Not the last word - the final report on the e-commerce sector inquiry

Technology Transactions and Strategic Sourcing Alert

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On 10 May 2017, DG Competition of the European Commission (the "Commission") published its final report on the inquiry into the e-commerce sector (launched in May 2015 as part of the Digital Single Market strategy). The findings in the report are based on information gathered from 1,900 stakeholders in 28 EU Member States, including some 8,000 distribution and license agreements relating to consumer goods and digital content. The report largely confirms the Commission's preliminary findings published in its report of September 2016.

Findings in relation to consumer goods:

The Commission's main findings in relation to consumer goods include the following:

  • E-commerce has led to a high degree of price transparency leading to an increase in price competition. The report noted that 53% of players track online prices of competitors (frequently with algorithms / dedicated software applications)
  • 64% of manufacturers reported that they engage in direct retail via their own online retail shops, leading to increased competition at retail level. Cosmetics and healthcare have the highest proportion of direct online retailing by manufacturers
  • Selective distribution systems are on the rise, mostly in relation clothing and shoes. More than half of the manufacturers using selective distribution require retailers to operate at least one brick and mortar shop. The results of the inquiry do not appear to support the need for any revisions to the approach to selective distribution agreements taken in the current Vertical Block Exemption Regulation (the "VBER"). However the report noted that the requirement to operate at least one brick and mortar shop can be problematic in cases where there was no evidence that the requirement would improve the quality of distribution and/or provide potential efficiencies
  • Manufacturers increasingly use contractual sales restrictions such as pricing restrictions and restrictions to sell or advertise through certain online channels or to sell cross-border (see graphic below). Interestingly, the report noted that almost one in ten retailers reported being restricted in their ability to use price comparison tools under their supplier contracts

table

  • Free-riding is an increasing concern, with customers obtaining advice in brick and mortar shops and then buying online
  • The practice of manufacturers to offer dual pricing to hybrid retailers1 might be justifiable in certain circumstances
  • Absolute bans on retailers using online platforms should not automatically constitute hard-core competition restrictions under the VBER (as retailers are often still able to make online sales in alternative ways), but the protection afforded by the VBER can be withdrawn in individual cases by the Commission or the national competition authority
  • Geo-blocking measures (which broadly prevents a customer from buying a product based on the customer's geographic location) will not be an issue for competition law when they stem from the unilateral actions of a non-dominant company. However, geo-blocking measures can be problematic under EU competition law if they result from agreements or concerted practices

The report also confirms that the Commission's aim is to find the right balance between the interests of e-commerce businesses and 'bricks-and-mortar' distribution.

Findings in relation to e-commerce in digital content

In relation to e-commerce in digital content, the Commission identified the ability of content providers to access relevant rights as the key determinant of competition in the market. Further, the Commission made the following observations:

  • Digital content providers frequently implement at least one type of geo-blocking measure at the request of rights holders
  • While exclusive agreements are widespread, it did not view this as problematic in and of itself
  • Right holders tend to have long-term licensing agreements with digital content providers (some more than 10 years) which, especially when combined with rights of first negotiation or automatic renewal rights, can make access to rights for others more difficult
  • The practice of "bundling" technology rights (e.g. where online transmission rights are bundled with other transmission methods) may hinder new entrants and, in cases where the licensee only partially exploits its bundle of rights, lead to a restriction in output
  • The payment structures for "premium" content (e.g. film and sports) favours established content providers who are able to commit to the larger upfront investment required to secure a licence for such content

In relation to geo-blocking in particular, the Commission acknowledges that there are many potential justifications for such measures (e.g. VAT issues, public interest legal provisions), but also notes the need to ensure that consumers seeking to buy products and services in another EU country are not unduly discriminated against. To this end, the Commission has submitted legislative proposals which, if enacted, would modernize the EU copyright rules and ensure that consumers would not face unjustified discrimination when making cross-border purchases.

Next steps

The Commission also notes that the sector inquiry has prompted various entities to review their commercial practices with regards to e-commerce on their own initiative. However, the Commission will use the findings from the inquiry to step up EU antitrust enforcement in European e-commerce markets. It has already opened investigations into holiday accommodation, PC video games distribution and consumer electronics pricing practices, and more are certain to follow. Companies employing the types of restrictions identified in the report as being harmful risk being exposed to, should consider preparing for, "dawn raids" (surprise inspections) or to have further requests for investigations.

The Commission has also indicated an intention to broaden its dialogue with domestic competition authorities in order to contribute to a consistent enforcement of the rules in the e-commerce sector.


1 This involves a manufacturer offering different (or "dual") prices for the same product to the same retailer depending on which distribution channel the retailer intends to sell the products through (e.g. via a website or through a brick and mortar store).