E-commerce sector inquiry: Commission publishes its final report

On May 10 2017, the European Commission published its final report on its e-commerce sector enquiry. As we have highlighted in previous updates (see the following links for updates: Competition Law Update | February 2017, Retail pricing and geo-blocking come under scrutiny from the European Commission; Regulatory Outlook: Competition – November 2016 European Commission conference on e-commerce: what now for stakeholders?, E-commerce sector inquiry: Commission sets out its preliminary findings) much of the debate focused on whether, and to what extent, suppliers should be permitted to restrict resellers’ use of online marketplaces.

As the European Commission’s preliminary findings have been previously tackled (see here) this update will focus on the additional key findings of the final report.

Goods: Key Features of e-commerce and Potential barriers to competition

The Final Report issued by the Commission identifies key features of e-commerce which have a significant effect on distribution strategies and which may give rise to potential barriers to competition.

First, what are e-commerce’s main features?

• Online price transparency: such transparency affects the behaviour of buyers and sellers. In that regard, unsurprisingly or not, 5 retailers out of 10 track their competitors’ online prices, and more than 7 out of 10 subsequently adapt their own prices.
• Free-riding: customers easily switch between online and offline sales channels, i.e. they use pre-sales services offered by one channel but then actually purchase the product via the other channel.
• Increased direct retail activities by manufacturers: it appears that many manufacturers have opened their own online shops (mostly in the cosmetics and healthcare sectors), resulting in increased competition between retailers and their own suppliers.
• Expansion of selective distribution: over the last decade, 2 manufacturers out of 10 introduced selective distribution systems for the first time in response to the growth of e-commerce. Retailers are often required retailers to operate at least one brick and mortar shop by manufacturers, and several retailers have pointed to a lack of transparency and objectivity of the selection criteria in the absence of any legal obligation for the manufacturers to publish those criteria.

As for potential barriers to competition, we further emphasise that the European Commission has pinpointed, among others (see here):

• Selective distribution: even though brick and mortar requirements are generally considered as being valid, requirements to operate at least one brick and mortar shop (thus excluding pure players from the network) “without any apparent link to distribution quality and/or other potential efficiencies” may trigger the obligation to justify these requirements under Art. 101(3) TFEU.
• Price comparison tools: an absolute ban on such tools could potentially hamper the effective use of the internet as a sales channel and hence, may amount to a hard-core restriction of passive sales under the VBER.
• Pricing restrictions: for instance, manufacturers and retailers might practice resale price maintenance in order to respond to the increased online price competition, which is a hard-core restriction under VBER. Regarding dual-pricing, the Report points to the possibility of exempting such agreements under Art. 101(3) TFEU notably if dual-pricing is justified in order to fight against free-riding.

Regarding restrictions on the use of marketplaces, the Commission states that the inquiry’s findings do not show that such restrictions generally amount to a de facto prohibition to sell online. However this does not mean in the Commission’s view that absolute marketplace bans are generally compatible with EU competition rules. Marketplaces restrictions shall therefore be handled carefully, based on a case-by-case assessment.

Digital Content

Regarding digital content, it appears that licensing agreements between right holders and digital content providers define the main parameters of competition. In that regard, the availability of the relevant rights is one of the key determinants for competition among digital content providers.

However, current complex licensing practices limit their actual availability, be it by splitting up/bundling online rights or due to the stability of existing commercial relationships. The complexity of these practices complexity also arises out of the various forms of exclusivity granted and payment mechanisms.

In addition, the European Commission notes that restrictions are the norm in licensing agreements. As mentioned in our previous update (see here), competition is being hampered by, among others, long and stable exclusive contractual relationships between right holders and established digital content providers (according to the Commission, exclusivity is not per se problematic and should be assessed through a case by case analysis), territorial contractual restrictions (often on a national basis), as well as payment structures (such as advance payments, minimum guarantees and fixed fees).

In light of the above, new entrants or smaller digital content providers may appear to be disadvantaged compared to established ones.

What now?

The Commission has tried once again to balance the interests of the manufacturers and the digital content providers, those of the traditional retailers and those of the digital age players (pure players, marketplaces, price comparison tools etc.).

As regards selective distribution, more than ever it appears clearly from the Commission’s Final Report that the business shall seize the opportunity to review the contractual wording, the selection criteria and the justifications for selective distribution and adapt them to the new legal screening.

The Final Report also provides further and valuable insight into the potential competition analysis that it might apply. Indeed, the Commission provides guidance regarding the assessment of vertical restraints, marketing and pricing mechanisms, geo-blocking and licencing practices and the exchange of competitively sensitive “big data”.

Given the various investigations which have already been launched by the Commission and the e-commerce sector being on the radar of national competition authorities , one might expect quite soon the effective application/criticism of the Commission’s findings and competition analysis: to be continued…