Protecting competition, or competitors?
— Europe’s pursuit of Silicon Valley

In Blog by Hosuk Lee-MakiyamaLeave a Comment

It’s getting harder to escape the suspicion that the EU is sometimes acting in the interest of European firms who struggle to compete with a new breed of rivals like Apple, Amazon and Google. President Obama has said that the recent scrutiny by the EU competition authorities of US tech firms was driven by “commercial interests”.

But the suspicions of Brussels using competition policy for protectionism are hardly anything new. In 2001, the merger between the GE and Honeywell was blocked by the European Commission (despite being cleared by their US counterparts), which famously made a senior official of the US Justice Department to quip: “Europe protects competitors, we protect competition”.

Such accusations – that Europe is far more concerned with protecting competitors than consumers – are gross simplifications, but they are not entirely groundless either: Consumer harm is difficult to prove objectively, which is why the EU antitrust investigators tend to look for evidence on injury to competitors. As a result, hard evidence on consumer harm is replaced by hypothetical thought experiments – such as whether an “efficient” competitor would survive on the market. Wonky “what if-s” are good for solving theological quibbles in a convent, but should not determine legal proceedings involving billions in assets.

Protecting competitors, not competition

Europe’s desire to protect competitors can be even less subtle. Such is the practice of “market testing”, where the Commission lets competitors assess the potential remedies that a company offers when it settles a competition case with the Commission. For example, when the express delivery firm UPS sought to buy Dutch TNT, its proposed settlement faced a “market testing” – where the competitors are asked to “approve” the deal –  which some competitors had no interest in ever settling. Others were even out to acquire TNT for themselves. In the end, FedEx was eventually allowed to acquire TNT, as it poses less threats to the German Post Office – a major political sensitivity in the original UPS deal.

When GE acquired the French engineering giant Alstom last year, it was determined not to repeat UPS or its own early mistakes: GE called on its partner – President Hollande of France – to push the deal through the corridors of the European Commission with brute force.

Both the UPS and GE investigations show how protecting competitors often comes with the price of politicisation, using political arguments. GE and the French government effectively argued that Alstom’s business faces future competition from China – and nowhere is future competition so present as on the internet. Start-ups on online markets can actually compete against dominant players, unlike on traditional and static markets like delivery services or gas turbines. Just to take one example, the European Commission deemed Microsoft as abusing its dominance by bundling Windows Media Player in 2004: But Microsoft that was dethroned by Apple iTunes, in turn bested by the Swedish start-up Spotify – all within just ten years. Or does anyone still remember Microsoft Zune?

Repeating the mistakes of the Microsoft case

In hindsight, it is obvious the EU was chasing windmills in its case against Microsoft. The remedies did absolutely nothing to facilitate Apple and Spotify’s entry into the market. Back in 2004, very few people (well, at least not antitrust bureaucrats) could predict the rise of iPods and iPhones, or Spotify and its revenue model of streaming. This begs the question: How could the EU help competitors, if no one has a clue who future competitors will be, or how they will enter the market?

The Microsoft case is the template for the recent investigation against Google Shopping – an awkward price comparison function of their search engine that has proven to be less than stellar. Nonetheless, the European Commission disqualified the argument that Google Shopping not dominant because it is open competition with much larger e-commerce sites such as Amazon with its impressive network of third party retailers – simply because Amazon charges them a fee. Similarly, the mobile operating system, Android, is deemed as “its own market” and not competing against Apple iOS or Windows Mobile. Needless to say, Android has 100% of the Android market. Duh.

This absurd exercise shows the Commission can prove any firm to be dominant and potentially abusing its position just by defining the relevant product market narrowly enough. Spotify, or any start-up could easily grab a niche market and find itself trapped in a nightmare of vexatious EU antitrust investigations just within a couple of years of existence. In addition, if the EU doesn’t see the major competitors as actual competitors on the same market, how could effective remedies be taken against Google to help them?

Where is the consumer harm?

The influx of foreign competition in Europe has helped to expose how much the EU antitrust rulebook has become incoherent, and diverged from its original intent: To mitigate consumer harm. This is the essence of OPEN’s criticism against the Digital Single Market and Europe’s response to digitalisation in our upcoming report.

Admittedly, proving consumer harm is methodologically complex – especially on the internet, where services are often provided for free. But this is also exactly why the Commission must present hard, empirical and quantitative evidence of consumer harm in this age of digitalisation and globalisation. If not, antitrust investigations attach too much attention to secondary factors like “market structure” (in other words, protecting someone’s market shares).

Perhaps more importantly, authorities should always live up to its burden of proof. No prosecutor should be able to avoid presenting economic evidence by merely stating it is “self-evident”. But this is not where European antitrust is heading. In the case against chipmaker Intel, the European Court of Justice argued that the discounts Intel was providing to its customers were “by their very nature” an illegal abuse, although consumer prices were falling and the market shares of competitors like ARM, AMD or Samsung were increasing. In other words: It’s up to Intel to prove their innocence. But it’s difficult to see how Intel could ever prove European antitrust authorities wrong if no evidence is presented against them.

This leads us to the major undoing of the EU antitrust: The European Commission has now full discretionary powers to target anyone it considers a problem by using murky market definitions, and moving the burden of proof to the accused. In effect, the absence of evidence on consumer harm has remodelled EU competition policy into political courts. This is not just about whether US firms abide by fair play in Europe – but the manner Europe pursues foreign companies it sees as fair game.