Merger control and Art 102
CLA evening discussion
Dr Cristina Caffarra
CLA Meeting
23 April 2012
1
Merger Control vs Art 102
Issue most acute with vertical/conglomerate mergers, where theory of harm
revolves around foreclosure/hold up arising from tying/bundling or refusal
to supply
Note: less likely to arise with conglomerate mergers à-la Tetra/Sidel or
GE/Hon, where concern was mixed bundling / contractual bundling:
high standard of proof, Court said Commission needs to show more than
mere possibility of the conduct (i.e. ability) and potential for exclusion arising
from these forms of mixed bundling is remote
However 3 recent mergers motivate interest in this topic, all in IT space
Intel/MacAfee – cleared in Ph 1 with interoperability remedy
Microsoft/Skype – cleared unconditionally in Ph.1 – but clearance now under
appeal
Google/Motorola – cleared unconditionally in Ph 1, Art 102 investigation on
Motorola opened back-to-back
Cristina Caffarra
CLA meeting, 23 April 2012
2
Why IT markets ? Some key features…
High technology markets may be prone to dominance
• Barriers to entry, high sunk entry costs , IP rights
Potential for tipping: winner takes all
• Brand-specific network effects, investment in platforms, ec. of scale
Multiple components – systems – complementarities –
importance of interoperability
• Benefits from integration of verticals/complements
• BUT foreclosure potential through exclusion/foreclosure AND
exclusion can have significant long-term effects
High margins
•
Unilateral effects concerns for horizontal mergers
Innovations protected by many small patents
• Proliferation of patent thickets
Cristina Caffarra
CLA meeting 23 April 2012
3
…leading to common concerns
High market share becoming persistent
•
Might be a sign of anti-competitive practices: in a world of fastmoving technology, hard to always be best on merits…
Anti-competitive tactics
•
•
•
Locking consumers into the current technology: control of
interfaces, pricing of upgrades,…
Linking today’s technology to the dominant firm’s own version of
the next technology: control of upward compatibility, contractual
tying of old and new technology…
Slowing down other firms’ innovation: aggressive (abusive)
enforcement of IP, exclusionary contracts…
Can have large effects quite fast
Is there a better case for “early” intervention in these cases?
Cristina Caffarra
CLA meeting 23 April 2012
Intel/MacAfee
Interoperability revisited
Intel (“dominant in x86 CPUs”) seeking to improve
security – armslength not worked (typical two-sided
investment issue – so integration makes sense)
Buys McAfee – stated objective integrating security software more deeply
Complaints: McAfee’s competitors (Symantec etc.) concerned that Intel
might downgrade interoperability with their products post-merger in order
to favour its new subsidiary McAfee
Parallel with Microsoft server case? MSFT degraded interop between its
OS and rival server OS in order to protect its monopoly in PC and non-PC
environments.
Remedy in both cases about disclosing information protocol
Arguably Intel Phase 1 remedy even more extensive: provide full
interoperability to McAfee’s competitors on a royalty-free basis, including for
merger-specific innovations jointly developed by Intel/McAfee post-deal
Cristina Caffarra
CLA meeting 23 April 2012
5
A reasonable case for ex ante intervention?
From one point of view, ex ante intervention makes sense:
• Quite a bit of competition in one market, strong dominance in CPUs
• Explicit objective of the merger was to integrate security into the chip
– in effect a technical tie, bolting software onto the chip to improve
security –need fairly deep level of integration– refusing/degrading
interoperability can be a powerful exclusion mechanism
Very different from GE/Hon: MIGHT be able to bundle in the future but no real
concern about physically integrating – just a contractual tie – makes sense to
pursue that ex post
With a technical tie, issue is more urgent
Cristina Caffarra
CLA meeting 23 April 2012
6
BUT low standard of proof… for a far-reaching
remedy which undermines merger rationale?
Vocal complaints in Phase 1
Downside of interoperability remedies is they may stall innovation.
Commission did not think was a huge issue, perhaps in light of MSFT
experience, but remedy here more far reaching than in MSFT server case
Remedy arguably defeats KEY purpose of the merger – creating synergies
between software and hardware in designing security solutions
Efficiencies highly merger-specific as they relate to innovations that cannot be
induced through arms-length contracts. By definition internal to the merging
parties, and may place the merging entity at a competitive advantage
Post-merger product improvements can be misconstrued as a source of
“foreclosure” by rivals - unrestricted/free access for competitors to
McAfee joint innovations with Intel seems a high “tax” in this light
Cristina Caffarra
CLA meeting 23 April 2012
Microsoft/Skype
A possible Media Player ?
Skype: software for communications over the Internet (IM, voice/video for
consumers/small businesses); Microsoft: communication services to
consumers (Windows Live Messenger) and businesses (Lync)
Horizontal overlap for consumer video calls on PCs (share 80-90%), but
Commission saw no concern in consumer market (services free of charge
and consumers are very price sensitive, entry barriers are low, Google / Facebook,
network effects small as consumers communicate with 4-6 people… ??)
Cleared unconditionally, but appealed by Cisco
Possible foreclosure concern: Two-sided market. Money is on business
side. Monopolising consumer market can be very lucrative even if cannot
extract rents directly there : if can refuse to interoperate Skype with all
business communication software except Microsoft’s Lync, this makes
Lync the exclusive platform able to reach private persons through video call.
Then can extract the rent with Lync
Cristina Caffarra
CLA meeting 23 April 2012
8
Similarities to Media Player?
Similar story was told in the Media Player case: monetisation on
consumer side was not really possible for Media Player, however
monopolisation of Media Player market (through bundling/tying with OS) may
allow to extract rents on the other side of the market (businesses using
Media Player format to transmit media).
Similar idea: monopolise price-sensitive side of the market and then
extract rent on the price-insensitive side of the market
Commission however clearly cautious as Media Player remedies strongly
criticised as ineffective (nobody bought unbundled version of Windows, and
today’s media player market is very competitive)
Foreclosure concerns based on two-sided market stories more difficult
to rely on ex ante
Cristina Caffarra
CLA meeting 23 April 2012
9
Google/Motorola
Tooling up for the mobile wars?
Overlaps?
IP portfolio overlap?
Cristina Caffarra
CLA meeting 23 April 2012
10
A range of foreclosure complaints?
“Exclusion of other mobile device manufacturers from full Android access to
promote MMI” (traditional foreclosure concerns)
“Using MMI’s IP to force licensees to provide Google Search on their devices
(rather than another engine)”
“Using MMI’s IP to harm other platforms (= operating systems – Msoft, Apple,
Rim) through
• Refusal to licence MMI’s IP
• Insistence on Android-wide agreements
Eventual consensus: Google “arming itself” for the ongoing patent wars…
Merger specificity? MMI already engaged in litigation. Why would Google be
“more aggressive” than MMI in litigating its IPs?
Theory of harm? Does the transaction “tilt the scale” or “restore balance” in
terms of patent wars? Why and how?
Merger cleared, Art. 102 investigation opened
Cristina Caffarra
CLA meeting 23 April 2012
11
Any tentative themes?
Mechanisms through which anticompetitive harm may occur substantively the
same, indeed convergence in substance between NHMG and Guidance paper
Unlikely to see ex ante concerns arising from contractual tying/bundling
Mergers in IT space a growing area of interface because of pervasive
complementarities in IT - IT an “add on” industry (unlike eg pharma)
A spectrum? Ex ante behavioural remedies more likely with mergers that
come close to a technical tie (though this may undo the efficiencies…), less
likely for leveraging stories where “wait and see” has more limited downside
The enforcer’s dilemma: self-correction? will Intervention dampen incentive to
innovate? Information constraints? Timing for behavioural remedies? Can
“equal treatment” of rivals be reasonable?
Cristina Caffarra
CLA meeting 23 April 2012
12
Case:
Intel/McAfee
Issue:
Conglomerate concern: bundling CPU with
security
Microsoft
Vertical / conglomerate concerns: MS
PC interoperability with MS workgroup
servers (file share, print, group and
user services)
1) Interoperability between security solutions
(both software based and hardware based) by
other vendors and Intel chipsets - major
concern,
Concerns:
Platform:
Remedy - price for
access:
Remedy - description:
Remedy - scope:
Remedy - relevant
technical nature:
2) compatibility between McAfee solutions and
non-Intel (AMD) chipsets - minor concern
MS limiting interoperability to exclude
competition in workgroup servers
hardware and softare / intersection
software
royalty free
rival security software and hardware vendors
must have same access as McAfee for a
period of 5 years
broad: for all new products in a period - 5
years
FRAND
complex: same level of interoperability as for
McAfee requires a deep disclosure of design /
idea - may be copied by AMD, others
API documentation licensed on
FRAND terms
narrow: only for the existing product
and its updates
less complex: requires a disclosure of
relatively small part of the products
innovative substance / deep design
can remain undisclosed
Cristina Caffarra
CLA meeting
Remedy
- cost23ofApril 2012costly - requires assisstance of hardware
implementation:
engineers
not so costly - allow access to
information
13
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CLA Meeting
23 April 2012
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