Vestager’s Speech: Innovation Free or Free from Innovation?

BELGIUM-EU-GOOGLE-ANTITRUST

On 12 October 2017, Margrethe Vestager, Competition Commissioner, gave a speech on setting innovation free.

Because it is an important speech that comes after the decision to fine Google Shopping more than 2 billion euros and after the Intel judgement from the Court of Justice – a rather busy year for algorithmic antitrust at EU level -, I insert the Commissioner’s speech in full below, before commenting this speech:

“Bpifrance Inno Génération, Paris, 12 October 2017

“PLEASE CHECK AGAINST DELIVERY”

Ladies and gentlemen,

In my office, I keep a plaster model of a hand, with its middle finger raised in a gesture that’s not very polite. It was a gift to me when I was minister of economy in the Danish government from some people in a trade union. They weren’t too pleased with the decisions we took to put Denmark’s finances back on track.

I keep it because it reminds me of something important. When you do things differently, when you transform the way things work, you can’t expect to make everyone happy.

Innovators know that very well. For every disruptive innovation, there’s a business that gets disrupted. For every new idea that makes people’s lives better, there’s a company whose profits depend on keeping things exactly the way they are.

So innovation is not just about good ideas. It’s about winning the argument in favour of change. And in Europe, our competition rules help to create the space to make that argument.

As the European Commissioner for Competition, it’s my job to make sure companies which dominate the market don’t misuse their power to stop others competing. That they don’t shut down innovation before new ideas have the chance to show customers what they can do.

That’s why, earlier this year, we fined Google nearly two and a half billion euros. Not because it dominates the market for Internet searches. But because it used the power of its search engine to stop others competing and innovating.

We’re living at a time when technology is transforming our world. Intelligent algorithms, working with huge amounts of data, are changing every part of the way we live. And I think we’ve reached a point where the limits to what we can do are not technological. They’re about whether technology undermines people’s basic expectations from society. For freedom, for privacy, for protection and support.

Right now, less than a quarter of Europeans trust online businesses to protect their personal information. If that doesn’t change, we won’t get the most out of the power of data, to make us healthier, happier and greener. So technology companies need to win back people’s trust. To show that they incorporate privacy by design, not as an afterthought.

And we also need to make sure digital businesses pay their fair share of tax. Because our societies are built on the principle that everyone makes a fair contribution to the services that make a decent society – health services and education, infrastructure and the welfare systems that protect us when things go wrong.

Last week, we decided that Luxembourg had to claim back around 250 million euros in unpaid taxes from Amazon. Amazon allocated the bulk of its operating profits in Europe to a Luxembourg company that paid no tax at all in that country. And yet that made no economic sense, because the company was a shell – with no employees, no office, and above all, no activities that could justify that allocation.

Special treatment like that, which benefits some companies and not others, is against our state aid rules. But it’s only one part of a much bigger picture. And the state aid rules alone can’t solve all the issues we face. Because the fact is, our tax systems just aren’t designed to make sure that digital companies pay their share of tax.

So we need to change the tax rules, not just in Europe but all around the world, so that technology companies make a fair contribution. Our hope is to agree a new international approach by spring 2018.

As public authorities, we know innovation matters. But we also know that we can’t predict or control it.

What we can do is give innovators the room to succeed. We can clear the path of obstacles. We can make sure innovation doesn’t undermine the basic expectations people have of society.

And then we can leave it to you to do what you do best – to do things differently, and transform our world.

Thank you.”

 

I would make few comments to this plain speech on innovation.

First and most importantly, the Commissionner explained in clear language the rationale that underpins the Google shopping decision. She argued that Google “misused” its market power by stopping competitors “competing and innovating”. First, I would like to stress out the rather non-perceptible but quite telling shift of language use: the Commissioner speaks of “misuse” rather than “abuse” of market power. They could be seen as synonymous words. There are not.

According to Cambridge dictionary, a “misuse” defines the use of something in a “unsuitable” or “unintended” way. Contrariwise, an “abuse” defines the use of something in a “harmful or morally wrong” way or for a “wrong purpose”. Clearly, the ideas of justice and of legality are more clearly disrespected with the concept of abuse, which yields a greater threshold for qualification, rather than with the concept of misuse, which is more likely to be found anytime a regulatory authority appreciates the suitability of market actors’ decisions.

Furthermore, with respect to the EU competition rules that the Commissioner is addressing  in her speech, Article 102 TFEU which was the legal basis for fining Google in the Google Shopping decision. This article states that is deemed to be illegal “any abuse by one or more undertakings of a dominant position within the internal market or in a substantial part of it shall be prohibited as incompatible with the internal market in so far as it may affect trade between Member States.” Consequently, not only must an “abuse” – and not simply a “misuse” – be evidenced for triggering anticompetitive investigations, it must also be evidenced an effect on “trade between Member States”. Therefore, the misuse condemned by the Commission seems way below the double threshold required by the law, consisting of evidencing an abuse and an effect on trade between Member States.

Definitely, this abuse of language is deliberate: the more policy-oriented (rather than economically-oriented) view on competition policy is easily grasped from the Commissioner’s speech where she highlights the notable policy goals EU competition policy is entrusted to pursue: “freedom“, “privacy“, “protection and support”…

The Commissioner seems to appropriately take the measure of how quickly (and deeply) algorithm-driven corporate strategies and data-laden innovation shape current competition understanding and practices. However, the pitfall lays on the conceptual need for competition law reforms given the too little weight given to innovation arguments to antitrust analysis. In short, dynamic efficiency rationale underpins too marginally the overall allocative efficiency rationale dominating current antitrust/competition practices.

Indeed, the Commissioner argued “[i]t’s my job to make sure companies which dominate the market don’t misuse their power to stop others competing. That they don’t shut down innovation before new ideas have the chance to show customers what they can do. That’s why, earlier this year, we fined Google nearly two and a half billion euros”. First, Google Shopping is not about new ideas (referencing products online, what’s new?) but about new ramifications and technologies (from Google search results to Google shopping helped by powerful algorithms). Therefore, competitors could have equally introduced new methods of referencing products online since this is the only innovation Google Shopping provides to customers. Also, Google can hardly be seen as a non-innovative company.

Second, you cannot ensure that innovation is not “shut down” before “new ideas have the chance to show customers what they can do”. Innovation is a result of a long, highly expensive, greatly uncertain, profoundly indeterminate process generated by a combination of few original ideas, some intuitions and chances, and a lot of patience. It is therefore not the role of any competition authority to ensure that new ideas “show customers what they can do” because i) it is not for regulatory authorities to decide which time-span is optimal between the emergence of innovative ideas and the materialization of these innovations to customers’ daily lifs; and ii) because new ideas are not, and should not, be directly at the benefit of the customers but could be indirectly useful by contributing to another process of innovation before these patterns of innovation is conducive of any material benefits for customers. Regulatory authorities should not supervise how innovation is generated and delivered to customers but should rather focus on the optimal regulatory framework for companies to become innovation-intensive within a competitive environment.

On taxes, the Commissioner is clearly right. Big digital companies cannot sustainably keep on paying so little taxes while making tremendous profits. It is a matter of political and democratic acceptability for these companies to be subjected to a tax level comparable to other small and medium-sized entreprises. But this tax law issue (i.e., how to effectively tax them without chilling out innovation) should not be spilled over the competition law practice with a negative (and protectionist) bias leading to condemn generally pro-competitive practices. Competition law is a different area of law which is not concerned with legitimate redistributive tax-transfers. It must, quite the contrary, remain focused on wealth-maximization only. Simply put, other policy goals are fulfilled by other policies.

My final comment would be a comparative analysis of the above speech from the Competition Commissionner with the speech of her DG Johannes Laitenberger from the 12th of October 2017, too. He delivered a speech which emphasized the aim of competition rules to be protective of the competition process, of competition as such. He also emphasized that digital competition is relatively less impacted by classic notions of competition policy such as price, quantity and relevant market, but more by elements such as quality, choice and innovation. The DG Johannes Laitenberger argues that since “there is no monetary price, one focus will inevitably be competition on quality […] We need to define the relevant market in view of product functionalities, instead of comparing products’ price movements in relation to each other.” Classic competition analysis, resting on fundamental concepts such as the SSNIP test, the notion of relevant market and the concept of market power seem out-of-touch with contemporary antitrust issues. When there is no price on the market, there can hardly be any antitrust concern (cf. Kinderstart.com ). When there is no price (or few) prices which are not fully portraying the exchanges and stakes on the market (because the aim is more data collection rather than direct profits), SSNIP test makes little/no relevance —  needless to precise their following concepts such as relevant market and market power/dominance.

Therefore, the need for an update of competition rules is now crucial. DG Johannes Laitenberger and his Commissioner agree on the sheer particularity of digital players for competition rules but both fail to conclude that these competition rules need a profound transformation in order to match this sector’s specificities and, more generally, to be adapted to new antitrust challenges.

 

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