US antitrust agencies' review of mergers involving online platforms is more common as online companies increasingly seek strategic combinations. Online platforms often are multi-sided markets characterised by different consumers and distinct product options on each side of the platform. While mergers of online platforms produce fantastical headlines,
While there have not been major reviews of platform transactions since the last Antitrust Review of the Americas, consideration of competition issues in digital platforms is at the forefront of the antitrust policy discussions in the US and around the world. Indeed, on 20 June 2018, the Federal Trade Commission (FTC) announced a series of public hearings that will include specific consideration of platform competition issues, including 'the identification and measurement of market power and entry barriers . . . in markets featuring “platform” businesses'.
Thus, the Antitrust Division of the US Department of Justice (DOJ) and FTC digital platform matters described in the 2017 edition of this publication remain important. Those matters have shown that in cases where the agencies do not find competitive harm on one side of a platform's multi-sided market, correspondingly, the agencies do not find the likelihood of competitive harm on the other side. This is because each side of the platform is dependent on the other, even though each side is characterised by distinct consumers. This interdependency comports with the consumer welfare standard that takes into account all consumers likely to be affected by a merger. It is also consistent with the Supreme Court's recent decision in Ohio et al v American Express, which, while not a merger case, instructs that courts considering companies that operate in 'two-sided transaction platforms' must consider economic interaction of the various sides of the platform in defining the relevant market.
This article examines how the DOJ and FTC consider product market definition, competitive effects, and entry when investigating mergers of online platforms. Specifically, we will examine the FTC's and DOJ's respective closing statements in Zillow/Trulia and Expedia/Orbitz as well as our impressions of the agencies' recent investigations and clearance of Alarm.com's acquisition of Icontrol and Vista's acquisition of Cvent.
Case Studies: FTC and DOJ analyses of product offerings in multi-sided markets
FTC investigation of Zillow's acquisition of Trulia
The FTC's 2014 investigation into Zillow's acquisition of Trulia considered whether the combination of the two largest online real estate portals would result in anticompetitive harm for real estate agents and consumers seeking to buy or sell a home. Trulia and Zillow were both online platforms that contained multi-sided product offerings – their platforms served real estate agents seeking an advertising, as well as offering homeowners and sellers an easy-to-use online mechanism for looking for and selling a home.
In its investigation, the FTC examined whether Zillow's and Trulia's products comprised a distinct advertising market for real estate agents – ie, a relevant product market, consisting of real estate portals for all real estate agents or for certain 'high performing' agents. The FTC's closing statement acknowledged some qualitative evidence that supported such a product market definition. However, the FTC ultimately found that a hypothetical monopolist of all online real estate portal advertising would be unable to impose a SSNIP on real estate agents because agents had other online and offline advertising options.
The FTC's closing statement notes that FTC staff also investigated whether Zillow's acquisition of Trulia would reduce competition for consumers researching home buying or selling online. However, prospective home buyers and sellers are beneficiaries of the diverse advertising and marketing options used by real estate agents. The FTC recognised this interdependence between the two sides of the online platform and in its closing statement indicated that the merged entity would have strong incentives to develop new features and to grow its consumer audience in order to increase advertising revenue.
Travel platform investigations: DOJ investigations of Expedia's acquisition of Orbitz and Vista's acquisition of Cvent
In 2015, the DOJ also cleared Expedia's US$1.3 billion acquisition of Orbitz in spite of reported complaints from the hotel industry, consumer groups, and members of Congress.
In its closing statement, the DOJ explained that it examined whether the merger was likely to harm competition on either side of the platforms.
• on the consumer side, the merger was unlikely to result in increased or additional charges;
• on the travel service provider side, Orbitz was a small source of bookings for airlines, car rentals and hotels, and that Orbitz did not affect Expedia's commission charges;
• travel service providers have other ways to attract customers and obtain bookings, including Priceline; and
• online travel services were rapidly evolving and pointed to recent entry by Google and expansion by TripAdvisor.
Here again, the DOJ's investigation demonstrates the interdependence of the two sides of an online platform offering. On one side, consumers had a variety of alternatives to meet their travel booking needs, such that Expedia and Orbitz would be unable to increase charges post-merger. Similarly, Expedia and Orbitz represent one of many booking sources for travel service providers such that the DOJ concluded anticompetitive harm from the merger was unlikely. Thus, the DOJ's investigation demonstrated that online travel services did not comprise a relevant market and that competitive harm was unlikely to result from the merger.
In 2016, the DOJ investigated the merger of the two leading suppliers of event management and strategic management software under Vista ownership: Cvent and Lanyon. The two platforms were leading providers of electronic RFP platforms for event planners, as well as providers of booking and marketing for hotels and venues. As multi-sided online platforms, on one side, they served event planners, and on the other, they served the marketing and advertising needs of hotels and meeting spaces. The DOJ did not issue a closing statement when it cleared the transaction, however, as in Expedia/Orbitz, to the extent that event planners use a variety of methods to source hotels, the hotels and event spaces must also diversify advertising to attract event planners.
FTC investigation of Alarm.com's acquisition of Icontrol
In 2017, the FTC investigated Alarm.com's acquisition of Icontrol. Both companies provided cloud-based platform solutions to security providers (including security dealers), which enabled the security providers to sell interactive security and home automation solutions to subscribers. In its investigation, the FTC focused on one side of the online security services platform: security dealers. On the other were the end-consumers: homeowners seeking a home security product.
During the investigation, the FTC examined whether sales of interactive security systems sold through the independent dealer channel constituted a relevant market and whether the merging parties were likely to be the only providers of open-source security software platforms. Alarm.com offered its interactive security software to the independent dealer channel, while Icontrol's interactive security products were white labelled and sold through other channels (eg, ADT). At the time of the investigation, Icontrol did not yet sell to the independent dealer channel, but had a dealer product in development. FTC staff investigated the likelihood of Icontrol One's entry into the dealer channel, and its ability to constrain Alarm.com's offering in that but-for world.
The investigation demonstrated that at the security dealer level, other software platforms such as Securenet, Honeywell Total Connect and Digital Monitoring Products served as alternatives to Alarm.com and the prospective Icontrol One product. Additionally, Vivint had developed its own software product, and evidence showed that Google also had plans to offer a dealer supported security product.
On the other side of the platform – security services used by homeowners – there were many other security solutions. Cable and telecom providers such as AT&T and Comcast offer their own home security products and there are other retail products available for direct consumer purchase.
The FTC did not issue a closing statement, but again we can surmise that the broad option set of security solutions available were relevant to the FTC's decision to allow the transaction to proceed. Post-merger, Alarm.com's software offering through the security dealer channel must compete with the multitude of options available to homeowners seeking security systems, disciplining any post-merger incentive and ability to raise the price or reduce innovation.
Lessons from agency analysis of online platforms
The role of entry in agency review of online platform products
Entry plays an important role in agency review of online platform products because companies poised to enter or expand into a market under investigation may render competitive harm unlikely. In the online platform mergers discussed here, the markets at issue presented the US antitrust agencies with novel issues unique to nascent, dynamic, high-tech marketplaces. For example, in Zillow/Trulia, online real estate services had seen significant entry and development since the parties launched in 2006, and while the FTC was considering the merger, investors made significant contributions to certain competitors. The parties advocated that these rivals would spur the post-combination Zillow to continue to innovate and to seek to grow its consumer audience. In closing the investigation into Zillow/Trulia, the FTC stated (in a footnote) that the competitive dynamics of the real estate market were rapidly changing, implying that additional changes, including entry or expansion, may be ongoing and forthcoming, but adding the caveat that depending on those changes, a narrower market may be relevant in the future.
Entry and expansion also played an important role in the Alarm.com/Icontrol investigation. As described above, Icontrol had not yet offered a product to the security dealer channel that was the focus of the FTC's concern, begging the question of what other potential competitors were also poised to enter. In the same transaction, Icontrol sold its cable-based security platform to Comcast, facilitating Comcast's expansion into home security using its Xfinity product. Finally, the proliferation of smart home technology and the internet of things allows for home security products and features. In the aggregate, all of these developments were likely to pose competitive constraints to Alarm.com post-merger.
The parties' scale is unlikely to constrain entry in mergers of online platforms
When considering the likelihood of entry in mergers of online platforms, the scale of the merging parties is important, but should not be overstated. Because mergers involving online platforms are frequently in nascent, rapidly developing, high-tech industries, the scale of the merging parties can leave an inaccurate impression that the likelihood of competitive harm is correlated with the parties' scale. For example, Zillow and Trulia were the first and second most visited online real estate search platforms, and there was concern that the merger would 'concentrate too much power in one company'.
Similarly, the DOJ found that in spite of Expedia's scale, which would have increased as result of the acquisition of Orbitz, 'the evidence suggests that the online travel business is rapidly evolving. For example, since the deal was consummated the industry has seen the introduction of TripAdvisor's Instant Booking service and Google's Hotel and Flight Finder with related booking functionality.'
Network effects are unlikely for nascent online platform products
Network effects, the phenomenon whereby a product or service gains additional value the more people use it, may constrain entry or expansion into online platform markets. This is because the more consumers use one side of an online platform, the more value the platform has to consumers on the other side of the platform. A product that enjoys momentum created by network effects generally benefits from increased market share as the product becomes more attractive than its alternatives.
However, in the nascent, rapidly changing, high-tech online platform markets that we observed in this article, network effects often were inapplicable, though theoretically possible. By definition, products in a nascent market will not have reached a level of maturity or market adoption sufficient for the presence of network effects. Assistant Attorney General Delrahim has made a related point in a recent speeches stating that when considering network effects in digital platform markets, enforcers should recognise 'an incumbent's monopoly may be fragile, and prone to being toppled by new entrants offering something better and more exciting'.
In future cases, network effects may also be important for defining the relevant product market in which the agencies analyse competitive harm. In the recent Amex decision, the court held that when 'indirect network effects' are strong enough (as demonstrated by 'interconnected pricing and demand'), a two-sided market should be analysed as actually supplying 'one product – the transaction'.
Efficiencies on one side of the platform may negate harm on the other
This article has focused on how the US antitrust agencies' product market and entry analysis implicate the likelihood of competitive effects in mergers of online platforms. In the closing statements issued in Zillow/Trulia and Expedia/Orbitz, any findings related to efficiencies were unmentioned, likely because the agencies' analysis dispelled of competitive harm. Of course, efficiencies may be derived from the combination of two online platforms and may manifest in one or both sides of the platform.
Indeed, the Horizontal Merger Guidelines contemplate how efficiencies inextricably linked to the relevant may be treated in mergers. In footnote 14, the guidelines state:
In some cases, however, the Agencies in their prosecutorial discretion will consider efficiencies not strictly in the relevant market, but so inextricably linked with it that a partial divestiture or other remedy could not feasibly eliminate the anticompetitive effect in the relevant market without sacrificing the efficiencies in the other market(s). Inextricably linked efficiencies are most likely to make a difference when they are great and the likely anticompetitive effect in the relevant market(s) is small so the merger is likely to benefit customers overall.
We submit that this footnote is applicable to online platform mergers that contain multi-sided markets. Assume a merger of online platform products is characterised by interdependent multi-sided markets. This merger is likely to result in efficiencies on one side of the platform that would subsume any likely harm on the other side of the platform. Consistent with our analysis and observations of the agencies' actions, such a merger should be permitted to proceed in accordance with the consumer welfare standard if the efficiencies on one side of the market are likely to generate sufficient benefits to customers on that side of the market in a magnitude greater than the harm to customers on the other side of the market.
The outcome of the four merger investigations discussed in this article provides some guidance into how the US antitrust agencies will review these online platforms for evidence of competitive effects. They also demonstrate that delineating the metes and bounds of the relevant market (on both sides of the platform) and determining the likelihood of anticompetitive effects and efficiencies is a complex exercise that often yields results different from first blush impressions.
1 Industry op-eds decrying a merger as an anticompetitive market consolidation generally appear after each online platform deal is announced. See, eg, Jacob Davidson, 'What a Zillow/Trulia Merger Might Mean For Consumers', Time (28 July 2014), available at http://time.com/money/3047329/zillow-trulia-merger-consumers/; Drew FitzGerald, 'Antitrust Paradox Hangs Over Expedia-Orbitz Deal', Wall Street Journal (16 February 2015), available at www.wsj.com/articles/antitrust-paradox-hangs-over-expedia-orbitz-deal-1424128832; Elizabeth West, 'Cvent Earnings Grow Ahead of $1.65 Billion Merger', Business Travel News (11 May 2016), available at www.businesstravelnews.com/Meetings/Cvent-Earnings-Grow-Ahead-of-1-65-Billion-Merger; Julie Jacobson, 'What's the Impact of Rumored Comcast, Alarm.com Purchase of Icontrol?', Security Sales & Integration (16 June 2016), available at www.securitysales.com/business/operations/impact_of_rumored_comcast_alarm-com_purchase_of_icontrol/.
2 Federal Trade Commission 2018, 'FTC Announces Hearings on Competition and Consumer Protection in the 21st Century', 20th June 2018 via https://www.ftc.gov/news-events/press-releases/2018/06/ftc-announces-hearings-competition-consumer-protection-21st.
3 Ohio v American Express Co, 585 US (2018) and See also, WSGR client alert, 'US Supreme Court Tackles Two-Sided Markets: Ohio v American Express', 25th June 2018 via https://www.wsgr.com/WSGR/Display.aspx?SectionName=publications/PDFSearch/wsgralert-ohio-amex.htm
4 WSGR represented Trulia, Icontrol and Cvent in the FTC and DOJ investigations.
5 Statement of Commissioners Maureen K Ohlhausen, Joshua D Wright, and Terrell McSweeny, Zillow, Inc/Trulia, Inc (19 February 2015), available at www.ftc.gov/system/files/documents/public_statements/625671/150219zillowmko-jdw-tmstmt.pdf [hereafter 'Zillow/Trulia Closing Statement'].
6 Statement by Assistant Attorney General R Hewitt Pate regarding the closing of the Orbitz investigation, Expedia/Orbitz (31 July 2003), available at https://www.justice.gov/archive/atr/public/press_releases/2003/201208.htm.
8 See Vin Gurrieri, 'DOJ Won't Challenge $1.6B Expedia-Orbitz Tie-Up', Law360 (16 September 2015), available at www.law360.com/articles/703770/doj-won-t-challenge-1-6b-expedia-orbitz-tie-up.
9 Press Release, US Dep't of Justice, Justice Department Will Not Challenge Expedia's Acquisition of Orbitz (16 September 2015), available at www.justice.gov/opa/pr/justice-department-will-not-challenge-expedias-acquisition-orbitz [hereafter 'Expedia/Orbitz Closing Statement'].
12 US Department of Justice, Assistant Attorney General Makan Delrahim Delivers Remarks at Bocconi University in Milan, 25 May 2018 via https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-remarks-bocconi-university-milan; M Delrahim, 'Don't Stop Believin': Antitrust Enforcement in the Digital Era', Assistant Attorney General Makan Delrahim Delivers Keynote Address at the University of Chicago's Antitrust and Competition Conference, 19 April 2018 via https://www.justice.gov/opa/speech/assistant-attorney-general-makan-delrahim-delivers-keynote-address-university-chicagos.
13 Ohio v American Express Co, 585 US (2018), p13.
14 Ibid, p15.
15 Global Competition Review 2018, 'Delrahim gives views on Amex and AT&T rulings', 27 June 2018 via https://globalcompetitionreview.com/article/usa/1171080/delrahim-gives-views-on-amex-and-at-t-rulings
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