KILLER ACQUISITIONS IN THE DIGITAL MARKET Should the EUMR be changed in order to address the anti-competitive concerns generated by killer acquisitions in the digital sector?

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Master’s Thesis

European Competition Law and Regulation

KILLER ACQUISITIONS IN THE DIGITAL MARKET

Should the EUMR be changed in order to address the anti-competitive

concerns generated by killer acquisitions in the digital sector

?

Giulia Garofoli

Student number: 12701122

Student email: giulia.garofoli94@gmail.com

Supervisor: Dr. Tamara Klimenta

Date of submission: 24.07.2020

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Killer acquisitions represent a theory of harm coined in the pharmaceutical sector and subsequently applied in digital markets. It indicates a repeated practice by dominant undertakings in acquiring smaller companies which may mature in potential competitors and threat the incumbents’ position on the market.

Such acquisitions, especially when they become a trend followed by big companies such as Google, Facebook, Amazon and Apple, favor the concentration of the digital market and create a “winner takes it all” dynamic where the dominant undertakings eliminate their competitors, build high barriers to entry and strengthen their dominant position on the market.

Since the targets are usually young companies, with low or no turnover as their business model is focused on the creation of a large user base and on the offer of free services monetized at a later stage, such acquisitions may not be notified and analyzed by the Commission, whose jurisdictional thresholds are based on the companies’ turnover.

Previous cases, such as Facebook/WhatsApp, Facebook/Instagram and Google/DoubleClick, demonstrated that turnover is no more a good proxy to assess the competitive significance of the acquisition and that the price the acquirer is willing to pay to purchase the target is a better revealing source of the effective competitive value of the target.

Based on the study of numerous reports published by competition authorities worldwide in the last two years, the thesis evaluates the hypothesis to update the jurisdictional thresholds contained in Articles 1(2) and (3) EUMR by introducing a new and supplementary transaction test, and the different approaches adopted at the EU and national level.

Beside a legislative amendment, the thesis also suggests the need to update the substantive criteria, adopted by competition authorities in the assessment of such acquisitions, which should be tailored to the characteristics of the digital market, in terms of definition of relevant market, market power and counterfactual.

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Introduction

The peculiarities of the digital sector are challenging the traditional approach used by competition authorities in assessing the anticompetitive harms of market dominance and mergers. A killer acquisition theory of harm has been observed, where dominant undertakings have developed a systematic pattern of acquisition of young companies, with low or no turnover but a quickly-growing user base and significant competitive potential.

This strategy generates a “winner takes it all” dynamic and leads to high concentration of the market where dominant undertakings eliminate potential competitors, building barriers to entry, and gather in their hands a large quantity of data.

Since the targets are young companies with low or no turnover, such acquisitions may not satisfy the jurisdictional thresholds set in the Council Regulation No 139/2004 (hereafter: “EUMR") and, therefore, are not analyzed by the Commission. Consequently, the turnover is no more a good proxy to assess the competitive value of the transaction, which can be better revealed by the purchase price the acquirer is willing to pay or by the target’s large user base.

Moreover, the multi-sided nature of the market, the market tendency to concentration and the parties’ strategical combination of data are all factors that must be considered in the concentration assessment. The current tools at competition authorities’ disposal must be updated and adapted to the context: a refine of the criteria used for the definition of relevant market, market power and counterfactual ought to take place.

In the first Chapter the theory of harm of killer acquisitions and the characteristic of digital markets will be explained. Such markets differ from the traditional one because characterized by the presence of digital platforms, which have two-sided nature, where the two sides are linked by strong network effects and positive feedback loops and services are provided for zero price to a group of customers on one side and further monetized on the other side. Moreover, big data represent a high valuable asset for data driven services, conferring to the undertaking an important competitive advantage.

The second Chapter will follow with an explanation of both competitive and privacy concerns. The digital market is characterized by a high degree of concentration and, even though there is not an actual overlap between the market in which the incumbent is active and the target’s one, the acquisition of young companies may strengthen the dominant position of the acquirer on the market, further increasing foreclosure effects. Privacy can also be a product qualitative feature on

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which companies compete and its deterioration, operated by the incumbent in order to gain access to more data, should be included in the assessment.

The legal framework under which concentrations are assessed at the EU level is contained in Chapter III. The Community dimension of a concentration is based on the jurisdictional thresholds which establish whether the transaction must be notified to the Commission. The referral system operates as a one stop shop system, where concentrations without a Community dimension can be examined by the Commission if they satisfy specific criteria.

The problem generated by killer acquisitions which, due to the low turnover of the target, risk to be not analyzed by the Commission, is further discussed in Chapter 4. The main solution proposed is the introduction in the EUMR of additional thresholds based on the transaction value. The Commission approach and the amendments introduced by Austria and Germany at the national level will be illustrated.

Finally, Chapter 5 contains an update of the assessment criteria used in digital mergers. The two-sided nature of the market is relevant for a correct definition of the relevant market and the asymmetrical pricing structure of the platform makes the SSNIP test obsolete. Big data are a crucial factor in the definition of market power: their control confers a competitive advantage upon the undertaking, especially when the data are not replicable. In the creation of the counterfactual authorities have to adopt a more forward-looking approach, taking advantage of new additional instruments, such as dawn raids and internal documents.

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I. Killer acquisitions

“Killer acquisitions" represent a theory of harm coined in the pharmaceutical sector and subsequently applied in digital markets. It indicates a repeated practice developed by dominant undertakings in acquiring smaller companies which may mature in potential competitors and threat their position on the market. Considering the peculiarities of digital markets, such acquisitions represent a major challenge for competition authorities.

The term “killer acquisitions” was coined in 2018 when research focused on the pharmaceutical industry identified a trend of large incumbents acquiring new nascent firms with innovative projects and subsequently terminating the development of the target’s innovation in order to avoid a replacement effect. In this way the incumbent pre-empts future competition by eliminating a potential competitor which may threaten its dominant position on the market.1

In the pharmaceutical sector it has been estimated that almost 6% of all acquisitions of firms with drug projects in development are killer acquisitions, approximately amounting to 50 killer acquisitions every year.2

What is described here is a theory of harm and not a category of acquisitions: in fact, the theory is that an incumbent “kills” the development of a product that, because of its innovative features, poses a potential risk to its established product line. The ratio of this strategy resides in the fact that in some circumstances the incumbent may find more profitable to buy and shot down a nascent firm’s product rather than risking to suffer from a “cannibalization” effect, where the target’s innovative project matures in a better product than the incumbent’s one and cannibalizes the acquirer’s existing profits.3

Cunningham et al4_{have identified the defining features of killer acquisitions in the pharmaceutical} sector: those acquisition decisions arise from the combination of the choice to acquire a particular firm with the intention to terminate and the reduced incentive to develop acquired projects that may absorb the incumbent’s profits. The targets usually are developing drug projects that overlap with the incumbent existing drugs and are at a nascent stage.5_{Therefore, it is possible to affirm that in} this sector the competitive concerns are horizontal in nature, since target and incumbent are direct 1_{Colleen Cunningham, Florian Ederer, Song Ma, “Killer Acquisitions”, [2018]. Available at SSRN:} https://ssrn.com/abstract=3241707

2_{OECD Directorate for Financial and Enterprise Affairs Competition Committee, Start-ups, Killer Acquisitions and}

Merger Control – Background Note, (2020), para 21.

3_{Cunningham (n.1), p. 21.} 4_Ibid.

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competitors by developing high interchangeable products, the acquirer is usually a dominant undertaking on the relevant market and the strategy leads to the termination of the product development.6

Such acquisitions have a clear negative impact on consumers, who are hurt by the lack of competition and the elimination of innovative products: on the market patients are able to find few drugs and the one that are developed are sold at higher prices.7

At the same time, they constitute a valid exit strategy for targets still at the start-up stage, which are fostered to increase ex-ante innovation in order to project a competitive product that may attract potential acquirers. However, the killer acquisition dynamic always spurs innovation of products very similar to the acquirer’s one, but with better features, at the expense of the origination of truly novel products.8

1.1. Killer acquisitions in digital markets

A similar situation to the one described in the pharmaceutical sector has been observed in the digital industry, where dominant undertakings have developed a systematic pattern of acquisition of young companies, i.e. start-ups or small businesses with low or no turnover but a quickly-growing user base and significant competitive potential.9

More specifically, in the last 10 years Amazon, Apple, Facebook, Google, and Microsoft made around 400 acquisitions globally10_{, where the median age of the targets was 6.5 years for Amazon,} 2.5 years for Facebook and 4 years for Google.11_{In 2017, for example, Google, Amazon, Apple,} Facebook and Microsoft together spent USD 31.6 billion acquiring start-ups.12

The behavior observed in digital markets is slightly different from the theory of killer acquisitions in the pharmaceutical sector: here the incumbent, which is a dominant firm on the market, decides to acquire a target, which is at its early stage of development and whose product is innovative and may grow into a rival product. In this case the acquisition represents a strategy to remove a

6_{OECD (n.2), para 9.} 7_{Cunningham (n.1), p. 50} 8_{Ibid, para 51.}

9_{Jacques Crémer., Yves-Alexandre de Montjoye, Heike Schweitzer, Competition Policy for the digital era – Final}

Report, (2019), p. 112.

10_{Jason Furman, Diane Coyle, Amelia Fletcher, Derek McAuley, Philip Marsden., Unlocking digital competition.}

Report of the Digital Competition Expert Panel, (2019), para 3.44.

11_{Elena Argentesi, Paolo Buccirossi, Emilio Calvano, Tomaso Duso, Alessia Marrazzo, Salvatore Nava, Ex-post}

Assessment of Merger Control Decisions in Digital Markets. Final report, Lear, (2019), para I.3.

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competitive threat through the entrance in the incumbent’s portfolio of the target, which is subsequently controlled by it, rather than by killing the development of the product itself.

Furthermore, the target may be active either in the same product market of the incumbent, therefore resulting a direct actual or potential competitor, or in a segment of the acquirer’s ecosystem, which at the same time constituted a standalone separate market. In the second scenario, the product of the acquired company is, most of the times, a complementary service integrated in the dominant’s one.13

In this way large digital companies absorb innovation to protect themselves from potential competition, developing strong ecosystems across multiple layers of value chains in order to strengthen their dominant position in the main market.

Usually such acquisitions are pro-competitive, i.e. they are capable of increasing the competitiveness of the industry producing substantial efficiencies that counteract the effect on competition and the potential harm to consumer14_{: in fact, the incumbent usually possesses the skills} and the financial resources to develop the innovative product and service designed by the target and the increase of the user base may allow the improvement of the product or service quality. Therefore, the operation results overall beneficial for consumers, who can enjoy technical and economic progress on the market.15

However, concerns may arise when such acquisitions become a repeated practice of dominant undertakings with the consequence of generating in the areas where they take place a “kill zone”16_, i.e. a range of products and services where incumbent digital platforms are likely to dominate, either by acquiring potential rivals or by aggressively reacting to new entry, and start-ups are unlikely to obtain funding17_{if they try to develop competing products.}

The kill zone is further reinforced by the acquisition of the target’s userbase and the data attached, which allow the incumbent to gain a competitive advantage difficult to be replicated by actual and potential competitors on the market. The result is the strengthening of the dominant position of the incumbent and the increase of barriers to entry in the market for potential competitors.

13_{Crémer (n.9) p.117}

14_{Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations} between undertakings [2004] OJ C 31 paras 76-81.

15_{Crémer (n.9), p. 110.}

16_{Sai Krishna Kamepalli, Raghuram G. Rajan, Luigi Zingales, “Kill Zone”, [2020] p. 2; Marc Bourreau, Alexandre de} Streel, “Digital Conglomerates and EU Competition Policy”, [2019] p. 21.

17_{For data related to the investment decrease in start-ups see Sai Krishna Kamepalli, Raghuram G. Rajan, Luigi} Zingales, “Kill Zone”, [2020] p. 5.

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From the competition law point of view, this practice poses major challenges to regulators. In fact, considered the early stages of their development, the targets tend to have no or low turnover, as their business model focuses more on creating a large user base and collecting large amounts of data rather than on monetizing the service. Therefore, they may not come under the radar of the competition authorities, which base their jurisdictional thresholds on the companies’ turnover.18 For instance, of the 299 acquisitions operated by Google, Amazon and Facebook between 2008 and 2018, very few of them received a review by the CMA and by the EU Commission and even fewer were looked at in detail.19_{This issue will be further discussed in Chapter IV.}

Acknowledging the existence of such theory of harm does not entail that every acquisition of start-ups performed by dominant undertakings has to be classified as a killer acquisition. However, the competition authorities in analyzing mergers in the digital sector should take into account the eventuality that the acquisition may be driven by pre-emptive motives. The fact that relatively small digital companies have been purchased for prices of large multiples of their earnings can lead to the conclusion that the purchase price of the target can also be considered a first alarm bell of an anticompetitive conduct.

Additionally, the OECD has identified three critical problems faced by competition authorities in the competitive assessment in digital markets, i.e. the definition of the relevant market, the assessment of market concentration and the evaluation of the consumer detriment20_{, which are} going to be further discussed in Chapter V.

In order to be able to comprehend the competition challenges existing in digital markets, it’s important to understand how those markets differ from the conventional one and the role played by big data. The Chapter will follow with a description of the main characteristics of digital markets in general, i.e. the two-sided nature of the market, the presence of strong network effects and the asymmetrical pricing, and an explanation of what big data are and how they are gathered.

1.2. Digital platforms

Digital markets are characterized by the presence of platforms, which are two-sided markets where firms act as intermediary between two different groups of economic actors, such as advertisers and customers. They are characterized by strong direct and indirect network effects and usually compete

18_{OECD (n.2), para 20.} 19_{OECD (n.2), para 22.}

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for users and advertisers. Since most of the times these platforms offer their product or service to consumers on one side for free, they monetize it on the other side of the market by “selling” data collected from consumers to advertisers. Consequently, data represent a high value source for platform, whose service quality depends on the quantity and type of information collected from users.21

1.2.1. Two-sided markets

A two-sided market is a market where an undertaking creates a two-sided platform which acts as an intermediary selling different products or service to two different group of customers on two different sides.22_{The demand from one group of customers depends on the demand from the other} group and vice versa. The demands on the opposite sides of the market are linked by indirect network effects.23

The multi-sided nature of the market does not apply exclusively to digital markets but it is possible to find other examples in more traditional ones, such as newspapers, which connect readers and advertisers, or payment cards, which connect card holders, merchants, card-issuing banks and acquiring banks.24

In the current digital-oriented era, however, our society has seen the increase of such markets and the development of digital platforms, which are able to bring together far more different types of customers on different sides.

In order to better understand the problems that may be faced in the definition of the relevant market for digital platforms, it’s important to outline a distinction between two types of two-sided markets25_:

- Two-sided non-transaction markets are markets where there is no transaction between the two sides or, supposing the presence of an interaction, it is usually not observable by the platform, which is unable to set a per-interaction fee or a part tariff. Examples of two-sided non-transaction markets are newspapers and social networks.

21_{Inge Graef, Yuli Wahyuningtyas, Peggy Valcke, “Assessing data access issues in online platforms”,} Telecommunications Policy [2015], Vol. 39, No. 5, p. 375-387. Available at SSRN: https://ssrn.com/abstract=2647309. 22_{David S. Evans, “The Antitrust Economics of Multi-Sided Platform Markets”, Yale Journal on Regulation [2003],} 20(2); 325-381.

23_{Lapo Filistrucchi, Damien Geradin, Eric E.C. van Damme, Pauline Affeldt, “Market Definition in Two-Sided} Markets: Theory and Practice”, Tilburg Law School Research Paper No. 09/2013 [2013], p. 5. Available at SSRN: https://ssrn.com/abstract=2240850 or http://dx.doi.org/10.2139/ssrn.2240850.

24_Ibid. 25_{Ibid, p. 6-7.}

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- Two-sided transaction markets are instead market characterized by the presence and observability of transactions between the two groups of platform users, on the ground of which the platform is able to charge a price for joining and using the platform. An example of two-sided transaction markets is the market for payment cards.

1.2.2. Network effects

The term network effect refers to how the use of a good or service by a user influence the value acquired by that specific good or service for other users. Considering two-sided platforms, such effects may be “direct” and “indirect”: the former are present if the users of one service on one side of the platform directly benefit when more people use the same service as well on the same side. For instance, the more people use a social network to communicate, the more it will become popular and downloaded.26

The second relates to the consequence of positive spill-overs between the different sides of the platform. With indirect network effects the value of a service for users on one side increases with the number of users present on the other side of the platform.27

Usually, network effects tend to reinforce the dominant position of the platform, leading to market concentration. When the platform is able to increase the amount of users’ data collected, its product or service can be improved, creating a position on the market difficult to be replicated by competitors and increasing barriers to entry for new players.28

1.2.3. Asymmetrical pricing

Because of the structure of two-sided markets and the presence of indirect network effects, most of the digital platforms here analyzed charge prices at marginal cost or provide services for zero price to a group of customers on one side, while charging a higher price to the other group. For instance, Google provides users with zero price services for almost all his services while getting revenues from advertisers. Users in return provide Google with different types of data that enable Google to analyze their behavior and offer improved advertising services. Despite the fact the service is provided for free to users, they are actually paying the platform with their personal data.29

26_{Autorité de la Concurrence, Bundeskartellamt, Competition Law and Data, (2016), p. 27.} 27_Ibid.

28_Ibid. 29_{Graef (n.21).}

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1.3. Big data as an important input for digital platforms

Big data are large amounts of different types of data, produced at high speed from multiple sources, whose handling and analysis require new and more powerful processors and algorithms.30_Their main characteristics are measured in terms of velocity, the speed at which data are generated, accessed, processed and analyzed, variety, the different type of data existing and being collected, and volume, the amount of data (the three Vs).31

Usually acquisitions between digital platforms raise concerns regarding the collection of a specific category of data, that is “personal data”.

Personal data are defined by Article 4 of the Regulation 2016/67932_{as “any information relating to} an identified or identifiable natural person/data subject”, where identifiable natural person is “one who can be identified, directly or indirectly, in particular by reference to an identifier, such as a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, psychological, genetic, mental, economic cultural or social identity of that natural person”.

Such data are collected by companies to better implement their working processes, to improve the quality of the product and service they offer or to develop a new type of product or service.33 The methods used by companies to gather data are different. Data are often provided on a voluntary basis by the data subject. The majority of digital platforms, when they supply their services, require the customer to provide some fundamental information: for instance, online shops usually ask the consumer to give the address, payment details and e-mail contact in order to process the order; social networks, at the moment of the subscription, require the new member to insert personal information, such as name, address, education, photos, video, shopping preferences, etc..34

Sometimes data can be obtained observing users’ behavior online, even without their knowledge. This might happen in two ways: either using a technique called “crawling”, where search engines

30_{European Data Protection Supervisor}_{https://edps.europa.eu/node/3671} 31_{Autorité de la Concurrence (n.26), p.4.}

32_{Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of} natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) [2016] OJ L 119.

33_{Nils-Peter Schepp, Achim Wambach., “On Big Data and Its Relevance for Market Power Assessment”, Journal of} European Competition Law & Practice [2016] Vol. 7, No. 2.

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systematically collect and process every page at their disposal, or otherwise tracking the web users’ movements from page to page or even across devices.35

A third way is to infer new information from already existing data. For instance, an online fashion shop can analyze the pattern of the products viewed by a specific customer to infer whether the visitor is male or female.36

The two-sided nature of the market, the network effects, the asymmetrical pricing and the big data gathering are all factors that influence the competitive concerns generated by killer acquisitions in the digital sector, further discussed in the next Chapter, and the assessment criteria used by competition authorities, analyzed in Chapter V.

II. The anticompetitive concerns generated by killer acquisitions in the digital

market

The particular features of killer acquisitions in the digital market challenge both the current European legislative framework and the traditional tools adopted by competition authorities in the concentration substantive assessment. Nowadays, the market power of a company centers around a new fundamental input represented by big data.

As anticipated in Chapter I, killer acquisitions in the digital market can have horizontal, vertical and conglomerate effects, depending on whether the target acquired is either a direct actual or potential competitor on the same core market of the incumbent, or active in a downstream, upstream or adjacent market. In the last case the acquisition will lead eventually to the integration of the target’s product in the incumbent’s one. In this way the acquirer absorbs the innovation brought about by the target new project, extend its market power to different layers of the market, reinforce its dominant position on the core market and protect itself from potential competition.

From the regulators’ point of view, two are the main problems generated by killer acquisitions in the digital sector. First of all, such acquisitions may escape the Commission’s jurisdiction, since the incumbent acquires young companies which at the time of the transaction generate not sufficient turnover to satisfy the thresholds set out in Articles 1(2) and (3) EUMR.37

In fact, the targets usually are start-ups or small businesses which offer their services and products sometimes almost for free, interested in building a successful product and attracting a large user-35_Ibid.

36_Ibid.

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base without much regard for short term profits. Their plan is to be acquired by a bigger company or monetize their user base at a later stage, for instance through advertising. Consequently, the added value of the target is not reflected in its turnover.38

On the other hand, the incumbents involved in those transactions are usually the most famous big tech giants active in the digital market, identified with the acronym GAFA, i.e. Google, Amazon, Facebook and Apple. Since these companies are active worldwide and given the global scale of the transactions, I believe that their competitive assessment should take place at the EU level, where the Commission is able to have a broader view of the internal market and adopt decisions with a bigger impact than the ones national competition authorities (hereafter: NCAs) may adopt.

Secondly, even if the acquisition is caught by the jurisdiction of the EUMR, the competitive assessment may be difficult since the characteristics of digital markets call for an update of the traditional tools used in the analysis.39

In fact, previous case law has highlighted some difficulties the authority may face in the definition of the relevant market, market power and counterfactual, especially when there is no horizontal overlap between the markets where the two undertakings are active and, therefore, they cannot be considered actual or potential competitors on the same market. For instance, when Facebook acquired WhatsApp in 201440_{, the former offered a social networking service and the latter a} communication service, without being active on the same market.

2.1. Concentration of data within the control of some companies may lead to

distortion of competition

It is undeniable that big data are an asset: they allow companies to undertake a type of innovation defined as data-driven, where a better understanding of customers’ demands, habits and needs, consolidate their competitive advantage and their position on the market.

The new insights gained from data are crucial in order to41_: - improve the quality of the product or service offered; - gain important efficiencies in productivity;

- experience new business opportunities; 38_Ibid.

39_Ibid.

40_{Case COMP/M.7217 – Facebook /WhatsApp (2014)} 41_{OECD (n.20), p.10.}

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- rely on more target-oriented business models.

The accumulation of data can lead to a phenomenon called positive feedback loops, where the improvements in data-driven services in turns can attract more users: the more people use a service, the more data are provided to the platform, the better the service becomes delivering more accurate services and products, and the more users the platform will attract. These feedbacks allow the platform to reach important economies of scale and economies of scope and to acquire a dominant position on the market. Economies of scale and scope are further reinforced by direct and indirect network effects.42

Moreover, the control over data by some platforms leads to high barriers to entry, especially when competitors cannot have access to the same data or these ones are not offered by third parties. Therefore, data represent a crucial economic and competitive advantage enjoyed by dominant undertakings and, even though the competitors are able to enter the market, they may not succeed due to data scarcity.

Consequently, the market results very concentrated, competition is harder to achieve and a “winner takes it all” dynamic generates. In the worst case the absence of counteracting factors, such as multi-homing and platform differentiation, causes a market tipping situation, where only one platform satisfies the market demand and all the other competitors disappear, thus the market “tips” towards monopolization.43

The barriers to entry generated are so high that the incumbent tends to acquire a persistent dominance, difficult to be threatened by competitors. The Australian Competition and Consumer Commission (ACCC) in the Digital Platform Inquiry44_{highlighted that some digital platforms, such} as Google and Facebook are insulated from dynamic competition by barriers to entry and expansion, advantages of scope, and their acquisition strategies.

Additionally, the peculiar circumstances delineated make the anti-competitive assessment particularly difficult and may challenge the traditional instruments used by competition authorities in assessing market dominance and mergers, calling for an update.

The OECD has identified three major challenges for competition law and competition authorities45_:

42_{Ibid, p. 58.}

43_{Bundeskartellamt, Market power of platforms and networks – working paper, (2016), p. 45.}

44_{Australian Competition and Consumer Commission, Digital platforms inquiry – final report, (2019), p. 66, 78.} 45_{OECD (n.20), para 143.}

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- Defining the relevant market: more than one market is relevant in multi-sided platforms and the price is no more a good proxy to define the relevant market since many digital services are zero priced.

- Assessing the degree of market concentration: big data are a source of market power and they should be considered in the competitive assessment.

- Assessing potential consumer detriments.

2.2. Incorporating privacy concerns in the merger competitive assessment

Some privacy-related considerations should be carried out since personal data play a crucial role in the acquisitions here analyzed. Even though there is no requirement to notify the concentration to the data protection authority in order to obtain its approval, merger reviews by competition authorities can be considered a good occasion to assess the impact of the transaction on consumers’ privacy.46

More than once the Commission has clarified its opinion on the topic: in the analysis of the merger between Facebook/Whatsapp, it stated that “any privacy-related concerns flowing from the increased concentration of data within the control of Facebook as a result of the Transaction do not fall within the scope of the EU competition law rules but within the scope of the EU data protection rules”47_{. However,} in this specific case, after the Commission’s approval, WhatsApp did exactly what the Commission firmly excluded in its merger assessment. The communication service changed its privacy policy and started to transfer its information to Facebook, leading therefore to a deterioration in the quality of WhatsApp’s privacy security.48

Probably because of this event, in the following merger between Microsoft and LinkedIn49_the Commission shew a more open approach, admitting the possibility to include privacy related concerns in the competition assessment to the extent that consumers see it as a significant factor of quality, and the merging parties compete with each other on this factor.

The way in which firms decide to handle the privacy matter should be taken into account whenever these decisions are liable to affect competition, especially in merger control cases where two horizontal competitors compete on privacy as an aspect of product quality and offer their services at zero price in exchange of personal data. The competition authority should consider whether, thanks

46_{Hanna Stakheyeva., Fevzi M. Toksoy, “Merger control in the big data world: to be or not to be revisited?”, E.C.L.R.} [2017] 38(6), 265-271.

47_{Facebook (n.40).}

48_{Samson Y. Esayas, “Data privacy in European merger control: critical analysis of Commission Decisions regarding} privacy as a non-price competition”, E.C.L.R. [2019], 40(4), 166-181.

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to the transaction, the undertaking is able to gain access to more data and to demean privacy policies, monetizing the data collected and thus reinforcing its market power.50

Interim conclusion

The privacy concerns won’t be further discussed since the thesis mainly focuses on the competitive issues generated by killer acquisitions in the digital market and the possible solutions. However, it’s important to highlight how all the factors above discussed contribute to such a peculiar market concentration of digital markets. Companies may compete on privacy as a service qualitative aspect but, at the same time, may take advantage of privacy standards diminishing in order to increase data access. Data are a fundamental input for companies, whose control, added to strong network effects and positive feedback loops, leads to a tipping effect on the market, where only one company is dominant and may satisfy the demand on the market, and potential competitors are not able to challenge it due to high barriers to entry.

The thesis proceeds in the following Chapter with a description of the current legal framework under which merger are assessed at the EU level.

III. The current legal framework under the Council Regulation (EC) No

139/2004

The European legal framework, under which mergers are assessed, is based on an ex-ante control, where every transaction, that qualifies as concentration and has a Community dimension, has to be analyzed by the Commission and receive its approval before the implementation.

The legal framework under which mergers51_{are regulated at EU level is contained in the EUMR.} Every transaction which qualifies as a concentration and has a Community dimension has to be pre-notified and approved by the Commission.52

Before the green light of the Commission the merging parties have a standstill obligation to not proceed with the operation and wait. After the notification the Commission carries out a substantive assessment of the transaction based on the definition of the relevant market and the assessment of the undertakings’ market power: it has to verify whether the transaction would significantly impede effective competition in the internal market or in a substantial part of it (SIEC Test). Once the

50_{Autorité de la Concurrence (n.26), p. 23.}

51_{The term “merger” here includes also acquisitions and joint ventures under Article 3 EUMR.} 52_{Richard Whish, David Bailey, Competition Law, ninth edition (2018), p. 849.}

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assessment is concluded the Commission has the power either to prohibit or to allow the transaction.53

3.1. The concept of concentration and the Community dimension under EUMR

The Community dimension of a concentration is established on the ground of the turnover of the undertakings participating into the transaction. When the Community dimension is established, the Commission has sole jurisdiction to decide on it under the principle of “one stop merger control”.54 Article 3 EUMR55_{defines the concept of concentration, which should “be deemed to arise where a} change of control on a lasting basis results from:

(a) the merger of two or more previously independent undertakings or parts of undertakings, or

(b) the acquisition, by one or more persons already controlling at least one undertaking, or by one or more undertakings, whether by purchase of securities or assets, by contract or by any other means, of direct or indirect control of the whole or parts of one or more other undertakings.”

Turnover thresholds provide a linear mechanism for the allocation of jurisdiction where turnover is used as a proxy for the economic resources that would be combined as a result of a concentration, and it is allocated geographically in order to reflect the geographical distribution of those resources.56_{Article 1(1) EUMR provides that the EUMR shall apply to all concentrations having a} Union dimensions as defined in paragraphs (2) and (3) of the same Article.

Article 1(2) EUMR57_:

A concentration has a Community dimension where:

(a) the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 5000 million; and

53_Ibid. 54_Ibid.

55_{Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the} EC Merger Regulation) [2004] OJ L 24.

56_{Whish (n.52), p.859.} 57_{EUMR (n.55).}

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(b) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 250 million,

unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.

This paragraph is intended to establish the size of the undertaking worldwide and the minimum level of activities within the European Union, excluding purely domestic transactions.

Article 1(3) EUMR58_:

A concentration that does not meet the thresholds laid down in paragraph 2 has a Community dimension where:

(a) the combined aggregate worldwide turnover of all the undertakings concerned is more than EUR 2500 million;

(b) in each of at least three Member States, the combined aggregate turnover of all the undertakings concerned is more than EUR 100 million;

(c) in each of at least three Member States included for the purpose of point (b), the aggregate turnover of each of at least two of the undertakings concerned is more than EUR 25 million; and

(d) the aggregate Community-wide turnover of each of at least two of the undertakings concerned is more than EUR 100 million,

unless each of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover within one and the same Member State.

With this paragraph the Commission retain jurisdiction also in cases where the concentration, even though without Union dimension under Article 1(2), is likely to have a substantial impact in at least three Member States.59

The definition of turnover is contained in Article 5(1) EUMR and it consists in the amounts derived by undertakings in the preceding financial year “from the sale of products and the provision of

58_Ibid.

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services falling within the undertakings’ ordinary activities”.60_{Article 5(4) EUMR additionally} provides that the calculation of the turnover of the undertaking concerned must include also the turnovers of the subsidiaries, the parents and the affiliates.

3.2. Referral system under Article 4(5) and 22 EUMR

When the concentration does not have Community dimension, it is subject to national systems of merger control of Member States. It can happen that one transaction is required to be notified and reviewed under numerous jurisdictions. Since multiple filings is undesirable for both undertakings and competition authorities, the EUMR contains a system of correction on the ground of which concentrations not having a Union dimension can be referred to the Commission, thus benefiting from the principle of one-stop merger control.61

Article 4(5): pre-notification referrals

The parties of a concentration without a Union dimension, which is capable of being reviewed under the national competition laws of at least three Member States, can make a reasoned submission asking the Commission to examine the concentration. Member States competent to examine the concentration have 15 working days to disagree with the submission and block the referral. If there is no disagreement the concentration is deemed to have a Union dimension and it will be reviewed by the Commission under the provisions of the EUMR; afterwards Member States can no longer apply their competition law to the case, which proceeds on the basis of one-stop merger control.62

The Commission considers the most appropriate cases for referral under Article 4(5)63_{are those} where:

- the market(s) in which there may be a potential impact on competition is/are wider than national in geographic scope;

- potential competition concerns rise in a series of national or narrower than national markets located in a number of different Member States. The aim of the Commission is to ensure a consistent and efficient scrutiny across the different countries;

60_{EUMR (n.55).}

61_{Whish (n.52), p. 864-865.} 62_{Ibid, p.867.}

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- in absence of competition concerns, there is a compelling case for having the operation treated by the Commission, due to cost and time delay involved in submitting multiple Member State filings.

Article 22: Post-notification referrals

A referral to the Commission can also take place after the notification in two ways: either the competent Member States may refer to the Commission a concentration that does not have a Union dimension but affect trade between Member States and threaten to affect competition significantly within the territory of the Member States making the request; or the same Commission can invite Member States to make a request under Article 22.64

When the Commission receives a request under Article 22, it must inform the competent authorities of the Member State and other Member States have the possibility to join the request within 15 working days. If a Member State decides not to join the request, it can apply its own law, even if the Commission accepts the request from other Member States. The principle of one-stop merger is not applicable since Member States retain the right to disagree with a request and apply their own law.65 Within 10 working days from the period during which Member States can join the request, the Commission must decide whether to accept and examine the concentration. If the Commission does not take a decision it is deemed to have accepted the request. Once the Commission has taken the jurisdiction the case proceeds in accordance with the provisions of the EUMR.66

3.3. Substantive assessment of concentrations

After the notification to the Commission the undertakings concerned have a standstill obligation67_, i.e. they are obliged to not proceed with the transaction before receiving the approval of the Commission.

Under Articles 2(1) and (3) EUMR the substantive analysis of the concentration by the Commission has the aim to establish whether the transaction “would significantly impede effective competition in the market or in a substantial part of it, in particular as a result of the creation or strengthening of a dominant position”.68_{It can be divided into two phases. Phase II takes place only if the}

64_{Whish (n.52), p. 870-871} 65_Ibid.

66_Ibid.

67_{Article 7(1) EUMR.} 68_{EUMR (n.55).}

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Commission establishes in Phase I that the concentration raises serious doubts of its compatibility with the internal market.

During Phase II the Commission carries out an in-depth investigation, including a detailed market investigation, a peer review within the DG COMP, a statement of objections sent to the undertakings concerned, which have the possibility to reply, an oral hearing, a meeting of the Advisory Committee on Concentrations and the adoption of the final decision by the Commission. This one can finally declare the concentration compatible with the internal market, compatible but subject to commitments from the parties, or incompatible.69

3.3.1. The definition of relevant market

The first step in the substantive assessment of the concentration is the definition of the relevant product and geographic market, in order to “identify the competitors of the undertaking involved that are capable [actually or potentially] of constraining those undertakings behavior and of preventing them from behaving independently of effective competitive pressure”.70_{The competitive} constraints on the undertakings can have three main sources: demand substitutability, supply substitutability and potential competition.

The criteria for the definition are set in the Notice on Market Definition71_{, which adopts the} hypothetical monopolist test, also known as the SSNIP test. The definition of the market is essentially a matter of interchangeability: where goods or services can be regarded as interchangeable, they are within the same product market.72_{Under the SSNIP test, it must be} verified whether consumers, in response to the introduction of a small but significant non-transitory increase in price (5%-10%) in the products and areas considered, would be inclined to switch their purchase to readily available substitutes or to suppliers located elsewhere. If substitution is enough to make the price increase unprofitable because of the resulting loss of sales, additional substitutes and areas are included in the relevant market.73

As it will explained in Chapter V, especially when assessing the possible anticompetitive conduct of digital platforms, the definition of relevant market has to take into account the nature of the market, which may be defined as a one-sided, two-sided or a multi-sided market. In the last two hypotheses,

69_{Whish (n.52), p. 881.}

70_{Commission Notice on the definition of relevant market for the purposes of Community competition law [1997 ]OJ C} 372, para 2.

71_{Ibid paras 15-24.} 72_{Whish (n.52), p. 29.} 73_{Notice (n.70), para 17.}

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the network effects exercised from one side to another and vice versa influence the decision of the competition authorities on whether to take into consideration all sides of the relevant market in order to get a good understanding of the competitive pressure faced by the merging firms before and after the merger.

3.3.2. Market power assessment

In the second step of the analysis the Commission verifies whether the concentration would significantly impede effective competition (SIEC test), in particular increasing the undertaking market power, possibly resulting in the creation or strengthening of a dominant position. The “Guidelines on the assessment of horizontal mergers”74_{and the “Guidelines on the assessment of} non-horizontal mergers”75_{provide guidance on how the Commission assesses concentrations.} Market power is defined as the ability of an undertaking to profitably increase prices, reduce output, choice or quality of goods and services, diminish innovation, or otherwise influence parameters of competition.76

In its assessment the Commission always compares the conditions resulting from the concentration with the conditions which would have prevailed without the merger, i.e. the counterfactual.

Undertakings market shares are a first indicator of the market structure and of the competitive importance of both the merging parties and their competitors. They are used also for the calculation of the Herfindahl-Hirschman Index (HHI), which indicates the overall concentration level in the market.77

The operation will be blocked by the Commission if the investigation will show the production of creation of the strengthening of a dominant position not counterbalanced by any efficiencies on the market.78

Regarding horizontal mergers, i.e. mergers between potential or actual competitors on the same relevant market, this can happen in two ways79_:

74_{Guidelines (n.14).}

75_{Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of} concentrations between undertakings [2008] OJ C 265.

76_{Guidelines (n.14), para 8.} 77_{Ibid, para 16.}

78_{Ibid, paras 12-13} 79_{Ibid, paras 22(a)-(b).}

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- either by eliminating important competitive constraints on one or more firms, which consequently would have increased market power, without resorting to coordinated behavior (non-coordinated effects)

- or by changing the nature of competition in such a way that firms that previously were not coordinating their behavior, are now significantly more likely to coordinate and raise prices or otherwise harm effective competition.

Considering conglomerate mergers, i.e. mergers between companies that are active in closely related markets, the main concern is foreclosure. The merged entity may have the ability to leverage a strong market position from one market to another, creating high barriers to entry in the market, impeding possible competitors to compete.80

The one described above is the current legal framework at EU level. In the next Chapters the possibility to add alternative jurisdictional thresholds to the existing ones in the EUMR and the update of the substantive assessment criteria in digital markets will be discussed in order to find a solution to the competition issues formulated in Chapter II.

IV. The digital market calls for an amendment of the Council Regulation No

139/2004

Recently, an amendment to the turnover-based thresholds contained in the EUMR has been suggested as a solution to address the problems generated by killer acquisition in the digital sector. Since the targets have low or no turnover, the concertation may not be notified to the Commission which, therefore, is not able to analyze it.

As mentioned above, Articles 1(2) and (3) EUMR set the turnover thresholds which must be satisfied in order to establish the Commission jurisdiction. Considering the acquisitions in the digital sector, where the target is a small company, mainly focused on the creation of a large user base which will be monetized at a later stage, at the time of the transaction the turnover does not appear to be a good proxy that reflects the competitive significance of the operation in the market.81

80_{Guidelines (n.75), paras 93-94.} 81_{Crémer (n.9), p. 110.}

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Therefore, this type of transactions is likely to escape the European jurisdiction, unless the merger is referred to the European Commission under Article 4(5) EUMR at the request of the parties or under Article 22(1) EUMR at the request of a Member State.82

This problem has led academics and authorities to suggest an update of the current legal framework, both at European and national level. One of the main recurring proposal is to operate a modification of the EUMR’s jurisdictional thresholds, in particular by introducing a new and supplementary transaction value test.83

4.1. The introduction of alternative jurisdictional thresholds based on the

transaction value in the EUMR

In 2015 the Monopolkommission84_{published a report}85_{where it highlighted the fact that merger} control on online markets may be not sufficiently effective. The Monopolkommission reported the presence of protection gaps both at EU and national level, where the ex-ante control system based on notification turnover thresholds is not able to catch killer acquisitions in digital markets due to their peculiarities. These transactions may fail the notification to the Commission or the NCA, since the company acquired usually has no or low turnover, and therefore the Monopolkommission suggested to introduce new additional notification requirements based on the transaction value. In the expert committee’s opinion, the additional thresholds should have general scope and not be limited exclusively to digital markets. 86_{The new system should be able to close the protection gaps} in case where the competition potential of a company is not really reflected in its turnover.

In fact, past cases have demonstrated that turnover is not a good proxy in assessing the competitive potential of young targets, which may have limited revenue at the time of the acquisition but may have subsequently a disruptive development on the market. Moreover, the turnover-based thresholds do not take into account the fact that personal data can be seen as the new currency with which consumers pay the zero-price service offered by the acquired company.87

82_{Ibid, p. 113.} 83_Ibid.

84_{The Monopolkommission is a permanent, independent expert committee which advises the German government and} legislature in the areas of competition policy-making, competition law, and regulation, whereas the Bundeskartellamt is an independent competition authority whose task is to protect competition in Germany.

85_{Monopolkommission, Competition policy: The challenge of digital markets, Special Report No 68, (2015).} 86_{Paragraph 58 of the Report contains an example of the sixth paragraph that should be added to Article 1 EUMR.} 87_{Alexander Italianer, “Competition Merger Brief”, Issue 1/2015 – February, European Union [2015].}

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The most striking example used in the report is the merger between Facebook and WhatsApp where the latter did not have a sufficient turnover (around USD 10 million) for the transaction to be notified to the Commission but the real value of the company acquired was expressed in the price payed by Facebook, i.e. USD 19 billion. The transaction was notifiable in three Member States under national thresholds and was referred to the Commission upon Facebook’s request.88

Relevant examples can be found in other cases as well, such as Facebook acquiring Instagram89_in 2012 for USD 1 billion, where Instagram was 2 years old and had just few employees, and Google acquiring Waze90_{in 2013 for USD 1,3 billion. Both targets had no sufficient turnover to satisfy the} turnover thresholds and, therefore, they were not analyzed by the Commission.

With the introduction of transaction value thresholds, the EU would follow the US which already has in place a similar system.91_{A transaction is reportable to the US authorities if three different} tests are satisfied92_:

- the commerce test, i.e. the acquiring or the acquired person is engaged in commerce or in any activity affecting commerce;

- the size of the transaction test, i.e. the aggregate total amount of voting securities, non-corporate interests and assets the acquiring person will held;

- the size of persons test, i.e. the annual net sales or total assets of the transaction participants.

After the German report the hypothesis to amend the EUMR thresholds has been vivaciously discussed and not welcomed by many academics and authorities. It has been sustained that the risk of protection gaps is already limited by the corrective measures contained in the EUMR, i.e. the referral system, which allowed to refer cases like Facebook/Whatsapp93_{and Google/DoubleClick}94 to the Commission for an assessment.

The turnover system is considered by many academics clear and easily accessible, tested for more than 25 years and therefore it should be maintained unchanged. The current thresholds are fully complaint with the ICN Recommendation Practices for Merger Notification and Review

88_{Monopolkommission (n.85), para 460.}

89_{https://www.crunchbase.com/acquisition/facebook-acquires-instagram--827053e5} 90_{https://www.crunchbase.com/acquisition/google-acquires-waze--3cd29637} 91_{Italianer (n.87)}

92 _{Hart-Scott-Rodino} _Antitrust _Improvements _Act _of _1976; _to _see _the _update _thresholds:

https://www.govinfo.gov/content/pkg/FR-2020-01-28/pdf/2020-01423.pdf

93_{Facebook (n.42)}

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Procedures95_{, on the ground of which “notification thresholds should be clear and understandable”,} “based on objectively quantifiable criteria”, such as assets and sales – i.e. turnover – and not market shares or potential transaction-related effects, and “based on information readily accessible to the parties of the proposed transaction”.96

Two main approaches have been outlined, the one more conservative adopted by the Commission, and a more innovative one supported by Countries, like Germany and Austria. Both of them will be further discussed.

4.2. The Commission approach and the Consultation about changing the

turnover thresholds

The Commission considered the eventuality of broadening the EU merger control jurisdiction between October 2016 and February 2017, when a Public Consultation97_{regarding the evaluation of} procedural and jurisdictional aspects of EU merger control was launched.

One of the topic discussed in the Consultation concerned the functioning of the jurisdictional thresholds: the Commission asked the participants whether and in which sector they perceived an enforcement gap when regulating acquisitions of highly valued targets with low or no turnover and whether they considered necessary the introduction of additional thresholds based on the transaction value.98

The minority of respondents, declared themselves in favor to the introduction of complementary jurisdictions thresholds, recognizing an enforcement gap especially in the digital, pharmaceutical and biotechnology sectors. In their comments they refer to Facebook/Whatsapp and Google/DoubleClick as examples of cases falling outside the Commission jurisdiction and referred to it through the use of the instrument of the pre-notification referral contained in Article 4(5) EUMR.99

These argumentations were supported by several competition authorities and public bodies. The Danish100_{and Irish}101_{Competition Authority would welcome a further survey for the introduction}

95_{ICN Recommended Practices for Merger Notification and Review Procedures.}

96_{Massimiliano Kadar, European Union competition law in the digital era, Published in Zeitschrift für} Wettbewerbsrecht, 4/2015, p. 342.

97_{European Commission, Summary of replies to the Public Consultation on Evaluation of procedural and jurisdictional} aspects of EU merger control (2017).

98_Ibid. 99_Ibid.

100_{Denmark reply to the Public Consultation on Evaluation of procedural and jurisdictional aspects of EU merger} control (2017)

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of sector specific additional thresholds, such as in digital and pharmaceutical sectors. The French102 Autorité de la Concurrence considered the increasing importance of digital markets and big data and affirmed to be favorable to the introduction of transaction value-based thresholds, which should be complementary and not autonomous from the current one based on the turnover. Both the German Bundeskartellamt and Monopolkommission103_{believed the referral system is not sufficient} to address killer acquisitions in the digital sectors, since it provides tight deadlines and requires the transaction to be notifiable in at least three Member States, which are supposed to have non-transaction-based thresholds in their national legislation. Finally, the UK104_{Competition and} Markets Authority on the ground of its experienced legislation, which contains the “share of supply” test, considered the introduction of a “deal size threshold” a good approach.

However, the majority of public and private stakeholders negated the presence of an enforcement gap at EU level and highlighted specific shortcomings of hypothetical thresholds based on the transaction value. Basically, the difficulties discussed relate to the high level of subjectivity of the purchase price, the legal certainty in determining whether a given transaction must be notified and the need for minimizing the administrative burden and transaction costs brought about by an extension of jurisdiction. In addition, in order to comply with the principles of public international law, which require the presence of a local nexus in order to establish jurisdiction, a substantial effect of the concentration in the EU internal market must be demonstrated.105

Moreover, contrary to the Monopolkommission, the Commission considers a better choice to create a new threshold limited to transactions with specific characteristic106_{, such as acquisitions by} dominant firms in market characterized by strong network effects, in order to avoid the risk to capture too many irrelevant transactions.107

In lights of all these difficulties, the approach chosen by the Commission is to wait and observe how new transaction value-based thresholds implemented at national level will work in practice and

101_{Ireland reply to the Public Consultation on Evaluation of procedural and jurisdictional aspects of EU merger control} (2017).

102_{France reply to the Public Consultation on Evaluation of procedural and jurisdictional aspects of EU merger control} (2017).

103_{Germany reply to the Public Consultation on Evaluation of procedural and jurisdictional aspects of EU merger} control (2017).

104_{UK reply to the Public Consultation on Evaluation of procedural and jurisdictional aspects of EU merger control} (2017).

105_{European Commission (n.97).}

106_{On the ground of such considerations, in June 2020 the Commission launched a new Public Consultation about a} possible new competition tool and an ex ante regulation for digital platforms with a gatekeeper position on the market, available here: https://ec.europa.eu/commission/presscorner/detail/en/ip_20_977

KILLER ACQUISITIONS IN THE DIGITAL MARKET Should the EUMR be changed in order to address the anti-competitive concerns generated by killer acquisitions in the digital sector?

Master’s Thesis

European Competition Law and Regulation