Insights

04/12/2018

Data gaining an increasing role in the scrutiny of mergers

"Data is key in the digital economy", stated Margrethe Vestager, the European Commissioner for Competition, in connection with the recent anticipated merger clearance decision regarding Apple and Shazam, the developer of a popular music recognition application.

Data is rapidly becoming a more and more valuable resource and instrument of exchange in today's economic system. Aggregated user information and other data is a valuable asset. In some cases it may even be a precondition for digital platforms and service providers to be able to operate a successful business.

In regard to the emerging tech giants, there is an ongoing international discussion if protecting the competitive process should be an objective itself in competition enforcement and policy instead of prioritising short term price effects.

Commissioner Vestager, who just recently addressed the crowd with the topic "Fairness in Tech" at the Helsinki start-up event Slush, has through her enforcement actions firmly and repeatedly demonstrated that data is gaining an increasingly important role in the assessment of mergers. National competition authorities around Europe have followed suit. 

Due to network effects and scaling, digital service markets tend to concentrate in large units. As this also spurs the condensation of data, European competition authorities seem to have set their sights on the tech industry giants. The aforementioned Apple/Shazam merger review was moved to an in-depth investigation over concerns of data condensation as well as Apple's potential access to sensitive competitor data. 

Eventually, the acquisition was unconditionally cleared. Other recent decisions and statements from EU competition officials also indicate that the data-intensive digital industries are among their top priorities, if not the paramount.

Merger control is not the only area of competition law where the use of data is currently under scrutiny. There have been concerns that digital platforms and services might misuse their market power and impose unfair terms and conditions on both trade partners and consumers. The Commission's investigations regarding tech giants such as Google and Amazon have gained a lot of attention, but also national enforcement action is taking place around Europe.

In December 2017, the German Competition Authority announced that it had made a preliminary legal assessment in its proceedings against Facebook. The authority stated that it "holds the view that Facebook is abusing this dominant position by making the use of its social network conditional on its being allowed to limitlessly amass every kind of data generated by using third-party websites and merge it with the user's Facebook account". A decision in the matter may possibly be given by the end of this year.

Data as a new proxy for market power 

Some notable distinctions exist between traditional commodity markets and markets of digital goods and services. From the competition enforcement point of view, the most important difference is that in the market of digital goods and services defining and measuring a company's true market power is challenging at best.

For instance, digital platforms are commonly active on several markets: they offer a free (or zero-price) service to consumers while selling advertising space or providing a trading platform to businesses. The turnover of a company may be low but the amount of data they possess may be immense.

Another key feature of the digital markets is the rapid innovation cycle which also leads to quick changes and shifts of the market circumstances and relations. An illustrating example is the evolution of the mobile messaging application WhatsApp, which was not considered a relevant competitor in the 2011 merger decision of Microsoft/Skype, but just a few years later, was deemed as one of the leaders on the market of electronic consumer communication services.

For these reasons, traditional market power indicators such as value based market shares may no longer be effective enough. The Commission as well as national competition authorities have worked to find new tools and theories of harm to address the situation, which may lead to temporary uncertainty among businesses and even diminish the incentive to invest and extend operations.

Some alternative market power indicators used by the Commission have been, for instance, the number of users or downloads of an application or the penetration rate or reach of a service. The development of new tools and measurements remains to be seen during the upcoming years.

Legislative and regulatory changes underway?

According to Commissioner Vestager's statements, the reconsideration of merger control turnover thresholds is up for discussion. The potential need for possible extensions to merger review deadlines has also been flagged by some Commission officials.

Additional and alternative merger control thresholds based on deal value rather than the parties' turnovers were introduced in Germany and Austria in 2017. By introducing new deal value based thresholds, authorities wish to cover new types of transactions where one or both of the parties might have a small turnover but high value.

The new rules are aimed at addressing potentially harmful mergers that would otherwise be left unscrutinised. However, the amendments have also partly resulted in more disparate and less clear cut rules on merger control. Alternative threshold rules make determining if a transaction is notifiable more complex and time-consuming.

As the assessment of the local nexus of the transaction is done based on indicators other than just turnover, the obligation to notify a merger in jurisdictions with alternative thresholds may in some cases come as a complete surprise to the parties of a transaction. With increasingly disparate merger control rules, it becomes increasingly important for companies and other market players to stay on top of the changing legal regime and making sure that the merger control stream is carefully implemented in M&A activities.

Although it is well worth it to keep all eyes open for legislative changes in the future, we have already seen many important examples of data playing a pivotal role in merger reviews. The use of data may already now become a central aspect in successfully finalising an acquisition.

The merger review of Apple and Shazam demonstrated that even though a merger may eventually be cleared without any further requirements, the role of data may in some cases significantly complicate and delay the review process. The case also demonstrates that enforcers already now have tools to intervene, as Apple/Shazam based on turnover thresholds was originally notifiable only in Austria, but was subsequently on request by Austria and several other members states referred for review to the Commission.