EU Geopolitical Risk Update - Key Policy & Regulatory Developments No. 117

On 19 September 2024, the Commission announced its Competition Policy Brief on Competition in Generative AI and Virtual Worlds, which examines the impact of these technologies on competition in Europe. The Commission argues that because of their disruptive nature and the competitive risks that it asserts these technologies may entail, the Commission aims at ensuring that society as a whole enjoys their potential benefits in terms of innovation and prices.

The Policy Brief is based on over 170 stakeholder responses to the Commission's calls for contributions in January 2024 on competition in virtual worlds and generative AI (seehere), the follow-up workshop in June 2024 (seehere), interviews with key stakeholders and parallel market investigations, as well as collaboration with other competition authorities, including in France, Hungary, Portugal, and the UK, as well as the US Federal Trade Commission.

The Policy Brief sets out market dynamics and potential elements of a preliminary framework for assessing anticompetitive concerns and the possible tools to address these, including antitrust enforcement and merger control. According to the Commission, in particular:

For generative AI,

• Market tendencies. Vertical integration or establishing partnerships to access input resources or distribution channels are among the tendencies shaping generative AI related markets.
• Potential barriers to entry. Key components for developing and deploying generative AI systems include data, AI accelerator chips, computing infrastructure, cloud capacity and technical expertise. Depending on the economic context, the Commission may view each of these as amounting to a potential barrier to entry or expansion, or potentially leading to an anticompetitive practice. Furthermore, risks of abuse of dominance could arise where the Commission perceives established large players as aiming at foreclosing competitors, for instance, through control over distribution channels for generative AI applications or services.

For virtual worlds:

• Market tendencies. The virtual worlds industry features diverse players with distinct strategies, who invest in a variety of intertwined technologies and services (e.g., large digital players investing in hardware technologies such as virtual reality headsets). High-speed networks, cloud computing, chips, intellectual property, AI and data are vital enabling elements. Access to these can play a crucial role for robust competition in the virtual worlds sector.
• Potential barriers to entry. Some stakeholders raised concerns that strong scale effects can increase entry barriers in virtual worlds markets. Very high costs are necessary for investment and innovation in the sector, and large digital players may enjoy greater financial means if deciding to invest heavily in underlying infrastructure, technology, content and talent. By contrast, European start-ups and SMEs often lack access to funding, which can create difficulties in scaling up and matching the offer of established tech companies

Commission response. Given the significant scope of the impacts of these technologies and the risks they might entail, DG Competition is actively monitoring the generative AI and virtual worlds sectors in seeking to safeguard competition. For instance, DG Competition is analyzing investments and partnerships between large digital players and generative AI developers, as well as agreements for pre-installing generative AI models on devices in view of ensuring that they do not raise the Commission's competitive concerns.

DG Competition is also currently undertaking preliminary investigations into markets seen as crucial for the development of generative AI and virtual worlds, such as the markets for cloud or for different types of specialized chips.

On 5 September 2024, the Commission published a Staff Working Document Evaluation ("Evaluation") ofRegulation 1/2003 and Regulation 773/2004 on implementing EU competition rules (together the "Regulations"), which entered into force 20 years ago on 1 May 2004.

The Commission views the Evaluation as particularly timely in light of digitization of the economy and the Commission's priority of completing the EU's digital transformation by 2030 (see EU 2030 Digital Compass Communication).

Launched in March 2022, the Evaluation reflects some 60 stakeholder contributions, 250 expert interviews with external lawyers and in-house counsels, and data from the Commission, NCAs (national competition authorities) and non-EU jurisdictions.

Backdrop. The Regulations established a procedural framework aimed at ensuring the effective implementation of the EU competition rules set out in Articles 101 (prohibits agreements between companies that restrict competition) and Article 102 (prohibits abusive conduct by companies that have a dominant position on a particular market) of the Treaty on the Functioning of the EU (TFEU).

The Regulations have played a crucial role in enforcing EU antitrust rules. According to the Commission, between 1 May 2004 and end-2022, the Commission imposed over €42 billion in fines under Regulation 1/2003, of which the EU courts have upheld approximately €37 billion.

The Commission set out its views on the Evaluation's main findings, such as:

• The Regulations have generally attained their objective of the effective and uniform application of EU competition rules.
• Regulation 1/2003 brought positive changes:

− By abolishing the old system of requiring companies to notify agreements to the Commission in order to benefit from an exemption under Article 101(3) TFEU,* this enabled cost savings for the Commission and for businesses.

− By implementing a decentralized system of parallel enforcement of EU competition rules by the Commission and NCAs, this led to more effective enforcement. NCAs and the Commission have together adopted over 1,650 decisions (with NCAs adopting over 85% of these).

Impact of digitalization and globalization. The economy's digitalization has raised concerns over the effectiveness of the Commission's investigative tools (over 60 years old) and the increasing tension between the need for swift intervention and the average duration of antitrust proceedings. In particular:

− Investigations now take place in a digitalized environment that greatly differs from the paper-based environment when Regulation 1/2003 was enacted. With the ever-growing importance of digital evidence for antitrust investigations, the current legal framework may not fully enable the Commission to gather effectively the information necessary for its enforcement of competition rules.

For example, the Commission's inspection powers consist of entering business premises, taking copies of relevant evidence stored in such premises, and asking explanations from the company's relevant staff members. However, few business records are now stored at the inspected premises (as these are hosted in data centers or in cloud services) and company staff may not be present at the inspected premises (e.g., due to remote working).

− Investigations have become increasingly complex due to the large volume of digital data collected and highlight the need for faster investigations. For instance, the system of granting access to a non-confidential version of the Commission's file in order to ensure parties' rights of defense was developed when investigations were of much smaller scale. With the proliferation of data and larger files, the preparation of a non-confidential version of the file creates a substantial burden on parties, information providers, and the Commission itself.

Going forward. The Evaluation's purpose was to gather evidence on the functioning of the Regulations, and it does not make proposals for reform. In the coming months, the Commission will consider the need for a legislative proposal, including taking into account stakeholder feedback during the Evaluation on potential areas for reform.

* Article 101(3) TFEU acknowledges that some restrictive agreements may generate objective economic benefits that outweigh the negative effects of the restriction of competition, and exempts those agreements from these prohibitions. Article 101(3) can be applied in individual cases or to categories of agreements and concerted practices through block exemption regulations.