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Bigger than Geo-blocking: How the European Commission’s Sector Inquiry Can Set E-Commerce Free

Early this month the European Commission unveiled its Digital Single Market (DSM) strategy. The strategy has the very laudable goal of promoting the digital economy by furthering Europe’s integration in this sphere — something a borderless Internet is indeed ideally placed to do. It encourages European companies, citizens and institutions to think more digital and sheds some of the barriers that citizens and companies face when engaging in business transactions online.

While the DSM strategy’s vague discussion of online platforms and geo-blocking were among the issues that received most media attention, it is worthwhile to recall that a fully fledged competition sector inquiry into e-commerce is formally a part of the strategy. Expressed in competition policy terms, the sector inquiry will look at private barriers set up by companies that lead to territorial fragmentation and to restrictions of price competition.

The issue of territorial fragmentation is key. The Commission has made it very clear that restrictions to cross-border e-commerce in tangible and intangible products are the central concern of the inquiry. The Commission will primarily focus on specific product markets like electronics, shoes, clothing, and digital content. This seemingly arbitrary selection is driven, according to the Commission, by the fact that consumers frequently buy these products online. It is important to recognize that a sector inquiry is nothing which one could term DG COMP ‘standard practice’ because of its resource intensity. This is only the fourth sector inquiry the Commission has ever conducted. And sector inquiries are usually only conducted if there are indications of anticompetitive practices which could fall foul of EU competition law.

From a practical point of view the sector inquiry is a huge data gathering exercise. The Commission is primarily interested in getting as much market data as possible to better understand market dynamics. This data is needed to not only be clear about the problems but, most importantly, about their scale. Hence, a first, and in all likelihood very comprehensive, questionnaire will be sent to relevant market participants in June. A second round of questions is expected to follow at a later stage, allowing the Commission to dig deeper into issues that the first questionnaire will uncover. Addressees of these questionnaires could in theory include everyone the Commission considers as relevant to e-commerce. Online marketplaces, online sellers, manufacturers, content producers and distributors are among the obvious prospective recipients of the questionnaire.

Potential consequences of the inquiry are to be taken seriously. Should DG COMP find a systemic problem in the market which needs to be addressed, targeted enforcement actions could follow. Pressure to review the Vertical Block Exemption Regulation and the accompanying Guidelines on Vertical Restraints is likely to (strongly) increase. At the very least, the outcome of the inquiry will feed into the regulatory debate providing a basis for the Commission to act ex ante in areas in which the evidence shows such intervention is justified.

As regards concrete anticompetitive practices, online marketplace bans imposed by certain manufacturers on their sellers will be specifically addressed in the inquiry. These practices continue to hamper the development of e-commerce in Europe as authorized resellers continue to be prohibited from selling products through their shops on open marketplaces like eBay, Allegro or Amazon. To be clear, these bans are specifically targeted at open marketplaces and are not part of a general online sales prohibition which the CJEU has already ruled to be illegal in Pierre Fabre. Literally thousands of European online sellers have already complained about these restrictions which significantly impede their ability to use the Internet as a distribution channel because most private online shops simply don’t have a potential customer base as large as the ones of the most popular online marketplaces. With all due respect for Vice President Ansip’s institutional as much as private war on ‘geo-blocking’ (“But deep in my heart I would like to say: I hate geoblocking”), online marketplace bans are a bigger problem than geo-blocking — far bigger.

In light of the Commission’s focus on cross-border trade, Amazon recently announced that in the past year businesses selling on its EU websites earned a record EUR 2.8 billion in revenue from exports within the EU. In addition, the number of EU businesses exporting products to customers outside of their home country increased nearly 50% in the past 12 months. This example alone reveals how online marketplaces are becoming a driving force behind Europe’s cross-border trade which enjoys one of the top spots in the Commission’s policy agenda. But if authorized resellers are prevented from using these opportunities, (cross-border) e-commerce in Europe will continue to suffer. As a general principle, manufacturers should not be able to prohibit the sale of products on online marketplaces if these marketplaces are able to fulfil the qualitative requirements applicable to sales through private online shops. Especially with respect to ordinary products like shoes or clothing there is no reason to presume that an online marketplace cannot fulfil requirements a seller’s own online shop has to fulfil. (In fact, given the high sophistication of popular online marketplaces the opposite could be true).

As mentioned above, the results of the sector inquiry could prompt the Commission to review the legislative framework on vertical restraints. It is not really a secret that the Commission’s reading of the Guidelines on Vertical Restraints is currently preventing action against online marketplace bans. This is not without consequences because national competition authorities, led principally by the German Bundeskartellamt, have taken action. Last year the Bundeskartellamt forced Adidas to abandon these restrictive practices while an investigation against Asics is still ongoing. What is certainly good for German consumers must inevitably concern the European Commission: divergent national approaches to the same problem. From a business perspective, German online sellers using online marketplaces have a comparative advantage because of the Bundeskartellamt’s strong enforcement practice. And would the next online marketplace startup prefer to grow its business from Germany because manufacturers cannot impose restrictions on online sales which were found to be anti-competitive in that country alone? This would run counter to the whole logic of an integrated DSM in which it should not matter from where you run your online businesses.

A preliminary report summarizing the Commission’s findings is expected for summer 2016. This report will be accompanied by a public consultation. The final report of the sector inquiry is expected for the first half of 2017.

European Union

DisCo is dedicated to examining technology and policy at a global scale.  Developments in the European Union play a considerable role in shaping both European and global technology markets.  EU regulations related to copyright, competition, privacy, innovation, and trade all affect the international development of technology and tech markets.