By Anthony Bochon
On 3 October 2014, the European Commission of the European Union (the “Commission”) approved the acquisition without any commitments. After the approval of the acquisition of Skype by Microsoft in 2011 and of the acquisition of Nokia by the latter in 2013, this was another occasion for the European Commission to examine competition issues in the consumer communications services sector. It merely confirmed its approach adopted in the Microsoft / Skype case, which was endorsed by the General Court in the Cisco Systems Inc. judgment of 11 December 2013.
As a preliminary remark, it must be pointed out that the acquisition project was notified to the European Commission on the ground that the national competition authorities of at least 3 EU member States would be competent to review this acquisition. In principle, filings are made with the Commission because the two undertakings involved in the operation have a turnover that exceeded the notification threshold. However, Article 4 (5) of Regulation 800/2004 (the “Merger Regulation”) provides that any concentration subject to the review of at least three national competition authorities can instead be examined by the European Commission.
A product market definition left open
The Commission first determined that the acquisition concerned consumer communications services which have the double characteristic of allowing users to communicate in real time and which are used to communicate with relatives, friends and other contacts.
The Commission immediately drew a distinction with the professional communication services, as it does with other product markets where the professional-consumer dichotomy still has some significance. In the present case, the Commission’s approach could be considered surprising because most current communication services indistinctively provide the same functionalities to any type of user and professional users could, at least, use WhatsApp for professional purposes. This would be less true for Facebook which was, at first, a social media allowing alumni of universities to keep or get back in touch.
The Commission then decided to segment the market concerned by platforms, as WhatsApp is only available on smartphones and did not have any plan to be available on other platforms such as personal computers where Facebook is already available. The relevant product market was therefore defined as only including consumer communications apps for smartphones.
The Commission considered the issue of whether traditional electronic communication services such as voice calls, SMS, MMS and e-mails should be included in the relevant product market. The Commission’s findings that substitutability or complementarity between the traditional and the new electronic communications was imperfect were solely speculative. Indeed, the Commission concluded that the inclusion of traditional electronic communication services in the relevant product market would dramatically decrease the market share of Facebook and WhatsApp. As a result, the Commission decided to leave the exact product market definition open, because the acquisition did not raise any concern as to its effects on competition, irrespective of the product market definition.
Plenty of smartphone apps in the European Union
The Commission considered that the regulatory environment of telecommunications in the European Union could, unlike the United States, explain the diversity of smartphone applications. Indeed, the application of roaming and international call charges – despite their decrease over the last decade due to several legislative interventions of the EU institutions – is an incentive for EU consumers to use smartphone apps to communicate rather than via their mobile voice telephony or traditional messaging services. Despite the fact that WhatsApp is subject to subscription fees in some member States and not in others, the Commission was of the opinion that there is no national market and that the geographic market should be European Economic Area wide.
Differences between social networks and consumer communication services
The Commission did not want to define any further the social networking product market suggested by Facebook as being its relevant market, since the acquisition did not raise any concern. The Commission took the view that the consumer communication services market should remain the relevant definition for the purpose of the investigation. It however identified notable differences between Facebook and WhatsApp.
The Commission considered that the user’s experience on Facebook is not the same as a WhatsApp user: a Facebook user can communicate to a wider audience and also the rhythm of communication is dissimilar because the comments function on Facebook allows users to respond long after an initial message has been posted. WhatsApp is rather an advanced form of messaging service similar to SMS or MMS. The existence of a messaging service for Facebook – the so-called “Facebook Messenger” – did not retain the Commission’s attention. The market investigation showed there was a strong interchangeability between messaging services and that most of the WhatsApp users were already Facebook users.
The issue of advertising in the social media
Facebook provides online advertising services, but not on its Facebook Messenger app. The users’ data is currently neither sold nor subject to data analytic services. WhatsApp does not allow any space for advertising. As there was no competition concern, Commission did not consider as necessary to define any further the online advertising product market to know whether advertising on social networking websites has distinctive characteristics. The Commission merely confirmed its findings in the Google / DoubleClick and Microsoft / Yahoo ! Search Business decisions. The prospective analysis of the Commission also showed that Facebook was a minor player among the users’ data collectors with a market share around 6%.
Drivers of competitive interaction between consumer communications apps
The functionalities offered and the underlying network have been identified as the main drivers of competitive interaction between consumer communication apps. In addition, the Commission took into account non-technical factors such as the perceived trendiness and coolness amongst groups of users. Furthermore, the users’ price sensitivity has been confirmed during the investigation, as almost all apps do not charge any fee for their use while others only charge a small amount of money.
Market shares and innovation cycles : Microsoft / Skype confirmed
The highest combined market share of Facebook and WhatsApp for social media messaging services would amount to 40%. The Commission concludes at paragraph 99 of its decision that “Even if the data provided by the Parties were to underestimate the Parties’ combined market shares, the Commission notes that the consumer communications sector is a recent and fast-growing sector which is characterised by frequent market entry and short innovation cycles in which large market shares may turn out to be ephemeral. In such a dynamic context, the Commission takes the view that in this market high market shares are not necessarily indicative of market power and, therefore, of lasting damage to competition.”
The Commission underlines that the sector is characterized by short innovation cycles and relies therefore on the assumption that market shares could be ephemeral. The Commission thereby confirms its approach already adopted in its decision of 7 October 2011 authorizing the acquisition of Skype by Microsoft (case M.6281) where, despite of the high percentage of combined market shares, it approved the acquisition for the same reasons. This justification was also endorsed by the General Court of the European Union which dismissed on 11 December 2013 the appeal brought by Cisco Systems Inc. against the Commission’s decision approving the Microsoft/Skype acquisition (case T-79/12) (see Newsletter 5-6/2013, p. 7).
The General Court said at paragraph 69 of the judgment that “[…] the consumer communications sector is a recent and fast‑growing sector which is characterised by short innovation cycles in which large market shares may turn out to be ephemeral. In such a dynamic context, high market shares are not necessarily indicative of market power and, therefore, of lasting damage to competition which Regulation No 139/2004 seeks to prevent.” Almost all these words have been used by the Commission to justify the acquisition of WhatsApp by Facebook. The General Court’s conclusion at paragraph 74 of the Cisco Systems Inc. judgment definitely legitimized the Commission’s reasoning: “It follows that the very high market shares and very high degree of concentration on the narrow market, to which the Commission referred merely as a basis for its analysis, are not indicative of a degree of market power which would enable the new entity to significantly impede effective competition in the internal market.”
This new decision approving an acquisition in a recent information technology sector confirms that the Commission would adopt the same pro-acquisition approach if other acquisitions in recent new technologies sectors would occur, because the short innovation cycle argument is transposable to other sectors, provided that the innovation cycle is short and the sector is too recent to base the economic assessment on data showing the market trends and market shares evolution.
After a comparison of the functionalities of the two instant messaging services, the Commission concluded that Facebook Messenger and WhatsApp were not close competitors and that, with the exception of network effects, users could still switch providers in the market for consumer communications apps.
No IP or interoperability issues
The Commission also concluded that there were neither intellectual property nor interoperability issues. Only Facebook owns some patents on messaging technologies which were irrelevant in terms of standardization. Furthermore, both apps were not pre-installed on smartphones and their downloading did not prevent users from using apps from competitors.
This Commission decision is in line with the decision in Microsoft/Skype and paves the way for future favorable approvals of acquisitions in the emerging technologies sector, as the Commission’s assumption that short cycles of innovation exacerbate the instability of market shares can be used as a justification for acquisitions as long as the technologies can be developed by competitors and new entrants on the market.
By Gabriele Accardo and Aurelia Magdalena Goerner
On 30 June 2014, the U.S. Federal Trade Commission (“FTC”) stated that, in order to address the competition concerns raised by Actavis’s proposed acquisition of Forest Laboratories, it has tentatively accepted the proposed settlement agreement between the FTC’s Bureau of Competition and the two pharmaceutical companies.
In brief, under the proposed settlement agreement, Actavis and Forest agreed to sell or relinquish their rights to four generic pharmaceuticals that treat hypertension, angina, cirrhosis, and prevent seizures.
According to the FTC’s complaint, the effects of the proposed acquisition, as originally proposed, would violate federal antitrust laws insofar as it may substantially lessen competition in the markets for three generic products that treat hypertension, angina and cirrhosis. In particular, the number of suppliers in the markets concerned would be reduced from three to two (for angina) and from four to three (for hypertension and cirrhosis), whereas market concentration would increase substantially post-merger.
Moreover, the proposed transaction would delay the introduction of generic competition against Lamictal ODT, the branded lamotrigine orally disintegrating tablets used to prevent seizures, manufactured by Forest and marketed by GlaxoSmithKline (“GSK”). No companies currently market a generic version in the U.S., whereas Actavis holds the only approved abbreviated new drug application to market generic Lamictal ODT. Thus, absent the proposed acquisition, Actavis is likely to be the first generic entrant and would be the sole competitor to Forest/GSK’s branded Lamictal ODT product for a significant period of time.
In particular, under the proposed settlement agreement, the companies have agreed to relinquish their rights to market generic diltiazem hydrochloride to Valeant Pharmaceuticals International, sell generic ursodiol and generic lamotrigine ODT to Impax Laboratories, and sell generic propranolol hydrochloride to Catalent Pharma Solutions.
The proposed settlement will preserve competition in the markets for these important drugs and is part of the FTC’s ongoing effort to protect U.S. consumers from higher heath care-related costs.
A description of the consent agreement package will be published in the Federal Register by the FTC shortly. Following a public consultation that will last until 30 July 2014, the FTC will decide whether to make the proposed consent order final. A monitoring trustee will then oversee the swift implementation of the consent order.
It may be recalled that last June 2013, the U.S. Supreme Court reversed the eleventh Circuit opinion in the landmark FTC v. Actavis case (see Newsletter 3-4 2013, p. 3 for more background), holding that reverse payment settlement agreements may violate federal antitrust laws but are not a per se violation, thus recognizing the impact that such settlement agreements would have on American consumers in the pharmaceutical market. Yet the validity of such agreements will still be tested under the rule-of-reason.
by Gabriele Accardo
On 11 December 2013 the EU’s General Court (the “Court”) handed down its ruling concerning Microsoft’s acquisition of Skype. The Court held that the Commission rightly considered that the transaction does not restrict competition either on the consumer Internet-based communications market or on the business Internet-based communications market, and is therefore compatible with the internal market.
In their appeal, Cisco Systems and Messagenet claimed that the Commission was wrong in its assessment of the internet visual communications market and the effect of the interoperability between Skype and Microsoft’s business videoconferencing service, Lync.
First, the Court notes that the Commission confined itself in its decision to differentiating internet-based communications for the general public (“consumer communications”) from communications for businesses (“enterprise communications”) and found that the concentration from the proposed acquisition did not give rise to competition concerns even in the narrowest markets. In particular, according to the Court, high market shares (some 80 to 90%) and high degree of concentration in the market for video communications made on Windows-based PCs (a segment of the consumer communications market) are not indicative of a degree of market power which would enable Microsoft to significantly harm effective competition in the internal market.
The consumer communications sector is a recent and fast-growing sector characterised by short innovation cycles in which large market shares may turn out to be ephemeral. Moreover, Microsoft is less present on increasingly important operating devices for consumers, such as tablets and smartphones, so that any attempt to increase prices of communications for users of PCs might encourage consumers to switch to alternative devices. Furthermore, a commercial policy of making users pay would run the risk of encouraging them to switch to other providers who continue to offer their services free of charge. Besides, on devices other than Windows-based PCs, competing operators have sufficiently large market shares to constitute communication networks whose level of use and attractiveness for users are at least comparable to those of Skype and Microsoft, taken together.
Second, the Court held that the harm to competition alleged in the internet-based enterprise communications market was purely speculative, dismissing the appellants’ claim that the Commission did not take account of the foreclosure strategy that the new entity could follow in the enterprise communications market by creating exclusive or preferential interoperability between Lync products and Skype’s large customer base.
In this respect, the Court held, first, that to achieve interoperability between Lync and Skype and to successfully marketing this new product still depends on a number of factors, and it is therefore too uncertain to be considered a direct and immediate effect of the concentration.
Also, according to the Court, the applicants have failed to explain why business users might wish to specifically communicate with users of Skype, since the latter, in fact, are not necessarily their potential customers.
Finally, in the event that the product resulting from the integration of Lync with Skype gives Microsoft a real commercial advantage, Lync would still face competition from other large players on the enterprise communications market, including Cisco, which alone holds a larger share of the market than Microsoft. Competitors could adjust their prices, the quality or functionality of their products or have recourse to the services of other large providers of consumer communications services, such as Facebook, Twitter and Google, thereby countering Microsoft’s alleged market foreclosure strategy. That circumstance considerably reduces Microsoft’s ability to impede competition in that market.
In that respect, the Court further noted that the fact that Lync could be sold in conjunction with other products from Microsoft does not alter that finding, since such a sales strategy is not dependent on the concentration of the market under consideration.
On 29 May 2013 the European Commission issued a press release approving the proposed acquisition of Mach by U.S.-based Syniverse, subject to some of Mach’s assets being divested in order to ensure that the merger will not have anticompetitive effects within the European Economic Area, notably that the merger does not hamper the smooth functioning of wholesale roaming services through an increase in price or a decrease in quality.
The Commission was concerned that without divestiture, the merger would allow the top two providers of mobile phone roaming services to merge into one entity, essentially creating a monopoly. The Commission was also concerned with a possible increase in prices or a decrease in the quality of the service provided.
In particular, the merger has been cleared subject to the divestiture of Mach’s Data Clearing services and Near Trade Roaming Data Exchange, which are services that consumers use on their mobile phones when travelling abroad. In order to maintain competition in the Data Clearing House market, Mach’s assets are to be sold to viable competitors that will ensure the development of the divested activities at a global level, and thus preserve competition in the market.
The Commission was previously able to clear Syniverse’s acquisition of BSG, the third largest Data Clearing House, because Mach was still a strong competitor. [Anthony Reda]
On 24 June 2013, the European Commission issued a press release stating that it has cleared the acquisition of NYSE Euronext (“NYX”) by the InterContinental Exchange (“ICE”). Both NYX and ICE operate in future exchanges, derivative trading platforms, and clearing services. NYX is an operator of exchanges in the U.S. and Europe, and ICE is a global operator of exchanges in the U.S., Canada and Europe.
The Commission confirmed that the transaction would not raise competition concerns due to the fact that NYX and ICE are not direct competitors and due to the presence of other competitors that would continue to compete with both exchange operators.
It may be recalled that last December 2012, the European Commission prohibited the merger between Deutsche Börse and NIX, based on concerns that the merger would have resulted in a quasi-monopoly in the area of European financial derivatives traded globally on exchanges (together, the two exchanges control more than 90% of global trade in these products.)
The Commission investigated the proposed acquisition on multiple market platforms, notably the market for trading and clearing services for exchange traded derivatives (“ETDs”) such as agricultural commodities, soft commodities and U.S. equity derivatives. Additionally, the Commission found minor overlaps in the areas of other agricultural ETDs, foreign exchange derivatives and bonds trading.
Finally, the Commission did not identify any vertical competition concerns with respect to trading and clearing of derivatives, as well as the provision of exchange connectivity services and front-end trade execution services. [Anthony Reda]
On 14 June 2013 the European Commission issued a press release stating that it approved Time Warner’s acquisition of Central European Media Enterprises (“CME”).
According to the Commission, the two entities are not in direct competition with each other (Time Warner is a U.S. based media provider, while CME broadcasts its television networks in a limited number of European countries, notably in Bulgaria, Czech Republic, Hungary, Romania, the Slovak Republic and Slovenia).
In terms of the licensing of TV content, TV advertising, wholesale supply of TV channels and the distribution of films for theatrical release the Commission found that there would be no anticompetitive effects. This is due to the fact that there is no overlap in TV content. CME generally operates free-to-air channels, while Time Warner provides basic Pay TV channels or premium film channels. Additionally, the Commission has concluded that the acquisition will not increase the merged entity’s buyer power. The merged entity of CME and Time Warner will not have the combined economic power to shut out any other competitors from the media market. [Anthony Reda]
On 14 June 2013 the European Commission cleared the proposed acquisition of Intermec by Honeywell (both U.S. entities). Intermec manufactures and supplies barcode scanners and ruggedized mobile computers.
The Commission assessed the possible anticompetitive effects within the ruggedized mobile computer, barcode scanner, and scanning engine markets, as well as the possible vertical relationships of the parties in voice recognition software. In all cases, the Commission concluded that due to the presence of other competitors/suppliers of scanning engines in the market, competition would not be significantly impeded within the European Economic Area. [Anthony Reda]