Germany: Germany Updates Competition Rules To Deal With Digital Markets

The "Digital Strategy 2025", adopted by the German Federal Government on March 1, 2016, aims to ensure that Germany remains a growing, modern and significant financial marketplace in an increasingly digitalized environment. Measures proposed under the Digital Strategy 2025 include the further development of Germany's regulatory landscape, in particular in the areas of competition and consumer rights.

On March 20, 2017, the German Federal Ministry for Economic Affairs and Energy (Bundesministerium für Wirtschaft und Energie) published the White Paper 'Digital Platforms'. The white paper stresses the need to further develop competition and antitrust policy in Germany to facilitate a level playing field for both digital and analog businesses.

In recent years, the German competition regime has been widely perceived as inadequate in addressing digital platforms, for instance, when assessing their market power; traditional turnover-based concepts have proved incapable of capturing their position for competition, in particular in the light of big data. The growing relevance of big data, with consumers nowadays "paying" for the services digital platforms provide "free" of charge, has created the need to refine the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen, ARC) in addition to strengthening consumer rights.

The ARC is currently going through its ninth amendment, which is expected to enter into force shortly. On March 31, 2017, the German Federal Council (Bundesrat) consented to the legislative changes which had already been approved by the German Federal Parliament (Bundestag) earlier this year. The ninth amendment introduces alternative and more effective concepts into German competition policy that apply to the specific features of digital platforms:

  • Under the new law, the existence of a relevant market will no longer depend on the generation of turnover, and so social platforms, search engines and information sites will no longer slip under the radar of competition regulation only because they offer their services to consumers for free.
  • The amendment further incorporates numerous criteria into the assessment of two- or multi-sided markets (in which digital platforms are typically active) such as the interdependencies of the different market sides (so-called direct and indirect network effects), whether users only engage one or several competing services (i.e., engage in single- versus multi-homing), the existence of so-called lock-in effects (e.g., losing access to contacts when leaving a social network), economies of scale relating to network effects, access to relevant data, and the potential constraints on competition due to innovation.
  • The amendment introduces a size-of-transaction test into German merger control with the intention of catching transactions with a deal value of €400 million where the target company does not generate turnover in Germany or its turnover in Germany is below the €5 million threshold. This will ensure effective merger control in cases where the target's economic relevance in Germany is not adequately reflected in its domestic turnover. Supplementing the existing turnover-based threshold test with an alternative size-of-transaction test is also being discussed at the EU level. The acquisition of WhatsApp by Facebook in 2014 prompted this change under the ninth amendment – the transaction was caught under neither German nor (initially) EU merger control although the acquisition's relevance in the market was significant (Facebook paid approximately US$19 billion for the acquisition).

The anticipated changes to the assessment of the competitiveness of digital platforms do not necessarily introduce entirely new concepts and approaches but rather help to synchronize the law with concepts already established in the approach to decisions taken by the German Federal Cartel Office (Bundeskartellamt, FCO) and German courts. In contrast, the introduction of the size-of-transaction test into German merger controls will close a perceived enforcement gap. It remains to be seen to what extent this will lead to an increase in burdens and bureaucracy for both companies and the FCO, in particular since the size-of-transaction test will apply to transactions across all sectors and not just digital markets. This test is, therefore, also likely to increase the volume of cases before the FCO relating to mergers which are not potentially anti-competitive. Furthermore, the additional criterion introduced into the test, which requires the target to be domestically active "to a significant extent", may lack sufficient legal certainty when determining whether or not a transaction is notifiable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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