22 April 2024

India's Digital Competition Bill, 2024 – The Need For Caution

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In the context of the proposed Digital Competition Bill 2024, this article by Vinod Dhall, calls for caution in India before introducing heavy handed ex ante regulation of major digital companies...
India Antitrust/Competition Law
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The debate around the regulation of the tech giants is not new. Nor is it confined to India. These are global companies operating across the world in various geographies. While they have in many ways contributed to society and transformed the way we lead our daily lives, these companies have been accused of accumulating immense economic and market power and abusing that power.

Enforcement by authorities

The EU Competition Commission has been in the forefront of enforcement against the Big Tech. Only recently, the EU imposed a penalty of over EUR 1.8 billion on Apple for abusing its dominant position in the market for the distribution of music streaming apps through its App Store, including for imposing 'anti-steering provisions'. Earlier, the EC had ordered Apple to return the tax incentive of virtually EUR 13 bn that it had received from Ireland as it felt this gave Apple an unfair market advantage vis a vis its rivals.

The EC has imposed penalties on Google totalling over EUR 8 billion for practices for giving preferences to its own comparison-shopping app called Google Shopping, for placing restrictions on mobile manufacturers that used the Android OS and for restricting certain third-party websites from displaying search advertisements from Google's competitors. Very recently the EC served a statement of objections to Google for favouring its own Adtech services.

Not too far back, the EC had opened a formal investigation against Microsoft for bundling its Teams product to its popular Microsoft 365.

In the US, the DOJ / FTC, along with some States, have filed cases against Google for anticompetitive and exclusionary practices in the search and search advertising markets and for monopolizing multiple digital Adtech products. They have also commenced cases against Apple including very recently for monopolization of smartphone markets. The FTC had also brought cases in court to block Microsoft's acquisition of Blizzard Activision, which failed. Somewhat oddly, the chairperson of FTC Lina Khan has publicly stated that no matter that they may lose in courts, but they will continue to bring cases against the Big Tech companies. Prior to her appointment to the FTC, when she was at the University of Yale, she had written a research paper against the anticompetitive abuses by Amazon; that paper made her famous and possibly was a factor in her appointment as the FTC chair.

There have been similar developments in a few other countries such as Japan and South Korea; Japan is investigating Google's requirement for Android phone manufacturers to pre-install Google search and browser along with Google Play. In South Korea, a fine of around USD 32 million was imposed on Google for restricting video game makers to exclusively release their titles on Google Play.

Enforcement in India

In India, the Competition Commission of India (CCI) has held against Google in the Android OS case, and in the Google Play case imposing heavy penalties. Much earlier it had penalised Google in the Bharat Matrimony case. All of the CCI orders are under appeal. In the Google Play case, Google introduced an optional payment system called UCB giving apps the option to pay outside the Google Pay route. The aggrieved parties again approached the CCI against Google's new system, and this has led to yet another CCI inquiry. An investigation against Apple has been going on in the CCI for quite some time.

Not only the global Big Tech, there have been complaints even against India's domestic tech companies such as MakeMyTrip and Ola (also against Uber) and also against Flipkart (and Amazon). In the MakeMyTrip case, the CCI has passed an order against the company. However, mostly other complaints have not succeeded.

In India, the hotel companies had complaints against Oyo and AirBnB . Taxi companies had complaints against Ola and Uber, but now they have themselves adopted technologies similar to these tech companies. Restaurants have had issues with food delivery companies like Swiggy and Zomato. Kirana shops have been complaining against ecommerce platforms like Amazon and Flipkart. The CCI did inquire into some of these complaints such as against Swiggy and Zomato and rejected them.

Protests against new policies and technologies

It is not uncommon that when new developments take place, in technology or in policy, the affected parties strongly oppose the same. In the 1990s when India's domestic economy was being opened up, the Indian industry leaders (nicknamed the Bombay Club) strongly opposed the new policies. Their complaint was that the entry allowed to foreign businesses will lead to the death of domestic industries. But liberalisation was an idea whose time had come and there was no going back. The Indian businesses had to accept the new challenges and thrive. Today they are better off from the liberalisation policies and have themselves grown to global size. So also perhaps those who are opposing the various practices of the Big Tech or the domestic tech companies will learn to survive and grow in the midst of these new technological developments.

As we know unfortunately these controversies often acquire a political colour when say, small enterprises in large numbers complain against the larger tech companies. Or when domestic companies protest against foreign rivals. Or when political leaders themselves resent the economic clout acquired by large companies. But it is important that the enforcement authorities stay away from political pressure and act only on merits.

Criticisms of competition authorities' approach in enforcement

Many experts have been critical of the competition authorities' methodologies in analysing the practices of the Big Tech. According to them the authorities need to have a better appreciation of the business models of the technical companies, including the Big Tech. The experts also believe that the competition agencies need to attach more weightage to the consumer benefits and rich consumer experiences brought about by the technology companies, in short to consumer welfare. They further are of the view that competition authorities are using only traditional tools to analyse digital markets, which differ in many ways from the traditional manufacturing and other businesses. These criticisms suggest that while competition law has served the world well, including in India, it would be failing in its objectives if it did not evolve and adjust to the specific features of the tech companies.

Digital markets differ from traditional markets

Digital markets differ from traditional businesses in several ways. One, the internet has abolished distances and reduced the cost of interaction between the service provider and the recipient. This facilitates immense economies of scale, allowing the companies to expand without substantial additional costs once the technology infrastructure has been established. Secondly the technology allows them to simultaneously provide services to different groups of customers, e.g. the users and the advertisers, and enables them to interact with each other. This results in multi-sided platforms. Thirdly, digital technologies allow firms to gather real time data on the users, about their preferences in the products and services they consume. These insights enable the tech companies to customise their services to individual consumers and continuously improve the quality of their services.

In fact, digital companies compete more on quality than on price, which is the case mostly in traditional markets. On the one side of the market they may have zero-pricing. The attraction for them lies in adding additional users or eye balls and reaping the data that comes with them. Going forward, it is likely that this advantage may be even more pronounced in the age of artificial intelligence, enabling the companies to better train their algorithms and thereby provide yet better quality and more personalised services. This could make their platforms even more attractive for the advertisers, thereby enhancing their revenues. Hence, in their case, zero pricing cannot be classified as predatory under competition law; on the other hand zero pricing on one side of the platform is the source of revenue from the other side of the platform. In fact, zero pricing may be a profit maximising strategy.

Further, the tech companies are able to harness their modular technology to provide a bundle of connected services on their platform that maximise their value to the users. In this way they are able to develop an entire ecosystem of services. For example, years back Amazon started off as an online book retailer, but soon it began to retail online thousands of other products, and also develop a huge ecosystem of complementary services like gaming, video, payment solutions, and cloud storage.

Similarly, Google has developed a vast service based ecosystem around its android operating system which is freely available to users and product manufacturers, comprising search, mail, maps, cloud services, comparison shopping etc that are extremely popular with users.

So also, Apple can be viewed as a multi-device based ecosystem which offers access to several devices and services. Similar is the case with several Indian digital companies.

These examples serve to illustrate how dynamic the digital markets are, where the technology is being innovated and newer services are being offered all the time. In fact innovation and technological development are typical features of the digital markets. One may expect that with the advent of generative AI, the markets can undergo unforeseen and exciting changes. Newer challengers would emerge, and yesterday's champions may be hard put to retain their pre-eminent position as of today.

Article by Frederic Jenny

In a well researched article on competition law and digital markets, Frederic Jenny, (a much respected academic and expert in competition law, formerly deputy head of the French competition authority and a judge of the French Supreme Court) has drawn attention to the characteristics of the digital markets and how he believes that the traditional tools of competition analysis may not be suitable for analysing digital markets. Inter alia, he has opined that the static analysis relied on by competition authorities may not be adequate to assess the dynamic and technology driven digital markets. He has also quoted business economists who have said that since technologies and customer needs evolve, later entrants may often be at an advantage over existing competitors. An example that comes to mind is the story of Blackberry mobile phone, which was once the standard equipment for business users. Over time it got overtaken by newer phones such as the Iphone and the Android mobiles.

Jenny has also pointed out that competition between rivals is within an ecosystem as well as between their ecosystems. It is important for the competition agency to examine the interplay between competition at both levels when deciding a matter.

Jenny has stated that the technical barriers to entry in the tech sector may not be the most crucial element explaining the dominance of a few successful platforms. The design of these platforms and their organisational capabilities may be an equally important factor in their success.

On the question of the so called 'killer acquisitions' resorted to by the Big Tech players, many observers have contended that authorities should analyse the counterfactual as well, that is to say what would have happened if such an acquisition had not taken place. Would the target of the acquisition, left on its own, have risen to become a successful rival? Would its services have been able to reach the markets on a wide scale on their own strength; or is it that the acquisition has in fact enabled the target company's services to achieve far wider markets than what it could have done on its own? Would an alternative acquirer have been interested in the target? Is it not a business strategy of many startups to reach a level where they become a valuable target for larger companies? These are some of the issues in the so called 'killer acquisitions' that competition authorities should be asking when assessing them under competition law to get what might be called a complete or 360 degrees view of the case.

Enterprises employ all sorts of clever or innovative ways to compete and maximise profits. Unlike in traditional markets, their business models might differ in digital markets, and yet they would be competing against each other. The differing business models of rivals Apple and Google is a case in point. Only in a proper case by case inquiry can such companies explain their business practices and how these maximise consumer experiences and benefits. Thus under competition law the inquiry has to be case specific. No one can defend the indefensible, and if the law is being breached, action has to be taken. But what may be grossly unacceptable in one case, may be completely reasonable company behaviour in another case e.g. zero pricing to acquire more users and data. Hence a blanket ban on large companies would be uncalled for and even counter productive as it may curb business initiatives and innovation.

New ex ante laws

Confronted with the so called 'abuse of dominance' by the Big Tech, authorities in some jurisdictions have veered to enacting new laws to deal with the problem, that is to say ex ante laws that will at the very threshold bar the Big Tech giants from undertaking certain kinds of practices. The ex ante approach would mean that once a company crosses prescribed thresholds it would be required to discontinue such practices on its own, failing which it can be directed to discontinue those practices, and heavy penalties can be imposed.

The most prominent among the ex ante laws is the Digital Markets Act or DMA of the EU. Very briefly the DMA provides that if an enterprise exceeds the laid down thresholds in size and the number of users, such an enterprise cannot resort to certain prohibited activities such as self-preferencing, tying, preventing users from deleting apps, etc. The Act came into effect on 6 March this year (2024) for such companies who have been designated as "Gatekeepers".

The UK too has deliberated on this issue and a Bill has been introduced in Parliament. We understand however that this Bill diverges from the EU DMA in several ways, and is designed to be milder and more nuanced, and not as heavy handed as the DMA. In Australia too the debate has been taking place and the ACCC has made some recommendations, on which the government has so far not taken any decision. In the United States, Congress had inquired into the issue and recommended two laws to rein in the activities of the Big Tech. But no law has been enacted so far even though the Biden Administration has been much more committed to forceful enforcement of the antitrust law than previous Republican administrations. On the other hand, the Biden administration has pursued its objective by launching several cases under the antirust laws only; these cases of course will have to be fought out in the courts where the opposite parties like Apple and Google will be able to defend themselves.

Objective of the ex ante laws

The objective of these ex ante laws are the same as of competition law, that is to say maintain healthy competition in the market; but the approach of the two laws vary: the guiding principle of competition law has always been non-invasive and it allows rivals to compete to the utmost, to unleash their 'animal spirits', allowing the better rival to prevail. However, if any entity resorts to practices prohibited under the competition law, then and then only, the interference by the competition authority is called for. In that case the law provides that a due inquiry should be undertaken by the competition authority before passing any order, and the pros and cons should be examined. The due process would allow a full opportunity to the offending party to justify and defend its practices. On the other hand, under the ex ante laws, in a manner of speaking, the verdict would have been passed before the inquiry is held.

In the light of these considerations, a heavy-handed ex ante law needs to be avoided. Great caution needs to be observed. Blanket prohibitions of certain practices across the board may not be in order and may chill innovation and technological development along with the multifarious benefits these bring to consumers and to the economy. In this respect the fallout from the DMA has still to be examined, and many countries are waiting to observe this.

May be a little caution in India is worth considering. As a broad principle it should be considered to what extent we can eschew the ex ante approach in favour of ex post action. Perhaps certain provisions can be inserted into the existing Competition Act, for example can we add to the list of abuses of dominance specifically designed for digital markets, can we strengthen the CCI's power to pass interim orders, can we impose strict timelines on the CCI's enforcement proceedings and so on.

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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