The European Antitrust Review 2014 Section 2: EU industry sectors

Telecoms & Media

EU Developments in the Telecoms, Media and IT Sectors

In the first half of 2013, the European Commission (the Commission) has continued to grapple with the age-old challenge posed by the telecoms, media and IT sectors of maintaining effective competition while still preserving incentives to innovate. However, in this digital age the challenge is even more acute and the considerable technological expansion, particularly in mobile applications and online services, means that antitrust authorities need to stay ahead of the curve.

The telecoms and media industries are indeed characterised by rapid innovation, which results in the entry of new technologies, products and firms that can completely leapfrog the positions of existing market players and quickly attract customers and suppliers. As a result, established operators are under constant threat from innovating operators, unless the entry of such new technologies or operators is impeded in some way by arrangements, exclusionary practices or restrictions on access to input that are critical for competition.

These characteristics are relevant to competition analysis in two specific ways. On the one hand, the application of competition law needs to properly take into account the fact that some form of temporary market power may be necessary in order to achieve the efficiencies associated with innovation. On the other hand, it may be particularly important in order to protect and preserve competitors’ incentives and opportunities to innovate to ensure that operators with market power do not impede the ability of new technologies to emerge on to markets.

Against this background, competition enforcement policy needs to strike the right balance between preventing the creation or entrenchment of market power to the detriment of future competition, and not undermining undertakings’ incentives to invest and innovate. This may raise complicated trade-offs that do not necessarily have an easy policy resolution.

One particular recent focus of the Commission in these sectors has been the issue of standardisation, be it in the development of standards for future services or the strategic use of standard essential patents (SEPs) to the detriment of competition.

The Commission has long extolled the benefits of standards which ensure interoperability, maintain and enhance quality and provide information.1 Indeed, in sectors such as IT and telecoms, which are in continual evolution, interoperability is vital since it encourages competition on the merits of technologies from different companies and helps prevent lock-in.

The fewer restrictions consumers have, the more popular the products and services of the industry will become. This increase in consumer base is likely to encourage new companies to enter the market with innovative products thereby increasing competition and innovation as incumbent vendors are spurred into improving their market position through product differentiation.

However, rapid technological progress does not necessarily correspond to low entry barriers, especially if users find it costly to switch to new brands or products that are incompatible with the established technology. In addition, as is often characteristic of these high technology markets, it is difficult for smaller firms to gain scale when dominant firms hold a substantial share of the market.

Indeed, from looking at the developments in these sectors during the first half of 2013 it is clear that new technological advances bring with them new challenges for antitrust authorities. Navigating the dynamics of these evolving markets is indeed a complex task but addressing the challenges that these markets pose remains crucial for effective competition policy.

Enforcement policy in the telecoms sector

Hutchinson 3G Austria/Orange Austria

Following an in-depth investigation, the European Commission conditionally approved the acquisition of Orange Austria by Hutchinson 3G Austria, merging the two smallest mobile network operators (MNO) in the Austrian market and resulting in a reduction of the market players from four to three.2

After its in-depth investigation, the Commission found that the elimination of Orange as an independent MNO and the reduction of operators from four to three would significantly impede effective competition by means of non-coordinated effects. In particular, the Commission considered that the transaction would eliminate two relatively small MNOs with an aggressive positioning on the market and create a new much bigger MNO with significantly reduced incentives to compete aggressively. The Commission also concluded that MNO or MVNO market entry was unlikely to be sufficiently timely to exercise a disciplining effect on the price levels resulting from the merger.

The Commission’s approval was therefore conditional upon the implementation of a commitments package designed to lower barriers to entry for both groups of potential competitors, MNOs and MVNOs.

More specifically, Hutchinson 3G agreed to:

  • divest radio spectrum and additional rights to an interested new entrant in the Austrian mobile telephony market.3 The potential new mobile network operator will have the right to acquire spectrum not only from H3G but also additional spectrum at an auction planned in 2013 by the Austrian telecom regulator;
  • provide, on agreed terms, wholesale access to its network for up to 30 per cent of its capacity to up to 16 mobile virtual network operators (MVNOs) in the coming 10 years; and
  • refrain from completing the acquisition until it enters into a wholesale access agreement with one MVNO approved by the Commission.

Interestingly, the commitments include a clause whereby if the spectrum to be divested is not acquired, there would be no further obligation on Hutchinson 3G to procure the divestment and it will be entitled to continue to use the spectrum. The Commission indeed recognised in this respect that there can be no guarantee that a MNO will effectively enter the market as such decision would involve serious investments and a long-term commitment in Austria. However, what is more important for the Commission is that the commitments are capable of significantly lowering the barriers to entry and therefore create the conditions to enable a new MNO entrant to come. In addition, even if no new MNO were to emerge, the divestment commitments are supplemented by MVNOs access commitments which ensure that one new MVNO (the upfront MVNO) and potentially additional MVNOs will enter the market and exert significant competitive constraints on the three remaining MNOs.

In a statement released the same day the Commission conditionally approved the transaction, Commissioner Almunia took the opportunity to comment more generally on the mobile markets: ‘European consumers increasingly use their mobile phones to upload and transfer data and new mobile data services are a major contribution to growth. The risks posed by more concentration in national mobile telephony markets cannot be ignored. The commitments proposed by H3G ensure that competition is preserved so that Austrian consumers continue to enjoy the benefits of innovation and fair prices.’

The statement and conditions under which the merger was approved suggest that the Commission is likely to look closely at any further consolidation within national markets, particularly at transactions that would reduce the number of players in the market from four to three.

Match/Syniverse

On 29 May 2013, the Commission announced that it had cleared the proposed acquisition of Mach of Luxembourg by Syniverse of the US following a phase II investigation triggered by concerns that the transactions, as initially notified, would create a quasi-monopoly on the market for mobile roaming data clearing.

Both parties involved are data clearing houses (DCHs) that settle the usage records of subscribers that roam on mobile operators’ networks. Mobile operators use these services to determine the wholesale payments they make to each other for the roaming of these subscribers.

The Commission’s initial investigation showed that the merger would create the largest DCH by a very wide margin at both EEA and worldwide level. However, the parties argued that market shares should not be considered as decisive in bidding markets such as the mobile data roaming one, where shares reflect bids that the companies previously won. In their view, companies active in the same business who could potentially be credible competitors should also be considered.

The Commission, however, was not completely convinced and required that Syniverse divest a significant part of Mach’s assets, in particular the entirety of Mach’s DC and NRTRDE business in the EEA, including technology platforms, necessary employees, customer contracts and the MACH brand. On 4 June 2013, Syniverse announced that it had reached an agreement to sell the divested business to Starhome, a Swiss-based company.

The ‘patent wars’ among mobile-device firms

So far in 2013 the Commission has continued to focus on the so-called patent wars among mobile-device firms and has been prudent in preventing any possible strategic use of patents to the detriment of competition. Indeed, competition issues arise when a dominant firm is not using its SEPs for the genuine aim of protecting its IP rights, but instead as an attempt to block access to an entire market or with the purpose of hindering interoperability and preventing the production of third-party produced accessories.

Under the Commission’s guidelines on horizontal cooperation agreements, standard setting organisations require the owners of patents that are essential for the implementation of a standard (such as 3G) to commit to license these patents on fair, reasonable and non-discriminatory (FRAND) terms. Such commitments are designed to ensure effective access to standardised technology. They prevent patent holders from making the implementation of a standard difficult by refusing to license or requesting excessive fees after the industry has been locked-in to the standard or by charging discriminatory royalties.

Samsung: enforcement of ETSI SEPs

In January 2012 the Commission opened a formal investigation to assess whether Samsung had abusively, and in contravention of a commitment it gave in 1998 to the European Telecommunications Standards Institute (ETSI), used certain of its SEP rights to distort competition in European mobile device markets.

The focus of the investigation centers around whether seeking an injunction against rivals, including Apple, for using SEPs amounts to a breach of Samsung’s commitment to license on FRAND terms.

On 18 December 2012 Samsung announced that it was withdrawing its injunctions in Europe. Nevertheless, on 21 December 2012, the Commission sent a statement of objections (SO) to Samsung informing it of the Commission’s preliminary view that under the specific circumstances of the case, where a commitment to license SEPs on FRAND terms has been given by Samsung, and where a potential licensee, in this case Apple, has shown itself to be willing to negotiate a FRAND license for the SEPs, the recourse to injunctions harms competition. In the Commission’s view, since injunctions generally involve a prohibition of the product infringing the patent being sold, such recourse risks excluding products from the market without justification and may distort licensing negotiations unduly in the SEP-holder’s favour.

Commissioner Almunia stated: ‘Intellectual property rights are an important cornerstone of the single market. However, such rights should not be misused when they are essential to implement industry standards, which bring huge benefits to businesses and consumers alike. When companies have contributed their patents to an industry standard and have made a commitment to license the patents in return for fair remuneration, then the use of injunctions against willing licensees can be anti-competitive.’4

Indeed, the Commission has made it clear that recourse to injunctive relief is generally a legitimate remedy for patent holders in case of patent infringements, for example in the case of unwilling licensees. However, in this case it declined to offer any guidance on what license terms would be considered to be FRAND.

Motorola Mobility

On 6 May 2013, the Commission announced that it had formally sent Motorola Mobility (now owned by Google) a statement of objections over the company’s alleged misuse of mobile phone SEPs.

Shortly after the Commission’s unconditional clearance of the Google/Motorola Mobility transaction in February 2012, Microsoft and Apple lodged complaints with the Commission against Motorola Mobility alleging that it had violated its irrevocable commitments made to standard setting organisations to license its SEPs on FRAND terms. More specifically, it is claimed that by seeking and enforcing injunctions against Apple and Microsoft’s signature products such as iPhone, iPad, Windows and Xbox on the basis of patents it had declared essential to produce standard-compliant products, Motorola failed to honour its commitments.

The Commission’s SO set out its preliminary view that Motorola Mobility’s seeking and enforcing of an injunction against Apple in Germany on the basis of its mobile phone SEPs amounts to an abuse of a dominant position. In the Commission’s view, where the potential licensee is willing to enter into a licence on FRAND terms, dominant SEP holders should not have recourse to injunctions which generally involve a prohibition to sell the product infringing the patent, in order to distort licensing negotiations and impose unjustified licensing terms on patent licensees.

It is clear that the Commission is acutely aware of the risk of SEP owners holding up the entire industry with the threat of banning products of competitors from the market and evidently will not tolerate such conduct. Indeed, it is vital to ensure that SEPs should not be manipulated so as to grant a monopoly over a given market. Broadly speaking, while a dominant SEP-owner may be able to protect his patent from infringement, he should not be able to use it to block access to a market or markets.

Commission investigation into E5

In spite of their benefits, the setting of standards can, in certain instances, give rise to competition issues when companies discuss and agree on the technical developments of an industry among themselves.

On 7 March 2013, the Commission announced that it had closed its investigation into whether Europe’s five leading telecoms operators were violating EU competition laws in their discussions on standards for future mobile services.

The Commission confirmed that it had requested information from the so-called E5 (Deutsche Telecom, France Télécom, Telefónica, Vodafone and Telecom Italia) and from the mobile sector association GSMA about the way standards for future mobile communications services are being developed.

Deutsche Telecom had previously announced that the E5 had discussed new telecoms services such as mobile advertising and ‘near field’ communication, which enables devices to communicate when held together.

In a speech given in February 2012, Commissioner Almunia stressed the importance of access and price in the telecoms industry and stated that he had warned telecoms operators not to develop standards that could place other market players at a disadvantage.5The Commission’s press release announcing the closure of the investigation reiterated that its policy remains to ensure that standardisation processes led by major telecoms operators are not being used strategically to foreclose other companies.

However, in this case, the Commission noted that the standardisation work formally conducted by the E5 had been transferred to the GSMA and other industry associations that allows for more stakeholder participation and reduces the risk of standard setting work affecting competition negatively.

Google/Android

On 9 April 2013, a coalition of specialised search and technology companies (FairSearch) filed a formal complaint with the Commission on the grounds of abuse of a dominant position concerning its practices in the mobile markets.

The complainant submits that Google’s Android is the dominant operating system. Google achieved this dominance in the smartphone operating system market by giving Android to device-makers for free. In addition, Android phone makers who wants to include must-have Google apps such as Play, YouTube or Maps are required to pre-load an entire suite of Google mobile services and to give them prominent default placement on the phone. This disadvantages other providers and puts Google Android in control of consumer data on a majority of smartphones shipped today.

According to recent statements made by Commissioner Almunia, the Commission is concerned about the way the Android ecosystem treats competitors and has sent a series of questions to Google following the receipt of this complaint. In particular, the Commission wants to establish whether the operating system is able to create anti-competitive barriers to entry for competitors.

Enforcement policy in the media and IT sectors

Microsoft’s non-compliance with browser choice commitments

On 6 March 2013 the Commission announced that it was imposing a €561 million fine on Microsoft for having failed to comply with the legally binding commitments it made in December 2009 to offer users a browser choice screen enabling them to easily choose their preferred web browser. This marked the first time that the Commission has fined a company for non-compliance with a commitments decision.

In setting the level of the fine, the Commission took into account the gravity and the duration of the infringement as well as the need to ensure that the sanction had a sufficiently deterrent effect. However, it also took into account as a mitigating circumstance the fact that once the breach was discovered, Microsoft cooperated with the Commission.

In a speech made the same day the Commission issued its fining decision, Commissioner Almunia stated: ‘commitments decisions are a very important tool in the EU antitrust enforcement system. Decisions of this type – so-called Article 9 decisions – can be a good way to solve antitrust concerns swiftly since they avoid lengthy proceedings. In fast-moving markets such as the IT sector, this can be particularly helpful, making easier for us to obtain concrete results from consumers.’6

While this is undoubtedly true, commitments decisions are only effective if companies strictly adhere to their undertakings. For the Commission, the fact that for around one and a half years millions of users in the EU did not have a choice screen, whether intentional or not, was a serious and harmful breach. The Commission therefore rejected Microsoft’s arguments that the fine should be reduced due to the fact that the violation was caused inadvertently and that the popularity of Microsoft’s Internet Explorer was already declining, making the impact of the failure to comply less grave. In fact, Almunia admitted that DG COMP had been ‘naive’ in leaving Microsoft in charge of policing its commitments and as a result is now considering a strengthening of the Commission’s monitoring mechanisms in all commitment cases.

Google/Search

In March 2013, the Commission officially informed Google of its preliminary conclusion that four types of practices in search and search advertising may violate EU antitrust rules prohibiting the abuse of a dominant position.

The first competition concern relates to the way Google promotes the links to its own specialised web search services in its web search results. The Commission is concerned that this practice results in unduly diverting traffic away from Google’s competitors in specialised search towards Google’s own services. In addition, since Google is an important source of traffic for competing specialised search engines, this may reduce competitors’ incentives to innovate in specialised search.

The second concern relates to the way Google uses without consent content from competing specialised search services in its own offerings. According to the Commission, this practice may reduce competitors’ incentives to invest in the creation of original content for the benefit of internet users.

The third concern relates to exclusivity requirements in Google’s agreements with publishers. The Commission is concerned that these requirements may oblige publishers to obtain all or most of their online search advertisements from Google.

Finally, the fourth competition concern relates to contractual restrictions on the transferability of online search advertising campaigns to rival search advertising platforms and the management of such campaigns across Google’s Adwords and rival search advertising platforms.

Commissioner Almunia has openly stated on various occasions that these fast-moving markets would particularly benefit from a quick resolution of the competition issues, ie, a commitment procedure pursuant to article 9 of Regulation 1/2003.

Google submitted on 3 April 2013 a first set of remedies which involve for a period of five years and under specific conditions, labelling its own specialised search-services and offering links to rival search-engines. The proposals also foresee that an independent monitoring trustee would advise the Commission in overseeing the proper implementation of the commitments.

The commitments are now subject to a market test allowing complainants, third parties and members of the public to submit their observations on the commitments, and the extent to which they address the Commission’s four concerns. The market testing stage was extended for most of the participants by one month (ie, 27 June).

The commitments have already drawn severe criticism from complainants, and the Commission’s next step will be to review the responses from the market test. However, EU competition chief Joaquín Almunia indicated that he would likely ask the search engine to improve its offer and that if the Commission’s concerns are not addressed, it would then continue its investigation through the normal antitrust procedure.

E-books antitrust investigation

In December 2012 the Commission accepted legally binding commitments from Apple and four international publishers (Simon & Schuster, Harper Collins, Hachette and Holtzbrinck) following the Commission’s formal investigation launched the previous year into the e-books sector.

The Commission had concerns that these companies, along with Penguin, had colluded to manipulate the price of e-books in the EEA by jointly switching the sale of e-books from a wholesale model to agency agreements containing the same key terms (in particular an unusual Most Favoured Nation (MFN) clause for retail prices). This so called agency model imposed restrictions on retailers that wished to set e-book prices independently.

In April 2013, Penguin became the last party to offer commitments in order to allay the Commission’s concerns. It offered to terminate existing agency agreements and refrain from adopting price MFN clauses for a period of five years. In the event Penguin enters into new agency agreements, retailers would be free to set the retail price of e-books during a two-year period, provided that the aggregate value of price discounts granted by retailers does not exceed the total annual amount of the commissions that the retailer receives from the publisher.

These commitments are substantially the same as those offered by the other four publishers. Interested parties had until 20 May 2013 to submit their comments on Penguin’s proposed commitments.

In reaching an article 9 decision7the Commission does not find an infringement of EU competition rules but rather legally binds the companies concerned to respect the commitments offered. In case of breach, the Commission can impose a fine of up to 10 per cent of the company’s annual worldwide turnover. Allaying the Commission’s concerns by means of a commitment decision is favoured by the Commission as it allows for a speedier resolution by avoiding the pursuit of formal proceedings with a Statement of Objections and the subsequent adoption of a decision imposing fines and remedies. Indeed, the Commission has repeatedly stated that it recognises the need for quick enforcement in fast-moving markets and it must ensure that it strictly adheres to this objective so that innovation in high-tech markets is not constrained by unnecessarily lengthy proceedings.

E-payments investigation

On 26 September 2011 the European Commission opened an antitrust investigation into the standardisation process for payments over the internet (e-payments) undertaken by the European Payments Council (EPC), the coordination and decision-making body of the European banking industry for payments.

The Commission undertook a careful examination of the standardisation process to ensure that competition was not unduly restricted, for example through the exclusion of new entrants and payment providers not controlled by a bank. After an intensive investigation that lasted almost eighteen months, the EPC announced its decision to stop the development of the e-Payments Framework and any other standardisation initiatives that would have the same object or effect. As a result, the complainant in this case, Sofort AG, withdrew its complaint and the Commission decided to close its investigation.

However, the Commission intends to keep monitoring this market closely to ensure healthy competition and a level playing field for all operators. In addition, the Commission is considering proposing legislation to establish objective and non-discriminatory rules for all players active in the e-payments market to ensure that customers can make secure payments while ensuring that new players are not prevented from entering the market.

Conclusions

Overall, when looking at the recent technological developments in the telecoms and media sectors, it is clear that such new developments bring with them new challenges for antitrust authorities. In particular, navigating the dynamics of these evolving markets and striking a fair and effective balance between preventing the creation or entrenchment of market power to the detriment of future competition, whilst still preserving firms’ incentives to invest and innovate, is a particularly complex task. What is clear, however, is that although markets cannot be left to address these challenges and competing interests on their own, it is crucial that the Commission adapts its competition framework to reflect such a fast-evolving environment.

In addition to the need for quick enforcement, sectors such as IT, media and telecoms, which are in continual evolution, need transparency and openness in order to ensure the possibility of new entrants. In this respect, standards play a crucial role since they tend to increase competition and allow lower output and sales costs, thus benefitting consumers.

It is therefore imperative that the Commission facilitates the development and establishment of such standards and in fact, towards the end of this year, it will launch an independent review of its standardisation system and make recommendations based on the review. It has also encouraged standard-setting organisations such as ETSI, to clarify rules about standard-setting and IP rights.

Indeed, where applicable, competition rules should be used in order to ensure that the benefits of standards materialise. Such benefits have a fundamental impact on new technology markets as they ensure interoperability which in turn encourages competition on the merits of technologies.

Notes

  1. Commission Communication on the role of European standardisation in the framework of European policies and legislation, COM (2004).
  2. Case COMP/M.6497, Hutchinson 3G Austria/Orange Austria, 12 December 2012.
  3. The spectrum to be divested consists of 2 x 10 MHz of contiguous spectrum in the 2.6 GHz frequency band.
  4. European Commission press release, Brussels, 21 December 2012.
  5. Joaquín Almunia, ‘Competition policy and growth’, 28 February 2012.
  6. Joaquín Almunia, ‘Statement on Microsoft’, 06 March, 2013.
  7. Article 9 of Council Regulation (EC) No 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty.

Gide Loyrette Nouel

View Building
Rue de l’industrie, 26 - 38
1040 Brussels
Belgium
Tel: +32 2 231 11 40
Fax: +32 2 231 11 77

Stéphane Hautbourg
hautbourg@gide.com

Laurent Godfroid
godfroid@gide.com

www.gide.com

Gide Loyrette Nouel is the only international law firm to have originated in France. Founded in Paris in 1920, the firm now operates from 24 offices in 19 countries. It has more than 700 lawyers, including 110 partners, drawn from 50 different nationalities. Gide Loyrette Nouel offers some of the most respected specialists in each of the various sectors of national and international finance and business law. In each of its offices in Europe, Asia, North America, Africa and the Middle East, the firm puts its comprehensive knowledge of local markets, its regional expertise and the resources of an international law firm to the service of its clients.

Gide Loyrette Nouel is active in all aspects of French and European economic law, including competition law (merger control, concerted practices, state aids, abuse of a dominant position and vertical restraints), distribution law, the law relating to publicity, product liability, international trade (anti-dumping, anti-subsidies, safeguards and WTO), EU regulatory law (including agriculture and food law) and customs law. Its economic and European law practice group, comprising 50 lawyers based in Paris and Brussels, handles both contentious and non-contentious matters, and regularly represents clients before French commercial and disciplinary or criminal jurisdictions. It is also in constant contact with both national and Community-wide regulatory authorities. The firm’s Brussels office provides an effective means of access to the European institutions. Its lawyers regularly appear as advocates before the Court of First Instance and the Court of Justice in Luxembourg.

Back to top

Law Business Research Ltd

87 Lancaster Road, London
W11 1QQ, UK
Queen's Award logo American Bar Association strategic partner logo

Copyright © 2014 Law Business Research Ltd. All rights reserved. | http://www.lbresearch.com

87 Lancaster Road, London, W11 1QQ, UK | Tel: +44 207 908 1188 / Fax: +44 207 229 6910

http://www.globcompetitionreview.com | editorial@globalcompetitionreview.com