Bursting the Bubble

Vestager quests for what is fair

27 April 2016 | by

Competition means that businesses are under constant pressure to be better than their competitors so as to win customers. Competition stimulates innovation and technical progress, and this improves consumer welfare. Consumer interests are thus at the core of competition policy. In a competitive market, each business strives to “be the best”, attracting consumers by cutting prices and increasing the quality of products or services.

With consumers’ help, authorities like the European Commission can take more efficient actions to prevent or prohibit anti-competitive practices that are sometimes found on the market place. The European Commission monitors: agreements between companies which restrict competition, like cartels; abuses of a dominant position, where a major player tries to squeeze competitors out of the market; mergers, when companies join forces permanently or temporarily; and financial support (state aid) for companies paid by EU governments.

Companies can distort competition by agreeing with competitors to fix prices, limit output and innovation or divide the market up so that each one keeps a local monopoly. For example, price fixing occurs when competing sellers agree on what prices to charge consumers, or agree on simultaneous price increases. Unlike other business cooperation ventures, such as joint research, these agreements do not benefit consumers.

A company can restrict competition if it is in a position of strength for a given market. A dominant position is not in itself anti-competitive. However, if the company exploits its position in order to eliminate competition, this amounts to abuse.

Big Data

This amounts to the recent case of Google where Commissioner Vestager attacked the dominant position of Google in the smartphone and tablet market. It is not that Google abuses its dominant position like Microsoft (or is American), but it was fined since most smartphones or tablets use Android software made by Google. This is an example of obstructing competitors in the market (or in related markets) by making the sale of a popular product conditional on consumer purchasing a less popular one, which forces them to buy only from the dominant company. The same logic was used for Microsoft when it was fined by the Commission for its dominant position in the computer market.

Android has become the dominant software for smartphones, especially for running apps and app software developers are striking deals with Google, so that they are found on Google play and used by Android. Android is an open source software that gives device makers the freedom to build and run their own software, yet the vast majority of European phones and tablets run a standard package and Google apps that must be licensed from Google.

Google requires phone vendors to sign confidential contracts. A handful of those contracts which have leaked into the public realm do not explicitly force phone makers to pre-load certain Google apps, but they do, effectively, require it in order to install the Google Play app store.

Two thirds of all mobile phones used in Europe this month were running on Android, according to StatCounter data. Devices running on Apple’s proprietary iOS software account for another 27 percent, leaving other systems such as Microsoft (MSFT.O) or Blackberry (BB.TO) barely registering in the rankings.

Vestager’s Quest

Before arriving in Brussels in late 2014, Ms Vestager was viewed as the driving force in the centre-left government of Helle Thorning-Schmidt, where she served as both Economy Minister and Deputy Prime Pinister. Sidse Babett Knudsen, star of the hit television drama Borgen, studied Ms Vestager for her portrayal of Birgitte Nyborg, the principled Prime Minister. Some observers detect an unusually moral approach, perhaps inspired by her ecclesiastical upbringing in the small town of Olgod. She often addresses her most complex cases in stark terms of what is “fair”. She has made fairness her policy pinnacle and charged Apple and Gazprom in the beginning of this year for abuses in their dominant position. Google is her latest would-be-trophy.

While Apple are under investigation for tax deals in the UK and Ireland and Gazprom for the dependency of most Eastern European countries on Russian gas and oil, Google is most compared with the case of Microsoft. In 2004, the commission found Microsoft had abused its dominant position in the market for desktop operating systems by freezing out rivals in adjacent markets, such as media players and server software.

The Redmond-based company was ordered to produce a version of Windows without Microsoft’s own media player, and to make available technical information that would allow rivals to develop server software that functioned smoothly with Windows-run computers.

In 2007, Europe’s courts rejected Microsoft’s appeal against the commission and imposed hefty fines. Neelie Kroes, then EU Competition Commissioner, described the decision as “bittersweet”, as her desire for Windows to suffer a “significant drop in market share” seemed unlikely to result. Instead, it was a technological revolution that eventually broke Microsoft’s dominance. According to data collated by Goldman Sachs and the research group IDC, Microsoft had a 97 per cent share of operating systems running all computing devices in 2000, a time when people mostly used desktops and laptops.

For the Commission to prevail, analysts say the substance of its arguments against Google will have to differ significantly from those once employed against Microsoft. Google declined to comment but has rejected claims of wrongdoing. The company’s legal team had studied the Microsoft legal battles in Europe and are believed to have considered those cases while developing Android. Google is likely to argue that bundling in this way is legal because it is not “exclusionary”, meaning rival developers are not blocked from creating competing products for Android. Some analysts argue that simpler technology means consumers are more likely to download alternative apps from stores such as Google Play than they ever did on Windows PCs. Even if Vestager cracks down on the source code of Google on its Android dominance, Google’s strategy has been successful, in that it has prevented Microsoft becoming as dominant on tablets and smartphones like it was on PCs.

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