Our Knowledge

15.Sep.2016

E-Commerce Sector Inquiry: Preliminary Report Published

Executive Summary
The Commission today have published their preliminary report on the e-commerce sector inquiry, setting out their initial thoughts on what they consider to be problematic practices in this field. This marks a significant milestone in the Inquiry, which was launched eighteen months ago.    

The Commission’s key findings can be split across: (i) consumer goods and (ii) digital content.  

In respect of consumer goods, the key finding of the report is that as online retail has grown, manufacturers have responded by adopting practices to provide them with more control over the distribution of their goods. For example, they have put in place restrictions on where, in what manner and for how much their goods are sold. Some such measures are permissible, but certain agreements between manufacturers and distributors may be in breach of EU anti-trust rules.

In digital content, the Commission has found that the availability of licences from the holders of copyright in content is one of the key determinants in encouraging competition in this market. They noted that they key restrictions in licensing practices are in respect of: (i) the scope of the technology, territory and time in which digital content may be used; (ii) duration of the licencing agreements; and (iii) the widespread use of exclusivity agreements in licensing arrangements. The Commission made clear that it will need to assess on a case-by-case basis whether any such licensing practices restrict competition and would therefore potentially fall foul of EU competition rules.  

The preliminary report is now open for stakeholder comment for a period of two months, with a final report due in the first quarter of 2017. Given the preliminary conclusions, it is possible that the Commission will decide to launch a number of separate investigations targeting specific companies, on the basis that certain restrictive practices may have breached EU anti-trust law. 

Background
In 2013, a report was published alleging that although over 50% of EU citizens have shopped online, only around 15% of those people have purchased goods or services from a member state other than their own.  This caused concern in the Commission and led to the e-commerce sector inquiry being officially launched in May 2015 by the Competition Commissioner, M. Vestager, who has declared that:

“It is high time to remove remaining barriers to e-commerce, which is a vital part of the true Digital Single Market in Europe. The envisaged sector inquiry will help the Commission to understand and tackle barriers to e-commerce to the benefit of European citizens and business”.

The inquiry forms part of the wider European Digital Single Market Strategy, one of the key aims of which is achieving better consumer access to digital goods and services across Europe.

What has the Commission done so far?

Information Gathering
The Commission commenced an in-depth information gathering process, sending out Questionnaires and reviewing the responses from nearly 1,800 stakeholders. The focus of the questions was to understand the impact of certain barriers to cross-border trade, in particular the following areas: 

  1. Geo-blocking (e.g. blocking consumers’ access to purchases on foreign websites by, for example, requiring a native post code to complete a purchase, or diverting customers back to national websites, or blocking their access to foreign websites);
  2. Contractual barriers, in particular those restricting cross-border trade (e.g. impermissible selective distribution agreements, or resale price maintenance and other vertical restraints);
  3. Practical barriers (e.g. language / currency / distribution and shipping costs); and
  4. Dominance (e.g. abusive behaviours by dominant players in the e-commerce sector)

Initial Findings 
On the basis of the responses received, the Commission in March of this year published its initial findings on the subject of geo-blocking which it split into the categories of (i) consumer goods and (ii) digital content. 

In its initial findings it noted that, in relation to consumer goods, there was evidence of contractually imposed geo-blocking, which could fall foul of EU antitrust rules. In respect of digital content, whilst appreciating that such services are also governed by the copyright framework and licensing considerations, the Commission noted that geo-blocking may not always be required in licensing arrangements and that this was something they would be considering in more detail.

Preliminary Report
The Commission has now published its preliminary report, outlining what it sees as the key issues in the field of e-commerce and identifying particular business practices that it considers to be potentially restricting competition and limiting consumer choice. 

In its report, the Commission has reviewed the changing characteristics of e-commerce, confirming that it is a fast growing sector of increasing economic importance. It has also examined what it sees as potential barriers to competition. 

In respect of consumer goods it has noted that practices such as restrictions on cross-border sales and on the use of online marketplaces to sell goods (e.g. Amazon or eBay) may be hindering competition in the e-commerce sector. They also highlighted a trend in retailers / manufactures blocking the use of price comparison sites, predominantly on the basis that these deal with price alone, rather than quality. Lastly, they noted that pricing, in particular pricing restrictions could be problematic. Although manufacturers are permitted to suggest prices to its distributers, e.g. through a RRP, any strict re-sale price maintenance agreements are likely to be considered in breach of EU anti-trust law. Additionally, ‘dual pricing strategies’, i.e. pricing goods online and offline differently, has been highlighted as a potentially problematic practice. 

For Digital Content, the Commission has stated that licensing practices are the key issue in the effective distribution of digital content, with content providers requiring licensing relationships with the content producers in order to provide this service to end consumers. Within these licensing arrangements, the Commission has recognised a number of restrictions that may be a hindrance to competition, including contractual restrictions in relation to transmission technologies, the timing of releases and the territories into which they may be provided. They also noted that the generally long-life of licensing arrangements makes it difficult for new entrants and smaller operators to grow their digital content business. Finally, they concluded that payment structures for licences potentially discriminate against new or smaller providers, who do not necessarily have the ability to make large advance payments, or provide minimum guarantees. 

Next Steps
The Preliminary Conclusions are now open for stakeholder consultation until 15 November 2016, and the Commission is then due to present its Final Report in the first quarter of 2017.

The Commissioner Vestager has noted that, on the basis of the questionnaires and initial findings, a number of companies have already changed their distribution contracts to ensure they are not running counter to EU law. However, with over two-fifths of respondents to the Inquiry noting that they had some kind of restriction in their distribution contracts, there appears to be further work to be done. 

It is possible that the findings in the Final Report will lay the groundwork for cases against specific retailers for breaches of EU antitrust law, as was the case with previous sector inquiries (e.g. in the pharmaceutical sector). The European Commission may also use the report to influence national competition authorities to look into certain behaviours, encouraging them to open their own investigations.