business at ‘no minimum price’. Whereas a monitoring trustee is ‘almost’ always present in all conditional clearances, use of divestiture trustee is relatively infrequent. The appointment of divestiture trustee is contingent upon the failure of the parties to divest the assets within a given time frame. The divestiture trustee comes to play when the parties are unable to conduct the divestiture within the first divestiture period. In such a case, the divestiture trustee has an ‘irrevocable and exclusive mandate’ to divest the business within a deadline to a suitable purchaser at no minimum purchase price.35 Whereas the monitoring trustee should be appointed immediately following the Commission decision; the divestiture trust has a role to play after the end of the first divestiture period. The mandate of the divestiture trustee begins during the trustee divestiture period. Depending on the case, the Commission may approve the same person or Institution as the divestiture, as well as the monitoring trustee.36 Appointment of both these types of trustees is based on the trustee mandate executed between the parties and the trustee and subject to the approval of the Commission.37 For appointment, they both must be independent of the parties, have necessary qualifications to effectively carry out their functions and should not be exposed to any conflict of interest.38 Appointment of divestiture trustees is less frequent in comparison to the appointment of monitoring trustees. Brueckner et al studied the conditional clearance decisions from 2005 to 2010 and found that out of 99 conditional clearances, over

33

Ibid., at para 344 and Commitments to the European Commission, section C, para 21. Ibid., at para 344 and Commitments to the European Commission, section C, para 22. 35 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, paras 121–122. 36 Ibid., at para 123. 37 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, para 125. 38 Ibid., at para 124. 34

16.6

The Role and Responsibility of the Trustee

257

91 contained a provision for monitoring trustee.39 In the year 2001, all conditional clearances, except for one merger, were cleared following the appointment of the monitoring trustee.40 The employment of monitoring trustees has become only more frequent over time. From 2011 to 2017, the Commission used monitoring trustee in all its ICT and telecoms conditional clearance decisions.41

16.6

The Role and Responsibility of the Trustee

Not only has the use of trustees become more frequent, but the role played by him/her has also evolved over time. The monitoring trustee’s tasks are laid down in the trustee mandate. The five most important tasks carried out by the trustee are as follows. First, the trustee, during the interim period, oversees the preservation of the assets to be divested. Second, in case of a carve-out, s/he ensures the proper splitting of assets and personnel between the divested business and the business retained by the parties. Third, s/he oversees the selection of a right potential purchaser, presentation of suitable information to him/her for conducting due diligence and ensure the sale of assets in accordance with the commitments. Fourth, s/he communicates and interacts with potential purchasers and in case of disagreement between the merging parties and potential purchasers, discusses the same with both the parties and reports to the Commission. Finally, s/he submits periodic compliance reports and also additional reports, upon request, to the Commission.42 If in the earlier Commission decisions, the trustees had a very limited role to play, in the more recent decisions, the scope of trustee duties has expanded considerably. In the Axalto/Gemplus decision for instance, the trustee was seen for the first time as a touchpoint to facilitate initial dispute settlement between the parties.43 The decision at the time was exemplary, as it envisioned an expansive role for the trustee. The trustee, broadly speaking, was expected to perform three functions: first, monitor the

Jonas S Brueckner and Thomas Hoehn, ‘Monitoring Compliance with Merger Remedies- The Role of the Monitoring Trustee’ (September 2010) 6 Competition Law International 73. 40 Mario Monti, ‘The Commission’s Notice on Merger Remedies’ in François Lévêque and Howard Shelanski(eds), Merger Remedies in American and European Union Competition Law (Edward Elgar 2004) 9. 41 The author studied and found that all the conditional clearance decisions during this period required the appointment of a monitoring trustee. 42 Commission Notice on remedies acceptable under Council Regulation (EC) No 139/2004 and under Commission Regulation (EC) No 802/2004 [2008] OJ C 267/01, paras 119–120. 43 Gordon Blanke, ‘Arbitration and ADR in EU Merger Control’ in Gordon Blanke and Phillip Landolt (eds) EU and US Antitrust Arbitration: Handbook for Practitioners, Volume I (Kluwer Law International 2011) 1705; Siegfried H Elsing, ‘Performance as a Remedy: Non-Monetary Relief in International Arbitration’ in Michael E Schneider and Joachim Knoll (eds) Performance as a Remedy: Non-Monetary Relief in International Arbitration: ASA Special Series No. 30(Juris 2011) 254. 39

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parties’ compliance with the conditions and obligations; second, offer timely reports to the Commission and third, settle disputes under the conciliation clause. [T]he tasks of the monitoring trustee will be to ensure a smooth implementation of the commitment, in particular to guarantee the setting of FRAND terms and conditions and to hear any dispute prior to the arbitration procedure. If the dispute cannot be resolved by the monitoring trustee during the conciliation phase, then the third party may request a fast-track arbitration. This two step system is designed to remove any risk that the parties may stall the negotiation process with third parties.44

Overtime, an extensive role of the trustee to ensure overall compliance with the commitments has become commonplace. In the Western Digital/Hitachi HDD merger for instance, the commitments envisioned an expansive scope of the role and responsibilities of the managing trustee. These varied from active participation in the process of divestiture to acting as the first line of mediation following disputes concerning the allocation of intellectual property rights. In Intel/McAfee, the monitoring trustee was envisioned to perform a vast variety of functions ranging from dispute resolution to reporting to the Commission Intel’s non-compliance with the commitments.45 Following his/her appointment, the trustee had to provide a detailed work plan and course of action to the Commission and to Intel.46 The language of correspondence was English.47 In Cisco/Tandberg, the monitoring trustee was expected to play a central supervisory role in the implementation of remedies that sought to enhance interoperability between end-points in the market for video conferencing solutions, particularly in the dedicated room segment.48 In NXP Semiconductors/Freescale Semiconductor, the monitoring trustee was envisioned to foresee the proper implementation of the firewall provisions and ensure that no commercially sensitive information was shared between NXP and the divested business.49 To ensure this, NXP was under an obligation to provide the monitoring trustee within a month of the Effective Date, a detailed description of the measures it proposed to undertake to implement the firewalls.50 The trustee was to ‘monitor the proper implementation of the measures, assess their appropriateness and where ever required, request suitable amendments’.51

44

Axalto/Gemplus (Case COMP/M 3998) [2006] OJ C196/34, para 85. Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, Commitments to the European Commission, section C, para 18. 46 Intel/McAfee (Case COMP/M 5984) [2011] OJ C98/1, para 344 and Commitments to the European Commission, section C, para 19. 47 Ibid., at para 344 and Commitments to the European Commission, section C, para 20. 48 Cisco/Tandberg (Case COMP/M 5669) [2010] OJ C036/9, para 148. 49 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, Commitments to the European Commission, section B, para 9. 50 Ibid. 51 Ibid., Commitments to the European Commission, section B, para 9. 45

16.7

16.7

Monitoring Trustee or a ‘Managing’ Trustee?

259

Monitoring Trustee or a ‘Managing’ Trustee?

As can be seen from the foregoing, today in a typical conditional clearance decision, a monitoring trustee has a very extensive and central role to play. The observation is equally true for structural, as well as non-structural commitments. This may imply that the trustee has an important say in major investment decisions such as whether to keep the business running, renegotiation of long term contracts during divestiture period or brand management such as marketing and negotiation with the retailers.52 The trustee may also play a highly influential and strategic role such as represent the interests of shareholders in case of a hold-separate or ring-fencing commitment and take a seat on the board of directors of a subsidiary or that of a joint venture.53 In case of divestiture for instance, a hold separate manager is appointed to ensure the interim preservation of the assets. The hold-separate manager is usually an existing manager or director of the divested business who is close to retirement. This is a very effective solution to ensure the interim preservation of the assets. The challenge, however, seems to emerge from the fact that the hold-separate manager following divestment is abruptly cut off from his/her line of reporting. Prior to divestment, the hold-separate manager reports directly to the senior management. Following divestment, the manager may now need to report to the managing trustee and may seek ‘reassurance and guidance’ from him/her.54 ‘Monitoring by trustee’ in such a case may become ‘managing by trustee’. In NXP Semiconductors/Freescale Semiconductor for instance, NXP had to appoint a hold separate manager, who was expected to closely cooperate with and report to the monitoring trustee and the divestiture trustee.55 Managerial decisions by the monitoring trustee may become important in situations such as splitting and the allocation of key resources to a divested business following a carve-out.56 This is particularly true in the ICT sector, where human resources are often the most valuable asset and the divesting company may be reluctant to divest its R&D and managerial talent pool. The more recent commitments have incorporating innovative clauses to avert this challenge. Foreseeing such a possibility, in NXP Semiconductors/Freescale Semiconductor the parties undertook to take ‘all reasonable steps’ to maintain ‘incentive schemes’ to ‘encourage all Key Personnel’ to stay with the divested business and NXP undertook ‘not to solicit or move any Personnel’ to its ‘remaining

Jonas S Brueckner and Thomas Hoehn, ‘Monitoring Compliance with Merger Remedies- The Role of the Monitoring Trustee’ (September 2010) 6 Competition Law International 73, 76. 53 Ibid. 54 Jonas S Brueckner and Thomas Hoehn, ‘Monitoring Compliance with Merger Remedies- The Role of the Monitoring Trustee’ (September 2010) 6 Competition Law International 73, 76. 55 NXP Semiconductors/Freescale Semiconductor (Case M.7585) [2015] OJ C375/2, Commitments to the European Commission, section B, para 12. 56 Jonas S Brueckner and Thomas Hoehn, ‘Monitoring Compliance with Merger Remedies- The Role of the Monitoring Trustee’ (September 2010) 6 Competition Law International 73, 76. 52

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business’.57 If the Key Personnel still chose to leave the divested business, NXP was under an obligation to offer a reasonable proposal for replacement.58 The replacement was to take place under the supervision of the monitoring trustee who in turn was under an obligation to report it to the Commission.59 In H3G Ireland/Telefónica Ireland, the remedies sought to create a viable MNO over a period of time. As part of the remedies, the MVNOs had the possibility to purchase the divestment spectrum. The monitoring trustee in this regard had a very central role to play considering that the upfront buyer of the second MVNO could obtain the spectrum subject to the condition that it could effectively demonstrate to the satisfaction of the monitoring trustee a ‘concrete business plan to use the Divestment Spectrum to become an MNO within a reasonable period of time’.60 The monitoring trustee, thereby, was not only responsible for the management and preservation, he was also expected to play an instrumental role in deciding the allocation of spectrum that in turn would contribute to shaping of the competitive forces in the Irish mobile telecommunications market. The monitoring trustee acting as a managing trustee, is therefore, an evident danger that merits the attention of competition authorities. A practical way to remedy the challenge is to appoint an independent director with substantial responsibilities who reports directly to the trustee.61 Such a remedy, although attractive at first, tends to suffer from two limitations. First, the merging parties may be reluctant to appoint an independent director considering the level of additional financial and administrative resources required to implement this recommendation. Second, it may further complicate the already complicated structure of commitments. Another possible way to resolve this challenge can be a written commitment from the parties that assures the appointment of an independent director in case there later emerge substantial managerial functions during the interim period that require daily oversight.

16.8

The Practice in the US

Compared with their EU counterpart, the US antitrust authorities rather infrequently employ the monitoring trustees. The 2004 Merger Remedies Guidelines reserved the appointment of the trustee to ‘relatively rare situations’ wherein s/he could offer

57 NXP Semiconductors/Freescale Semiconductor (Case M 7585) [2015] OJ C375/2, Commitments to the European Commission, section B, para 10. 58 Ibid. 59 Ibid. 60 Hutchison 3G Ireland/ Telefónica Ireland (Case No COMP/M6992) [2014] OJ C264/6, paras 977. 61 Jonas S Brueckner and Thomas Hoehn, ‘Monitoring Compliance with Merger Remedies- The Role of the Monitoring Trustee’ (September 2010) 6 Competition Law International 73, 76.

16.8

The Practice in the US

261

‘technical expertise’ which was otherwise unavailable in-house to the competition authority.62 This appointment could either be made outright or reserved for the future.63 In the Robert Bosch merger decisions for instance, the FTC made an outright appointment whereas in the United Techs case, the DOJ reserved the right to make an appointment should the requirement arise in the future.64 In the earlier cases one also observes difference in frequency with which the FTC and the DOJ employed monitoring trustees—with FTC employing it more often than the DOJ.65 The 2011 Merger Remedies Guide are an advance over the 2004 Remedies Guide, as the former seems to be more open to the appointment of ‘operating’ and ‘monitoring’ trustees. The 2011 Remedies Guide state the possibility to appoint a trustee in case the merger offers the defendant an ‘ability and incentive to mismanage’ during the period of divestiture.66 This is particularly foreseeable in case of intangible property as software, where the fast moving nature of the industry may mean that under-investment in R&D during the period of divestiture may lead to an irretrievable loss in the value of the asset.67 In addition to an operating trustee, a monitoring trustee may be appointed (alternatively, a monitoring trustee can play the role of both an operating, as well as a monitoring trustee) whose task is to ensure that the defendant complies with ‘its decree obligation to sell the assets to an acceptable purchaser as a viable enterprise’ and comply with the hold-separate obligations.68 Monitoring trustees may also be employed to ‘oversee compliance with a conduct remedy involving ongoing obligations’, particularly when ‘oversight requires technical expertise or industry-specific knowledge’.69 Although the 2011 Merger Remedies Guide offers the possibility and is more open than the 2004 Guide to idea of the appointment of operating and monitoring trustees, the US competition authorities have been relatively conservative, when compared with their EU counterparts. Recent conditional clearances with substantial behavioural and hybrid remedies such as Ticketmaster/Live Nation, Comcast/

62 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division [October 2004] accessed 06 January 2019. 63 David Gelfand and Elaine Ewing, ‘“Be careful what you wish for”: U.S. government enforcement of merger consent decrees’ (Summer-Fall 2013) 58(2 & 3) The Antitrust Bulletin 225, 233. 64 Ibid. 65 Gelfand and Ewing study the FTC and DOJ conditional clearance decisions from 2010 and reach the conclusion that the FTC more frequently employs the Monitoring Trustee, which they attribute to the different historical approaches pursued at the two agencies. David Gelfand and Elaine Ewing, ‘“Be careful what you wish for”: U.S. government enforcement of merger consent decrees’ (Summer-Fall 2013) 58(2 & 3) The Antitrust Bulletin 225, 233. 66 Antitrust Division Policy Guide to Merger Remedies, U.S. Department of Justice, Antitrust Division, section B, part 2 [June 2011] accessed 06 January 2019. 67 Ibid. 68 Ibid. 69 Ibid.

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NBCU/JV and Google/ITA offer a case in point. In each one of these mergers, merger remedy-related arbitration, rather than the appointment of trustees, was identified as a better instrument to minimise the authorities’ ex-post monitoring costs. Overall, it seems that in the EU at least, considering the complex and hybrid nature of commitments accepted by the Commission, the use of monitoring trustees may only become even more frequent over time.

Part III

Big Data Mergers: Merger Review and Remedies

The third part of this book deals with big data mergers. This part comprises of only one chapter. Using a case study methodology, this chapter critically examines those aspects of big data mergers that cannot be effectively dealt within the framework recommended in the Part I and the Part II of this book. As an example, turnoverbased threshold for merger notification may be sufficient for mergers in the ICT sector in general. However, in case of big data mergers, use of the turnover-based threshold may mean that many high value mergers can go unnotified. Another significant aspect of big data mergers is the ‘non-price’ dimension of competition. This chapter first distinguishes between big data and personal data, and then discusses the challenges in big data mergers that often transgress the traditional notion of competition and touches upon other disciplines of law such as consumer protection and privacy law. Design of remedies for big data, just like the design of remedies for telecom mergers (discussed in Part II of the book) requires some creative thinking. The chapter accordingly analyzes the EU General Data Protection Regulation and assesses the possible set of remedies that can be employed in case of mergers concerning big data.

Chapter 17

Big Data and Merger Control

Abstract This chapter deliberates on the following pertinent issues central to big data mergers. First, whether mergers for big data are a competition law concern and thereby, require detailed review. Second, how do these mergers impact personal data and privacy? In case the answer to the first two questions is in the affirmative, then what should be the design of an effective merger control framework to deal with big data mergers? Another key issue dealt with in this chapter is the relation between merger control and other disciplines of law—such as the data protection law, the consumer protection law, and the law of privacy.

17.1

Introduction

The key arguments in the part I and part II of this book are as follows. First, for merger control to effectively promote competition in innovation in the ICT sector, it requires an element of flexibility to consider the special characteristics of the sector such as network effects and customer lock-in. Second, the design of remedies too needs to be innovative, as it must consider the economies of scale and scope in R&D activities. This in turn means more frequent use of non-structural remedies such as the licensing of IPRs and other access commitments. Innovation in remedial design in 4-to-3 telecom mergers is a case in point. These decisions underscore the commendable and innovative remedial design in the innovation-led telecoms sector. During the term of Commissioner Almunia, the Commission experimented with a range of access commitments. These commitments sought to promote downstream competition and facilitate the entry of MVNOs in national telecom markets. Frequent ex-post monitoring in these non-strucutral commitments means that mergerremedy related arbitration, such as baseball arbitration and monitoring trustees, the latter being more widely known as the ‘eyes and ears’ of the Commission are vital to an effective merger control framework. The special nature of multi-sided platforms and the definition of relevant markets in MSPs was key issue under consideration in Chap. 2.

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_17

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The principle argument, and tentative conclusion emerging from the discussion in Part I and Part II of this book is that although the ICT sector does not require a different merger control framework in order to be effective, but the competition authorities do need to consider the peculiar characteristics of the sector. Considering the distinctive nature of the MSPs, the discussion in this book has so far refrained from a detailed discussion on merger control with regard to the MSPs and big data mergers. The rationale is that considering the non-competition aspects such as ‘quality’ and privacy issues, big data and algorithms as competitive advantage and privacy as a dimension of quality, some additional factors that exist at the periphery in the ICT sector in general, may actually be very central to big data mergers. This chapter further develops the discussion on MSPs and big data mergers and argues why and how the special nature of these platforms may actually force ‘a conceptual shift in some of antitrust’s [most fundamental] doctrines’.1 Although ex-post competition law enforcement such as collusion (facilitated by self-learning algorithms) and abuse of dominance may present some of the more challenging facets of MSPs, but considering the scope of the present work, this part of the book limits the discussion to merger control. The MSPs, connected devices, and the Internet of Things (IoT) have increasingly turned us into a ‘class of saleable information asset’.2 With the possibility to have complete and perfect information about purchasing power and the buying behaviour of individual users, the MSPs can swiftly respond to a change in prices and engage in perfect price discrimination. To borrow an expression from Hayek, merger control in big data continues to remain a ‘process of discovery’, with substantial trans-Atlantic divergences on the subject. The concerns in these mergers relate to big data meaning that the merging parties come together to create some data-related advantages. Early in 2015, the German Monopolkommission3 published a paper on competition issues in multisided markets, shortly followed by a joint paper by the French and German competition authorities.4 The UK’s CMA’s paper on personal data also merits attention.5 Big data mergers present a challenge, just as forceful, if not more, in terms of magnitude equivalent to that of unilateral effects. The first wave of mergers

Salil Mehra, ‘Competition in Times of Algorithm’ Minnesota Law Review 100 (2016) 1323, 1355 accessed 06 January 2019. 2 Ibid., p. 1340–1341. 3 Monopolkommission, ‘Wettbewerbspolitik: Herausforderung digitale Märkte’ Sondergutachten 68 der Monopolkommission gemäβ §§ Abs. 1 Satz 4 GWB (Bonn/Berlin 1 June 2015) accessed 06 January 2019. 4 Autorité de la concurrence and Bundeskartellamt, ‘Droit de la concurrence et données’ (10 May 2016) accessed 06 January 2019. 5 Competition and Markets Authority, ‘The Commercial Use of Consumer Data: Report on the CMA’s call for information’ (London 2015) accessed 06 January 2019. 1

17.2

Data, Big Data, Personal Data and Merger Control

267

involving unilateral conduct, such as the Oracle/PeopleSoft merger went un-remedied. Insights from Industrial Organization (IO) and econometrics offered valuable insights into how such mergers may harm the process of competition. Mergers involving big data today present similar novel challenges to the competition authorities. Following issues merit deliberation. First, should competition policy consider a concern that does not fit into the traditional price-based notion of competition and apparently seems to be a consumer and privacy-related issue? Second, can mergers lead to enhanced market power through the aggregation of data in the hands of one large enterprise? Or are there other factors, such as algorithms and power to interpret data and make useful interpretations—factors that could potentially transform big data into a competitive advantage? Third, in case the competition authorities do find this to be a concern, how should such harm be classified? Fourth, what are the possible remedies that can limit these potential anti-competitive effects? This chapter offers a critical discussion on the following key issues: what is big data, personal data and non-personal data? (Sect. 17.2); challenges typically associated with MSPs and big data mergers (Sect. 17.3); the interface of merger control with other disciplines of law particularly in the context of big data mergers (Sect. 17.3); jurisdiction and filing threshold (Sect. 17.4); following case studies that highlight the practice of the competition authorities on the two sides of the Atlantic: Google/DoubleClick (Sect. 17.5.1), Facebook/WhatsApp (Sect. 17.5.2), Telefónica UK/ Vodafone UK/Everything Everywhere (Sect. 17.5.3), Microsoft/Yahoo! (Sect. 17.5.4) and Sanofi/Google/DMI JV (Sect. 17.5.5); the European Commission’s decision in Microsoft/LinkedIn (Sect. 17.6); and possible remedies in big data mergers (Sect. 17.7). Section 17.8 summarises the foregoing sections and outlines a general framework for merger control in big data mergers.

17.2

Data, Big Data, Personal Data and Merger Control

I know half the money I spend on advertising is wasted, but I can never figure out which half.6

The simplest and perhaps the most critical question is what is meant by ‘big data’ and what is the real currency in which the consumers pay in the Information Age? A well-founded answer to this question can help effectively argue against the argument that competition law should only look for the price effects of a merger. From the perspective of merger control—the central question that needs to be answered is three fold—first, should big data be seen as an offence or a defence? Second, if big data leads to some irreversible advantage and in the process, generates potential competition concerns, can it be identified as a possible theory of harm. And finally, if there is some anticipated harm, can such a merger be remedied (if yes, then how)?

6 John Wanamaker, the US retail magnet quoted in Martin Meyer, Madison Avenue, U.S.A: The Inside Story of American Advertising (Penguin Books: New York, 1958) at pg. 257.

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17.2.1 Data: The New Currency of the Digital Economy Big data and predictive coding through the use of complex algorithms empowers structured thinking and make rational interpretations about users by elucidating data to make valuable commercial interpretations from the information available. For instance, when a user googles for ‘bookshops with cafés in Munich’, Google can make many valuable interpretations from the information so gathered. Google knows that there is a user situated in Munich who is looking for the following two services—first a bookshop and second a café. This valuable access to information makes Google a valuable place for product and service providers to place targeted ads. By advertising on Google, the seller can reach the targeted consumer and in the process avoid the famous problem as articulated by the nineteenth century advertising guru John Wanamaker. This implies that this apparently free service of web search to consumer is actually paid for by him/her in the form of personal data, a service that is estimated to approximate €900 billion by the year 2020.7 We pay Google and Facebook not only in terms of valuable data, but also in terms of the time spent on these platforms.8 If time can be measured quantitatively and assigned a monetary value, we are paying a very high price for these free services considering the amount of time spent (particularly the time spent couch-surfing which is a key social cost) on these social networking sites. Additionally, these MSPs in general and social networking sites in particular are designed in such a manner that it encourages us to be ‘psychologically dependant’ on them and get addicted to them, spend more time and in the process leave our ‘digital footprints’.9 It leads one to question whether the expression ‘zero-price’ economy and ‘zero marginal cost society’10 actually need a re-think? Considering that information, the privacy and the time spent on these social networking sites and MSPs is the true currency, we potentially need to re-think and re-employ the economic models to understand the economics of big data. As the principles of neo-classical economics fail to consider some of the key challenges that are very central to the MSPs—such as customer Preliminary Opinion of the European Data Protection Supervisor, ‘Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy’ (March 2014) 8 accessed 06 January 2019. 8 Harris Tristan, ‘How Technology Hijacks People’s Minds – from a Magician and Google’s Design Ethicist’ (Online 19 May 2016) accessed 06 January 2019. 9 Daria J. Kuss and Mark D. Griffiths, ‘Online Social Networking and Addiction – A Review of the Psychological Literature’ (2011) International Journal of Environmental Research and Public Health 8 accessed 06 January 2019. 10 Mark Lemley, ‘IP in a World Without Scarcity’ (2015) New York University Law Review 90 accessed 06 January 2019. See in particular page 12, 15, 17–19, where Prof Lemley discusses the rise of internet and its impact on the economics of information and the rise of digital media and how it led to democratisation of content. 7

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lock-in and customer inertia that prevents multi-homing—a price-based theory, it emerges is unsuitable to model privacy and competition in big data mergers.11 If the principles of Industrial Organization and game theory have been key to understanding the challenges associated with ICT merger control dealt with in part 1 and part 2 of this book; a potentially more useful approach to understand the issues in big data mergers is to employ the principles of behavioural economics and understand how the so-called ‘zero-price’ effect impacts consumer behaviour.

17.2.2 Value of Big Data There are 33 million different versions of Netflix.12

From the nineteenth century, where companies failed to understand which part of their advertising budget was most effective, to the twenty-first century wherein modern technology, computing power and storage capacity offer limitless potential to keep close track on the tastes and preferences of literally every customer; marketing, advertising and product & service development have undergone a marvellous evolution. Netflix that keeps close account of every individual consumer’s behaviour and uses it in product development is a case in point. Netflix’s decisions to invest in programs are made neither intuitively nor in some black box. Using big data, Netflix and Amazon Prime can at times make very accurate predictions about the tastes and preferences of their viewers. A case in point is ‘Houses of Cards’. With the voluminous amount of data that Netflix had about its 33 million strong worldwide subscriber base, the OTT ran systematic analysis of the viewers’ programming habits and identified a ‘circle of interest’ where the Venn diagram intersection indicated that the programme would be an instant worldwide hit.13 If decision making in the past was intuitive and finding a hit formula was at best a ‘mixed alchemy’ of intuition, experiments and experience, Netflix with its logical and algorithmic approach has re-defined this search for successful programmes. As the case of Netflix’s success with the House of Cards underscores, big data alone is not valuable. Instead, it is the information that is derived from this data, which is of value. Drawing intelligent inferences about correlations and causalities is a skilful art, exercised by human decision-makers. Offering valuable insights, it is the analysis of data facilitated by rich data mining tools which helps make

Pasquale, ‘Privacy, Antitrust, and Power’ (2013) George Mason Law Review 20, p. 1016 accessed 06 January 2019. 12 John Evers, Director of Global Communications, Netflix, in Zach Bulygo, ‘How Netflix Uses Analytics to Select Movies, Create Content, and Make Multimillion Dollar Decisions’ accessed 06 January 2019. 13 David Carr, ‘Giving Viewers What They Want’ The New York Times (Online, 24 February 2013) accessed 06 January 2019. 11

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constructive predictions about human behaviour. Analysed from a resource-based view of the firm, it is not only big data that makes for a ‘sustainable competitive advantage’.14 Data algorithms are mere amalgamation tools that offer raw information.15 To be able to build a ‘sustainable competitive advantage’, firms need three elements—big data, algorithms that can offer valuable insights from the data available and the ability to make valuable interpretations from these insights and understand the needs of the customers.16

17.2.3 Zero Price Effect & User Dynamism as Non-Price Parameter of Competition and Innovation in the MSPs Data along with suitable technological tools (that is algorithms) can be a source of key competitive advantage as data can help make valuable interpretations about customers’ tastes and preferences and his/her purchase behaviour. It is notable to add that the peculiarities of the multi-sided markets, such as network effects, externalities and economies of scale make MSPs a winner-takesall or a handful of winners-take-all markets.17 Although these special effects are present throughout the ICT sector, the MSPs are special in the sense that these special features tend to have an ‘echo effect’. In the ICT sector, the normal neo-classical principles of economics continue to be applicable, as there exists a dynamic interaction of demand and supply. The movement of demand and supply curves are principally driven by the cost of manufacturing, the disruptive or innovative features of the product and the final price of the goods. The MSPs have forced a ‘re-thinking of [traditional] economic principles’18 as the platform economy may literally be classified as a ‘zero-marginal cost society’.19 Following this ‘zero-price effect’, the traditional antitrust law cannot effectively assess the impact of ‘free goods’. In fact, they do not even form a relevant market as understood in traditional antitrust law. This fallacious reasoning is evident from earlier competition law cases

Anja Lambrecht and Catharine Tucker, ‘Can Big Data Protect a Firm from Competition’ (2017) Competition Policy International 3 < https://www.competitionpolicyinternational.com/can-bigdata-protect-a-firm-from-competition/> accessed 06 January 2019. 15 Viktor Mayer-Schönberger and Kenneth Cukier, Big Data: A Revolution that will Transform how we Live, Work and Think (John Murray: Hachette UK 2013) 74 ff. 16 Anja Lambrecht and Catharine Tucker, ‘Can Big Data Protect a Firm from Competition’ (2017) Competition Policy International 15 < https://www.competitionpolicyinternational.com/can-bigdata-protect-a-firm-from-competition/> accessed 06 January 2019. 17 Evans DS, ‘Competition and Regulatory Policy for Multi-Sided Platforms with Applications to the Web Economy’ (2008) Concurrences 57(2) accessed 06 January 2019. 18 Mark Lemley, ‘IP in a World Without Scarcity’ (2015) New York University Law Review 105 accessed 06 January 2019. 19 Ibid., p. 102. 14

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dealing with MSPs. In KinderStart v. Google, the Northern District Court of California refused to apply antitrust laws to internet search engines as earlier case law or authority did not offer support to the application of competition law in markets that offered free services.20 From Kinderstart in the US to the more recent Microsoft/LinkedIn merger that received conditional clearance from the European Commission, our understanding of the competition and non-competition law concerns generated by big data has come a long way. The so-called ‘zero price effect’ or ‘free effect’ has a ‘nudge-like quality’ which pushes consumers to make choices that they would otherwise refrain from, as free is ‘not’ a simple point on the ‘continuum of low cost alternatives’.21 It may infact, be seen as a ‘kink’,22 a break on the supply curve that disruptively alters consumer behaviour. To illustrate with a simple example, let us assume that each time a user googles to search information, s/he has to pay five cents. Although the amount is insignificant by all measures and only marginally positively impacts the revenues of the search engine, it disproportionately influences users’ search frequency. Following a cost component, s/he will be very prudent in using the search engine and possibly may use it much less frequently. The moment, the monetary cost per search is reduced to zero, as is currently the case, the user doesn’t have to think twice before clicking on the search engine. This zero price effect kinks the consumer to recurrently use the engine. Each time the user googles for information, the search engine only gets more knowledgeable. This ‘nudge-like quality’ of the zero price effect can be incorporated as a trade-off factor in the non-price dimension of competition. As consumers are ‘bounded’ rational, following zero prices, they callously share personal information and trade-off their privacy. Multisided platforms impact our lives, our tastes and preferences, as well as our decisions in some very profound ways, touching upon the very foundations of our modern democratic society. In a series of experiments across different countries, Epstein and Robertson found that search engines have a substantial ‘manipulation effect’. In case of indecisive voters, the search engines can impact the voting patterns of over 20% of the floating population. To add insult to the injury, a large majority of the sample population was not even aware of the impact that these search engines have had on their voting preferences.23 In that respect, ‘free goods’ have a very 20

KinderStart.com LLC v. Google, No. C06-2057 JF (RS), 2007 WL 831806 (N.D. California March 16, 2007). 21 Daniel Rubinfeld and Michael Gal, ‘The Hidden Cost of Free Goods: Implications for Antitrust Enforcement’ (2016) Antitrust Law Journal 80 at p. 530 < https://www.law.berkeley.edu/wpcontent/uploads/2015/04/80AntitrustLJ521_stamped.pdf> accessed 06 January 2019. 22 A kinked demand curve refers to a point in the demand curve, where increase in prices by an oligopolist is not followed by the competitors. A decrease in price is immediately followed by a corresponding decrease in prices by other market players. For a game theoretical explanation of kinked demand curve, see Eric Maskin and Jean Tirole, ‘A Theory of Dynamic Oligopoly, II: Price Competition, Kinked Demand Curves, and Edgeworth Cycles’ (May 1988) Econometrica 56 (3) accessed 06 January 2019. 23 Robert Epstein and Ronald E. Robertson, ‘The Search Engine Manipulation Effect and Its Possible Impact on the Outcomes of Elections’ in Jacob N. Shapiro (eds), Proceedings of the

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adverse impact on democracy, where ‘bounded rationality’ prevents consumers from assessing the impact of the ‘free’ offer on their long-term welfare or harm.24 There are also several positive and innovative aspects of the MSPs. By investing in and developing a platform, the MSPs make an innovative contribution and resolve the typical ‘chicken and hen dilemma’. They offer a platform where participants from different sides of the market interact and generate value. But the MSPs also benefit from the ‘user dynamism’ as the user is not just a static supply side that consumes the final output; a user is just as much a creator, a generator of content and value, who offers valuable ‘technological and qualitative improvement’.25 In short, looking at single-sided sources of innovation is misleading. The interactions in the digital economy are bilateral—the users are as much a source of innovation, as the platform providers who resolve the ‘chicken and hen dilemma’. This insight should always remain central to the discussion on innovation in big data mergers. Additionally, user dynamism that adds value to the MSPs in addition to the valuable information users share about themselves, should also lead to a re-think about whether the MSPs are indeed available for free to the users. Both these aspects can collectively be seen as a non-price dimension of competition. User dynamism in addition should also be identified as a source of innovation.

17.2.4 Personal Data: Privacy Concerns and Law The ‘anytime anywhere connectivity’ and the advent of 5G, which is expected to digitally connect over 50 billion devices by 2020, means that we no longer passively profit from the world wide web.26 Instead we are living in a ‘web of the world’, where we leave ‘digital footprints’ by generating voluminous amount of data.27 At the most fundamental level of production, ‘raw data’ may be defined as ‘information on the semantic level’ or ‘simple bits and bytes on the syntactic level’.28 The results National Academy of Sciences of the United States of America 112(3) (NJ: Princeton University 2015) accessed 06 January 2019. 24 Daniel Rubinfeld and Michael Gal, ‘The Hidden Cost of Free Goods: Implications for Antitrust Enforcement’ (2016) Antitrust Law Journal 80 < https://www.law.berkeley.edu/wp-content/ uploads/2015/04/80AntitrustLJ521_stamped.pdf> accessed 06 January 2019. 25 Salil K Mehra, ‘Paradise is a Walled Garden? Trust, Antitrust and User Dynamism’ George Mason Law Review (18)889 (2010-2011) p. 16 accessed 06 January 2019. 26 World Economic Forum and Bain & Company, ‘Personal Data: New Asset Report’ (January 2011) p.13

accessed 06 January 2019. 27 Ibid., p. 5. 28 Herbert Zech, ‘Data as a Tradeable Commodity – Implications for Contract Law’ in Josef Drexl (ed.), Proceedings of the 18th EIPIN Congress: The New Data Economy between Data Ownership, Privacy and Safeguarding Competition (Edward Elgar Publishing Forthcoming) p.3 accessed 06 January 2019.

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and correlations that emerge from big data analysis can be defined at the ‘semantic level’ only.29 Each time a user visits a website or uses a device connected to the internet, different kinds of data are generated and collected. The device or the MSP, as the case may be, automatically generates ‘technical’ data such as the IP address and the device identifier; ‘personal’ data such as the user’s name, age, marital status, occupation and education and ‘behavioural’ data such as the websites visited, online purchases made and items added to shopping list for future purchase.30 The MSPs use ‘web cookies’ to collect many of these types of data. A web cookie is the equivalent of our passport, our unique identification number. The availability of personalised data facilitates personalised pricing—meaning that based on the ‘algorithmic analyses’ of individual customer profiles, the platform can quote different prices to different users and thereby engage in perfect price discrimination.31 Moreover, technological advancements, such as ‘sophisticated methods of reverse engineering’ make it unlikely that data can be anonymised totally.32 Technical factors offer big data an important property of ‘data persistence’, which means that once created, technical reasons make it “difficult to delete it completely”.33 In the backdrop of the ‘valuable’ and ‘persistent’ nature of data, the question is what kind of merger control framework, particularly what design of merger remedies can minimise the concentration of data and ensure that the ‘privacy’ of users is not breached? Although many public interest groups have raised concerns about privacy, the competition agencies have until recently restrained from incorporating consumer protection issues such as privacy in their merger analysis.34 To develop a framework that assures that big data mergers are subject to review and wherever required, appropriate remedies are put in place, the following section looks at the approach of the EU and the US competition authorities in their assessment of big data mergers.

29

Ibid. Andreas Lerner, ‘The Role of “Big Data” in Online Platform Competition’ (26 August 2014) p.8 accessed 06 January 2019. 31 Stephan Wisking and M Herron, ‘Algorithmic Pricing – the New Competition Law Frontier?’ (September 2017) p.5 accessed 06 January 2019. 32 Michèle Finck, ‘Digital Regulation: Designing a Supranational Legal Framework for the Platform Economy’ (2017) LSE Law, Society and Economy Working Papers 15/2017, p.23 accessed 06 January 2019. 33 Catherine Tucker, ‘Privacy, Algorithms and Artificial Intelligence’ (NBER 2017) p.6 accessed 06 January 2019. 34 Darren S Tucker and Alexander Okuliar, ‘Internet Ready Agency Enforcement of Online Mergers’ (2011) 26 Antitrust 80, 83. 30

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Competition, Consumer Protection and Privacy Laws

Big data mergers seem to transcend the traditional frontiers of antitrust law and transgress into other disciplines of law such as consumer protection and privacy laws. The challenge emerges as an analysis of only the price-based dimension of competition would mean that non-competition concerns go unaddressed. Big Data touches upon many disciplines of law—data protection, competition and consumer protection—all converging to first, ‘protect and promot [consumer] welfare’ and second, facilitate the ‘creation of a single European market’.35 Considering their complementarity of objectives, ‘an artificial dichotomy’ between the two seems unsustainable and incomprehensible.36 It is often argued that data concerns and privacy issues are better dealt with under consumer protection law and targeted legislation, instead of the merger control law.37 The FTC Commissioner Maureen Ohlhausen for instance argues that competition policy and consumer law are two different fields and to preserve the doctrinal values of the two, antitrust law should not be used for dealing with privacy concerns, which it anyways is ill-equipped to handle.38 The argument is reflected in the FTC’s decision in Google/DoubleClick merger discussed in the following section. The practitioners too have argued that competition law should not deal with privacy issues.39 It has been suggested that a reform of the data protection regime, rather than competition law may be a better way to achieve this objective.40 Another frequently recommended remedy is the introduction of sector-specific regulation to regulate the data-rich and online platforms—as is currently the case with airline-managed computerised reservation systems.41 There is another emerging school of thought that suggests that merger control focussed solely on evaluating price-based competition may fail to meet its fundamental objective of keeping the markets competitive. Swire, for instance, raises two

Preliminary Opinion of the European Data Protection Supervisor, ‘Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy’ (March 2014) 11–12 accessed 06 January 2019. 36 Pamela Jones Harbour and Tara Isa Koslov, ‘Section 2 in a Web 2.0 World: An Expanded Vision of Relevant Product Markets’ (2010) 76(3) Antitrust Law Journal 769, 773. 37 Geoffrey Manne and Ben Sperry, ‘Debunking the Myth of a Data Barrier to Entry for Online Services’ [26 March 2015] accessed 06 January 2019. 38 Maureen K Ohlhausen and Alexander P Okuliar, ‘Competition, Consumer Protection and the Right [Approach] to Privacy’ (2015) 80(1) Antitrust Law Journal 121. 39 Richard Craig, ‘Big Data and competition – merger control is not the remedy for data protection issues’ [July 2014] accessed 06 January 2019. 40 Ibid. 41 Ibid. 35

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arguments on why privacy issues are relevant to antitrust analysis—first, privacy harms can actually lead to reduction of consumer welfare that the antitrust laws seek to promote, and second, as privacy harm can lead to diminished quality of a good or service, it is a harm resulting from the accumulation of market power—this means that mergers concerning big data should be subject to antitrust scrutiny.42 Viewed from this perspective, an approach that looks at consumer harm resulting only from ‘higher prices, while excluding the harm from privacy invasions’ is plainly illogical as both sorts of harm equally contribute to a reduction of consumer surplus and consumer welfare in the relevant market.43 Mergers in multi-sided platforms can support and sometimes accelerate the ‘economies of aggregation’44 by aggregating information in the hands of the merged entity. If different streams of law—such as competition, data protection and privacy—are viewed as separate disciplines, with each one insulted from the other, it may allow the merged entity to engage in an opportunistic behaviour by asserting compliance with data protection law, while simultaneously generating significant anti-competitive effects.45 There is therefore, a desirable need for co-operation between competition and data protection authorities to ensure the effective enforcement of the rules.46 This issue is further discussed in Sect. 17.5.2 dealing with the design of remedies. In the EU, the competition and consumer law are seen to have complementary roles as the former seeks to ensure that the consumer has a ‘range of choices’, whereas the later ensures that consumers have ‘truthful and accurate information’ during the decision making process.47 Competition authorities, data protection authorities and consumer protection regulators in this regard share ‘common concern 42 Peter Swire, ‘Protecting Consumers: Privacy Matters in Antitrust Analysis’ [19 October 2007] Center for American Progress accessed 06 January 2019. 43 Ibid. 44 Preliminary Opinion of the European Data Protection Supervisor, ‘Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy’ (March 2014) 30 accessed 06 January 2019; The term was first used by Bakos and Brynjolfsson in Yannis Bakos and Erik Brynjolfsson, ‘Bundling and Competition on the Internet’ (Winter 2000) 19(1) Marketing Science 63. 45 Preliminary Opinion of the European Data Protection Supervisor, ‘Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy’ (March 2014)31 accessed 06 January 2019. 46 Ibid. 47 Pamela Jones Harbour, ‘European Parliament- Privacy Platform “Competition & Privacy in Markets of Data”’ (European Parliament, Brussels, 26 November 2012) accessed 06 January 2019; Dissenting Statement of Commissioner Pamela Jones Harbour, Google/DoubleClick, FTC File No. 071-0170

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Welfare vs harm Choice Trust and the internal market Transparency Accurate, intelligible information

Consumer protection

Competition

Exploitation

Fig. 17.1 Competition, consumer and data protection law in big data mergers (Source: preliminary opinion of the European data protection supervisor, March 2014)

and remedies’.48 The approach also finds support in the European laws. In the EU, the Charter of Fundamental Rights contains consumer protection in Chapter IV dealing with ‘Solidarity’ and recognises consumer protection as a fundamental policy objective.49 The right to privacy is recognised by both the European Convention on Human Rights under Article 8 and the Charter of Fundamental Rights under Article 7 and 8. Article 16 TFEU guarantees the right to individuals in relation to personal data. Following conflict between the two different sets of rights, the jurisprudence of the ECJ indicates unfailing commitment to privacy.50 In short, the key point is that competition law, consumer law, human rights and privacy law—all of them have their foundations in the fundamental treaties that led to the formation of the European Union. At its nucleus, therefore, these set of laws have a common source. As their ultimate objective as well, all of them seek to maximise the welfare of an individual—whether as a human or as an individual, whether as customer or as a consumer. This is well-highlighted in a 2014 study by the EU Data Protection Officer, wherein he identifies (Fig. 17.1) that the Venn diagram intersection of the reduction in choices, consumer welfare and internal market raise a harm that equally touches upon competition, consumer protection and data protection law. (Dec. 20, 2007), accessed 06 January 2019. 48 Preliminary Opinion of the European Data Protection Supervisor, ‘Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy’ (March 2014)31 accessed 06 January 2019. 49 Iris Benöhr, EU Consumer Law and Human Rights (Oxford University Press 2013). 50 Case C-70/10 Scarlet Extended SA v Société belge des auteurs, compositeurs et éditeurs SCRLC (SABAM) [2011] ECR I-11959.

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Jurisdiction and Filing Threshold

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Jurisdiction and Filing Threshold

The presence of network effects51 means that on several occasions, profitability may follow long after the product or service, as the case may be, has captured a substantial proportion of the relevant market.52 In such a scenario, the turnoverbased test as used in the EU, may fail to capture potentially anti-competitive mergers. The current threshold-based notification regime presents a legal gap, as it may fail to capture mergers where although the turnover may not be very high; the merging companies nonetheless, hold ‘commercially valuable data’ or collectively present ‘considerable market potential’.53 In 2013, although WhatsApp’s revenue at the time was a mere $ 10.2 million, Facebook paid over $22 billion for the acquisition.54 Facebook valued WhatsApp’s substantial worldwide subscriber base, which at the time approximated 600 million users.55 Considering the special nature of multi-sided markets and the fact that profitability follows much later once the markets have tipped to a certain platform, either ‘share of supply’ or ‘transaction volume’-based notification regime may be more suitable to determine jurisdiction in the digital economy. In its recent study on competition law challenges in the digital markets, the Monopolkommission recommended a notification regime based on the value of the transaction to capture such mergers.56 Based on the recommendations of the Monopolkommission, Germany subsequently amended its rules of notification. The ninth reform of the Act against Restraints of Competition, that entered force on 9th June 2017, has introduced amongst others, merger control threshold based on the value of the transaction. The German competition authority now has the power to

For a discussion on ‘network effects’, see Chap. 3 Special features of the ICT Sector. Monopolkommission, ‘Wettbewerbspolitik: Herausforderung digitale Märkte’ Sondergutachten 68 der Monopolkommission gemäβ §§ Abs. 1 Satz 4 GWB (Bonn/Berlin 1 June 2015) accessed 06 January 2019; Autorité de la concurrence and Bundeskartellamt, ‘Droit de la concurrence et données’ (10 May 2016) accessed 06 January 2019; Office of Fair Trading, Completed Acquisition by Motorola Mobility (Google, Inc.) of Waze Mobile Ltd., ME/6167/13, para 28 (17 December 2013). 53 Monopolkommission, ‘Wettbewerbspolitik: Herausforderung digitale Märkte’ Sondergutachten 68 der Monopolkommission gemäβ §§ Abs. 1 Satz 4 GWB (Bonn/Berlin 1 June 2015) accessed 06 January 2019. 54 Catriona Hatton, David Gabathuler and Alexandre Lichy, ‘Digital Markets and Merger Control in the EU: Evolution, not Revolution?’(2018) Competition Policy International p.3 accessed 06 January 2019. 55 Ibid. 56 Monopolkommission, ‘Wettbewerbspolitik: Herausforderung digitale Märkte’ Sondergutachten 68 der Monopolkommission gemäβ §§ Abs. 1 Satz 4 GWB (Bonn/Berlin 1 June 2015) accessed 06 January 2019. 51 52

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review mergers in case the value of the transaction exceeds € 400 million and the parties are active in the German market. Austria too amended its rules and the new rules, like the German law, identify value of the transaction as one of the relevant thresholds.57 The UK Enterprises Act, 2002 contains a ‘share of supply test’ which the then OFT (now the CMA) employed to review two significant mergers in the technology markets. Motorola Mobility/Waze and Facebook/Instagram—two transactions that clearly failed to meet the turnover test as Waze and Instagram respectively earned negligible and no revenues, were assessed under the share of supply test. To be eligible for a review, the ‘turn-over based test’ requires that the enterprises must have a minimum pre-defined worldwide and jurisdiction-wide turnover. As per the share of supply test, when one of the enterprises that offers a certain percentage of goods or services (in the UK, the threshold being 25%58), the competition authority may review the transaction for possible anti-competitive effects. In Facebook/Instagram, Facebook, a social networking platform, proposed to acquire Instagram, a mobile app for sharing photos. At the time of the merger, Instagram app was available freely. As Instagram at the time did not generate any revenues, the turnover test of Section 23(1) (b) of the Enterprise Act 2002 was not met. The OFT (now the CMA) was of the opinion that the transaction led to a relevant merger situation as the parties’ activities overlapped in the supply of virtual social networking services. Facebook’s share at the time was over 25% and as Instagram would add to these shares, accordingly, the share of supply test under Section 23 of the Act was met.59 In Motorola Mobility/Waze, both the parties offered ‘turn-by-turn navigation applications for mobile devices’ and the app Waze was available freely for download in the UK.60 The transaction failed to meet the then annual turnover-based threshold of ₤70 million; however, as the parties captured over 25% of the market share, the share of supply test was satisfied and the OFT (now the CMA) analysed the proposed transaction for possible unilateral effects.61 Following a detailed competitive assessment, the OFT decided not to refer the merger to the Competition Commission and cleared the transaction unconditionally as the merger was not expected to lead to any possible anti-competitive effects in the relevant market.62

Catriona Hatton, David Gabathuler and Alexandre Lichy, ‘Digital Markets and Merger Control in the EU: Evolution, not Revolution?’(2018) Competition Policy International p.6 accessed 06 January 2019. 58 Enterprise Act 2002, sec 23. 59 Office of Fair Trading, Anticipated acquisition by Facebook Inc of Instagram Inc, ME/5525/12 (22 August 2012), para 5. 60 Office of Fair Trading, Completed Acquisition by Motorola Mobility (Google, Inc.) of Waze Mobile Ltd., ME/6167/13 (17 December 2013), para 9. 61 Ibid., at paras 4–11. 62 Ibid., at paras 83–93. 57

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Threshold-based turnovers also present a peculiar challenge for the media markets. In media markets, the challenge is not so much on account of the difficulty in defining a relevant market or delineating it, as may be the ‘financial unattractiveness’ of certain market segments, which may result in lower economic valuations of these channels. Consider for instance a local television channel with substantial regional audience in a linguistically and culturally diverse country as India.63 Regionally, this channel may be very popular amongst the local audience because of its language and content. However, as a region located in a geographically-dispersed rural area may comprise of a relatively small section of the total population and may be financially unattractive to draw the interest of advertisers, the market may completely escape the turn-over based thresholds.64 To bring such markets—that are from the perspective of cultural diversity and plurality of opinion play a key role—within the framework of merger control,65 a creative approach such as lower thresholds for intervention by employing the concept of ‘superior opinion power’ may be exercised.66 Alternatively, even the ‘share of supply’ test may be useful to capture the potential effects of ‘reduction in media diversity’ following the consummation of such a merger. Although such a transaction may be a commercially optimal strategy, assessment of non-competition issues such as the ‘plurality of opinion’ by the authority is an important consideration. Further, it is possible that under certain circumstances, such a transaction may fail to meet even the ‘value of transaction test’, but it may potentially be caught by the ‘share of supply’ or the ‘superior opinion power’ test. At the EU level too, there has been substantial debate and public consultation concerning the reform of the EU merger control law. One of the importance issues dealt with in the ongoing debate is whether the current ‘turnover-based regime’ effectively captures value-enhancing and innovation-driven acquisitions. Although numerous responses were received to the Commission’s consultation on the ‘turnover-based notification regime’ and it was widely argued that the regime be amended from the present ‘turnover-based’ one to also include a ‘size of the transaction’ test, as recently done by Germany and Austria or a ‘share of supply’ test as available under the UK competition law, no amendment to the notification regime has been made to date.

63

India offers a very good example on the subject of media plurality and its importance, considering that over 16 officials and overall 300 languages are spoken across the country. Add to this over 6,000 regional dialects and geographically speaking, vast linguistic, cultural and religious diversity that has led many scholars to define the country as a sub-continent. 64 Smarika Kumar, ‘Big media has become bigger – Media Diversity and Reliance’s takeover of Network 18’ accessed 06 January 2019. 65 The approach is based on the presumption that only the relevant competition authority assesses the media mergers and there exists no or in case it does exist, there is insufficient, sector-specific regulation, to assess the impact of such transactions on ‘cultural diversity’, ‘media plurality’ and their relationship with larger constitutional value of ‘democracy’. 66 Josef Drexl, ‘Competition Law in Media Markets and its Contributions to Democracy – A Global Perspective’, (2015) 38(3) World Competition 367, 397–398.

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The following section looks at the assessment of big data mergers by competition authorities on the two sides of the Atlantic. Note that these are all mergers captured either by the current turnover test or otherwise voluntarily reported by the parties, such as was the case in the Facebook/WhatsApp merger.

17.5

Case Laws

This section discusses big data mergers and their assessment by the EU and the US competition authorities. Each one of the cases discussed has some special noteworthy feature. The FTC’s then Commissioner Harbour’s dissenting statement in Google/Double Click (Sect. 17.5.1) highlights how loss of privacy can be assessed as a non-price dimension of competition. In Facebook/WhatsApp (Sect. 17.5.2), it is useful to mention the letter sent by the Director of the FTC Bureau of Consumer Protection to the parties on the same day as the FTC offered its unconditional clearance. Telefónica UK/Vodafone UK/ Everything Everywhere (Sect. 17.5.3) and Sanofi/ Google/DMI JV (Sect. 17.6) merit special mention as they highlight the ever converging nature of the ICT with the banking and the pharmaceuticals sector respectively. The two cases also underscore the importance of big data for non-ICT companies. In TomTom/Tele Atlas67 and Microsoft/ Yahoo! (Sect. 17.5.5) the parties argument on efficiency defence for making ‘better maps’ and ‘better search engines’ respectively merits mention.

17.5.1 Google/Double Click The Google/ Double Click merger raised horizontal, vertical and conglomerate effects. It was a merger between Google, a ‘very popular search engine’, with Double Click, an undertaking that offered online advertising services.

17.5.1.1

Decision of the Competition Authorities

In the US, the FTC, after an unduly 8 month long investigation, unconditionally cleared the merger as it reached the conclusion that the proposed transaction was unlikely to lead to substantial lessening of competition. On the issue of privacy, the

67

For a discussion on TomTom/Tele Atlas, kindly refer to Chap. 5 Theories of Harm: Vertical Effects in ICT Mergers.

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FTC observed that privacy concerns were ‘not unique to Google and Double Click’, rather they were prevalent in the entire online advertising marketspace.68 The antitrust laws, it was stated, had a dedicated commitment to the objective of identifying and remedying transactions that led to substantial lessening of competition and it was not the prerogative of antitrust laws to remedy any non-antitrust related concerns resulting from the merger.69 However, the FTC observed the importance of consumer privacy and referred to a set of proposed behavioural principals announced by Google the same day, as the Commission’s decision in Google/Double Click.70 Commissioner Harbour, then Commissioner at the FTC, in her dissenting opinion, argued that ‘privacy’ be analysed as a ‘non-price dimension of competition’. In mergers such as the one between Google and Double Click, it would be an error to discount the relationship between privacy and competition laws and the issue of markets for consumer data merits detailed analysis.71 Viewed from this perspective, the merger between Google and DoubleClick, could lead to fewer search engines as network effects would tip the market in favour of the newly created enterprise.72 A possible recommended remedy to alleviate the anti-competitive concerns was the creation of firewalls.73 In Google/Double Click,74 the European Commission took note that the parties operated in an emerging industry experiencing innovation at a rapid pace, wherein reliable market data was difficult to acquire.75 The Commission also identified the two-sided nature of the markets and performed a competitive analysis by considering the literature on two sided platforms. The Commission did not focus on privacy issues and identified only paid advertising—that is direct sales of online advertising space, intermediary services and display ad serving technology—as the relevant

68 Press Release, Federal Trade Commission, Federal Trade Commission Closes Google/ DoubleClick Investigation (Dec. 20, 2007), available at accessed 06 January 2019. 69 Ibid. 70 Ibid. 71 Pamela Jones Harbour, ‘European Parliament- Privacy Platform “Competition & Privacy in Markets of Data”’ (European Parliament, Brussels, 26 November 2012) accessed 06 January 2019; Dissenting Statement of Commissioner Pamela Jones Harbour, Google/DoubleClick, FTC File No. 071-0170 (Dec. 20, 2007), accessed 06 January 2019. 72 Dissenting Statement of Commissioner Pamela Jones Harbour, Google/DoubleClick, FTC File No. 071-0170 (Dec. 20, 2007), accessed 06 January 2019. 73 Ibid. 74 Google/DoubleClick (Case COMP/M.4731) [2008] OJ C184/10. 75 Raphaël De Coninck and Penelope Papandropoulos, ‘The non-horizontal merger guidelines in practice’ (2008) 3 Concurrences 1, 3–4.

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markets for competitive assessment. It, however, took note of the Data Protection Directive (Directive 95/46/EC) under which the merged entity was obliged to respect the privacy of the consumers.

17.5.1.2

Comment

The merger combined information generated through Google’s search and DoubleClick’s browsing information. The Commission, by pursuing a ‘purely economic approach’ failed to evaluate how a combination of the two data sets could creatively be bundled or tied, or even exploited as the price paid in the form of ‘surrendered personal information’ was conceivably disproportionate to the value of the service offered.76 Google employs a cost-per-click (CPC) model. This means that the advertiser pays Google only when the user ‘actively’ clicks on the advertisement (and not merely ‘passively’ sees it). Post-merger, Google could combine the ‘deep’ information that it had about an individual’s actions such as the search terms with information gathered by DoubleClick via the use of cookies about an individual’s surfing behaviour.77 This meant that the combination offered a two-dimensional search product—which was both ‘deep’, as well as ‘broad’ enough to make valuable conclusions about an individual’s search and surfing habits.78 As noted by Swire, although Google at the time of notification explained how it would limit the use of this data, it did not offer any undertakings to ensure compliance with these limits following the consummation of the transaction.79 The following sub-section discusses the Facebook/Whatsapp merger, where the FTC seems to have noted this gap.

Preliminary Opinion of the European Data Protection Supervisor, ‘Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy’ (March 2014) 29–30 accessed 06 January 2019. 77 Ibid. 78 Ibid. 79 Peter Swire, ‘Protecting Consumers: Privacy Matters in Antitrust Analysis’ [19 October 2007] Center for American Progress. accessed 06 January 2019. 76

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17.5.2 Facebook/Whatsapp Facebook/WhatsApp was a merger between Facebook, the world’s leading social networking website with WhatsApp, a communication app. The merger offered Facebook access to additional data about the users of Whatsapp.

17.5.2.1

Decision of the Competition Authorities

On privacy concerns, the European Commission was concerned with the ability of the merger to strengthen the position of Facebook in the market for online advertising.80 Privacy concerns resulting from ‘increased concentration of data within the control of Facebook’ it was argued was subject to EU data protection rules.81 In its competitive assessment, the Commission analysed two possible theories of harm: first, if post-merger, WhatsApp could offer online advertising space and second, the use of WhatsApp’s user data by Facebook to improve its advertising activities outside WhatsApp.82 The first theory of harm was dismissed as it was contrary to WhatsApp’s then privacy policy, and any possible change in policies, as recent developments in the German market for communication apps indicated, would have been sufficient to prompt the users to switch to competing apps. In Germany, it was reported that following the announcement of the deal, thousands of WhatsApp users closed their account and switched to competing communications apps.83 Further, even if the merged entity did choose to advertise on WhatsApp, the presence of actual and potential competitors such as Google, Yahoo!, MSN and local providers that offered advertising services in competition with Facebook, it was believed would present customers with a range of alternatives for targeted advertising.84 As per the second theory of harm, the Commission assessed the possibility that the merged entity could use data collected from WhatsApp to improve the accuracy of ads on Facebook to the users of Facebook and WhatsApp.85 In its assessment, the Commission observed that the merger could raise competition concerns, only if the concentration of data allowed Facebook to better its position in advertising.86 Considering that Facebook collected insignificant amount of data when compared with its competitors such as Apple, Amazon, eBay, Twitter, Microsoft etc., the 80

Facebook/WhatsApp (Case No COMP/M.7217) [2014] OJ/C 417/4, para 164. Ibid., at para 164. 82 Ibid., at para 167. 83 Thomas Jüngling, ‘WhatsApp-Nutzer fürchten Analyse ihrer Date’ Welt (Online 23 Februar 2014) accessed 06 January 2019. 84 Facebook/WhatsApp (Case No COMP/M.7217) [2014] OJ/C 417/4, at paras 171–179. 85 Ibid., at para 180. 86 Ibid., at para 187. 81

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Commission was of the opinion that irrespective of whether WhatsApp user data was used to improve Facebook’s targeted advertising or not; the presence of large amount of data that was not within the sole control of Facebook meant that the transaction did not raise any significant competition concerns.87 In the US too, the FTC cleared the merger without taking any action. Following unconditional clearance, the US FTC generally does not issue any statement offering the details and reasons for the outcome.88 However, the Facebook/WhatsApp deal was special in that respect as the then Director of the FTC Bureau of Consumer Protection sent a letter to the parties on the same day as the FTC offered its unconditional clearance. The letter articulated the parties’ commitment to respect the promises that they had previously made to their users.89 In the letter, the Director reminded the parties of WhatsApp’s policy to not to collect any user information, except their mobile numbers. These statements in the opinion of the Director meant a clear promise to the consumers about the nature of collection and limitations on use of data by WhatsApp, following the consummation of the merger.90 Any breach of WhatsApp privacy policy and the promises made, it was stated, would constitute a breach of Section 5 of the FTC Act and possibly, subsequent FTC’s order against Facebook.91 The FTC Privacy Director’s letter was a reminder of the promises already made, any breach of which was likely to invite action under Section 5 of the FTC Act. This clearly is an approach that is very different from the process of issuing consent decree in cases where a transaction is likely to lead to substantial lessening of competition.92

17.5.2.2

Comment

In Facebook/Whatsapp, the European Commission identified the consumers could easily multi-home in case they were dissatisfied with the offered services.93 This is in stark contrast to the Commission’s position in the Microsoft tying case wherein the

87

Ibid., at paras 180–90. Lisa Kimmel and Janis Kestenbaum, ‘What’s Up with WhatsApp? A Transatlantic View on Privacy and Merger Enforcement in Digital Markets’ (Fall 2014) 29(1) Antitrust 48, 51–52. 89 Ibid. 90 Letter from Jessica Rich, Director, Bureau of Consumer Protection, Federal Trade Commission to Erin Egan, Chief Privacy Officer, Facebook Inc and Anne Hoge, General Counsel, WhtsApp Inc (Apr. 20, 2014) accessed 06 January 2019. 91 Ibid. 92 Lisa Kimmel and Janis Kestenbaum, ‘What’s Up with WhatsApp? A Transatlantic View on Privacy and Merger Enforcement in Digital Markets’ (Fall 2014) 29(1) Antitrust 48, 52. 93 Michele Giannino, ‘Microsoft/Linkedin: What the European Commission said on the competition review of digital market mergers’ (SSRN 2017) p.9 accessed 06 January 2019. 88

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Commission identified ‘end-user inertia’ as a bias and argued that this bounded rationality could be exploited by Microsoft to leverage its market power in the neighbouring markets.94 In Microsoft/Linkedin (see Sect. 17.6 below), the Commission argued that the status quo bias resulting from user inertia may prevent the users from switching away from the pre-installed software.95 This difference in approach—in the Facebook/Whatsapp decision on the one hand and the Microsoft/ LinkedIn decision on the other—can potentially be explained by the fact that Microsoft with its control on the Operating System had the ability to pre-install apps, whereas in case of the Facebook/Whatsapp merger, the apps did not come pre-installed, instead the user was required to download them from the internet.96

17.5.2.3

Ex-post Developments: Commission Fines Facebook

The Commission recently imposed a fine of one hundred and ten million euros on Facebook. Following its review, the Commission fined Facebook for ‘negligently’ providing incorrect or misleading information first, in the notification form made pursuant to Article 4 and second, in response to a request made by the Commission under Article 11(2) of the Regulation 139/2004.97 In Facebook/WhatsApp,98 the Commission analysed the ability of the merger to strengthen pre-existing network effects. The Commission’s assessment indicated that the merger could further strengthen network effects if the transaction offered the possibility to integrate users of WhatsApp with those of Facebook into one common network.99 To facilitate this integration, the parties first needed to technically integrate the two services. Facebook alleged that as Facebook and Whatsapp used ‘different identifiers’ it was not possible to link the two accounts. The cloud-based architecture of Facebook was different from WhatsApp’s downloadable app. This meant that the integration of their networks was infeasible on account of technicial issues.100 Facebook used ‘user’s Facebook id’, whereas Whatsapp used users’ mobile phone number in order to identify and verify the user accounts. In the final Form CO, Facebook asserted that the use of different identifiers posed a substantial

94 Nicolas Petit and Miguel Rato, ‘Abuse of Dominance of Technology-enabled Markets: Established Standard Reconsidered?’ (April 2013) European Competition Journal 9(1) accessed 06 January 2019. 95 Michele Giannino, ‘Microsoft/Linkedin: What the European Commission said on the competition review of digital market mergers’ (SSRN 2017) p.9 accessed 06 January 2019. 96 Ibid., pp. 9–10. 97 Commission Decision of 17.05.2017 imposing fines under Article 14(1) of Council Regulation (EC) No. 139/2004 for the supply of an undertaking of incorrect or misleading information (Case No. 8228 – Facebook/Whatsapp). 98 Facebook/WhatsApp (Case No COMP/M.7217) [2014] OJ/C 417/4. 99 Ibid., at para 136. 100 Ibid., at para 116–142.

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technical and engineering limitation to facilitate ‘cross-platform communication between two distinctly architected services’.101 Subsequent Commission investigations indicated that this information offered in the Form CO was incorrect and misleading. In fact, it was found that even at the time of the merger review, Facebook was working on a ‘Phone ID Matching Solution’.102 A ‘Phone Matching ID Solution’ uses phone ID as the common identifier across user’s different accounts. Phone ID is a 128-bit unique string associated exclusively with every phone and thus, can be used as a basis to match apps installed on a given smartphone.103 The Commission identified the infringement was of a ‘serious nature’ as misleading information offered by Facebook compromised the ‘accuracy of the information’.104 However, the misleading information did not impact the Final Commission decision in the merger proceedings.105 Moreover, Facebook’s cooperation in the current proceedings was considered as relevant mitigating factors to determine the final amount of fine imposed.106 To have a ‘sufficiently punishing and deterrent effect’ and taking due note of all the facts on record, the Commission fined Facebook € 55 million for the infringement of Article 14(1) (a) of the Merger Regulation and Article 4(1) of the Implementing Regulation and € 55 million for the infringement of Article 14 (1) (b) of the Regulation by negligently offering incorrect or misleading information to the Commission.107

17.5.3 Telefónica UK/Vodafone UK/Everything Everywhere Telefónica UK/Vodafone UK/ Everything Everywhere was a joint venture between three of the four biggest mobile network operators in the UK.108 The joint venture sought to develop a platform upon which all the participating Service Users could develop and offer differentiated mobile wallets services to end users, as long as the design was compatible and interoperable with the joint venture’s platform.109 The joint venture intended to ‘collect and analyse the data generated’ from the Commission Decision of 17.05.2017 imposing fines under Article 14(1) of Council Regulation (EC) No. 139/2004 for the supply of an undertaking of incorrect or misleading information (Case No. 8228 – Facebook/Whatsapp), at para 61. 102 Ibid., at para 70. 103 Ibid., at para 49. 104 Ibid., at para 97. 105 Ibid., at para 100. 106 Ibid., at para 102. 107 Ibid., at paras 107–108. 108 Telefónica UK/ Vodafone UK/ Everything Everywhere (Case COMP/ M 6314) [2013] OJ C66/04, para 39. 109 Telefónica UK/ Vodafone UK/ Everything Everywhere (Case COMP/ M 6314) [2013] OJ C66/04, para 91. 101

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transactions and advertising services to develop ‘valuable insights into consumer behaviour’. It intended to use this information to offer better services to its customers and in the process improve their ‘retention rates’.110 In its competitive assessment, the Commission found that the joint venture did not offer the parties some unique advantage in terms of access to personal data, considering that other market players such as ‘Google, Apple, Facebook, card issuers, reference agencies or retailers’ already had access to this kind of personal information.111 As in the case of Facebook/Whatsapp, in Telefónica UK/Vodafone UK/Everything Everywhere too, any competitive advantages resulting from the accumulation of data in the hands of the joint venture were dismissed as postmerger there remained other significant market players in each one of the possible relevant markets.112

17.5.4 Microsoft/Yahoo! Mergers involving big data may not necessarily be anti-competitive. They may also endow efficiency gains and with more personal information available, post-merger the platform can offer a more personalised surfing experience (as in the case of search engines) or a better portfolio of products and value-added services (as is the case in telecom mergers).113 To assess such efficiency claims, though there needs to be a reasonable quantification of the resulting efficiencies. For instance, if a merger leads to efficiencies of x and privacy harms equalling y, then effective efficiencies should be valued as a difference of x and y.114 It also needs to be assured that any proposed efficiency gains be verifiable and merger specific. In short, efficiencies from merger cannot be attained by other means, such as organic growth or joint venture. In case of the MSPs, mergers may instantaneously offer parties scale and access to valuable information. This is crucial for economies where network effects can tip the market to a given platform. In Microsoft/Yahoo!, the parties entered into a 10 year exclusive licence wherein Microsoft was to license Yahoo’s core search technologies with a possibility to integrate the technology into its web search platforms.115 While unconditionally clearing the merger, the European Commission, as well as the US DOJ, took note

110

Ibid., at para 191–94. Ibid., at paras 542–544. 112 Ibid., at paras 576–579. 113 Peter Swire, ‘Protecting Consumers: Privacy Matters in Antitrust Analysis’ [19 October 2007] Center for American Progress accessed 06 January 2019. 114 Ibid. 115 Microsoft/Yahoo! Search Business (Case COMP/M.5727) [2010] OJ C20/32, paras 4–10. 111

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that to compete effectively in the search advertising space, it was essential for the parties to have a certain ‘critical mass’ and ‘control over data’. Both the US DOJ, as well as the European Commission, assessed the possible effects of the merger on advertisers, users, publishers and distributors.116 Microsoft and Yahoo!’s combined minimal market share as opposed to Google’s dominance in the market for search engines meant that the parties had in the past, effectively failed to compete with Google.117 The merger was expected to lead to ‘rapid improvements in the performance of Microsoft’s search and paid search advertising technology’ then could have been possible otherwise, had the parties continued to compete independently of one another.118 The positive correlation between ‘scale and competitive performance’ meant that an ‘access to a larger set of queries’ following the exclusive licence, would ‘accelerate the automated learning of Microsoft’s search and paid search algorithms and enhance Microsoft’s ability to provide more relevant search results and paid search listings’ especially concerning the more rare or tail queries.119 This pooling of data was expected to offer Microsoft the scale, the competitiveness and the critical mass required to compete effectively with Google.120

17.5.5 Sanofi/Google/DMI JV In Sanofi/Google/DMI JV, Sanofi, a global pharmaceuticals company and Google, a technology company specialising in Internet related search and products, entered into a joint venture to offer ‘services for management and treatment of diabetes including data collection, processing and data analysis’.121 The joint venture also sought to commercialise products such as continuous glucose monitoring devices, insulin pumps and insulin. Sanofi/Google/DMI JV was the first merger control case 116

Microsoft/Yahoo! Search Business (Case COMP/M.5727) [2010] OJ C20/32, para 177; Press Release, U.S. Dep’t of Justice, Statement of the Department of Justice Antitrust Division on Its Decision to Close Its Investigation of the Internet Search and Paid Search Advertising Agreement Between Microsoft Corporation and Yahoo! Inc. (Feb. 18, 2010), accessed 06 January 2019. 117 Microsoft/Yahoo! Search Business (Case COMP/M.5727) [2010] OJ C20/32, para 250–256. 118 Press Release, U.S. Dep’t of Justice, Statement of the Department of Justice Antitrust Division on Its Decision to Close Its Investigation of the Internet Search and Paid Search Advertising Agreement Between Microsoft Corporation and Yahoo! Inc. (Feb. 18, 2010), accessed 06 January 2019. 119 Ibid. 120 Margrethe Vestager, ‘Big Data and Competition’ (EDPS-BEUC Conference on Big Data, Brussels, 29 September 2016) accessed 06 January 2019. 121 Sanofi/Google/DMI JV (Case M.7813) [2016] OJ/C112/1, at paras 3–5.

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where the Commission had to define a relevant market for treatment and management of diabetes using an ‘integrated digital e-medicine platform’.122 The Commission’s analysis indicated that the market for ‘services for the management and treatment of diabetes using an integrated digital e-medicine platform’ was fragmented and highly competitive as many active players such as Livongo, WellDoc’s Blue Star, Voluntis’ Diabeo already offered innovative solutions for the management of the disease.123 During the Commission investigation, Key Opinion Leaders (KOL) and competitors expressed concern that the joint venture could make the patients more dependent on Sanofi’s insulin or ‘lock-in patients to the Services by limiting or preventing the portability of their data towards alternative platforms’.124 In the opinion of the Commission, as the GDPR offered the patients the right to ask their personal data to be ported in a structured and commonly used machine-readable format, the joint venture lacked the ability to lock-in or prevent the portability of data.125 The presence of competing providers of the service too diminished the incentives of the joint venture to foreclose rivals.126 The Commission also noted that any ‘privacy-related concerns flowing from the user data within the control of the Parties’ were subject to the EU data protection rules (and not the EU competition rules).127 On the market for data analytics, the parties did not intend to offer data analytic services. Instead, the joint venture sought to offer the results of data analysis of patients and healthcare services as part of the services. Considering the presence of several providers of healthcare data analytical tools, including SAP, Siemens, and GE, the joint venture was expected ‘not’ to raise any anti-competitive concerns.128 The Commission also assessed potential conglomerate effects resulting from the transaction. It evaluated whether the joint venture had the potential to bundle the products, the devices and the services and/or limit the interoperability with competing offerings and foreclose rivals.129 The Commission’s assessment indicated that neither the joint venture nor the Parties ‘[enjoyed] a market position that could be leveraged to exclude third-party device manufacturers, insulin providers or providers of digital services for the management and treatment of diabetes from these respective markets’.130 Moreover, considering the very special nature of the pharmaceuticals sector, where the healthcare professional makes a choice for the patient (as opposed to the patient making a choice for him/herself) the number of potential

122

Ibid., at paras 16, 42. Ibid., at paras 63–65. 124 Ibid., at paras 65–67. 125 Ibid., at paras 69. 126 Ibid. 127 Ibid., at paras 70. 128 Ibid., at paras 72–77. 129 Ibid., at para 78. 130 Ibid., at para 84. 123

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patients who would likely thesemselves select the device was limited.131 Thus, the parties lacked both the ability, as well as the incentive to foreclose rivals, as such a foreclosure strategy would drive away the patients and was thus, unprofitable for the joint venture.132 As the Commission found no adverse effect on competition, it unconditionally cleared the joint venture.

17.6

Microsoft/LinkedIn

The Microsoft/LinkedIn merger received conditional clearance by the EU Commission for competition, although it received unconditional clearance from the US, the Canadian and the Brazilian competition authorities. Considering that it is the most recent big data merger reviewed and conditionally cleared by the European Commission, it merits a detailed study particularly concerning the non-horizontal aspects of the transaction and the commitments offered. It is important to mention that the remedies were about conglomerate effects and not because of any big data concerns. Microsoft, a global technology company active in the manufacture and sale of operating systems for personal computers, software and cloud-based solutions and online advertising notified the Commission on 14th October 2016 its intention to purchase LinkedIn, a professional services network (PSN) for $ 26.2 billion in an all-cash deal. It was one of the biggest tech acquisitions of the year 2016 and Microsoft’s most expensive acquisition to date. The Commission’s assessment of the “impact of big data” in the Microsoft/ LinkedIn merger was “evolutionary”, considering the Commission’s very rich and extensive experience in dealing with digital markets—that ranged from markets as disperse from search engines to social networking websites.133 The following section discusses the horizontal non-coordinated effects (Sect. 17.6.1), vertical (Sect. 17.6.2) and conglomerate effects (Sect. 17.6.3) resulting from the transaction and the commitments offered by the parties (Sect. 17.6.4) to receive the Commission’s conditional clearance.

131

Ibid. Ibid. 133 Catriona Hatton, David Gabathuler and Alexandre Lichy, ‘Digital Markets and Merger Control in the EU: Evolution, not Revolution?’, Competition Policy International’s Antitrust Chronicle (February 2018) at p. 6, available at URL. 132

17.6

Microsoft/LinkedIn

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17.6.1 Horizontal Effects The Commission assessed horizontal effects of the transaction in the online market for advertising. Although Microsoft offered both non-search and search advertising services, LinkedIn was active only in online non-search advertising.134 The merger was not expected to result in any concerns from the post-merger combination of data, considering that parties could combine their datasets ‘only’ to the extent it was allowed by the data protection rules in force.135 The General Data Protection Regulation (GDPR) 2018 was further expected to strengthen user rights and offer them greater control over their data.136 The Commission also assessed the possibility of increased market power of the merged entity in the ‘hypothetical market for supply of data’ and the resulting barriers to entry for actual or potential competitors who may require access to this data.137 The Commission’s assessment indicated that the concern was unfounded as Microsoft and LinkedIn did not offer access to data for advertising purposes, except in very limited cases. Second, internet user data for advertising purposes was not available solely with the merged entity. Infact there remained other competitors in the market including Google that had considerable amount of data that was highly valuable for advertising purposes. Third, the parties continued to compete only to a very limited extent in the market for online advertising.138

17.6.2 Vertical Effects The Commission also assessed whether the merger could lead to vertical non-coordinated effects through input foreclosure. The Commission’s assessment indicated that the merger did not offer the parties an ability to foreclose competing providers of the CRM software solutions, considering that LinkedIn did not have a significant market power in the “hypothetical market or segment for the provision of data for the purposes of Machine Learning (ML) in CRM software solutions”.139 Second, as Microsoft was subject to privacy laws and following the coming into force of the GDPR in 2018, it would limit Microsoft’s ability on the treatment of LinkedIn full data.140 Moreover, the data was not expected to become an important input within the meaning of para 34 of the NHM Guidelines about the provision of ML in CRM software in the next 2 to 3 years.141 Post-merger, Microsoft had limited 134

Microsoft/LinkedIn (Case M.8124) [2016] OJ/C 388/04, at paras 152–164. Ibid., at paras 176–177. 136 Ibid., at para 178. 137 Ibid., at para 179. 138 Ibid., at para 180. 139 Ibid., at para 254. 140 Ibid., at para 255. 141 Ibid., at para 256. 135

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incentives to engage in foreclosure as it was doubtful whether foreclosure was a profitable strategy.142 Foreclosure overall was unlikely to lead to consumer harm, considering limited profits flowing from such a foreclosure strategy and the presence of alternative data sources to offer useful insights.143 The transaction was thus, not expected to result in input foreclosure to the detriment of CRM software solution providers.144

17.6.3 Conglomerate Effects The Commission assessed conglomerate effects in ‘five distinct technology markets’—first, the market for CRM software solutions, second, the market for online recruitment services, third, productivity software, fourth, enterprise communication services and fifth, PSN services.145 The merger was ‘unlikely’ to lead to significant impediment to effective competition through ‘conglomerate foreclosure effects to the detriment of competing providers of CRM software solutions’.146 The merged entity did not have the ability to ‘foreclose’ competing CRM software solution providers as LinkedIn did not enjoy a strong market position in the market for sales intelligence.147 It also had no incentives to engage in foreclosure, considering that the market for Sales Navigator was a fast growing market segment, whereas the market for CRM was saturated with limited potential for any further revenue increase.148 Second, the Commission assessed whether the merged entity could leverage its market position in the OS and productivity software to the market for online recruitment services through tying, bundling or other exclusionary practices.149 Although Microsoft had the technical ability to engage in tying, the benefits from such a strategy were limited considering that private customers did not require LinkedIn’s Talent Solutions and even amongst the business customers, there was limited demand for the product as it was needed ‘only’ either by the employees in the Human Resource department or by the recruitment agencies.150 Third, the Commission also dismissed any conglomerate effects resulting from tying of LinkedIn’s features with Microsoft’s productivity software considering

142

Ibid., at para 270–272. Ibid., at paras 275–276. 144 Ibid., at para 277. 145 Eleonora Ocello and Cristina Sjödin, ‘Microsoft/Linkedin: Big data and conglomerate effects in tech markets’, Competition Merger Brief 1/2017, p. 3. 146 Microsoft/LinkedIn (Case M.8124) [2016] OJ/C 388/04, at para 245. 147 Ibid., at para 222–223. 148 Ibid., at para 232–236. 149 Ibid., at para 356. 150 Ibid., at paras 361–366. 143

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Microsoft/LinkedIn

293

additional networking feature such as LinkedIn were not essential for competing in the market for productivity software.151 The reason customers chose a particular productivity software was because the solutions helped in the creation of document rather than the sharing of content.152 Fourth, the Commission also assessed whether integrating LinkedIn with Microsoft’s Skype for Business (SfB) may foreclose competing providers of enterprise communication services.153 This was unlikely, as social networking sites were neither a “must-have” input, nor did they impact the choice of enterprise communications service providers.154 Fifth, the Commission assessed whether Microsoft could integrate LinkedIn’s features into Office and thereby foreclose competing PSN service providers.155 Windows PCs was an important channel for the PSNs to acquire new customers, as it accounted for over half of total LinkedIn sign-ups.156 Foreclosure of competing PSNs was profitable for Microsoft, as it would have led to a ’meaningful increase in LinkedIn membership and user activity’.157 To develop applications for Microsoft office, third party applications need access to Microsoft Office API.158 The merged entity had both an ability, as well as incentive to foreclose competing providers of PSN by first, pre-installing LinkedIn on Windows PCs; second, by integrating its features into Office and third, by denying access to its APIs to competing PSN service providers, which in turn was expected to offer LinkedIn substantial advantage that its competitors could not match.159 This in turn was expected to tip the market in favour of LinkedIn.160 Tipping of the market to LinkedIn in turn was expected to harm consumer welfare in the following two ways. First, a reduction of choice for consumers and second, marginalisation of existing competitors through foreclosure.161 PSN providers such as XING offered greater privacy to consumers which the Commission identified as an important ‘parameter of competition’ in the selection of professional networks.162 Thus, foreclosure effects were identified in the market for PSN services.163

151

Ibid., at para 389. Ibid. 153 Ibid., at para 394. 154 Ibid., at para 400. 155 Ibid., at para 305. 156 Ibid., at para 318. 157 Ibid., at para 319. 158 Ibid., at para 322. 159 Ibid., at para 338. 160 Ibid., at paras 339–343. 161 Ibid., at para 349–350. 162 Ibid., at para 350. 163 Ibid., at para 351–352. 152

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17.6.4 Commitments To alleviate the Commission’s concerns in the market for PSN services, the parties submitted the following commitments. First, to address concerns relating to the foreclosure of competing PSN service providers because of integration of LinkedIn’s features into Office and the refusal to offer competing PSN’s access to Microsoft’s API, the parties offered ‘Integration Commitments’. As part of the ‘Integration Commitments’, the merged entity offered to ensure that all Third-Party PSN Service providers would have access to the Office Add-in Program and the associated Office APIs on standard terms and policies and without discrimination.164 It also ensured that ‘Office add-ins built by Third Party PSN Service Providers’ were available in the Office Store and could run independent of any LinkedIn features integrated in the MS office.165 Further, the competitors could also, subject to the consent of Users, access their data from Office 365 or other cloud services.166 The Users could also on their own disable LinkedIn features for all major Office products including Outlook. This possibility was to be displayed in an accessible and prominent manner so that users could actively choose to disable the feature. Users in this context included consumers, organisations, their IT departments and the employees of these organisations.167 The parties offered the ‘Pre-installation commitments’ to address concerns relating to potential foreclosure of competing PSN service providers following pre-installation of LinkedIn application on Windows PCs.168 First, OEMs and distribution partners were given a freedom to decide which applications the OEMs may install on Windows PC.169 Second, users—including consumers and organisations—could remove the LinkedIn Windows PC Application or LinkedIn Windows PC Tile from their Windows PC, if they so wished.170 In addition, Microsoft could not prompt through Windows OS, users to either install the LinkedIn Windows PC Application or the LinkedIn Windows PC Tile.171 Microsoft was however free to use other means including ‘Windows store standard promotional mechanisms’ (which was also available for third party applications).172

164

Ibid., at para 447. Ibid., at para 448. 166 Ibid., at para 449. 167 Ibid., at para 450. 168 Ibid., at para 452. 169 Ibid., at para 453. 170 Ibid., at para 454. 171 Ibid., at para 455. 172 Ibid., at para 455. 165

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Remedies for Big Data Mergers

295

The commitments were to stay in force for a period of 5 years. Commitments also included a monitoring trustee and merger remedy-related arbitration to ensure compliance with the commitments. 173

17.7

Remedies for Big Data Mergers

In two-sided markets, one side of the market is either offered free or subsidised services, whereas the other side pays for them.174 In short, one side of the market subsidises the other side. Some authors have argued that there is nothing like a free service. The rationale of free lunches—meaning no such thing as a free lunch—is equally applicable to the so-called free search services.175 One side only apparently seems to receive free services. This side of the market is actually making a very valuable ‘non-price payment’ for the services it receives. This ‘non-price payment’ is in the form of ‘personal data’ of the individual offering some direct or indirect details about his/her personality, lifestyle, behaviour, preferences and motivations. This implies that mergers between data rich firms may lead to substantial impediment to effective competition, as the combined entity will have greater amount of data and there may be multiple possibilities of how the new firm can leverage this data rich position to its advantage. Moreover, market foreclosure following a merger can have significant and irreversible anti-competitive effects in multi-sided markets as the natural interplay of the market forces may not be sufficient to ‘self-correct’ the market within a reasonable period.176 Remedies addressing such problematic mergers need to assess how they can effectively address this particular challenge. Can big data be considered as an essential facility, which means could sharing of data with competitors be a possible remedy? Or limiting collection and the use of data be a potential alternate remedy? If the answer to this is in the affirmative, then the issue that merits attention is whether it will be correct to put limits on what a merged entity can do and cannot do with the data? This remedy in addition to surpassing the scope of antitrust remedies, also requires continued ex-post monitoring by the courts.177 Moreover, in certain cases,

173

Ibid., at para 462. Julian Wright, ‘One-Sided Logic in Two-Sided Markets’ (2008) 3(1) Review of Network Economics 44. 175 Alec J Burnside, ‘No Such Thing as a Free Search: Antitrust and the Pursuit of Privacy Goals’ (29 May 2015) Competition Policy International accessed 06 January 2019. 176 OECD, Barriers to Entry, DAF/ COMP (2005)16, 42 accessed 06 January 2019. 177 Geoffrey Manne and Ben Sperry, ‘Debunking the Myth of a Data Barrier to Entry for Online Services’ [26 March 2015] accessed 06 January 2019. 174

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as the Commission noted in Microsoft/LinkedIn, the data protection rules can constrain the ability of firms on the treatment of datasets. Forced data sharing remedies in merger control can lead to similar concerns that transcend the frontiers of antitrust law to touch upon other areas such as the privacy and human rights law.178 The following section briefly discusses EU GDPR 2018 and how it can inspire an innovative remedial design in the digital platform mergers (Sect. 17.7.1) followed by a discussion on the remedies in Thomson/Reuters and its relevance for big data mergers (Sect. 17.7.2).

17.7.1 The 2018 EU General Data Protection Regulation and Potential Remedies Merger control may not be the best framework to ‘ex-ante regulate the market’ through ‘positive rules of conduct’ such as non-structural remedies that require ex-post monitoring.179 Moreover, the European Commission has repeatedly referred to the 2018 EU GDPR and its potential to preserve the privacy and choice of consumers. This section accordingly evaluates the key features of the EU GDPR and whether some of its requirements, such as ‘data portability’, ‘right to be forgotten’ and the appointment of ‘data protection officer’ can potentially promote competition in the digital economy. These provisions also offer interesting insights concerning the design of remedies in big data mergers. In April 2016, the European Parliament adopted the EU GDPR.180 The GDPR was published in the Official Journal of the European Union on May 4, 2016 and entered into effect on 25 May 2018. The Regulation recognises the role of rapid technological advancements and globalisation that has resulted in ‘new challenges for the protection of personal data’ and the need to develop an effective framework and enforcement that facilitates the development of the digital economy in the internal market.181 The Regulation offers many practical recommendations to that effect. The ‘right to be forgotten’ and the ‘right to data portability’ for instance are two such rights that merit attention.

178

Ibid. Josef Drexl, ‘Designing Competitive Markets for Industrial Data – Between Propertisation and Access’ (2016) Journal of Intellectual Property, Information Technology and Electronic Commerce Law 8(4) pp.43–44 accessed 06 January 2019. 180 Joel Harrison, Laurence Jacobs, Sean Keaton and Nicholas Smith, ‘European Parliament Adopts EU General Data Protection Regulation’ [18 April 2016] Lexology accessed 06 January 2019. 181 Regulation(EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC(General Data Protection Regulation), recital 6-7 [2016] OJ L 119/01. 179

17.7

Remedies for Big Data Mergers

297

The Regulation offers the ‘data subject’— that is the subject whose personal data is concerned—to have his/her data rectified or forgotten, where the ‘retention of such data’ is in violation of the said Regulation.182 In case any of the grounds suggested in Article 17 are valid—for instance, the personal data is no longer required for the purpose for which it was first collected or processed—the data subject has the right to request for the erasure of such personal data.183 Data portability has been defined as the ‘ability to move data among different application programs, computing environments or cloud services’.184 The European Commission, as distinguished from their US counterparts, seems to be more open to ensure data portability through competition law.185 The remedy can potentially ‘release synergies between competition law and data protection law’ by limiting anti-competitive practices and prevent customer lock-in, as well as by empowering consumers to benefit from the value-added services offered by third parties and in general, ease the conditions for market entry.186 The Regulation offers the data subject, a right to ‘receive the personal data concerning him [in a] structured, commonly-used and machine-readable format’ such that it is portable from one controller to another.187 The remedy, although very interesting, and the equivalent of number portability in the mobile telecommunications sector, can in practice be very difficult and complicated to craft as it transcends the boundaries of intellectual property law and touches upon a very fundamental human dimension that is the ‘free development of human personality’.188 Absent data portability, however, using so-called free services in two-sided market can for the users of these platforms end up being ‘a freebie once, taxed-perpetually’ syndrome. 182

Regulation(EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC(General Data Protection Regulation), recital 65-66 [2016] OJ L 119/01. 183 Ibid. 184 ‘Essential Guide to app portability and interoperability’ accessed 06 January 2019. 185 Joaquín Almunia, ‘Merger review: Past evolution and future prospects’ (Conference on Competition Policy, Law and Economics, Cernobbio, Italyh, 02 November 2012) accessed 06 January 2019. 186 Preliminary Opinion of the European Data Protection Supervisor, ‘Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy’ (March 2014) 36 accessed 06 January 2019. 187 Regulation(EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC(General Data Protection Regulation) [2016] OJ L 119/01. 188 Gabriela Zanfir, ‘The right to Data portability in the context of the EU data protection reform, International Data Privacy Law’ (2012) International Data Privacy Law accessed 06 January 2019.

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The GDPR offers the possibility to appoint ‘data protection officers’ whose task shall be to monitor compliance with the Regulation.189 The Commission has on multiple occasions admitted ‘privacy’ as a non-price dimension of competition. In case a merger in the digital market requires compliance with ‘privacy commitments’, it may be useful to benefit from the presence of data protection officers. The Data Protection Officer, considering his/her knowledge, proximity and expertise on the subject may in addition to compliance with the Regulation, can also possibly help facilitate effective implementation of the merger commitments. This in turn can possibly diminish the requirement for other measures such as monitoring trustees and merger remedy-related arbitration. The following sub-section discusses the Commission’s decision in Thomson/ Reuters, a merger that concerned the market for financial services. Considering that the Thomson/Reuters concerned data markets, the design of remedies in Thomson/ Reuters offers valuable insights for the design of remedies in big data mergers.

17.7.2 Thomson/Reuters Thomson was a leading global provider of valuable information in the ‘legal, tax, accounting, financial services, scientific research and healthcare markets’.190 Reuters, at the time ‘world’s largest international multimedia news agency’ offered tailored and processed information that targeted financial professionals.191 The merger concerned the market for the ‘provision of financial information, analytics and trading activities’ whose main customers were in the financial services industry.192

17.7.2.1

Competitive Assessment

Adverse competitive effects were expected to materialise in the markets for ‘Broker Report (Aftermarket Research), Estimates (both current and historical estimates), Fundamentals, and Time series/Economic data (TS/E)’ at the worldwide and at the EEA level. Both adverse horizontal, as well as vertical effects were expected and the effects as can be seen from the following discussion were expected to reinforce one another. High entry barriers in terms of time and substantial resources required to develop a rich and expansive database that equalled the quality of the merged entity

189

Regulation(EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC(General Data Protection Regulation) recital 77,97, Article 30 and Section 4 [2016] OJ L 119/01. 190 Thomson Corporation/ Reuters Group (Case COMP/M.4726) [2008] OJ C212/5, para 5. 191 Ibid., at para 6. 192 Ibid., at para 10.

17.7

Remedies for Big Data Mergers

299

and the reputational effects meant that no substantial competition was expected to emerger in the next two to three years. In the market for Broker Reports, the merger offered the parties incentives to increase prices of its Aftermarket Research products, as well as vertically foreclose competitors by increasing the prices for Aftermarket Research distributed through redistributors or by limiting the access to the Aftermarket Research offering to its own customers—that is those customers who purchased a complete desktop solution from Thomson/Reuters.193 The loss of revenues resulting due to the foreclosure of competing redistributors, it was expected would be offset, as the customers would be prompted to switch to Thomson/Reuters in the downstream market to purchase desktop products. The revenues in the downstream market were expected be way more substantial then those realised through the sale of content sets via redistributors.194 Adverse vertical effects were identified as the merged entity could leverage from its strengthened position in the market for Estimates market to foreclose competitors either through an increase in the price of the content that was distributed through the distributors on a royalty-basis or sell-through basis or simply by refusing to deal with its competitors.195 Foreclosure was possible as post-merger, Thomson and Reuters would no longer directly compete against one another in the ‘upstream market for the distribution of Estimates contents to redistributors [who were] competitors of the parties’.196 As aggregators depended on Thomson’s data feed, either partial or complete foreclosure was expected to adversely impact their competitiveness and in turn limit the ability of independent data vendors from exercising a competitive constrain on the merged entity in the ‘downstream market of data feeds and workstation’.197 Loss in revenues through foreclosure of competing redistributors from content sets in the upstream market was expected to be offset through displacement of the customers of these redistributors to Thomson/Reuters for purchase of desktop products in the downstream market.198 Resulting vertical foreclosure, it was expected, would also aggravate the horizontal effects of the concentration, ‘as the increase in price for content sold to/through redistributors and/or degradation of the quality of the desktop products (– that comprised of the Earnings Estimates) distributed by the redistributors’ eventually enhanced the possibility that the merged entity could increase the prices for its customers.199 The merger was also expected to reduce the number of competitors from three to two in the market for Fundamentals as Thomson and Reuters were the most credible providers of database for Fundamentals with a global coverage in terms of breadth

193

Ibid., at para 228. Ibid., at para 222. 195 Ibid., at para 286. 196 Ibid., at para 292. 197 Ibid., at para 293. 198 Ibid., at para 294. 199 Ibid., at paras 299–301. 194

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(covering both, the US and the EEA), depth and the period of coverage.200 Foreclosure was also expected as loss of revenues resulting from the increase in prices for Fundamentals via redistributors or limiting access to the Fundamentals would have been offset by an increase in prices for a complete desktop solution from Thomson/ Reuters.201 In the market for TS/E, the parties were identified as one another’s ‘closest’ competitors as they were the only parties in the relevant market that offered greatest depth and range of data, as well most-widespread economic coverage.202 It also offered the parties the incentives, as well as the ability to foreclose competitors in the TS/E market ‘by increasing prices for TS/E distributed via redistributors (royaltybased and sell through) or limiting access to its Economic Time Series offering to its own customers’.203 The merger also offered the parties the ability, as well as the incentives to foreclose competitors in the Aftermarket Research, Earnings Estimates, Fundamentals and the TS/E solutions.204 The merger was also subject to review by the DOJ in the US. The DOJ identified similar competition concerns in the market for fundamentals data, earnings estimate data and aftermarket research reports.205 The US DOJ also accepted substantially similar remedies as the remedies accepted by the European Commission.206

17.7.2.2

Remedies

To alleviate the competition concerns identified, the parties carved out of the existing business of Thomson and Reuters into a new business entity.207 The buyer was to receive, amongst others, an up to date ‘copy of the database for each of the content areas Fundamentals, Estimates, Aftermarket Broker Research, and TS/E’.208 The parties also committed ‘to assign to the relevant purchaser, to the extent assignable, customer contracts specifically for direct content data feeds from the Thomson

200

Ibid., at paras 355–58. Ibid., at paras 370–78. 202 Ibid., at paras 389–400. 203 Ibid., at paras 401–18. 204 Ibid., at paras 422–32. 205 United States v. Thomson Corp., No. 08-0262, Complaint at ¶¶ 14-31 (D.D.C. filed Feb.19, 2008), accessed 06 January 2019. 206 Press Release, U.S. Dep’t of Justice, Justice Department Requires Thomson to Sell Financial Data and Related Assets in Order to Acquire Reuters (Feb. 19, 2008) [hereinafter Thomson/Reuters News Release],

accessed 06 January 2019. 207 Thomson Corporation/ Reuters Group (Case COMP/M.4726) [2008] OJ C212/5, para 482. 208 Ibid., at para 480. 201

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301

Fundamentals database and Reuters Estimates databases’.209 The customer transfer was ‘not’ automatic. Instead, the purchaser was to make an offer to the customers of the merged parties, who were then offered an opportunity to switch to switch suppliers.210 To facilitate customer switching, the parties undertook to allow the customer for an early penalty-free termination, as well as undertook not to interfere during customer negotiations.211 As the foregoing discussion highlights, in Thomson/Reuters, both the EU, as well as the US identified a market for data. Commissioner Harbour in her dissenting statement in the Google/DoubleClick merger articulated a similar approach that seeks to identify ‘an input market for data itself, not just a market for the services fuelled by the data’.212 In the more recent, Microsoft/LinkedIn merger too, the European Commission identified a ‘hypothetical market’ for data for advertising, as well as a ‘hypothetical market or segment for the provision of data for the purposes of Machine Learning in CRM software solutions’. It may be useful to reiterate that no competition concerns were identified in this hypothetical market. Viewed from this perspective, Thomson/Reuters merger has some important lessons for big data mergers. Particularly noteworthy is how the parties offered to transfer to the buyer a ‘copy of the database’ for each of the affected markets. Second, the divestiture did not involve an automatic transfer. Instead, each one of the customers was offered an active choice to switch suppliers.

17.8

Summary and Recommendations

Big data, particularly personal data raises unique challenges from the perspective of data protection and merger control. A segregated approach treating the two disciplines as distinct can possibly lead to an undesirable, although perfectly legal possibility, where ‘data are processed legitimately, competition rules are respected, but the end result is a concentration of personal information in a dominant company which will become the holder of a power beyond the commercial world.’213 In the context of merger control, this chapter makes the following recommendations. Although, the ‘value of transaction’ is a better test then the ‘turn-over based’ test currently used by the European Commission, the ‘share of supply test’ for reasons discussed in Sect. 17.4, may be even more useful for network-led economies.

209

Ibid. Ibid., at para 500. 211 Ibid., at para 480. 212 Pamela Jones Harbour and Tara Isa Koslov, ‘Section 2 in a Web 2.0 World: An Expanded Vision of Relevant Product Markets’ (2010) 76(3) Antitrust Law Journal 769, 783. 213 Federico Ferretti, EU Competition Law, the Consumer Interest and Data Protection: The Exchange of Consumer Information in the Retail Financial Sector (Springer 2014) 117. 210

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Considering that there are various sources for the acquisition of relevant data, it is often argued that access to user data of dominant online platforms is not ‘indispensable’ to offer advertising services.214 This may be true generally but instances do exist where data may also be a source of competitive advantage. A failure to consider the collective value of ‘personal information as an intangible asset’215 which along with the availability of data mining tools may lead to ‘ring-fencing’ of many such big value mergers beyond the reach of competition and consumer protection rules. Second, considering the ‘nudge-like quality’ of the zero price effect in the MSPs, which in certain cases adversely impacts not only the non-price dimension that is privacy, but also impacts the ‘apparently very democratic choices’—the ‘spirit’ of the modern civilised society—an old-school competition law approach founded in neo-classical economics may instead of increasing consumer welfare, may infact adversely impact it. In that respect the very meaning of consumer harm merits a re-think. Third, data portability positively impacts downstream competition (competition in innovation). Data can play an important role while evaluating a potential competitive rival as an acquisition target, although the competitors are yet to monetise the reservoirs of data.216 As we are yet to see a big data merger that was conditionally cleared on account of big data concerns, the design of remedies in Thomson/Reuters holds very important lessons for design of remedies in big data mergers. Another point noteworthy of mention is the absence of regulation for online services. In Vodafone/Ono, the Commission has identified Voice over Internet Protocol (VoIP) and voice services offered through fixed line as interchangeable and thus, part of the same relevant market.217 Although they belong to the same market, whereas the fixed line are subject to the intensive scrutiny of regulators, the VoIP is not subject to any such accompanying regulation. This point touches upon regulation, but it well underscores the need to pursue either a regulatory framework defined on the basis of services offered, instead of the products or in the alternate, a need to further de-regulate the telecommunications sector. In this respect an irony continues to persist in the ICT markets—more particularly in the converged Damien Geradin and Monica Kuschewsky, ‘Competition Law and Personal Data: Preliminary Thoughts on a Complex Issue’ (SSRN 2013) 13 accessed 06 January 2019; Inge Graef, Wahyuningtyas and Patrick Valcke, ‘Assessing data access issues in online Platforms’ (2015) Telecommunications Policy 39 (5) 375–376

accessed 06 January 2019. 215 Preliminary Opinion of the European Data Protection Supervisor, ‘Privacy and competitiveness in the age of big data: The interplay between data protection, competition law and consumer protection in the Digital Economy’ (March 2014) 28 accessed 06 January 2019. 216 Margrethe Vestager, ‘Big Data and Competition’ (EDPS-BEUC Conference on Big Data, Brussels, 29 September 2016) accessed 06 January 2019. 217 Vodafone/ONO (Case M.7231) [2014] OJ/C166/09, at paras 26–28. 214

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303

telecoms sector. Telecoms sector is one of those exceptions to this date, where markets continue to remain divided on national basis on account of regulatory barriers. These regulated telecom operators compete head-on with the multi-sided platforms, that not only benefit from the infrastructure created by the traditional telecoms sector, but also, unlike the telecom operators are free from any accompanying regulatory hiccups!

Part IV

Summary, Conclusions and the Road Ahead

This final part of the book comprises of only one chapter. The chapter summarises the findings of the study (from Parts I–III) and presents issues that can be subject matter of further inter-disciplinary and intra-disciplinary research. To avoid repetition, only those issues that have not been summarised elsewhere in the book are summarised in this chapter.

Chapter 18

Summary, Conclusions and Further Research

Abstract This chapter summarizes the key findings of the book. It also presents some novel issues that can be a subject matter of further inter-disciplinary and intradisciplinary research.

Inherent limitations associated with predicting the future in effects-based approach, ‘limitations in knowledge, of uncertainty, and of risk taking’1 make it difficult to evaluate the future with accuracy.2 Highly complex innovation-related cases need a thorough ‘economic understanding of the details of each case’.3 This calls for an inter-disciplinary approach for a holistic study of merger review and remedies. As can be seen through the course of this book, the new economy does not need special antitrust laws; instead, what is more desirable is a consideration of the special industry-specific factors in the enforcement of merger control laws.4 The presence of unilateral effects, barriers to entry, merger efficiencies, innovation and big data are few such concepts that are particularly relevant to the information age. Further, the very special nature of big data mergers may require a re-think of some of the very fundamental principles of competition law and economics. Moreover, it may be valuable to add that this key observation holds true as of the year 2019. Considering the very disruptive nature of the ICT sector, it cannot be entirely ruled out that subsequent disruptive innovations may present some novel challenges that may potentially call for at least some fundamental re-think on merger enforcement in the digital economy. Or in the alternative, new technological developments may also

Josef Drexl, ‘Real Knowledge is to Know the extent of One’s Own Ignorance: On the Consumer Harm Approach in Innovation-related Competition Cases’ (2009-2010) 76 Antitrust Law Journal 677, 681–682. 2 Ibid. 3 Josef Drexl, ‘Is There a “More Economic Approach” to Intellectual Property and Competition Law?’ in Josef Drexl(ed), Research Handbook on Intellectual Property and Competition Law (Cheltenham: Edward Elgar 2008). 4 Carl Shapiro, Mergers with Differentiated Products [Spring 1996] Antitrust 24–27. 1

© Springer-Verlag GmbH Germany, part of Springer Nature 2019 K. Tyagi, Promoting Competition in Innovation Through Merger Control in the ICT Sector, Munich Studies on Innovation and Competition 10, https://doi.org/10.1007/978-3-662-58784-3_18

307

308

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self-resolve the some of the challenges currently posed by the digital economy. The future, in short, is highly unpredictable. In the ICT sector, differentiated product offerings means that each firm has a certain degree of market power that offers it the ability to act independently of its consumers and competitors. This leads to more widespread prevalence of unilateral effects, whereby certain firms compete more closely than others for the same set of customers.5 Mergers in the ICT sector, because of the very nature of the sector, are frequently transatlantic in scope.6 If in the earlier decisions such as the Oracle/PeopleSoft merger one observes tremendous differences and occasional tension in the approach of the US and the EU competition authorities, then the more recent decisions such as the Cisco/Tandberg merger offer the hope of an emerging consensus. In the Cisco/ Tandberg merger, the US DOJ closed its investigation as the European Commission announced its clearance decision.7 More recently, the acquisition of US, Texasbased Freescale Semiconductor Ltd. by the Netherlands-based NXP Semiconductors N.V. saw intensive cooperation between the European Commission, the US Federal Trade Commission, the Japanese, the Chinese and the Korean competition authority.8 The different competition authorities cooperated enormously during the entire process of merger control—right from the initial stages of merger review to the final implementation of the remedies. From a comparative perspective, China merits special mention, considering how it has been the lone wolf in recent times—particularly because of its divergence with the more established jurisdictions such as the EU and the US. The Chinese Ministry of Commerce, MOFCOM (now the SAMR) for instance, offered conditional clearance in mergers such as Google/Motorola9 and Nokia/Microsoft10—mergers that

5 Gregory J Werden and George A Rozanski, ‘The Application of Section 7 to Differentiated Products Industries: The Market Delineation Dilemma’ (1993-1994) 8 Antitrust 40. 6 See e.g., the Microsoft/Skype, Oracle/PeopleSoft, Cisco/Tandberg, Nokia/Navteq – discussed in detail throughout the book - were all transactions that were all transatlantic mergers wherein the relevant geographic market were found to be global in scope, and the merger review was simultaneously carried out on both sides of the Atlantic with frequent inter-agency interaction during their review. 7 Justice Department will not challenge Cisco’s acquisition of Tandberg (29 March 2010) accessed 06 January 2019. 8 FTC requires NXP Semiconductors N.V. to Divest RF Power Amplifier Assets as a Condition of Acquiring Freescale Semiconductor Ltd., available at accessed 06 January 2019. 9 Announcement No. 25, 2012 of the Ministry of Commerce-Announcement of Approval with Additional Restrictive Conditions of the Acquisition of Motorola Mobility by Google (31 May 2012) accessed 06 January 2019. 10 The Ministry of Commerce Holds a Special Press Conference on Anti-monopoly workshop (11 April 2014) http://english.mofcom.gov.cn/article/newsrelease/press/201404/20140400554324. shtml dated 11th April 2014> accessed 06 January 2019.

18

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309

otherwise received unconditional clearance in the EU and the USA. The divergence in the MOFCOM’s (now the SAMR) approach was reminiscent of the trans-Atlantic divide in merger enforcement in the early 1990s and 2000s.11 Evolutionary economics offers valuable insight for developing an effective competition policy for dynamic and innovation-led sectors.12 According to the approach, the greater the number of participants, the higher is the possibility of attaining a better technology as more firms compete to innovate, when compared with concentrated markets wherein the monopolist (or the oligopolist as the case may be) has diminished incentives to engage in innovation.13 As is evident throughout the course of this work, this evolutionary approach and need for diversity is not only relevant for maintaining vigorous competition, this diversity also strikes at the very foundation of competition policy—it promotes a ‘convergence in divergent approaches’ across jurisdictions—meaning that different approaches are not merely indicative of the divergence in policy objectives, they may sometimes indicate a novel approach to a particular challenge confronting competition policy, especially in the context of the rapidly-evolving ICT sector. Ex-post economic and econometric studies may in the future provide valuable insights into the effectiveness (or failure) of these novel approaches to promote competition in innovation. The contribution of these isolated approaches is that irrespective of whether these novel measures are good or bad for the process of competition, their implementation will offer an opportunity to evaluate their effectiveness (or ineffectiveness) in retrospect. Innovations can be extremely disruptive for prevalent market conditions. The elimination of potential competition following a merger that brings together ‘two imminent technologies’—one of which is a pipeline product and following a successful launch, could possibly have competed and challenged the incumbent—may lead to ‘irreversible loss of product market rivalry’.14 Likewise, innovation in one segment may disrupt demand and supply conditions in another market. Demand for wireless communications and 4G and 5G services15 for instance emerged because of Donna E Patterson and Carl Shapiro, ‘Transatlantic Divergence in GE/Honeywell: Causes and Lessons’ (Fall 2001) Antitrust 18. 12 Wolfgang Kerber, ‘Competition, Innovation, and Maintaining Diversity through Competition Law’ in Josef Drexl, Wolfgang Kerber and Rupprecht Podszun (eds), Competition Policy and the Economic Approach: Foundations and Limitations (Edward Elgar: Cheltenham, UK and Northampton, MA, 2011) 173. 13 Ibid. 14 Michael L Katz and Howard A Shelanski, ‘Schumpeterian’ Competition and Antitrust Policy in High-Tech Markets’ (2005) 14 Competition 47, 59 accessed 06 January 2019. 15 4G and 5G respectively refers to fourth generation wireless communication for broadband mobile, able to exchange data at 100 Mbit/sec at least and better coverage (including in rural areas) and 5G, the fifth generation is based on the IEEE 802.11ac standard of broadband technology. 5G is expected to be a significant breakthrough as it is expected amongst others, to offer “one to 10 Gbps connections to end points” and offer almost 99.999 percent availability and 100 percent coverage. Christina Mercer, ‘What is 5G? Everything You need to know about 5G’ TechWorld 11

310

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innovation in smartphones and rapid growth of multi-sided platforms such as Google’s search engine, social and professional networking sites and the app stores. In case a given merger leads to anti-competitive concerns, the competition authorities may clear the merger following the submission of suitable remedies. Increased popularity of non-structural remedies has meant that the competition authorities have often employed self-monitoring mechanisms such as merger remedy-related arbitration and monitoring trustees. In case mergers lead to a concentration of proprietary rights such as patents and copyrights, the competition authorities have benefitted from informational and access remedies to prevent significant impediment to effective competition. For a further study on the subject of merger remedies, inputs from economics such as ex-post study of the cases that used licensing as a merger remedy and their consequent impact on innovation can offer valuable insights for defining the length and the scope of compulsory licensing and the provision of interoperability information. Overall, as far as the design of remedies is concerned, innovation, it seems is the key. This will in the near future be particularly true for big data mergers. In case of mergers involving big data, the merger may lead to a ‘concentration of a tradable commodity foreclosing competition under the shield of data protection’.16 Chapter 17 argued that the objective of competitive policy is the preservation of economic and non-economic aspects of competition and also assessed privacy as a non-economic dimension of competition. In case big data mergers continue to be cleared unconditionally, leaving behind the issue of dealing with undesirable concentration of economic power to data protection laws, it may lead to a situation wherein the data protection laws on a stand-alone basis are ineffective in dealing with the situation.17 This calls for an integrated approach, such that the merger control benefit from the insights offered by data protection laws, and actively use them in design of remedies. The data protection officer can play a very useful role in this context by facilitating the ex-most monitoring of commitments. In practice, it emerges that merger review offers immense flexibility and scope for incorporating perspectives from other disciplines. Merger review has in the past benefitted tremendously from key insights offered by industrial organisation and game theory on the issue of unilateral effects. Chicago and post-Chicago insights have been highly useful to analyse the impact of tying, bundling and resulting efficiencies following non-horizontal integration. The design and implementation of merger remedies too has greatly benefited from the other sub-disciplines of law. Merger remedy-related arbitration often described as an innovation suprenante and a supra-national paradigm in the making is a case in point. The rise of the big data it seems has brought merger control in direct interaction and has propagated a need for

(Online, 26 January 2018) accessed 06 January 2019. 16 Federico Ferretti, EU Competition Law, the Consumer Interest and Data Protection: The Exchange of Consumer Information in the Retail Financial Sector (Springer 2014) 117. 17 Ibid.

18

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311

the merger control practitioners to more closely look at the data protection law. Merger control in that respect offers the possibility to view the legal system as an integrated whole, instead of individual disconnected parts. The objective is to preserve the integrity of the system and prevent any abnormal situations to ‘offer adequate or just solutions’.18 For mergers in the ICT sector in general, the work is comprehensive as it succinctly highlights key issues in merger review and the design of remedies in part I and II of this book. Many of the findings are equally relevant for big data mergers, dealt with in detail in part III of this book. Despite the exhaustive nature of this work, many issues remain untouched or dealt with somewhat superficially. An issue barely dealt with in this work concerns the fundamental rights of consumers—which becomes an important determinant in the assessment of their interests, and hence, welfare, considering that a consumer is not just a homo economicus, as suggested by the neo-classical economists, s/he is also an emotional and a creative homo faber and homo emotere.19 Viewed from this perspective, merger control in particular and competition law in general, offer an expansive scope, with the possibility to integrate the value and principles of data protection in its assessment of big data mergers20—an interesting subject matter for further intra-disciplinary and inter-disciplinary study.

18 Federico Ferretti, EU Competition Law, the Consumer Interest and Data Protection: The Exchange of Consumer Information in the Retail Financial Sector (Springer 2014)119; Privacy and Legal Issues in Cloud Computing (Anne S.Y. Cheung and Rolf H. Weber ed) Elgar Law, Technology and Society(2015). 19 Ibid., p. 119. 20 Ibid., p. 117.