Digital platforms in merger control

Digital platforms play a major role in our lives. Their business model is to bring users or user groups together so that they can interact via the platform. In recent times, the European Commission as well as national competition authorities have dealt with a number of merger control proceedings regarding digital platforms, like the Microsoft/LinkedIn merger. This article sheds light on the merger control peculiarities of digital platforms.

No turnover yet? Doesn’t matter!

Digital platforms are characterized by high dynamics. Established providers can swiftly be replaced by new innovative companies. These newcomers have possibly not yet achieved any (significant) turnover, but might already have a significant competitive potential. Merger control regimes, as for example in the EU, often take into account only the turnover of the parties to the transaction when deciding whether a transaction has to be notified to the authority for merger control review or not. This can result in an enforcement gap as was almost the case in the takeover of WhatsApp by Facebook. To close this gap, the German legislator has introduced a supplementary notification threshold. If the consideration for the acquisition of the target exceeds EUR 400 million (this value shall reflect the competitive potential of the target), the transaction can be notifiable irrespective of the turnover of the target.

Network effects, market-tipping and multi-homing

Digital platforms can be characterised by direct and indirect network effects. Positive direct network effects exist when members of a group profit directly from the fact that more members of their group are active on the platform. For example, the more professionals actively use a career network like LinkedIn or XING, the more interesting the platform becomes for other professionals (“activity breeds activity”). Positive indirect network effects exist, when members of one user group benefit from the fact that members of another user group join the network. For example, recruiters make increased use of that career network which has the most active professionals. Vice versa, professionals make increased use of that network which has the most active recruiters. Due to these network effects, the value of the platform increases, if more users join and interact on the platform. This self-strengthening effect triggers concentration tendencies that can result not only in the development of large platforms but also in the tipping of the market into a monopoly. In its recent decision against Facebook (which is not a merger control decision but an abuse of dominance decision), the German Federal Cartel Office assumed such a market tipping on the market for private social networks. This monopolization effect can be prevented by the so-called multi-homing of users. This means that users are active on different platforms in parallel. As a result, market power is reduced.

The competitive role of data

As stressed by EU Commissioner Margrethe Vestager, data can play an important role for the competitive assessment of a merger. The competitive role of data is at least twofold: On the one hand, data is relevant as an “asset “, i. e. as a competitive advantage enjoyed by the merged entity post-merger because large data sets can improve companies’ products and services. This in return, attracts more customers – bringing more data to the company again. On the other hand, access to a unique data pool can potentially constitute a barrier to market entry and, therefore, significantly impede effective competition. Furthermore, data protection can be seen as a parameter for competition which can be degraded by the merged entity post-merger.

High market shares ≠ market dominance

Due to network effects, providers of digital business models can have high market shares. And in principle, high market shares serve as an indicator for market dominance. However, especially in the world of digital business models, competition watchdogs should not stop at this point. They should also take into account that innovation is the most important competitive parameter in the digital economy. Today’s status quo can be outdated tomorrow. Who remembers StudiVZ?