E-commerce sector inquiry: Commission sets out its preliminary findings

Over 15 months since it first launched its competition inquiry into e-commerce, a flagship part of the Digital Single Market (“DSM”) initiative, the European Commission has now released its preliminary findings. So, what has it found and what are the implications for e-commerce players?

The Report

The Preliminary Report was released on 15 September, and focuses on e-commerce of goods and digital content. The Commission’s stated aim was to gain an overview of prevailing market trends and practices; and to assess whether these may lead to anti-competitive results.

Promotion of e-commerce is a key part of the DSM.  The EU is now the largest e-commerce market in the world, with the Commission seeing this market as fundamental to breaking down national barriers in retail – particularly for digital content, where no physical delivery is required.

The Commission and national competition authorities also have to apply traditional competition law to rapidly evolving technological, distribution and contractual practices across the EEA.  This has led to some inconsistency in the application of competition law between Member States – and a perception in the Commission that competition law may not be sufficiently tackling potential barriers to cross-border e-commerce.

To assess the e-commerce landscape, the Commission gathered information from nearly 1,800 EU stakeholders and collected around 8,000 distribution agreements. The respondents spanned every level of the market, including retailers, manufacturers, marketplaces, price comparison tools and payment systems providers, active in product categories ranging from clothing to media.

The Findings

So, what were the key findings?

Goods

The Commission has identified several e-commerce business practices that ‘may raise competition concerns … and give rise to potential barriers’.  In particular:

• over two in five retailers face some form of price recommendation or price restriction from manufacturers;
• almost one in five retailers are contractually restricted from selling on online marketplaces;
• almost one in ten retailers are contractually restricted from submitting offers to price comparison web sites; and
• over one in ten retailers report that their suppliers impose contractual restrictions on cross-border sales.

The Commission also analyses other restrictions on the freedom of distributors to promote their businesses online, such as limitations on Adword bidding.  The Commission says that all these types of contractual sales restrictions may, under certain circumstances, make online shopping more difficult and ultimately harm consumers by preventing them from benefiting from greater choice and lower prices in e-commerce.  Indeed, some of these practices would constitute “hardcore” restrictions of competition and could expose the parties to the risk of fines and follow-on damages claims.  Infringing restrictions will also be unenforceable.

The Commission recognises that some of these practices are driven by the fact that the features of e-commerce have a substantial effect on traditional distribution strategies.  For example, price transparency, the drive for brand protection, the scope for ‘free-riding’ and increased direct retail activities by manufacturers have led to the increased use of selective distribution systems.  However, selective distribution restricts competition for that brand, which may have anti-competitive effects for products with significant market shares.

Importantly, the Commission also notes that almost half of the manufacturers using selective distribution reported that they do not allow pure online players to join their selective distribution network.  It can be expected that selective distribution will come under increasing attention at an EU level, not least because the Commission found that many of the restrictions identified were most commonly used in these systems.

Selective distribution

The Commission noticed that the increased recourse to selective distribution as well as the use of new selection criteria represents one of the most frequent reactions of manufacturers to the growth of e-commerce in the last decade.

Very importantly the Commission noticed that many suppliers using selective distribution exclude pure online players from their network and that the requirement for retailers to operate at least one brick and mortar shop may in some cases go beyond what is necessary for the purpose of ensuring high quality distribution. This will be a highly significant change for many manufacturers that rely on this clause.

Marketplace restrictions

The Commission finds that marketplaces are an important channel, especially for SMEs, but notes that, for manufacturers, they can have both a beneficial and detrimental impact. Although the Commission’s own Guidelines on Vertical Agreements provide some guidance on the use of quality requirements for online marketplaces, this has been inconsistently interpreted to date.

Importantly, in these Preliminary Findings, the Commission confirms that marketplace bans are not “hardcore” restrictions of competition.  However, this does not mean that they are automatically lawful and the Commission sets out the competition law analysis that will apply.

Digital Content

The Commission focuses on two key aspects of competition for digital content.  At the upstream level, there are several potential barriers to entry for new market players. These are driven by factors including the availability (or not) of online rights to these players, the long and exclusive relationships that are often sought by rights holders and the common need to make significant upfront advance payments.  However, at the same time, the Commission acknowledges that multiple business models across a diverse licensing regime already exist, so it seems likely that its enforcement approach may be ‘case by case’ in this arena.

At the downstream level, the Commission continues to focus on geo-blocking, which is already a key aspect of the DSM (read more on the proposed Geo-blocking Regulation here) because of the impact on cross-border content for consumers.

The Commission notes that almost 60% of responding digital content providers have contractually agreed with right holders to geo-block.  While we await the outcome of the Pay TV investigation (read more here) the Commission has been clear in its position that agreements to geo-block are likely to be anti-competitive and unenforceable. This is reflected in the concerns raised in the Preliminary Findings on the prevalence of geo-blocking and other restrictions on cross-border trade.

However, the Commission says in its press release that “any competition enforcement measure against geo-blocking would have to be based on a case-by-case assessment, which would also include an analysis of potential justifications for restrictions that have been identified.” This does offer businesses scope to consider whether their agreements to geo-block might be enforceable and we hope that the Pay TV decision will offer guidance on when such agreements may be justified.

What now?

Although the Preliminary Findings detail significant activity of potential concern to the Commission, they also provide useful acknowledgements around the challenges of the e-commerce market and some insight into the competition analysis that might apply.  While the Commission states that ‘as a follow-up … the Commission may investigate further the compatibility with the EU competition rules of certain practices‘, it has been clear that it wants the Preliminary Findings to act as a trigger for a ‘fact-based exchange of views’ with stakeholders. As part of this, it is inviting comments as part of a two month consultation, and will produce a final report in Q1 2017.

The prevalence of potentially anti-competitive restrictions means that the Commission simply cannot investigate every incidence that it has uncovered.  However, it has already launched test cases, such as Pay TV and will expect that industry will use the findings of the e-commerce sector inquiry to assess their own arrangements and bring them into line with competition law.  We would therefore recommend that all e-commerce players review their distribution arrangements and assess whether there is any potential exposure to competition law.