Guest post by Rupprecht Podszun, professor of Civil Law, German and European Competition Law at the University of Düsseldorf *
The German legislator currently amends the competition code so as to update it for the digital economy. This is a pioneering step. After having examined part of the proposed amendments yesterday (see here), this post will describe the new rules for the digital economy.
New rules for the digital economy
The implementation of the directive and the closing of the sausage gap coincided with a heated debate in German media on the power of internet companies, these Voldemorts from the Silicon Valley. Vice-Chancellor Sigmar Gabriel and the head of the influential German media house Axel Springer, Mathias Döpfner, led the campaign against Google & Co. And so, Gabriel’s ministry came up with new rules for the digital economy.
New transaction volume threshold for merger control
The biggest change will come via merger control. The government introduces a new value-of-transaction-threshold. Traditionally, deals have to be notified to a competition agency when the companies involved reach certain turnover thresholds. With the new rule in § 35 (1a) ARC, a merger also has to be notified to the Bundeskartellamt when all companies involved have an overall turnover of more than € 500 million and substantial business in Germany and, this is new, when the purchase price (or more exact: the value of consideration) exceeds € 400 million. This rule was modelled with a view to Facebook’s acquisition of WhatsApp. Facebook paid $ 19 billion for WhatsApp, a company that may steal time from its users but has negligible revenues. The deal neither qualified directly for EU merger control nor for the existing German thresholds. (The EU Commission was able to check it with the skin of its teeth, based on a referral according to Art. 4 (5) of the Merger Regulation (EC) 139/2004. The Commission did not see competitive problems then but now has opened an investigation against Facebook for giving misleading information.)
How to calculate the value of transaction?
The new transaction volume threshold has come under fire from German start-ups, claiming that this would prove to be an “anti-exit-statute”. Having to notify € 400 million plus investments and exits may indeed bring some procedural hassle to entrepreneurs. The rule will also burden pharma and other sectors where companies are bought based on their potential (e.g. in the form of patents) rather than their actual performance. Yet, procedures with the Bundeskartellamt are easy to handle and usually swiftly dealt with. It is highly unlikely that the authority ever intervenes in substance – see the Facebook/WhatsApp-approval. So, the new rule essentially provides for transparency. What is not so transparent: How do you calculate the value of transaction when things are not as plain as in the $ 19 billion WhatsApp deal?
New criteria for market definition in the digital sector
Another question has troubled courts in the past: How do you define a market when there is no monetary consideration? Does the service WhatsApp provides “for free” to its users amount to a market? The SSNIP-test, a tool commonly used to define markets, is not particularly helpful in such instances since it requires payments. Some German courts say that there is no market under these circumstances. The German legislator introduces a new rule now stating that the notion of “market” does not depend on a monetary payment. This targets multi-sided markets, platforms for instance. It is not entirely clear whether the new rule means that in the relation of the platform to end consumers we have a stand-alone-market or whether it has to be analysed as one side of a multi-sided market (the other one being the advertisement business in the case of Facebook for example). In practice, little will change, but it is a clear signal that competition courts and authorities have to deal with the “economics of free”.
In order to be able to analyse the digital sphere properly, the German law-makers add to an existing list of market power criteria in § 18. Five new characteristics shall guide the analysis of multi-sided markets and platforms. These are direct and indirect network effects, multi-homing and switching costs, economies of scale in relation to network effects, access to data and innovation-driven competitive pressure. These factors are seen as relevant for establishing whether an undertaking has market power or not – particularly in cases related to the digital economy. The terminology is close to modern economic theory, and the criteria have been tested in cases of the Bundeskartellamt (e.g. the merger of two dating platforms) before.
This change is not an insignificant one. The list actually forces the authorities and courts to take a close look at the particular features of multi-sided markets. Welcome Jean Tirole, Nobel laureate and champion of two-sided markets, to the courtroom! The existing criteria had a considerable career as key features of market analysis, and this may happen with the new criteria as well.
Also under consideration is a special power for the Bundeskartellamt in matters of consumer protection in the digital world, but I will come back to this in another post.
*Rupprecht Podszun is professor at the University of Düsseldorf and holds the Chair for Civil Law, German and European Competition Law. He is also an Affiliated Research Fellow with the Munich Max Planck Institute for Innovation and Competition. Contact:https://www.jura.hhu.de/en/dozenten/podszun.html or Facebook: Lehrstuhl Podszun