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Digital Single Market DSM

The European Commission’s plan to create a digital single market that cuts across the national boundaries of the continent and boosts competition is gaining momentum. Now if the EC can just overcome those annoying regulatory hurdles...

Over the past decade or so, the digital economy has exerted enormous pressure on a number of industries to reform their regulations and open up more competition. Transportation, entertainment and hospitality are just three examples. Most recently, the European Commission (EC) has been pushing towards reforms around the online marketplace that encompasses member countries of the European Union. The EC’s goal is establish a Digital Single Market (DSM) that would create a more open and adaptable online economy for both retailers and consumers.

In September, the EC called for an inquiry to review practices in e-commerce and investigate sales restrictions on consumer goods and digital content within the marketplace. The EC gathered information from 1,800 stakeholders and 8,000 distribution agreements. What the commission found was no big surprise: Online retail is growing, shows little sign of slowing, and mainstream evolution has led to changes in distribution models. Those changes include increased price transparency, reduced barriers to entry, and incentive for firms to distinguish themselves on non-price factors such as quality and brand.

However, the review also showed that only 7% of EU small and medium sized businesses sell cross-border. The EC wants to boost that number by reducing national barriers, particularly for digital products that don’t require physical delivery. These are the barriers to price competition that will need to be addressed to establish a successful Digital Single Market.

Digital Content: Copyright Holders Have Too Much Say

When it comes to digital content and intellectual property, the availability of content licenses was shown to be a key determinant of competition in the market. Current digital licenses and copyright agreements are fairly long-term and usually exclusive, with contracts often providing the right to first or automatic renewal. Because of this, new entrants or smaller digital content providers can find it difficult to access rights under long-term agreements. Moreover, a multitude of business models exist, so review ensues on a case-by-case basis to decide if licensing practices are, in fact, restricting competition.

The EC found in March 2016 that a major territorial restriction on content included “geo-blocking.” This is a common practice within retail, as an example, whereby a retailer that wants to maintain a country price differential in its stores must also maintain that same pricing differential online. Where this is part of a retailer’s commercial strategy, it is not a concern for competition law unless the retailer dominates in that product supply.

However, geo-blocking can also stem from regulation or licensing restrictions. These include: 1) direct contractual restrictions that limit retailers from selling outside the member state where they are established and 2) restrictions on passive sales. The latter means retailers may not respond to unsolicited requests from customers outside of an authorized sales territory—these sales are banned under competition law, but the nature of intellectual property rights often exempts them from this ruling.

Selective Distribution Systems: Confusing and Misunderstood Standards

Selective distribution systems occur with products that can only be sold via pre-selected authorized sellers. The EC determines that the criteria for forming these systems are not easily understood nor based on the type of good or product. For instance, although adding discount retailers in distribution systems may increase price competition, these retailers may be rejected despite qualifying on non-price grounds such as quality or conditions. Retailers may also be required to have at least one physical storefront, excluding many online-only retailers. Nearly half of the manufacturers using these systems reported they do not allow online-only retailers to join.

The EC will take into account the Vertical Agreements Block Exemption Regulation1, under which these schemes may be withdrawn. Investigating the regulation could bring a better perspective to anti-competitive clauses restricting online sales and the decision of which goods are suitable for selective distribution systems.

Online Marketplaces: Not Serving Customers’ Best Interest

Online marketplaces, like eBay or Amazon, reduce barriers to entry for new suppliers, in comparison to brick-and-mortar stores. They also allow consumers to easily compare prices between vendors. However, online marketplaces don’t always work in favor of the customer: the goods online may not always match what is received; and rather than giving complete refunds, suppliers will often take advantage of lower exit barriers that exist on the online market and exit altogether. Also, retailers’ reputations may be damaged due to online counterfeit goods tarnishing their brands.

The EC reports that particular suppliers aren’t allowed on many online marketplaces, specifically discount stores. They suggest that marketplace bans are not explicitly anti-competition, but this doesn’t mean they are legitimate. The European Court of Justice will soon hear this issue, the outcome of which could lead to major changes in how online marketplaces are designed and run from here on out.

Pricing: Disorganized Discounts

The review showed that many retailers use software to track the prices of goods offered by their competitors. This sometimes leads to price competition across a wide swath of geographies. It can also promote competition among physical stores, since retailers are likely to list the same prices online and in-person.

The EC reports that distributors offering discounts to retailers were found across online and offline channels—however, the amounts and schemes differed.

The EC and national competition authorities also took an interest in Most Favored Nation (“MFN”) contracts, in which distributors are ensured that no other country will receive better deals. However, it is not yet clear if these MFNs will be beneficial or harmful.

Price Comparison Tools: Banned from Usage in Some Cases

Price comparison tools usage is extensive. More than a third of retailers reported they supplied data to these tools in 2014. However, about 10% of retailers said they had agreements with suppliers that place a restriction on the use of price comparison tools. These restrictions ranged from total bans, to restrictions based on certain quality criteria.

Conclusion

The main challenge in creating a unified e-commerce market is applying conventional competition law to new scenarios. The ever-evolving and fast-paced digital world often clashes with the traditional one of brick-and-mortar businesses. The EC is taking note of which businesses and retailers comply with policy, but it is of course impossible to investigate every single incident. The big question regarding the Digital Single Market is whether e-commerce participants will bend to the competition laws or if the laws will have to expand to accommodate the online marketplace.

NOTES
1: See European Commission, Guidelines on vertical restraints

© Copyright 2016. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.

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