The Android decision: Is the EU blade runner seeking to retire the more-economic replicant?

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In the aftermath of the Intel judgment, the exemplary punishment on Google has come as a reality check for our daydreams of a resurrected “more-economic approach” in abuse of dominance enforcement.

By Pablo Solano, expert in Competition and European Union Law 

As (distortedly) voiced beyond competition law circles, Google has been fined a record EUR 4.34 billion for allegedly tying the Google Play app store to the licensing of other apps, paying for the exclusive pre-installation of Google Search, and preventing device manufacturers from using alternative Android versions not previously approved by Google. This article aims to separate the antitrust wheat from the public stir chaff by outlining the cutting-edge debates that the decision has fueled. Particularly interesting are market definitions in the digital economy, the exhaustion of traditional per se rules regarding tying and exclusivity, and the intervention of competition authorities in dominant companies’ business models.

Last summer, the Google Search decision[1] seemed grave to supporters of the more economic approach, which advocates for requiring that enforcers analyze the current or potential anticompetitive effect of a given conduct in order to deem it abusive, instead of blindly relying on per se rules. In addition to adhering to this controversial theory of harm, the Commission forewent a one-off opportunity to update the old abuse rulebook and adapt it to the current conditions of the digital economy. Specifically, high market contestability in digital environments and indirect network effects as a competition boost failed to displace the traditional importance of market shares and the shallow concept of indirect network effects as barriers to entry.

However, the September Intel judgment[2] created new hope for a more economic approach to Article 102 of the Treaty of the European Union (TFEU). Regarding exclusivity payments by the chip maker to device manufacturers, the Court of Justice of the European Union (CJEU) held that the Commission and the General Court on appeal are obliged to examine, on the basis of all relevant circumstances, the evidence put forth by the dominant company in efforts to suggest that its conduct is not capable of producing foreclosure effects, as well as evidence regarding the efficiencies that may counterbalance this.

In Android,[3] the Commission seems to have relapsed into the imposition of record fines against Google on the basis of per se rules. Although the decision has not yet been published, the press release hints at a restrictive interpretation of Intel by the European Union (EU) watchdog, just like in the Qualcomm (exclusivity) decision, of which only a summary is available.

The existence of sufficient competitive pressure between both markets is denied on the basis of considerations that do not align with the realities of the digital economy

 

Market definition and dominance

On a multi-sided platform, different groups of users with interdependent demand (app developers, device manufacturers, mobile carriers, users, and app-based service providers ) interface with one another via Android, and externalities produced by one group (i.e. indirect network effects) are captured and monetized in the form of marketing to other groups. In practice, separate markets tend to be defined on either side of a platform in which there is a group of users with independent (albeit interrelated) demand.[4]

The Commission has once again opted to define relevant markets in an artificially narrow manner. This has been seen in Google Search, in which the trustbuster forcefully insisted on comparison websites forming separate markets from marketplaces, like Amazon or eBay. In Android, the worldwide market (excluding China) for smart mobile operating systems available for license, in which Google would hold a 95% market share, was emphatically delineated from operating systems used exclusively by vertically integrated developers, such as Apple iOS or Blackberry.

Furthermore, the existence of sufficient competitive pressure between both markets is denied on the basis of considerations that do not align with the realities of the digital economy, such as consumers’ purchasing decisions being influenced by factors other than operating system (e.g. hardware features or device brand), Apple devices’ high prices not being affordable to a large portion of Android device users, the cost of switching from Android to Apple devices (in terms of apps, data, loss of contacts, and learning costs), and switching to Apple having limited impact on Google insofar as Google Search would also be the default search engine on Apple devices, and users would, therefore, be likely to continue using it.

The same analog-based reasoning allows the EU watchdog to assert Google’s dominance in the worldwide app store market (excluding China) for the Android mobile operating system, unconstrained by Apple’s App Store (which is only available on iOS devices). The Commission’s emphasis on negating the competitive relationship between Android and other operating systems could be an effort to close the door to a more flexible approach to tying, similar to the approach taken with competition between bundles.[5]

Concerning dominance, like with Google Search, the Commission refuses to give the same credibility in merger control[6] upheld by the General Court to the paradigm of market contestability, according to which easy entry and exit in naturally concentrated digital markets would undermine the incumbents’ market power to the point that welfare conditions would be close to perfect competition.[7] Instead, the Commission is excessively focused on high market shares, and network effects are again unequivocally seen as barriers to entry rather than complex phenomena that could be pro-competition.

Today, it is difficult to see how the pre-installation of certain apps would prevent a majority of digital natives and tech-savvy users from either resorting to better apps or multihoming.

 

Tying

The first concern takes issue with Google making mobile device manufacturers’ pre-installation of Google Search subject to their pre-installation of Google Play Store (i.e. Google’s proprietary app store), and the pre-installation of both apps dependant on the pre-installation of the Google Chrome web browser. The Intel momentum could have been used to move away from the traditional per se rule regarding tying seen in the Microsoft saga.[8] Rather, the Commission turns to the same “status quo bias” argument that, a decade ago, led the then-Court of First Instance to rule that directly coercing original equipment manufacturers to pre-install Windows Media Player indirectly coerced consumers. Today, it is difficult to see how the pre-installation of certain apps would prevent a majority of digital natives and tech-savvy users from either resorting to better apps or multihoming.

Moreover, the Microsoft concept of indirect network effects creating a “positive feedback loop”[9] that reinforces the exclusionary effect is maintained. This ignores the ambiguous nature of indirect network effects in the digital economy, which can also work as catalysts for the dissemination of innovation in a multihoming environment in which differentiated products may swiftly gain a critical user base. In a nutshell, with competition being one swipe away,[10] the status quo bias does not appear to be a sufficiently sound foundation for heavily censoring the whole Android business model.

Exclusivity

Exclusivity was traditionally a stronghold for per se rules, at least until Intel. In the Android press release, as in the Qualcomm (exclusivity) summary, the Commission reckons, in line with Intel, to have considered, amongst other factors, the conditions under which the incentives were granted, their amount, the share of the market covered by the agreements and their duration. It also dismissed Google’s claim that payments for exclusivity were necessary and proportionate to convince device manufacturers and mobile network operators to produce devices for the Android ecosystem.

However, it remains to be seen in the full versions of the Android and Qualcomm (exclusivity) decisions whether the effect analysis conducted is sufficiently thorough to comply with the Intel judgment, and, specifically, whether the EU trustbuster second-guessed the parties’ arguments as to the absence of foreclosure effects and countervailing efficiencies, instead of limiting itself to building a shallow analysis just to reject them.

 

Android forks

The third limb of the overall strategy attributed to Google is related to making device manufacturers commit to not developing or selling any device running on Android forks (i.e. alternative versions of Android that are not approved by Google, and are based on open source code) in order to be able to pre-install proprietary apps, including Play Store and Google Search. This practice would have reduced innovation and choice in terms of devices running on Android forks, such as—allegedly—devices based on Amazon’s Fire OS, and ultimately, it would have removed an important outlet for competitors’ apps, specifically apps providing general search services.

Firstly, an effect-oriented approach on this point would be necessary for the sake of consistency with the treatment of single-branding and non-compete obligations under rules on the application of Article 101 TFEU to vertical agreements and concerted practices, as it concerns both the analysis of their effects and the consideration of efficiencies.[11] In this regard, the Android’s fork concern stirs up the debate over whether the special responsibility of dominant companies not to impair competition should prevent them from, for example, shielding themselves from free-riding.[12]

Secondly, while traditionally only ex ante objective justifications could offset abuse, the digital economy seems like the appropriate field for an ex post efficiency defense to be inserted into Article 102’s enforcement (the theoretical possibility of having been recognized by both the Commission and the CJEU),[13] given the magnitude of the potential positive externalities that can be captured by incumbent platforms with a large enough market share.

Nevertheless, the EU watchdog has limited itself to rebutting Google’s argument that its conduct was justified because it prevented the “fragmentation” of the Android ecosystem (also put forward and rejected in Microsoft). In the full decision, it will be interesting to see the extent to which Google voiced any efficiency defense and whether or not the trustbuster produced counter-evidence.

 

Conclusion

The Android decision could be read as a new setback to the long-awaited more economic approach to abuse enforcement in digital ecosystems. In fact, market definitions remain rooted in substitution patterns that are at odds with technology-based platforms, market power is still excessively engrained in market shares and a static concept of indirect network effects and theories of harm rely too much on per se rules.

In the full decision, we will see if the Commission interpreted the Intel ruling in the sense of requiring a full-fledged analysis of anticompetitive effects and efficiencies to invalidate Google’s. If this is the case, the battle for a digital approach to abuse enforcement might not be lost quite yet.

Pablo Solano is an associate at the Competition and European Union Law department at Uría Menéndez.  His practice focuses on EU and Spanish competition law and EU law. He works on a wide variety of national and international cases before the Spanish and EU authorities in relation to abuse of dominance, agreements and strategic alliances, mergers, and state aid, on implementing compliance programmes, and on assignments regarding EU fundamental freedoms, market unity and proceedings for unfair competition infringements affecting the public interest.

[1] See decision by the European Commission dated 27 June 2017 in case AT.39740 Google Search (Shopping).
[2] See judgment by the Court of Justice dated 6 September 2017 in case C 413/14 P Intel v Commission.
[3] See decision by the European Commission dated 18 July 2018 in case AT.40099 Google Android.
[4] For extensive discussion, see Pablo Solano, “EU Competition needs to install a plug-in”, World Competition, 40(3), 2017, 393 to 420, pp. 397 and 398.
[5] See Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ C 45/7, 24.2.2009, para. 61.
[6] See judgment by the General Court dated 11 December 2013 in case T-79/12 Cisco and Messagenet v Commission.
[7] For extensive discussion, see Pablo Solano, “Do androids dream of exclusivity?”, Competition Actually, 23 August 2016, available at http://www.competitionactually.com/abuse-dominant-position-article-102/do-androids-dream-of-exclusivity/ (accessed 23 August 2018).
[8] See judgment by the Court of First Instance dated 17 September 2007 in case T-201/04 Microsoft v Commission, and decision by the European Commission dated 6 March 2013 in case AT.39530 Microsoft (Tying).
[9] See judgment in Microsoft v Commission, cit., paras 1.061 to 1.089.
[10] Lewis Crofts, “Android Users Don’t Download Search Apps to Rival Google, Vestager Says”, MLex, 13 May 2016, available at http://www.mlex.com/GlobalAntitrust/DetailView.aspx?cid=794732&siteid=190&rdir=1 (accessed 23 August 2018).
[11] See Guidelines on Vertical Restraints, OJ C 130/1, 19.5.2010, paras. 106 to 109 and 129 to 148.
[12] See Pablo Ibáñez, “The Android decision is out: the exciting legal stuff beneath the noise”, Chillin’ Competition, 18 July 2018, available at https://chillingcompetition.com/2018/07/18/the-android-decision-is-out-the-exciting-legal-stuff-beneath-the-noise-by-pablo/ (accessed on 23 August 2018).
[13] See, for all, judgment of the Court of Justice dated 27 March 2012 in case C-209/10 Post Danmark, para. 42, and Guidance on the Commission’s enforcement priorities, cit., paras. 28 to 31.

Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution.