E-commerce: new enforcement priority for competition authorities?

The newly published Preliminary Report on the European Commission's E-commerce Sector Inquiry raises concerns on potential competition restrictions concerning elements of e-commerce such as cross-border sales, the use of marketplaces like Amazon and eBay as well pricing in general. The Commission notes that market players in the EU should review their business operations in the light of the Preliminary Report and make sure that they comply with EU competition rules.

The sector inquiry into the e-commerce of consumer goods and digital content in the EU was launched in 2015. It is part of the Commission's Digital Single Market strategy, which aims at enabling and creating a single digital market.

The Commission also published a legislative package (e-commerce package) in June 2016 to promote the strategy. The goal of the package is to prevent geo-blocking (i.e., restricting access to content based on the user's geographical location) and make cross-border deliveries more affordable as well as enhance consumer protection in the digital environment.

In addition, a package to revise and modernise copyright laws was proposed in September 2016 (see Krogerus Newsletter published on 21 September 2016), and a value-added tax proposal is expected later in 2016.

Key Findings Regarding Online Sales

In the sector inquiry, the Commission received information from numerous market players, including retailers, manufacturers, marketplaces, price comparison tools and online payment service providers active in different categories of consumer goods. The Preliminary Report identifies several competition parameters; including price, product quality, brand image, novelty and time of release.

Increased online price transparency is the feature that most affects the behaviour of market players and customers. Price transparency is likely to result in an increase in price competition both online and offline, bringing out new features of market behaviour such as free riding (i.e., customers using physical shops as presale services but purchase the product online), increased direct retail activities by manufacturers and expansion of selective distribution.

The Preliminary Report indicates that manufacturers and suppliers increasingly use problematic or prohibited sales restrictions in their distribution agreements:

• Cross-border sales restrictions through which manufacturers use geo-blocking measures to prevent cross-border sales and deliveries. Contractual cross-border sales restrictions come in many forms and are not always written down;
• Restrictions on the use of marketplaces which range from absolute bans to restrictions on marketplaces that do not fulfil certain quality criteria. An absolute ban on marketplaces would generally amount to a de facto prohibition to sell online;
• Restrictions on the use of price comparison tools which range from absolute bans to restrictions based on certain quality criteria. Certain manufacturers consider price comparison tools as beneficial for their business, increasing their brand's visibility, while others view price comparison tools more critically, believing that they further enhance competition on price, instead of other features;
• Pricing restrictions and resale price maintenance are used by some manufacturers to control prices or price levels in response to the increased price competition. One way to control prices is setting and forcing observance to minimum retail prices, which are normally considered to unlawfully restrict price competition. Numerous retailers have price recommendations in some form from manufacturers, who systematically track the prices of their products sold via independent retailers. Increased price transparency through price monitoring software may facilitate or strengthen collusion between retailers and thereby affect competition.

Key Findings Regarding Digital Content

Licensing of relevant rights for online distribution of digital content is an important driver of competition among digital content providers. The availability of licensing rights is determined by factors such as the (technological, temporal and territorial) scope of rights as well as the duration and the exclusivity of the rights, as defined in the licensing agreements between rights holders and digital content providers.

The preliminary results of the sector inquiry raise questions on whether certain licensing practices may make it more difficult for businesses to grow and expand their activities or for new players to enter existing online markets. This may be particularly true when online rights are sold exclusively per EU member state or bundled with rights for other transmission technologies.

In digital content, the Preliminary Report identifies various potential barriers to competition, including:

• Geo-blocking: The inquiry shows that a majority of digital content providers are required by rights holders to restrict access to their online digital content services for users from other EU member states by means of geo-blocking. Moreover, many of these agreements contain clauses enabling the rights holder to monitor the implementation of technical geo-blocking measures.
• Duration of licensing agreements: New entrants and smaller operators may find it difficult to obtain licences due to relatively long and stable exclusive agreements already in place.
• Payment structures: Certain payment structures such as advance payments and minimum guarantees may also hinder market access for new entrants.

What is there for businesses?

The Preliminary Report is now open for public consultation. Businesses are invited to comment on the findings of the sector inquiry, submit additional information and raise further issues until 18 November 2016.

The Commission will use the feedback received during the public consultation and expects to publish a Final Report on the inquiry in the first quarter of 2017.

As a follow-up to the sector inquiry, the Commission may further investigate the compatibility with EU competition rules of practices like restrictions on online sales, territorial restrictions and pricing restrictions. The Commission will assess these restrictions on a case-by-case basis, having regard to the characteristics of the specific product and geographic markets.

The Commission has noted that some manufacturers have changed their contractual provisions based on the inquiry. It may indeed be advisable for manufacturers, suppliers and retailers to use the Preliminary Report as a guideline to assess and possibly revise their current distribution agreements. For all businesses operating in the EU, the Preliminary Report should, according to EU competition commissioner Margrethe Vestager, "be a trigger for companies to review their current distribution contracts and bring them in line with EU competition rules if they are not".

It seems clear that e-commerce is a new enforcement priority for the Commission, which has in the sector inquiry received important information about businesses operating in the e-commerce sector. The Report might lay grounds for Commission to start investigations against specific companies.