Competition Law in the New Economy Industries: Is the
Current Competition Analysis Adequate to Protect
Consumers in the New Economy Industries
A thesis submitted to The University of Manchester for the degree of
Master of Philosophy
in the Faculty of Humanities
2012
Kwangkug Kim
The School of Law
Contents
Abstract ....................................................................................................................... 5
Declaration .................................................................................................................. 6
Copyright Statement .................................................................................................. 6
Acknowledgements..................................................................................................... 7
Part I. Introduction .................................................................................................... 8
I. Research Motivation ................................................................................................. 8
II. Research Background: The New Economy Markets and Their Characteristics ... 10
2.1 Definition of New Economy and Competition Policy ..................................... 10
2.2 Characteristics of New Economy Markets ....................................................... 15
2.3 Conflicting Views and Their Limitations ........................................................ 19
III. Research Questions .............................................................................................. 21
IV. Research Methodology ........................................................................................ 23
V. Thesis Structure ..................................................................................................... 25
Part II. Network Effects and Their Impact on Competition in New Economy
Markets ..................................................................................................................... 28
I. Introduction............................................................................................................. 28
1.1 Background ...................................................................................................... 29
1.2 Positive and Negative of Network Effects ....................................................... 31
1.3 Competition Policy Implication of Network Effects ....................................... 33
II. Conflicting Approaches of Network Effects ......................................................... 35
2.1 Neo-Structuralist Approach ............................................................................. 35
2.2 Neo-Schumpeterian Approach ......................................................................... 41
III. Case Law .............................................................................................................. 46
3.1 Market Definition in IT Markets ...................................................................... 46
3.1.1 America On-Line/Time Warner ................................................................ 47
3.1.2 WorldCom/Sprint ...................................................................................... 51
3.2 Dominance in IT Markets ................................................................................ 54
3.2.1 Traditional Test ......................................................................................... 56
3.2.2 Neo-Schumpeterian Definition of Dominance.......................................... 57
3.3 Abuse in IT Markets......................................................................................... 60
3.3.1 Safeguarding a Dominant Position ........................................................... 61
3.3.2 Leveraging ................................................................................................ 65
3.4 Objective Necessity: Incentives to Innovate .................................................... 67
IV. Conclusion ........................................................................................................... 70
Part III. Minimisation of Leveraging Effects in Technological Integration ....... 76
I. Introduction............................................................................................................. 77
1.1 Background ...................................................................................................... 77
1.2 Definition and Types of Product Tying and Bundling ..................................... 78
1.3 New Economy and Its Consequences in Product Integration .......................... 81
II. European Legal Approach to Tying ...................................................................... 82
2.1 Forms of Tying ................................................................................................. 83
2.2 European Union Approach to Tying in Case Law ........................................... 86
2.2.1 Dominance ................................................................................................ 87
2.2.2 Two Separate Products.............................................................................. 88
2.2.3 Coercion .................................................................................................... 94
2.2.4 Possibility of Foreclosure.......................................................................... 96
2.2.5 Objective Justifications ............................................................................. 98
III. US Legal Approach to Tying ............................................................................. 100
3.1 Per Se Illegality Approach ............................................................................. 100
3.2 Modified Per Se Approach ............................................................................. 105
3.3 Rule of Reason Approach .............................................................................. 110
IV. Economics of Tying: Reasons to Integrate Software ......................................... 114
4.1 Chicago School Explanations ........................................................................ 114
4.1.1 Price-Discrimination ............................................................................... 114
4.1.2 Risk Bearing ............................................................................................ 115
4.1.3 Quality Control ....................................................................................... 116
4.2 Post-Chicago Anticompetitive Explanations ................................................. 118
4.2.1 Monopoly Leveraging ............................................................................. 118
4.2.2 Preservation of Monopoly ....................................................................... 120
4.3 Post-Chicago Pro-competitive Explanations.................................................. 124
4.3.1 Responding to Diversity of Buyer Valuations ........................................ 125
4.3.2 Stimulating Demand for Complementary Products and Features ........... 126
4.3.3 Generating Revenue from Ancillary Services ........................................ 127
4.4 Evaluation of the Economic Theory on Product Integration ......................... 129
V. Evaluation of Elements Constituting Tying in Judicial Tests of the EU and the US
.................................................................................................................................. 129
5.1 Separate Products Test ................................................................................... 130
5.2 Coercion Test ................................................................................................. 137
5.3 Anticompetitive Foreclosure .......................................................................... 143
5.3.1 Foreclosure and the Nature of Bundling ................................................. 143
5.3.2 Anticompetitive Effects: Consumer Detriments ..................................... 155
VI. Framework of Technological Integration in New Economy Markets ............... 162
VII. Remedies in Technological Integration ............................................................ 167
VIII. Conclusion....................................................................................................... 177
Part IV. Interoperability and Compulsory Licensing in Technologically
Dynamic Markets ................................................................................................... 180
I. Introduction........................................................................................................... 181
1.1 Background .................................................................................................... 181
1.2 Interfaces between Competition Law and Intellectual Property Rights......... 183
II. European Approach to Refusal to License .......................................................... 187
2.1 Refusals to Supply and Refusal to License .................................................... 188
2.2 The Commission’s Essential Facilities Doctrine ........................................... 194
2.3 Magill TV Guide and the Exceptional Circumstances ................................... 196
2.4 Extension of Exceptional Circumstances/Essential Facilities after Magill.... 200
III. Exceptional Circumstances/Essential Facilities in Information Technology Sector
.................................................................................................................................. 206
3.1 Microsoft Case in the EU and Exceptional Circumstances ............................ 206
3.1.1 Commission’s Incentives Balance Test .................................................. 206
3.1.2 EU Courts’ Modification and Extension of Exceptional Circumstances 211
3.2.3 Implications for Future Cases ................................................................. 216
3.2 Microsoft Case in the US ............................................................................... 217
VI. Analysing Elements of Essential Facilities/Exceptional Circumstances ........... 224
4.1 Evolution of Leveraging: Two-Market Theory v. Single-Market Theory ..... 224
4.1.1 Market Foreclosure effects...................................................................... 224
4.1.2 Competitive Relationship ........................................................................ 227
4.2 Exceptional Circumstances ............................................................................ 231
4.2.1 Indispensability ....................................................................................... 231
4.2.2 Risk of Elimination of Effective Competition ........................................ 232
4.2.3 New Product Criterion: Limiting Technological Development .............. 234
4.2.4. Objective Justification and Proportionality............................................ 236
V. Conclusion........................................................................................................... 237
Part V. Conclusion ................................................................................................. 242
I. Summary of Findings ........................................................................................... 242
II. Consideration of Findings ................................................................................... 245
III. Per Se Approach to Article 102 TFEU and Its Consequences in IT Markets.... 248
IV. Implications of Applying the Current European Legal Analysis to IT Markets 251
V. Contribution to the Discussion on the New Economy and Article 102 and its
Limitations ............................................................................................................... 255
Bibliogrphy ............................................................................................................. 258
Words: 74,252
Abstract
This abstract is written by Kwangkug Kim for the thesis of MPhil in Law at The
University of Manchester, on 18 April 2012. The thesis title is: ‘Competition Law in
the New Economy Industries: Is the Current Competition Analysis Adequate to
Protect Consumers in the New Economy Industries.’
This thesis researches current European competition principles in the New Economy
industries. New Economy industries have distinct characteristics from traditional
ones. One of these characteristics is network effects. This characteristic plays a
significant role in determining the type of competition. In such marketplaces, the
competition is ‘for the market’, not ‘within the market’, and the market is likely to
end up highly concentrated or monopolised. The network effects lead to a tendency
for markets to tip towards a single dominant network or technology. Whilst the
network effects encourage new undertakings to enter a market, at the same time these
allow a dominant firm to leverage its dominance from a primary market to
secondary/downstream markets. In particular if a dominant network or technology
becomes a de facto standard, its owner has similar characteristics to a natural
monopolist because its technology is protected by intellectual property rights (IPRs)
and its exclusive exercise is guaranteed by intellectual property law.
In such a case, the dominant firm can easily leverage its market power from
one market to another; especially, when markets are vertically or horizontally related,
the risk of leveraging dominance is dramatically increased. For example, in the
computer software market, operating systems are a basic platform in order to develop
almost all software. Thus, if a firm has dominance in the operating systems market, it
can easily enter into and acquire a market power in applications markets using its
protected IPRs and various business strategies such as tying/technological integration.
In Microsoft, a milestone case in IT markets, competition authorities had
opportunities to deal with undertakings’ two strategies in the New Economy markets.
One was technological integration and the other was refusal to license.
Whilst technological integration provides increased access to new features or
technologies to consumers, IP holders can legally restrict access to its technology or
network, due to exclusivity allowed by IP law, through refusal to license. Dominant
firms may evict competitors from secondary or complementary markets using these
practices. Thus, these practices may make effective competition impossible in the
short term and cause harm to consumers in the long term. In IT markets, once an
effective competition is restricted, it is difficult or impossible to restore it because of
IT characteristics, such as network effects, relatively high switching costs, economies
of scale/large installed base, and lock-in. As a result, in such a case, immediate
intervention may be needed to maintain effective competition, but at the same time to
protect incentives to innovate.
Intervention made by European competition authorities into IT markets have
so far recognised their unique characteristics and this led to competition rules being
applied more flexibly to technological tying and interoperability cases. In other
words, more lenient standards have applied to IT markets due to its durable
monopoly caused by network effects.
Declaration
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application for another degree or qualification of this or any other university or other
institute of learning.
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Acknowledgements
There are several people to whom I would like to express my gratitude for their
support in the process of writing this thesis.
Dr. Liza Lovdahl Gormsen, my supervisor, has encouraged and advised me to
finish this thesis. Her deeper insights in competition law were precious.
A special appreciation goes to my dearest mother, Mrs. Young-Ae Choi, and
my family who have been financially and mentally backed me up during the period
of study.
Part I. Introduction
I. Research Motivation ................................................................................................. 8
II. Research Background: The New Economy Markets and Their Characteristics ... 10
2.1 Definition of New Economy and Competition Policy ..................................... 10
2.2 Characteristics of the New Economy Markets ................................................. 15
2.3 Conflicting Views and Their Limitations ........................................................ 19
III. Research Questions .............................................................................................. 21
IV. Research Methodology ........................................................................................ 23
V. Thesis Structure ..................................................................................................... 25
I. Research Motivation
Microsoft has been the subject of competition investigations over more than a decade
and has become high profile because it has been so long running and because it has
polarised opinion on the benefits of pursuing the information technology (IT)
software giant. Those who support the litigation express concerns that the dominant
personal computer software provider will extend its market power over other
software markets, whist those who criticise the litigation assert an absence of
evidence of damage to the market and the benefits to consumers of allowing
Microsoft to incorporate additional features into its software. Intersecting both
positions is a debate regarding the ability of antitrust/competition law to keep up with
the IT industry.
8
Now the litigation has been finished, however, discussions still continue for
evaluating what this case means for the whole IT industry and other innovative
markets as well as for competition law itself. It is quite interesting to ask whether
decision makers in the EU and the US put more focus on enhancing effective
competition generally or on hampering a dominant player in their dealings with
Microsoft. Another crucial question is whether, in highly innovative markets,
competition authorities can ever craft effective forward-looking remedies that are
able to anticipate and reduce future anticompetitive threats.
Although, recently, the Court of Justice confirmed that the application of the
competition rules could not depend on whether the market concerned had already
reached a certain level of maturity,1 the debates surrounding the issues of the New
Economy industries, such as technology maturity, still continue. It is also true to say
that because New Economy markets have new features, it is important to examine
whether the characteristics of IT markets are too new to apply the current
competition analysis to these markets.
Undertakings in the New Economy industries still use traditional business
strategies, such as tying/bundling and refusal to supply, to acquire a market power
although these industries have different features from traditional ones. Thus, the
research on whether the current competition approaches are adequately dealing with
the IT industry which is heavily IP intensive may answer the question about how and
how much the current European competition principles may be changed. In addition,
it may contribute to future competition policy which will deal with the newer
industries.
1
Case C-52/09 Konkurrensverketk v. Teliasonera Sverige AB [2011] 4 Common Market Law Reports
18, paras. 105-108.
9
II. Research Background: The New Economy Markets and Their Characteristics
2.1 Definition of New Economy and Competition Policy
“New Economy” is an expression which encompasses high-tech industries such as
information technology (IT) including computer software, hardware, Internet-based
businesses and associated technologies,
2
biotechnology and aerospace.
3
The
development of the New Economy industries is one of the great economic success
stories of this century, with the potential to significantly increase productivity and
improve living standards across the economic spectrum.
Unlike
traditional
markets,
the
New
Economy
markets’
dynamic
characteristics, such as rapid technology change and the creation of new forms of
cooperation and competition, may make traditional competition approaches
unworkable. As a result, there have been great debates about whether the existing
forms and principles of competition law are effective to deal with regulatory
problems in the New Economy industries.4
Like traditional industries, the emergence of one undertaking which has an
overwhelmingly dominant position raises important questions for competition in the
New Economy markets. The concern for competition policy is not simply that one
company has a monopoly in a specific market, but rather that it may be using that
monopoly to create barriers to entry in complementary markets and in the
Robert Lind and Paul Muysert, “Innovation and Competition Policy: Challenges for the New
Millennium,” European Competition Law Review 24, no. 2 (2003): 87.
3
Alison Jones and Brenda Sufrin, EU Competition Law: Text, Cases, and Materials, 4th ed. (Oxford;
New York: Oxford University Press, 2011), 57; However, in this paper, the term of “New Economy”
is used to be synonymous with the term of “information technology,”
4
Cosmo Graham, “Introduction,” in Competition, Regulation and the New Economy, ed. Cosmo
Graham and Fiona Smith (Oxford; Portland: Hart Publishing, 2004), 1.
2
10
monopolised markets themselves. If so, the impact could be to raise prices and stifle
innovation.
Recently the European Commission (‘the Commission’) has suggested that
competition rules are being more stringently applied to the high-tech markets.
Former Commissioner Mario Monti stated that “even if the pace of the high-tech
sector means that market failures last only for a short time … this does not mean that
we should be less concerned.”5 Given the rapid, innovative, immature, and dynamic
nature of this sector, this has caused criticism from the business press. For example,
The Economist, under the heading “Antitrust Run Amok?”, has expressed huge
doubts about whether the more aggressive application of competition law to mergers
in this sector is desirable, arguing that the best approach is forbearance. 6 However,
this is not only an issue for competition law, but also a general problem for schemes
designed to control the Schumpeterian marketplaces.7
In Frederick Brooks’ analysis, the process of high-tech development was
described as a tar pit where “… the accumulation of simultaneous and interacting
factors brings slower and slower motion. Everyone seems to have been surprised by
the stickiness of the problem, and it is hard to discern the nature of it.”8 In many
respects the theories and practices of competition law in the New Economy markets
are no less a tar pit, particularly compared to the more traditional industries. 9
Competition law applies equally to the New Economy markets as to other markets,
but the former imposes some unique challenges for competition authorities due to a
Mario Monti, “Competition and Information Technologies” Conference “Barriers in Cyberspace”,
Kangaroo Group, Brussels, 18 September, 2000, http://europa.eu/rapid /press Releases
Action.do?reference=SPEECH/00/ 315&format=HTML&aged=0&language=EN&guiLanguage=en
(accessed 22 February, 2007).
6
“Trust and Antitrust,” The Economist, 7 October, 2000, 21.
7
Graham, supra note 4, 1.
8
Frederick Brooks Jr., The Mythical Man-Month: Essays on Software Engineering, Anniversary ed.
(Boston; New York; London: Addison-Wesley, 1995), 4.
9
Willow Sheremata, ““New” Issues in Competition Policy Raised by Information Technology
Industries,” Antitrust Bulletin 43, no. 3/4 (Fall-Winter 1998):548.
5
11
number of issues that makes competition different from that observed in the
traditional manufacturing industries.10
Traditionally, competition policy has been concerned with competition in
markets for existing products and services. Admittedly, antitrust analysis often
incorporates the conditions for entry into the market of new products and actors, but
the economic foundations for competition law can be traced to microeconomic
perceptions where price is the main variable of competition and where the ideal
market presumes homogeneous products and commonly known and available
technologies. The incumbent market participants’ relative market shares of the
production and distribution of goods are still the general basis for deciding whether a
market practice will lead to a restriction of competition.11 Moreover, anticompetitive
effects are typically expressed as the ability to exercise market power by charging
prices that exceed those a competitive market would support.12
However, a competition policy focusing too narrowly on market shares and
pricing strategies may protect consumer welfare less effectively, getting the trade-off
skewed between short-and long term benefits. 13 The incentive for investment and
risk, not least in the development of new and improved products and services, as well
as the strategies for lowering risks and making research and development (R&D)
efforts more efficient, must be acknowledged if markets and competition are to
evolve dynamically. This is especially the case for areas where antitrust enforcement
interacts with the realm of intellectual property rights. Moreover, current market
shares, prices, and profit levels may say little about the true level of competition.
David Balto and Robert Pitofsky, “Antitrust and High-Tech Industries: The New Challenge,”
Antitrust Bulletin 43, no. 3/4 (Fall-Winter 1998): 584.
11
Marcus Glader, Innovation Markets and Competition Analysis: EU Competition Law and US
Antitrust Law (Cheltenham; Northampton, MA: Edward Elgar, 2006), 7.
12
Ibid.
13
Glader,supra note 11, 7.
10
12
Particularly in high-tech markets, dominance and high profits are not necessarily
signs of ineffective competition. Rather, such conditions are generally the result of
an efficiently and successfully conducted business.
In a growing number of industries, competitors with different technologies
and resources compete on the basis of product attributes and performance as well as
price. 14 Indeed, product performance may be much more important to many
customers than price. Declaring that a firm has market power if it can sustain a
“significant but non-transitory price increase”15 completely misses the performance
dimension of competition.
Dynamic characteristics of New Economy markets make competition
analysis more complicated. For instance, in assessing market power, potential
competition can curb market power, but its implications are more difficult to assess
in the dynamic New Economy marketplaces. Contestable market theory
demonstrates that potential entrants can make even a monopolist behave as if it faces
competition – as long as entrants have access to the same technology and there are no
barriers to entry in the form of sunk costs. However, greater dynamism changes the
nature of potential competition. Intellectual property rights, trade secrets, and knowhow all combine to make it difficult for potential entrants to possess the same
technology as the incumbent. Developing capabilities equivalent to the incumbent’s
may involve substantial sunk costs. These factors suggest that potential competition
may operate less effectively in dynamic New Economy markets.
At the same time, potential competition could be a much more vigorous force
in New Economy markets. When innovation and discovery are possible, potential
14
Jerry Ellig, ed. Dynamic Competition and Public Policy: Technology, Innovation, and Antitrust
Issues (Cambridge; New York: Cambridge University Press, 2001), 2.
15
Commission Notice on the Definition of the Relevant Market for the Purposes of Community
Competition [1997] Official Journal of European Union C372/5, paras. 17, 18.
13
entrants can leapfrog an incumbent by offering superior products and services. Sunk
costs depreciate more rapidly – and more unpredictably – because of ceaseless
changes. Potential competition, in the form of Schumpeterian “creative destruction,”
could be much more vigorous in spite of sunk costs.
This example illustrates how competition analysis becomes much more
complicated in a rapidly advancing economy. Thus, questions arise regarding the
manner in which competition policy can incorporate dynamic considerations in its
analyses. A recent case on the subject of digital marketplaces involving Microsoft
raises a number of fundamental questions relating to contemporary industrial
organisation analysis and competition enforcement. These are: does the existence of
network effects imply that the market for information technology is different from
more traditional markets and requires a different antitrust approach? does constant
technological innovation necessarily make information technology markets
vulnerable to new entrants and therefore, diminish the need for vigorous antitrust
scrutiny? does a dominant firm pose a threat to innovation due to its ability to extend
its dominance into secondary and/or complementary markets and deter entry by
potential competitors? can antitrust or other forms of government intervention
improve or even constructively shape the future of the New Economy marketplaces?
and what can governments do, and what should they do, to encourage competition
and open access in these rapidly developing markets?
The issues which are caused by the high-tech markets’ characteristics are
hotly debated between parties that advocate intervention to correct failing markets
and remedy anticompetitive behaviours, and those that advocate a laissez-faire
approach to self-correcting markets.16
16
Sheremata, supra note 9, 549.
14
2.2 Characteristics of New Economy Markets
Although the notion of the New Economy industry sounds vague, there is substantial
agreement amongst scholars regarding its distinctive features. One of the most
obvious features of New Economy or IT markets is that they are characterised by
rapid technological change which leads to the shift of the market structures either
through the creation of new markets or the transformation of old ones. The mobile
phone market in the UK is a good example. The first two mobile licences were
issued in 1985 and the next two were only issued in 1991. 17 From those tiny
inceptions the market has dramatically grown both in terms of the services provided
by the licensees and the manufacture of mobile phones. This industry is currently
evolving through the development of the fourth generation mobile network
technology, the so-called Long Term Evolution (LTE) technology.
The implication of network effects or network externalities is emphasised in
literature on network economics.18 A good example is communication networks such
17
Graham, supra note 4, 3.
Jeffrey Rohlfs, “A Theory of Interdependent Demand for a Communications Service,” The Bell
Journal of Economics and Management Science 5, no. 1 (Spring 1974): 16-37; Joseph Farrell and
Garth Saloner, “Standardisation, Compatibility, and Innovation,” The RAND Journal of Economics 16,
no. 1 (Spring 1985): 70-83; Michael Katz and Carl Shapiro, “Network Externalities, Competition and
Compatibility,” The American Economic Review 75, no. 3 (June 1985): 424-440; Joseph Farrell and
Garth Saloner, “Installed Base and Compatibility: Innovation, Product Preannouncement, and
Predation,” The American Economic Review 76, no. 5 (December 1986): 940-955; Michael Katz and
Carl Shapiro, “Product Compatibility Choice in a Market with Technological Progress,” Oxford
Economic Papers 38, no. supplement (November 1986): 146-165; Michael Katz and Carl Shapiro,
“Technology Adoption in the Presence of Network Externalities,” The Journal of Political Economy
94, no. 4 (August 1986): 822-841; Michael Katz and Carl Shapiro, “Product Introduction with
Network Externalities,” The Journal of Industrial Economics 40, no. 1 (March 1992): 55-83; Joseph
Farrell, Carl Shapiro, Richard Nelson, and Roger Noll, “Standard Setting in High-Definition
Television,” Brookings Papers of Economic Activity: Microeconomics 1992 (1992): 1-93; Michael
Katz and Carl Shapiro, “Systems Competition and Network Effects,” The Journal of Economic
Perspectives 8, no. 2 (Spring 1994): 93-115; Stanley Besen and Joseph Farrell, “Chosing How to
Compete: Strategies and Tactics in Standardisation,” The Journal of Economic Perspectives 8, no. 2
(Spring 1994): 117-131; Stan Liebowitz and Stephen Margolis, Winner, Loser, and Microsoft:
Competition and Antitrust in High Technology (Oakland: The Independent Institute, 1999), 49-115;
18
15
as instant messaging services, social network services and telephones services. The
effect is that the network becomes more valuable as the number of members who use
the same network increases. This is what is known as “network externalities” (direct
network effects). There may also be a similar effect in other sectors that do not
immediately rely on a physical network. For example, the more people that use
compatible computer software the more valuable it becomes because of the ability to
swap files and exchange information easily. The popularity of a network may lead to
demand-side economies of scale, that is, people value a product or service because it
is widely accepted. 19 When combined with the more traditional supply-side
economies of scale this creates “positive feedback”, which allows the dominant firms
to get stronger and the weak firms to get weaker, potentially leading to a monopoly.
20
As a result, the more complementary goods or applications are produced or written
for the product of a dominant firm (indirect network effects). These network effects
lead to a tendency for markets to “tip” towards a single dominant undertaking or
technology.21 In markets that tip, competition is “for” the market, not “within” the
market, and the market is likely to end up highly concentrated or monopolised. The
incentive is, therefore, to gain the upper hand and become a predominant player as
early as possible, inevitably leading to particularly vigorous competition at the early
stages. Given this incentive, it is common for undertakings to distribute products,
such as software, as far as possible. When all firms engage in such tactics with the
objective of maximising their market share, it becomes extremely difficult for
competition authorities to analyse predatory behaviours using conventional methods.
Carl Shapiro and Hal Varian, Information Rules: A Strategic Guide to the Network Economy (Boston:
Harvard Business School Press, 1998): 183-184.
19
Carl Shapiro and Hal Varian, Information Rules (Boston, MA: Harvard Business School Press,
1999), 179.
20
Michael Katz and Carl Shapiro, “Antitrust in Software Market,” 22 September 1998,
http://faculty.haas.berkeley.edu/shapiro/software.pdf.
21
Lind and Muysert, supra note 2, 89.
16
When competition is so high, companies can be expected to use as many tactics
available to them to gain the lead. Practices such as tying/bundling, exclusive dealing
and refusals to supply critical services or inputs, including interfaces and/or technical
information, may be used and can be more effective than usual if they are able to tip
the balance in the market at a crucial time. If they can change the competitive
situation even temporarily, network effects may make their advantage permanent.
Under some conditions these practices can be used by a firm that is dominant in one
market and intends to tip the market for a related product in its direction, although its
product is inferior to others.
A further characteristic is the importance of intellectual property to these
developments.
22
A huge investment in R&D is necessary to produce new
technologies and ideas are at the centre of these innovations. Intellectual property,
therefore, plays a major role in competitive strategies in the New Economy
marketplaces and competition policy needs to recognise this. In particular,
competition policy issues to do with patenting and licensing intellectual property
rights become very important in the highly creative and technologically dynamic
industries.
These markets tend to have high fixed or sunk costs and low marginal costs.23
They often need to invest a considerable amount of resources to develop their
products, either because they must make substantial investments in R&D, or because
they must invest in a physical or virtual network to create and deliver the product.
Once they make this initial investment, it is inexpensive to manufacture additional
units. For example, it does not cost much to produce another copy of Microsoft
Office, nor does it cost much to add another subscriber to the Skype network. In
22
23
Graham, supra note 4, 3.
Shapiro and Varian, supra note 19, 21-22.
17
other words, production in IT markets, especially software markets, exhibits
“increasing returns,” which have important implications for market structure. 24 A
further implication of an industry with high sunk costs and low marginal costs is that
it tends to be concentrated or monopolised because of the high costs of entry. This
industry is subject to rapid alteration, but dominated by a few firms or one major
player. It is possible that the firm, with a large market share, will exert price
discrimination, create entry barriers, and encourage customer loyalty to maximise its
profits. The competition authorities have always been highly suspicious of these
practices.
New Economy markets are often characterised by high levels of technical
complexity and the need for complementary products to work together. 25 These
characteristics lead to a need for firms to co-operate to ensure that products
interoperate. Competition authorities have also traditionally been concerned about
cooperation amongst competitors as it may be regarded as collusion. However, in a
way, such co-operation over technological standards can ensure that there is
competition within a market between different providers of products using the same
standard, rather than just competition for the market followed by monopoly or quasimonopoly.
In some New Economy markets, competition can take the form of a series of
races.26 In the first race, companies invest heavily to develop a product that creates a
new category, for example; Apple’s iPad, ARM’s chips for mobile electronic goods,
Facebook’s social network services, or Voice over Internet Protocol services like
Vibre for iPhone. The winner gains a huge market share or in some cases the whole
24
Shapiro and Varian, supra note 19, 24-29.
Lind and Muysert, supra note 2, 90.
26
Christian Ahlborn, “Competition Policy in the New Economy: Is European Competition Law Up to
Challenge,” European Competition Law Review 22, no. 5 (2001): 159.
25
18
of the market. In subsequent races, companies invest heavily to outstrip the leader by
leapfrogging their technology. The pace of high-tech markets has changed radically
in a relatively short period of time. From word processors to spreadsheets, instant
messaging services, and Internet browsers, in many cases the market leaders have
been unable to sustain their positions for any longer than ten years. In other words:
“the information economy is populated by temporary, or fragile, monopolies.
Hardware and software firms vie for dominance, knowing that today’s leading
technology or architecture will, more likely than not, be toppled in relatively short
term by an upstart with superior technology.”27
Finally, as with a host of endeavours in which many try but few succeed, the
winners are compensated by acquiring enormous profits as long as they stay ahead of
their rivals. 28 These “prizes” for the winner serve the same purpose as prizes in
professional sports tournaments, i.e., new challengers are attracted to enter the
market due to substantial prizes. It serves the interests of society to encourage a lot of
entrepreneurs to try to dedicate themselves to technological improvements because
the path to successful innovation is fraught with difficulties.
2.3 Conflicting Views and Their Limitations
There are two opposite approaches to the New Economy industries. There are those
that focus on economies of scale, network effects, and consumer lock-in, and
particularly on the dangers of network effects as a reason to justify competition
enforcement29; and those that centre on the dynamic characteristic of these industries,
27
Shapiro and Varian, supra note 19, 173.
Ahlborn, supra note 26, 160.
29
Timothy Muris, “Is Heightened Antitrust Scrutiny Appropriate for Software Markets?’ in
Competition, Innovation and the Microsoft Monopoly: Antitrust in the Digital Marketplace, Jeffrey
28
19
suggesting that any dominance is temporary as markets are contestable.30 The latter
group has questioned whether the New Economy industries are especially prone to
commit anticompetitive behaviours. These opposing viewpoints are indicative of a
more general debate over the role of competition law. On the one hand, the Chicago
School argues for a limited role for competition law because markets tend to be
competitive, 31 whilst its opponents criticise the Chicago School for being overly
optimistic about a market’s ability to rebalance itself, noting that certain market
structures are likely to lead to dominance and result in anticompetitive practices.32
The latter view is supported by the “neo-Structuralist” school of thought which
favours aggressive antitrust enforcement when anticompetitive structures manifest
themselves, 33 whereas the former is advocated by the “neo-Schumpeterian” one
which argues that dominance in New Economy markets tends to be temporary and
short-lived.34
However, in reality the neo-Schumpeterian argument is difficult to enforce at
ground level although it encourages competition authorities to be more flexible. In
neo-Structuralist circles there are two arguments; one argues that industry specific
regulations are necessary such as telecommunication regulations, while the other
argues industry specific regulations are unnecessary provided that the current
Eisenach and Thomas Lenard, eds. (Boston; Dordrecht; London: Kluwer Academic Publisher, 1999),
89-91; Lawrence White, “Microsoft and Browser: Are Antitrust Problems Really New?” in
Competition, Innovation and the Microsoft Monopoly: Antitrust in the Digital Marketplace, supra, 137,
139-148.
30
Ronald Cass and Keith Hylton, “Preserving Competition: Economic Analysis, Legal Standards and
Microsoft,” George Mason Law Review 8, no. 1 (Fall 1999): 36-37; Robert Levy, “Microsoft and the
Broswer Wars,” Conneticut Law Review 31, no. 4 (Summer 1999): 1352-1358.
31
Richard Posner, “The Chicago School of Antitrust Analysis,” University of Pennsylvania Law
Review 127 (April 1979): 925-948; Robert Bork, Antitrust Paradox: A Policy at War with Itself (New
York: The Free Press, 1993)
32
Philip Areeda and Donald Turner, “Predatory Pricing and Related Practices under Section 2 of the
Sherman Act,” Harvard Law Review 88 (February 1975): 697-733.
33
Howard Shelanski and Gregory Sidak, “Antitrust Divestiture in Network Industries,” University of
Chicago Law Review 68, no. 1 (2001): 1-99.
34
Philip Weiser, “The Relationship of Antitrust and Regulation in a Deregulation Era,” Antitrust
Bulletin 50, no. 4 (Winter 2005): 556-557.
20
competition law applies flexibly. The former will produce more regulations and the
latter will create legal unpredictability in relation to competition law.
III. Research Questions
One of the fundamental issues surrounding the New Economy is whether the current
competition laws are adequate to the task of protecting consumers in an era of
“winner-takes-all” market outcomes and Schumpeterian-style competition. To
answer this question, the present analysis will be reviewed in terms of how the
current competition approaches consider the characteristics of the IT industry. This
thesis does not intend to consider all the characteristics of New Economy. Instead,
the main focus will be on network effects or network externalities. This characteristic
plays a significant role in determining the type of competition and is different from
traditional competition as it is defined in New Economy marketplaces. Network
effects often act as both a negative factor and a positive factor in IT marketplaces.
Network externalities, in particular, allow a dominant undertaking to expand its
dominance to complementary or secondary markets by anticompetitive leveraging
practices, such as technological tying/bundling or a technical refusal to supply. These
effects in turn encourage competition among competitors as well. For instance, in IT
markets a tying/bundling practice or technological integration is used to enter a
market and to encourage competition, while this practice combined with network
effects is also used to raise an entry barrier and strengthen the dominance by a first
mover. In addition, in New Economy markets intellectual property makes the outer
boundaries of antitrust much more obscure. In other words, it is quite difficult to
distinguish between the legal and illegal exercise of intellectual property. The
21
exclusive use of company’s IPRs is secured by IP laws but sometimes this may be
regarded as the anticompetitive from a competition perspective.
Although IT markets are very competitive for obtaining critical mass, these
markets may be seen as natural monopolies due to strong economies of scale.
Information itself is costly to produce, but cheap to reproduce. The costs of
producing the first copy of information good are significant, whilst the costs of
producing additional copies are negligible. Due to the natural monopoly
characteristics, there are high barriers to entry in the IT markets. Moreover, the
network effects where are present in IT markets may fortify the dominant firm’s
monopoly position.
Since it is very costly to build a network, competitors may not be inclined to
invest their resources to enter the monopolist’s market and compete with the
monopolist directly. Rather, competitors may try to compete in secondary markets.
However, if a dominant undertaking provides only its primary service or product
bundled with its secondary applications, or does not want to disclose the
interoperability information, effective competition in the secondary markets may be
eliminated since the monopolist can easily distribute its applications through
operating systems, or competitors may not be able to make their products compatible
with the dominant firm’s operating system.
In general, this thesis will discuss whether the current European competition
analysis is adequate to protect consumers in the New Economy industries, such as IT
markets, in its application of Article 102 TFEU. In particular, this thesis will
examine the adequacy of the European competition approach to three main issues, i.e.
network effects, technological integration, and refusal to license which were central
issues in the Microsoft case:
22
1. Firstly, It will be asked what network effects are and whether these effects have
negative effects on IT markets. And then, it will be questioned whether network
effects are adequately dealt with in the current competition analysis, particularly, the
process of defining a relevant market in the IT sector.
2. And then, it will be examined how network effects are considered in the analysis
of anticompetitive behaviour, such as technological integration, in IT markets. Also,
whether the current European competition analysis appropriately deals with
technological integration cases in these markets? Or should it be changed?
3. Finally, it will be answered whether the current principles of European
competition rules handle refusal to supply cases adequately in the IT sector. In
particular, since IT industry is IP intensive, this question will be changed with the
following: Under what conditions can the European competition analysis of a refusal
to supply extend to IPRs and do these conditions fit to IT markets? And then, it will
be asked whether the current European competition doctrine adequately determines
the outer boundary between competition law and IPRs in the IT industry.
IV. Research Methodology
It is difficult to discuss competition law without some reference to US antitrust law
because of the influence that American lawyers and economists, working with
reference to the American legal system, have had on competition law thinking.35 The
US was one of the first jurisdictions to adopt a proper modern system of
35
Jones and Sufrin, supra note 3, 19.
23
competition.36 The EU competition policy was included in the list of Community
activities set out in Article 3 of the Treaty of Rome 37 from the inception of the
Community in 1958. EU competition law primarily aimed to serve the imperative of
single market integration. It differentiates EU competition law from the US antitrust
system. However, there seems to be a general consensus at present amongst
economists, competition lawyers, and policy makers in the EU and the US, that
competition law should be adopted and applied in pursuance of efficiency and
consumer welfare, while there are different views as to how competition law can
achieve this.38 Therefore, due to the influence of the US analysis and the similarity of
their goals, this thesis will analyse EU cases and regulations compared to the US
The primary methodology will be the examination and analysis of primary
and secondary documentary materials, such as Section 2 of the Sherman Act, Article
102 of the Treaty on the Functioning of the European Union (TFEU), and the
judgements of legal cases in two jurisdictions where similar issues arose in the
Microsoft decisions both for operating systems and software applications.
The Article 102 TFEU (ex Article 82 EC) sets out:
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. Such abuse may, in particular, consist in:
(a) directly or indirectly imposing unfair purchase or selling prices or other
unfair trading conditions;
(b) limiting production, markets or technical development to the prejudice of
consumers;
36
Jones and Sufrin, supra note 3, 19.
Now this is an Annex of the Treaty on the Function of the European Union (TFEU).
38
Jones and Sufrin, supra note 3, 18.
37
24
(c) applying dissimilar conditions to equivalent transactions with other
trading parties, thereby placing them at a competitive disadvantage;
(d) making the conclusion of contracts subject to acceptance by the other
parties of supplementary obligations which, by their nature or according to
commercial usage, have no connection with the subject of such contracts.
The US Congress passed the Sherman Act in 1890.39 It is still in force. Section 2
(Monopolising trade a felony; penalty) which is the counterpart to Article 102 TFEU
states:
Every person who shall monopolise or attempt to monopolise, or combine or
conspire with any other person or persons, to monopolise any part of the
trade or commerce among the several States, or with foreign nations, shall be
deemed guilty of a felony…
Article 102 TFEU and Section 2 of the Sherman Act are both concerned with
regulating concentrations of power within a market.
V. Thesis Structure
The whole thesis consists of three main topics and each chapter has a definition case analysis - evaluation structure. The second chapter is on network effects, the
third chapter deals with technological integration, and finally, the fourth chapter
discusses a refusal to license/a compulsory licensing issue.
Network effects are sometimes termed demand-side economies of scale. This
means that in the presence of network effects it may be efficient to have a single
39
It was supplemented by later statutes, the Clayton Act (1914), the Federal Trade Commission Act
(1914), the Robinson-Patman Act (1936), the Celler-Kefauver Act (1950), and the Hart-Scott-Rodino
Antitrust Improvement Act 1976.
25
provider or many providers of compatible goods. Therefore, the concern is related to
the fact that although the market may ultimately tip one way, the identity of the
company that comes out on top is not determined by competition but is the result of
anticompetitive actions.
The presence of network effects could increase the likelihood of the success
of a leveraging strategy aimed at foreclosure. However, as leveraging seems only
possible under some circumstances, it is important to understand more clearly when
this could be the case. Whether the practices may have anticompetitive effects clearly
depends on the specifics of a case.
Undertakings may be able to leverage their market dominance in a large
number of ways depending on the circumstances and facts of a case, including,
tying/bundling, rebates, exclusive dealings, full line forcing, and refusal to
supply/license critical services or inputs such as interfaces and technical information.
However, this thesis will focus on a few broad categories of leveraging practices;
tying/bundling and the refusal to supply/license. These were the main issues in the
Microsoft case in the EU and the US
In the perspectives of access and distribution, these practices have quite
opposite characteristics. From the point of view of access, tying/bundling may make
it easier for consumers to access certain products or networks. On the other hand,
refusal to supply/license may impede the access to some product or facilities. From
the point of view of distribution, the former practices enhance the distribution of new
products or technologies, but the latter restricts the spill-over of new technologies or
goods.
26
Both leveraging strategies are common in IT marketplaces and are sometimes
used to strengthen network effects and ultimately result in durable natural
monopolies in primary and/or secondary markets.
27
Part II. Network Effects and Their Impact on Competition in New Economy
Markets
I. Introduction............................................................................................................. 28
1.1 Background ...................................................................................................... 29
1.2 Positive and Negative of Network Effects ....................................................... 31
1.3 Competition Policy Implications of Network Effects ...................................... 33
II. Conflicting Approaches of Network Effects ......................................................... 35
2.1 Neo-Structuralist Approach ............................................................................. 35
2.2 Neo-Schumpeterian Approach ......................................................................... 41
III. Case Law .............................................................................................................. 46
3.1 Market Definition in IT Markets ...................................................................... 46
3.1.1 America On-Line/Time Warner ................................................................ 47
3.1.2 WorldCom/Sprint ...................................................................................... 51
3.2 Dominance in IT Markets ................................................................................ 54
3.2.1 The Traditional Test .................................................................................. 56
3.2.2 Neo-Schumpeterian Definition of Dominance.......................................... 57
3.3 Abuse in IT Markets......................................................................................... 60
3.3.1 Safeguarding a Dominant Position ........................................................... 61
3.3.2 Leveraging ................................................................................................ 65
3.4 Objective Necessity: Incentives to Innovate .................................................... 67
IV. Conclusion ........................................................................................................... 70
I. Introduction
Since New Economy markets have distinct features from traditional ones, effective
competition in these markets may be harder to maintain than in other markets. As a
result of network effects, consumers may face relatively high switching costs and
then may easily be locked into the technology of a dominant undertaking. Thus,
competitors have to overcome substantial entry barriers in order to effectively
compete with the dominant firm. When a dominant technology is a de facto standard,
the dominant undertaking may become a quasi-monopolist.
28
In this part, the most important characteristic of the New Economy industries,
network effects will be discussed with reference to the impact this feature have on
competition in IT markets. It will be argued that the network effects may enhance the
incumbent’s dominance after being discussed throughout the competition analysis
process.
1.1 Background
Barriers of entry into a market are important in many competition law cases,
especially dominance and monopolisation cases, in which the durability of a
dominant undertaking’s market power is critical. The potentially decisive impact of
network effects is illustrated by the Microsoft case, in which network effects have
been much commented on. 40 Network effects exist in any market where the
consumption of a product by one consumer has a positive impact on the value of that
product’s consumption by another consumer.
There are two opposite approaches to network effects in the New Economy
industries. One perspective argues that network effects may allow the dominant
undertaking to tip a market and to further entrench its dominance, whereas the other
claims that network effects may be easily overcome by “creative destruction.” A
decisive difference between these two perspectives is whether dominance with strong
network effects may endure in the New Economy marketplaces. Competition
authorities recognise that network effects could be an entry barrier to competitors.
It is true that unlike a network in traditional markets, one in New Economy
markets is heavily influenced by fast-moving technologies and consumers will
40
Case T-201/04 Microsoft Corp. v. Commission of the European Communities [2007] European
Court Reports II-3601; US v. Microsoft 84 F Supp 2d 9 (DDC 1999) (Findings of Facts), 87 F.Supp.
2d 30 (DDC 2000) (Conclusions of Law).
29
immediately benefit due to the increase of network value. However, at the same time
consumers will be worse off if they become locked into a specific network or
technology against their will, since their choice is severely restricted in the long run.
These positive and negative aspects of network effects create great challenges for
competition policymakers.
Network effects have played a significant part in the litigation against
Microsoft previously referred to. Operating systems are characterised by network
effects, sometimes called an application barrier to entry. Users want an operating
system that will permit them to run all the applications programmes they want to use;
developers tend to write applications that they want to use and are for the most
popular operating systems. Applications software written for a specific operating
system cannot run on a different operating system without extensive and costly
modifications or add-ons.41 Microsoft’s high market share has meant that many more
applications have been written for its operating system than for any other. 42 This
suggests that Microsoft’s market power in operating systems was to some extent
further protected by the presence of network effects, possibly raising the question as
to why Microsoft needed to act anti-competitively.43
This part will discuss how network effects can influence conditions of entry
and will survey the quality of current legal analysis; and whether this analysis is
adequate to protect consumers in New Economy markets. In other words, it will be
discussed whether network effects are properly examined in the process of current
Franklin Fisher and Daniel Rubinfeld, “US v. Microsoft – An Economic Analysis,” Antitrust
Bulletin 46, no. 1 (Spring 2001): 15.
42
Ibid., 16.
43
‘The Commission recognise that network effects may create barriers to entry. A market
characterised by network effects tends to tip in the dominant undertaking’s favour, or the dominant
undertaking entrenches its position through an installed-base,’ in “Guidance on the Commission’s
Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by
Dominant Undertakings (hereafter, ‘The Guidance Paper’),” [2009] Official Journal of the European
Communities C45/7, paras. 17, 20.
41
30
competition analysis. It is crucial to properly deal with network effects because a
large “installed base” facilitates market leveraging through exclusionary behaviour,
such as tying or refusal to license, and as a result, dominance may be entrenched or
become durable, although network effects are in themselves not anticompetitive. It is
also important that legal standards should be provided to undertakings for reducing
legal uncertainty, encouraging innovation, and ultimately increasing consumer
welfare, albeit that the speed of technological development is unpredictable and
network effects make competition policy more complex.44
1.2 Positive and Negative Network Effects
In choosing between the Microsoft and Mac operating systems, most consumers gave
some thought as to what others were choosing or were likely to choose. In deciding
whether to switch to a new operating system (OS) or to remain with their current OS,
many users consider the incentives offered by various software companies to switch
to the newer operating system. The software companies’ decisions, in turn, depend
on their expectations about the number of users who will switch to the newer
operating system.
There are many products for which the utility that a user derives from the
consumption of a product or service increases with the number of other users
consuming a product or service.45 There are two possible sources for these positive
consumption externalities or network effects:46
Here, ‘consumer welfare increases through lower prices, better quality and a wider choice of new or
improved goods and services,’ in The Guidance Paper, supra note 43, para. 5.
45
Michael Katz and Carl Shapiro, “Network Externalities, Competition, and Compatibility,” The
American Economic Review 75, no. 3 (June 1985): 424.
46
More general term is ‘demand-side externalities.’
44
31
(1) The consumption externalities may be generated through a direct
physical effect of the number of purchasers on the quality of the product.
The utility that a consumer derives from purchasing a mobile phone, for
example, clearly depends on the number of other consumers that have joined
the mobile phone network. These network externalities are present for other
communications technologies as well as, including Telex, data networks,
and over-the-phone facsimile equipment.47 (Direct Network Effects)
(2) There may be indirect effects that give rise to consumption
externalities. For example, an agent purchasing a personal computer will be
concerned with the number of other agents purchasing similar hardware
because the amount and variety of software that will be supplied for use with
a given computer will increase exponentially with the number of hardware
units that have been sold. This hardware-software paradigm also applies to
video games, video players and recorders, PC operating systems, and play
stations.48 (Indirect Network Effects)
Although positive network effects will be the main focus in this thesis, there
are negative network effects. 49 If, for example, a telephone or computer network
becomes overloaded, the effect on an individual subscriber will be negative.
Admitting the possibility of a negative network externality causes the set of goods
that share such network externalities to expand greatly. It is also the case that road
users suffer from a negative network externality because roads are subject to
crowding. Although a larger installed base of computer users might lower the price
47
Rohlfs, supra note 18, 16.
Katz and Shapiro, supra note 45, 424.
49
Stan Liebowitz and Stephen Margolis, “Should Technology Choice be a Concern Antitrust Policy?”
Harvard Journal of Law and Technology, 9 (Summer 1996): 287.
48
32
of computer software, there are many commodities, such as housing and fillet steak,
where larger networks of consumers appears to increase the price of the product.
1.3 Competition Policy Implication of Network Effects
One important implication for competition policy is that markets with network
effects tend to be tippy.50 A network or technology that succeeds in attracting more
consumers than its competitors becomes increasingly attractive for other customers
who have not yet joined. This reinforces the network’s advantage over the
competition. Therefore, these markets tend to tip in favour of one dominant network
or technology. This is equivalent to the phenomenon that economists have called
“natural monopoly.” 51 For individual customers, it is attractive to stick with the
winner because users face switching costs, whereas competing networks may find it
difficult to divert a critical mass of customers away from the prevailing network.
However, the fact that markets with network externalities are tippy does not
necessarily imply that consumers are worse off. 52 On the contrary, by definition,
consumers immediately benefit if they all use the same network and can therefore
communicate with each other.53 Consumers will only be worse off if, in the long run,
they become locked into that network against their will, i.e. they cannot switch to
another, presumably more attractive one unless all other users migrate at the same
time.54 However, it is very difficult for anyone, let alone competition authorities, to
judge in advance whether one network is more efficient or beneficial to consumers
50
Shapiro and Varian, supra note 19.
William Shepherd, The Economics of Industrial Organization, 3rd ed. (London: Prentice Hall
International, 1990): 210-212.
52
Oxford Economic Research Associates, “Competition and Network Externalities,” Competing Ideas
(February 2002): 2.
53
Ibid.
54
Oxford Economic Research Associates, supra note 52, 2.
51
33
than other networks. The QWERTY keyboard is a good example to show that market
forces do not always result in the most efficient standard (the QWERTY keyboard
was designed in the era of typewriters, but PC users are still locked into it). 55
However, studies have shown that even this example is not so clear cut. 56
Furthermore, tippy markets do not inevitably end up in monopoly. In many markets,
several networks or technologies can still exist alongside, and compete with each
other.57
The application of current competition law analysis, such as market definition,
dominance, and competitive effects, becomes less straightforward in markets with
network effects. Thus, the following questions can be raised in markets with network
effects, such as:
1. If there are several different networks or technology, are these in the same
relevant market or is each network/technology a separate market? (Market
Definition);
2. During a battle for the new industry standard, are current market shares
relevant for assessing dominance, and should prices below cost be
allowed? (Dominance);
Some economic theories and legal cases provide some guidance on how competition
in these markets should work.
Paul David, “Clio and the Economics of QWERTY,” The American Economic Review 75, no. 2
(May 1985): 332-337.
56
Stan Liebowitz and Stephen Margolis, “The Fable of the Keys,” Journal of Law and Economics 33,
no. 1 (April 1990): 1-25.
57
For example, there are several competitors, such as Nintendo’s Wii, Microsoft’s X-Box, and Sony’s
PlayStation, to compete in game console market.
55
34
II. Conflicting Approaches of Network Effects
2.1 Neo-Structuralist Approach
From a neo-Structuralist perspective, there are three market features which indicate
the likelihood of dominance in the New Economy marketplaces; economies of scale,
network effects, and consumer lock-in.
Many products are characterised by significant economies of scale. Whilst it
is very costly to develop new software, once the programme is written, it is virtually
costless to reproduce. Marginal costs are almost zero and this leads to a situation
where one dominant firm can capture most of the market.58 However, this does not
lead to dominance unless the high market shares can be held for a certain period.
This is where network effects and consumer lock-in create the risk of dominance.
In these markets where network effects exist, there will be a convergence to
the most popular network standard. For example, consider the “Voice over Internet
Protocol (VoIP)” systems offered by various Internet service providers. There is
currently no legal requirement for subscribers to one provider be allowed to send
voice or instant messages to subscribers of another. Any provider can keep its VoIP
system proprietary. In the absence of interconnection, it is costly for consumers to
subscribe to multiple services, and if consumers might find a comparatively
beneficial service to purchase it is only the service offering the largest VoIP network
externality. 59 However, if enough consumers drift to one VoIP system, then that
provider will have a dominant position, because new consumers may wish to enter
the network which has the greatest number of users. Similarly, those consumers
58
59
Oz Shy, The Economics of Network Industries (Cambridge: Cambridge University Press, 2001), 5.
Shelanski and Sidak, supra note 33, 8.
35
using smaller networks will migrate to the larger network where they can
communicate with more people. The result is that a proprietary network creates risks
of dominance if there is sufficient consumer demand for the services that can be
obtained via the network and if other networks are incompatible.60 All these elements
are necessary in order to characterise a network effect as potentially
anticompetitive.61 Thus, the existence of network effects does not mean that there is
or will be dominance. Like in game console networks, in VoIP networks there are
still many players with their own proprietary network on the market because there is
not sufficient consumer demand for a single network. In contrast, in the first decades
of the 20th century, when AT&T was developing the local telephone it refused to
connect with independent competitors, albeit there was strong consumer demand for
a telephone network that would allow a user to communicate with all other users.
AT&T became dominant. 62
Network effects can also evidence themselves in an indirect manner: the
owner of a dominant and proprietary network may attract undertakings wishing to
sell consumer products that run on the dominant network, thus strengthening the
dominance of the network.63 A good example of the competition authorities seeing
indirect network effects is the Commission’s 64 analysis of America On-Line’s
position in the dial-up Internet access market in the UK.65 AOL had a network of
users that navigated through its site. Navigating with AOL was not the same thing as
surfing the whole Internet because AOL had created a more limited network of sites
Giorgio Monti, “Article 82 and New Economy Markets,” in Competition, Regulation and the New
Economy, ed. Cosmo Graham and Fiona Smith (Oxford; Portland: Hart Publishing, 2004), 19.
61
Ibid., 19.
62
United States v. American Telephone & Telegraph Co., 552 F.Supp 131 (D.D.C. 1982).
63
Michael Katz and Carl Shapiro, “System Competition and Network Effects,” The Journal of
Economic Perspectives 8, no. 2 (Spring 1994): 97-100.
64
‘The Commission’ is referred to as ‘the European Commission.’
65
COMP/M. 1845 AOL/Time Warner, 2001/718/EC Commission Decision of 11 October, 2000
[2001] Official Journal of the European Communities L 268/28.
60
36
that could be reached by clicking on its pages. Thus, whilst an AOL customer might
feel like they were surfing the World Web Wide, it was in fact a much smaller
network that they were surfing. Moreover, because its web design was so appealing
many users had difficulties stepping outside the web pages that it supplied. This
“stickiness” allowed AOL to enter into lucrative contracts with content providers
who wanted presence in its territory. In the view of the Commission, the more
content providers’ contracted with AOL, the more people would subscribe. This
became a virtual circle where the more consumers it had the more content providers
would wish to join its network. This is sometimes called a “snowball effect.” AOL’s
dominance would increase dramatically if, for example, it was vertically integrated
with a leading music content provider, transforming it into an “on-line store.” 66
Music would attract many new subscribers, because music was one of the most
popular and sought after elements of Internet content.67 This approach suggests that
an Internet Service Provider (ISP) can consolidate a dominant position either by
vertical integration with popular Internet content or by having exclusive access to
popular Internet content, without ownership.68 In this circumstance a new entrant has
to promise consumers a superior network and superior ancillary content as well. This
makes entry more difficult because two markets may have to be concurrently broken
into by a new competitor.
By providing abundant content, AOL was able to become the dominant ISP,
enticing many more Internet subscribers and content providers to drift into its
network.69 This analysis assumes that there are certain complementary products that
add so much value to the network so as to allow the creation of a dominant
66
Ibid., para 82.
COMP/M. 1845 AOL/Time Warner, supra note 65, para. 82.
68
Monti, supra note 60, 21.
69
COMP/M. 1845 AOL/Time Warner, supra note 65.
67
37
position. 70 This is a variation on the network effects theory because the network
effect is caused by the presence of other compatible properties linked to the network,
but the anticompetitive risks are similar: a dominant network owner can behave
independently of competitors, who will find it difficult to secure sellers of ancillary
products hoping to place them with an Internet Service Provider that has a small
number of consumers, and independently of customers wishing to supply goods that
run on the existing network because they need the network more than the network
needs them.71
While network effects create entry barriers to new competitors and invite
more consumers to the dominant network, another phenomenon, i.e. consumer lockin, affects the ability of consumers to look for substitutes. 72 In the absence of
interconnection or interoperability among competing networks, switching from the
market leader to a rival will entail at least a short-term loss in network benefit.73 This
lock-in effect, in turn, makes entry or expansion by rivals more difficult because they
cannot attain a critical mass of customers.74 The network is thus said to “tip” to the
incumbent, which creates a barrier to entry in the costs to rivals of overcoming the
network benefits associated with the incumbent’s product.75
For instance, a consumer will find it too costly to switch Microsoft Windows
OS to another because of the need to learn how to use new software and the
problems of application programmes compatible with the new software. 76 To
overcome these barriers, a firm must have either a sufficiently better product such
70
Monti, supra note 60, 21.
Ibid.
72
Max Schanzenbach, “Network Effects and Antitrust Law: Predation, Affirmative Defenses, and the
Case of US v. Microsoft,” Stanford Technology Law Review 2002 (2002): para. 26
73
Ibid., para. 28.
74
Schanzenbach , supra note 72, para. 29.
75
Shelanski and Sidak, supra note 33, 9.
76
Monti, supra note 60, 21.
71
38
that consumers find it worthwhile to incur switching costs (such as loss in network
benefits and retraining costs) or a sufficient cost advantage such that it can
compensate consumers for those switching costs through lower prices.77 This makes
entry more demanding, and lock-in consumers are at risk of exploitation by the
dominant undertaking. 78 Thus, the race to gain and to maintain dominance in a
network market might also provide motives to engage in anticompetitive conduct, as
the trial court found Microsoft to have done.79
A large network externality can determine the path of technological change in
a market in much the same way it can determine market structure. 80 The market
leader will set the technological standard even if other technological standards are
superior in some economic or technical sense.81 Subsequent innovation in the market,
and in markets for complementary products, might thus follow the path set by the
technology that first takes a meaningful lead even if that path is not, ex post, seen to
be the optimal one.82 Path dependency can also occur for reasons other than network
externalities (for example, the costs of learning to use a competing product).83 That is,
if switching cost to a new system is low or if it is cheap to use multiple systems, then
entry is feasible and the market may support multiple networks of varying sizes.84
Nonetheless the path dependency caused by lock-in can hinder the migration to other
networks.
Veljanovski argues against the validity of snowball or network effects.85 He
focuses especially on the telecommunication industry which is one of the network
77
Shelanski and Sidak, supra note 33, 9.
Ibid.
79
Shelanski and Sidak, supra note 33, 9.
80
Ibid.
81
Shelanski and Sidak, supra note 33, 9.
82
Ibid.
83
Shelanski and Sidak, supra note 33, 9.
84
Ibid.
85
Cento Veljanovski, “E.C. Antitrust in the New Economy: Is the European Commission’s View of
the Network Economy Right,” European Competition Law Review 22, no. 4 (2001): 116-117.
78
39
industries. Firstly he points out that network effects per se do not lead to
anticompetitive outcomes.86 In the real world, networks are compatible with many
competing networks and seek to achieve universal connectivity through
interconnection and roaming arrangements. 87 Moreover, their internalisation by
undertakings generates large consumer benefits, so that larger networks are
efficient. 88 Network growth is therefore driven by attempts to increase consumer
benefits, and to profit from these. But there is no implication in the theory that the
increased profits are generated by restricting output as is the case for static
monopolies.89 Secondly, snowballing or tipping occurs under restrictive assumptions
which require some sort of “bottleneck” in the industry.90 Specifically, a necessary
condition for tipping is that competition takes place between incompatible products.
In this setting, the consumer makes an all-or-nothing choice which enables the
network operator to internalise the network benefits. 91 However, when physical
telecommunications networks are compatible and interconnected, the consumer of
any one network immediately has access to users on other networks, so that network
effects exist for the whole sector, and do not give advantage to any one individual
network operator.92
Thirdly, the claim that network effects necessarily lead to monopoly
provision requires presupposing that the average marginal external benefit function is
positive or increases faster than marginal costs as the installed subscriber base grows
to market saturation. 93 It is only in this way that complete monopolisation of the
86
Ibid., 116.
Veljanovsk, supra note 85, 116.
88
Ibid.
89
Veljanovsk, supra note 85, 116.
90
Ibid.
91
Veljanovsk, supra note 85, 116.
92
Ibid.
93
Veljanovski, supra note 85, 116.
87
40
market would be the competitive outcome. Since no one has measured network
effects, this is controversial. Indeed, most economists presume that as market
penetration increases, network effects become less significant.94 On the other hand,
some of the Commission’s claims drawn from snowballing, such as the claim that
new subscriber growth will be captured by larger networks, are easily refuted.95 In
the mobile sector smaller and later entrants have gained significant market shares
across the world.
Further, there is no reason to believe that network effects only lead to
snowballing or tipping.96 They are likely to operate symmetrically so that excessive
price increases or failure to cater for consumer demand by a large network may cause
its “network” to break up quickly in a downward spiral.97 For Internet and mobile
telephone markets where the customer’s switching costs are low, this is a real threat.
The most striking example in the antitrust field is IBM v. Commission98 in the early
1980s. The Commission alleged that IBM had abused its dominant position in the
central processing units (CPUs) market by; failing to supply other manufacturers
with interface information needed to make competitive products work with IBM’s
System/370, not offering CPUs without main memory capacity included in the price
(memory bundling), and not offering CPUs without the basic software included in
the price (software bundling). Five years after the case, the alleged dominance of
IBM collapsed under a multitude of new products such as PCs, desktops and laptops.
2.2 Neo-Schumpeterian Approach
94
Ibid.
Veljanovski, supra note 85, 116.
96
Ibid., 117.
97
Veljanovski, supra note 85, 117.
98
Case 60/81 International Business Machines Corporation v. Commission of the European
Communities [1981] European Court Reports I-2639.
95
41
In response to concerns about the risks of dominance, some argued that since New
Economy markets change at Internet time, competitive advantages are temporary and
markets are contestable.
99
Joseph Schumpeter invented the phrase “creative
destruction” to express the idea that the pursuit of market power was a creative and
dynamic force that “incessantly revolutionises the economic structure from
incessantly destroying the old one, and incessantly creating a new one.”100 Creative
destruction means that a firm’s acquisition or possession of market power may be
fleeting. In the passage from Schumpeter’s classic discussion on creative destruction,
he wrote:
Every piece of business strategy acquires its true significance only against the
background of that process and within the situation created by it. It must be seen in
its role in the perennial gale of creative
destruction; it cannot be understood
irrespective of it or, in fact, on the hypothesis that there is a perennial lull … The
usual theorist’s paper and the usual government commission’s report practically
never try to see that behaviour, on the one hand, as a result of a piece of past history
and, on the other hand, as an attempt to deal with a situation that is sure to
change presently – as an attempt by those firms to keep on their feet, on ground that
is slipping away from under them. In other words, the problem that is usually being
visualised is how capitalism administers existing structures, whereas the relevant
problem is how it creates and destroys them.101
Unless governments impose artificial barriers to market entry, the incumbent
will be repeatedly challenged and eventually supplanted by actual or potential
competitors. The incentives to contest markets are high: whoever finds the new
99
Michael Cusumano and David Yoffie, Competition on Internet Time: Lessons from Netscape and
Its Battle with Microsoft (New York; London; Sydney; Singapore: Simon & Schuster, 2000).
100
Joseph Schumpeter, Capitalism, Socialism and Democracy, revised ed. (London: George Allen &
Unwin Ltd, 1947), 83.
101
Schumpeter, supra note 100, 83-84.
42
“killer app” will take a large chunk of the market share and the prize is extremely
high profits. Many commentators have argued that the network dominance achieved
is always temporary.102 Thus, the dynamism of New Economy markets can cancel
out dominance. Joseph Schumpeter sets out this vision of competition in the 1940s:
… competition which counts but the competition from new commodity, the
new technology, the new source of supply, the new type of organisation (the
largest-scale unit of control for instance) - competition which commands a
decisive cost or quality advantage and which strikes not at the margins of the
profits and the outputs of the existing firms but at their foundations and their
very lives.103
If the holder of a network is in persistent fear of being outdone by a new
product, that angst will diminish the dominance of the network vis-à-vis its
consumers. In addition, the fear of an alternative network evolving will also create
incentives for the network owner to cooperate with producers of complementary
goods, because the provision of these to its consumers is a way of making the
network superior. Therefore, “antitrust authorities need to be cognizant of the selfcorrective nature of dominance” in New Economy markets.104
The consequences of markets being so dynamic also make predatory
strategies to exclude competitors more difficult because it may be unclear that
undertakings will succeed in fortifying their dominance.105 Furthermore, recoupment
of predatory losses is threatened by a paradigm shift.106
David Evans, Albert Nichols, and Richard Schmalensee, “An Analysis of the Government’s
Economic Case in US v. Microsoft,” Antitrust Bulletin 46, no. 2 (Summer 2001): 163-251; David
Evans, “Antitrust and the New Economy,” ALI-ABA SF 63(September 2000): 41-97.
103
Schumpeter, supra note 100, 84.
104
David Teece and Mary Coleman, “The Meaning of Monopoly: Antitrust Analysis in HighTechnology Industries,” Antitrust Bulletin 43, no. 3/4 (Fall-Winter 1998): 847.
105
Monti, supra note 60, 22.
106
Teece and Coleman, supra note 104, 808.
102
43
The implication of this analysis is that competition laws are largely
unnecessary; the monopolies of New Economy markets are fragile and exclusionary
tactics are likely to be unsuccessful.
107
Moreover, competition authorities’
intervention may even be counterproductive. If the industry develops at such quick
speeds then it is more difficult for competition authorities to impose remedies that
improve competition. There is an inevitable regulatory lag between the
anticompetitive act and the imposition of a penalty. 108 A situation may have changed
by the time the competition authorities are able to intervene. One concern is that
heavy-handed regulation will significantly discourage the incentive to invent new
technologies or services. This argument applies especially to the obligations of the
dominant undertaking to grant access to its “essential facilities” which can work as a
tax on innovation.109
Although one must accept that network effects exist, these effects are led by
demand and therefore have increased consumer welfare. 110 If so, where is the
antitrust problem? Moreover, when considering remedies, how can one be sure that
remedies will not lead to a less efficient provision of products or services? On this
view, the competition authorities should not attempt to recreate perfectly competitive
market structures as these may not be the most efficient in promoting consumer
welfare.111
However, according to Robert Pitofsky, while barriers to entry may often be
lower in the high-tech sector, partly because successful entry so often depends on
107
Ibid.
Teece and Coleman, supra note 104, 809.
109
Monti, supra note 60, 23.
110
Ibid.
111
Ahlborn, supra note 26, 160.
108
44
new ideas, those barriers can nevertheless be consequential.
112
The intellectual
property law systems designed to encourage and protect innovation, such as patents
and copyrights, can be used as barriers to entry by new competitors.113 A further
barrier to entry in New Economy markets involves network effects. A first mover
becomes or threatens to become the only supplier of certain products or services
because of interoperability. Consumers are more likely to remain with the established
network because of their sunk costs, sometimes referred to as “lock-in”, and
suppliers of application products will adjust those products to the established
network and be reluctant to prepare products for potential challengers. 114 In that
event, network dominance itself becomes an insurmountable barrier to entry. Also,
New Economy markets are no different than others in the sense that “brand-name
recognition” and reputation for reliability can create virtually overwhelming
advantages for incumbents.115 Finally, illegal practices under competition law, such
as price discrimination, exclusionary contracts, code-sharing, or intimidation tactics
can themselves hinder entry by more efficient competitors. 116 As a result of that,
undertakings can retain market benefits for decades or even longer.117 One cannot
assume that the market will invariably succeed in dissipating entrenched market
power in an acceptable time frame or that superior products will supplant inferior
products that enjoy first-mover advantages.118
Generally, under a neo-Schumpeterian model, New Economy undertakings
with large market shares have little incentive to exploit consumers, because they will
Robert Pitofsky, “Challenges of the New Economy: Issues at the Intersection of Antitrust and
Intellectual Property,” Antitrust Law Journal 68 (2001): 916.
113
Ibid.
114
Pitofsky, supra note 112, 916.
115
Ibid.
116
Pitofsky, supra note 112, 916.
117
Microsoft Windows OS is a good example.
118
Pitofsky, supra note 112, 916.
112
45
quickly find a substitute, and little incentive to impair rivals, as such tactics will be
counterproductive. Thus, dominance is rare in the New Economy markets. Even
though there is periodic dominance by one or a few firms, in information technology
markets it may be symptomatic of healthy and innovation-based competition and
may be subject to displacement, even when goods or services with network
externalities are at issue. Therefore, the role of competition policies is questioned:
the market may have already cured itself before the remedy is ready. Alternatively,
the countermeasure may give undertakings less incentives to develop new products,
reducing consumer welfare. Creative destruction implies that competition policies
based on static analysis of present market conditions can be misleading and, over
time, detrimental to consumers.
III. Case Law
3.1 Market Definition in IT Markets
Market definition focuses on consumer needs and identifies what products can be
substitutes if the products concerned become more expensive and if suppliers are
able to enter the market quickly.119 According to the Commission’s Notice on Market
Definition, the emphasis is upon demand substitution, using empirical and
econometric evidence to identify product markets.120
In AOL/Time Warner, the Commission faced the difficulty of determining
whether the delivery of on-line music and this emerging mechanism of distribution,
119
120
Monti, supra note 60, 24.
Commission Notice on the Definition of the Relevant Market, supra note 15.
46
could be considered a relevant product market.
121
In WorldCom/Sprint the
Commission analysed whether top-level Internet Service Providers (ISPs) were
distinct from lower-level ISPs. 122 From a neo-Structuralist perspective, the market
definitions are plausible in these two cases, whereas a neo-Schumpeterian argued
that the AOL/Time Warner decision seemed to employ an unnecessarily narrow
market definition for policy reasons, such as the intention to regulate the
development of New Economy markets.123
3.1.1 America On-Line/Time Warner
In AOL/Time Warner, the Commission found a market for on-line music, distinct
from other sales channels.124 The merged entity would hold 30 to 40 percent of music
publishing rights and the general risk identified by the Commission was:
One entity controlling such a sizable music catalogue could exercise substantial
market power, by refusing to license its right, or threatening not to license
them,
or
imposing
high
or
discriminatory
prices
and
other
unfair
commercial conditions on its customers wishing to acquire such rights (such as
Internet retailers offering music downloads and streaming).125
The approach is problematic in two respects. First, it is uncertain whether,
from the customers’ point of view, on-line music can be said to be a distinctive
market. 126 On the demand side, the Commission pointed out that consumers have
121
COMP/M. 1845 AOL/Time Warner, supra note 65.
COMP/M. 1741 MCIWorldCom/Sprint, 2003/790/EC Commission Decision of 28 June, 2000
[2003] Official Journal of the European Communities L 300 /1.
123
Monti, supra note 60, 25.
124
COMP/M. 1845 AOL/Time Warner, supra note 65.
125
Ibid., para. 47.
126
Monti, supra note 60, 25.
122
47
immediate access to music.127 However, as most people like to listen to music using
a variety of hardware other than their PCs, they will still need to buy portable music
players to listen to the music and some blank CDs to burn the music onto. The fact
that they can download single tracks is also unconvincing on its own.128 It referred to
a physical difference, but said nothing about whether this difference would affect
consumer choice.129 That specific hardware was needed to download music from online, but it did not show that on-line music sales were a separate market from off-line
sales.130 On the supply side, it is true that the structure of on-line music supply is
different for the supplier, but this does not make the two markets separate for the
consumer, and it should determine the relevant product market in the consumer
perspective. 131 The losses reported by record companies were a sign that pirate
copies downloaded on-line had a negative impact on sales of CDs, indicating that the
two markets were interconnected rather than separate.132 Lastly, the Commission also
noted that the on-line supply of music was an emerging market,133 but it does not
necessarily mean that it is a separate one. It is also the case that a virtual shop on the
Internet need not be considered so distinct from a physical shop on the high street.
For example, in Telefonica/Terra/Amadeus the Commission thought that an on-line
travel agency was in the same product market as traditional travel agencies.134
In sum, the first criticism is that the Commission in the AOL/Time Warner
case eschews the methodology propounded in the Notice on Market Definition (under
which the emphasis should be upon whether consumers, on the basis of econometric
127
COMP/M. 1845 AOL/Time Warner, supra note 65, para. 21.
Ibid., 25-26.
129
COMP/M. 1845 AOL/Time Warner, supra note 53, para. 21.
130
Ibid.
131
Monti, supra note 60, 26.
132
Ibid., 26.
133
COMP/M. 1845 AOL/Time Warner, supra note 65, para.21.
134
COMP/M. 1812 Telefonica/Terra/Amadeus, Commission Decision of 18 April, 2000 [2000]
Official Journal of the European Communities C 76/5.
128
48
evidence, find on-line music supply a separate market) in favour of a general and
subjective evaluation based exclusively on product characteristics.135 This approach
is particularly unhelpful in New Economy markets because high-tech products are
highly differentiated but may still be considered as substitutes. 136 Thus, the
traditional approach to market definition does not reflect the manner of competition
in the New Economy industries.137
The second criticism is that the Commission’s principal concern does not
seem to be that the merger would lead to higher prices for consumers, but that it
would impede potential competitors from entering a market.138 There are two ways in
which an owner of substantial music content could cause entry foreclosure in the online music market.139 First, if a lot of on-line music is formatted with one proprietary
standard, then the owner of that technology can control the development of music
player software by not licensing this technology unless the software manufacturers
promise not to support other technology. In addition, other music publishers will find
it necessary to format their music according to the technical standard of the leading
firm, which could act as a gatekeeper. Second, a large music publisher could enter
the downstream market and format its music to fit its own music player, thus
eliminating other music players’ software.140 The Commission’s definition therefore
seems to be policy oriented, because it allows the Commission to find dominance in
the market for on-line music and by allowing it to prevent the creation of such
dominance, the Commission can protect the development of competing technological
135
Monti, supra note 60, 26.
Ibid.
137
Christopher Pleatsikas and David Teece, “New Indicia for Antitrust Analysis in Markets
Experiencing Rapid Innovation,” in Dynamic Competition and Public Policy: Technology, Innovation,
and Antitrust Issues, ed. Jerry Ellig (Cambridge: Cambridge University Press, 2001), 117-136.
138
Monti, supra note 60, 27.
139
Ibid.
140
The European Commission, 28th Report on Competition Policy, 1998, Available at
http://ec.europa.eu/comm/competition/annual_reports/1998 (accessed 12 March, 2007), paras. 96 and
141.
136
49
alternatives and prevent the foreclosure of emerging markets. 141 Arguably, the
narrow market definition does allow the Commission to regulate the development of
technical standards in emerging markets, and also the development of technological
convergence in the IT industry.142
Unlike the EU decision on the AOL/Time Warner merger case, the US
Federal Communications Commission’s (FCC’s) decision is an example of direct
network effects rather indirect network effects. At the time AOL was the largest
narrowband ISP and the largest provider of instant messaging (IM) services in the
United States and in the world. Time Warner was the second largest provider of
cable systems in the United States, offering both TV programming, broadband
Internet services, and, to a more limited extent, telephony services. The FCC cleared
the merger, subject to additional conditions imposed by the Federal Trade
Commission (FTC).143
The FCC’s review mainly focused on the possibility that the proposed merger
would enable AOL/Time Warner to dominate the next generation of advanced IMbased applications. All IM-based services require as an essential input the use of a
“Names and Presence Database” (NPD) to determine the set of users that is online at
any given time. The FCC did not define markets for IM services based on an analysis
of consumer’s demand for specific services. Instead, it defined a market for “NPD
services,” that is, “interactive communication services which … depend on an NPD
for real time communication between and among users.”144 The presence of network
effects related to (non-interoperable) NPD was central in the FCC’s assessment of
141
Monti, supra note 60, 27.
Ibid.
143
Federal Communications Commission Memorandum Opinion and Order of 11 January, 2011, CS
Docket No. 00-30. Available at http://transition.fcc.gov/Bureaus/Cable/Orders/2001/fcc01012.pdf.
(accessed 20 February 2009).
144
Federal Communications Commission Memorandum , supra note 143, para. 152.
142
50
potential harm from the merger; “Without interoperability, users may choose AOL’s
IM simply because it has the largest NPD and not because it offers the best value or
is most attractive for some other meritorious reasons.”145 Because AOL controlled
the largest NPD in the industry and refused to allow interoperable access to other IM
providers, the FCC concluded that AOL was dominant in this market.146
This analysis was strongly criticised because the decision had not proved that
refusal to interoperate could only be explained as a dominant firm’s attempt to
strengthen its dominance.147 And also AOLs main IM rivals (Microsoft and Yahoo,
who jointly had a market share similar to AOL) were also not providing
interoperable access to each other and to other IM providers, thus casting doubt on
any theory that would essentially equate the refusal to interoperate with (abuse of)
dominance.148
3.1.2 WorldCom/Sprint
In mergers of Internet Service Providers (ISPs), the concept of network effects has
been deployed to aid the process of market definition.149 For the Internet to work
there has to be an infrastructure that allows computers to connect to the World Wide
Web. According to US Department of Justice in WorldCom/Sprint, consumers
contracted with Internet Service Providers (ISPs) to access the Internet, and ISPs
entered into contracts with each other to ensure that their customers could
145
Ibid., para. 175.
Federal Communications Commission Memorandum , supra note 143, paras. 158-167.
147
Separate Statement of Commissioner Michael Powell, Federal Communications Commission
Memorandum Opinion and Order of 11 January, 2011, CS Docket No. 00-30. Available at
http://www.fcc.gov/encyclopedia/major-transaction-decisions (accessed 20 February 2009).
148
Ibid.
149
Monti, supra note 60, 28.
146
51
communicate with customers of other ISPs.150 It would be quite expensive and time
consuming for an ISP to enter into commercial relations with all other ISPs. So to
facilitate the process, the market had evolved into two tiers, i.e. “top-level” and
smaller ISPs. Smaller ISPs only needed to contract with one of the top-level ISPs to
allow its customers to access all other Internet users.151 The top-level ISPs havd high
capacity transmission facilities and “peering” arrangements among themselves
whereby they received traffic from other top-level ISPs free of charge. The smaller
ISPs entered into so-called “transit” arrangements with one of the top-level ISPs, for
which there was a charge, in exchange for which the smaller ISPs could offer their
customers universal access to the Internet. Thus, the infrastructure was hierarchical
and top-level ISPs were in a separate market. This was supported by the finding that
most Internet communications were carried out over top-level networks.152
With this perspective, top-level Internet service provision was a separate
market, hence if an undertaking owned all or a sizable share of the top-level ISP
market, it held a dominant position. This conclusion was underpinned by the theory
of network effects, that is, an Internet consumer will prefer to join an ISP which will
guarantee universal connection and if universal connection is only available for the
top-level ISPs, then the first tier is a compulsory partner for any ISP and indirectly,
for any Internet user. In fact, the Commission concluded that a dominant top-level
firm would own a network which could be characterised as an “essential facility.”153
What was crucial to this analysis was the finding that the Internet only worked
150
US vs. WorldCom and Sprint complaint by the Department of Justice, 26 June, 2000, Available at
http://www.usdoj.gov/atr/cases/f5000/5051.htm (accessed 12 March, 2007).
151
Ibid., para. 22.
152
WorldCom and Sprint complaint, supra note 150, para. 27.
153
IV/M. 1069 WorlCom/MCI, 1999/287/EC Commission Decision of 8 July, 1998 [1999] Official
Journal of the European Communities L 116/1.
52
hierarchically,154 and top-tier ISPs acted as gatekeepers of Internet access. However,
the question is whether the shape of Internet communications would be changed if
the top tier ISPs raises their prices and the US Department of Justice answered this
question in a negative way.155 It stated that top-level ISPs had two advantages: a cost
advantage because they had peering relationships with other top-level ISPs and
therefore, did not need to buy transit in order to provide universal service connection.
In addition, lower level ISPs exchanged traffic at inferior public interconnection
facilities, whereas the larger ISPs owned private interconnection facilities meaning
data transmission was more secure and stable. Consequently, the fewer the number
of network connections connecting to a large top-level network, the fewer the crossnetwork connections.156 In addition, even if the lower level ISPs managed to create a
sub-network, this would not provide universal access because the customers of the
top-level ISP could not be connected unless a transit arrangement was enter into with
a top-level ISP.157 Thus, for universal connectivity, contracts with the top-level were
needed and no supply substitution is readily available in the ISP market.
This analysis of the decisions by the Commission and the US Department of
Justice showed that network effects could play a part in defining the relevant product
market. However, the response from advocates of dynamic competition was that this
analysis was outdated. There had been at least two developments that challenged the
identification of top-tier ISPs as a separate market. First, the cost of alternative
routing had become cheaper, consequently peering at lower level ISPs was now
economical since the new routing standard known as BGP4 was developed. 158
Second, corporate users now resorted to multi-homing, i.e. purchasing connection
154
Monti, supra note 60, 29.
WorldCom and Sprint complaint, supra note 150.
156
WorldCom and Sprint complaint, supra note 150, paras. 27-30.
157
Ibid., paras. 75-76.
158
Monti, supra note 60, 30.
155
53
from more than one provider.159 The impact of this was that top-tier ISPs were no
longer a compulsory partner for much Internet traffic and an economic study had
noted that these developments had had the effect of reducing the bargaining
advantage of the top-tier ISPs.160 These observations cast some doubt over the value
of using network effects to decide market definition. The difficulty is that the
approach is unduly static, which is unsuitable in technologically dynamic markets
where there is rapid innovation because it will lead to unnecessarily narrow market
definitions.161 However, the Commission and US Department of Justice seemed to
prefer a neo-Structuralist approach for two reasons. First, it is difficult to take fastmoving innovation into account when determining the relevant product market, since
it is uncertain that the outcome of innovation will be marketised. 162 Moreover, this
kind of consideration can be considered at the next stage, when assessing dominance,
for long-term supply substitutability is considered fully at this stage in the Article
102 TFEU cases.163
The second reason is that if the market definition is policy-driven, then the
analysis will eschew all evidence that contradicts the narrow market definition which
helps the Commission and US Department of Justice target a market concerned.164
3.2 Dominance in IT Markets
Traditionally, competition policy analysis in Europe has relied heavily on the
159
Ibid.
Stanley Besen, Paul Milgrom, Bridger Mitchell, and Padmanabhan Srinagesh, “Advances in
Routing Technologies and Internet Peering Agreements,” American Economic Review 91, no. 2 (May,
2001): 292-296.
161
Pleatsikas and Teece, supra note 137, 131.
162
Monti, supra note 60, 31.
163
Commission Notice on the Definition of the Relevant Market, supra note 15, paras. 23-24.
164
Monti, supra note 60, 31.
160
54
concept of “dominance.”165 Concrete proof of dominance can only really be found in
the pricing structures of monopolies but this evidence may be difficult to capture and
in any case may not be the way in which dominance manifests itself. More broadly
defined dominance is “a position of economic strength enjoyed by an undertaking
which enables it to prevent effective competition from being maintained on the
relevant market by giving it the power to behave to an appreciable extent
independently of its competitors, customers and ultimately of its consumers.”166 To
assess whether a position is dominant, the Commission, following the principles
established by the Court of Justice, adopts a two-step approach; first, it defines the
relevant market and then it assesses the undertaking’s dominance in the market. 167
In the US an undertaking is dominant if it has a high market share which is protected
by barriers to entry.168 This is a structural approach that allows the court to infer
dominance from a high market share.169 In New Economy markets the Commission
has interpreted network effects as a critical element in the determination of
dominance, its abuse and the creation of an essential facility. 170 It has even gone
further to suggest that networks which are not dominant are still large enough to lead
to snowballing. Competition authorities should be encouraged to intervene in IT
markets.171 However, some commentators have argued that it is wrong to focus on
network size when evaluating the information technology markets. 172 These are
emerging industries in a fluid state buffeted by rapid technological changes and there
165
Article 102 TFEU.
Case 27/76 United Brands Company & United Brands Continental BV v. Commission
of the European Communities [1978] European Court Reports 207, para. 65.
167
Case 6/72 Europemballage Corporation & Continental Can Company Inc. v. Commission of the
European Communities [1973] European Court Reports 215.
168
US v. Aluminum Company of America et al., 148 F.2d 416, 424 (2nd Cir. 1945).
169
US v. Microsoft 253 F 3d 34 (DC Cir. 2001) (en banc).
170
Veljanovski, supra note 85, 117.
171
Veljanovski, supra note 85, 117.
172
Cass and Hylton, supra note 30, 36-37; Levy, supra note 30, 1352-1358.
166
55
is a need to make massive and ongoing investment in software and infrastructure.173
3.2.1 Traditional Test
For most products, market share can easily be estimated by looking at sales volume.
However, in high-tech markets calculation of market shares may require different
measures. For example, in the market for Internet services the Commission used
revenue and traffic flows to decide market share.174 Given the high speed of market
evolution, the relevance of market share can be questioned. If dominance is weak as
the neo-Schumpeterians claim, then the relevance of market share decreases
significantly. This is especially the case since competition in the information market
is for a market, not within a market, thus making short term monopolies inevitable.
However, the market share is not the exclusive measurement of dominance.175 Entry
barriers or conditions are also important.176
In the Microsoft case, the barrier to entry was termed an “applications barrier
to entry.”177 Consumers wanted to purchase an operating system for which a large
number of application programmes were already available and developers of
applications preferred to write for an operating system that had a huge consumer
base.178 The consequence was that once Microsoft Windows had such a large market
share in the OS market, the application developers preferred to write applications for
Microsoft Windows. This further cemented its dominance or quasi-monopoly
173
Ibid.
IV/M. 1069 WorlCom/MCI, supra note 153, 19-20.
175
Case 85/76 Hoffmann-La Roche & Co. AG v. Commission of the European Communities [1979]
European Court Reports 461; Case C-62/86 AKZO Chemie BV v. Commission of the European
Communities [1991] European Court Reports I-3359.
176
Ibid.
177
US v. Microsoft 84 F Supp 2d 9 (DDC 1999) (Findings of Facts), 19-24.
178
US v. Microsoft, supra note 177, 19-24.
174
56
because applications written for Microsoft Windows were not interoperable with
other operating systems.179 This conclusion rests on the theory of indirect network
effects, although it is a virtual network where consumers cannot speak to each other,
it is nevertheless created by consumer demand.180 Thus, the fact that Microsoft had
created network effects through superior marketing and excellent product design
does not deny the fact that the network effects placed Microsoft in a dominant
position.181 In the Microsoft case the court defined entry barriers as “factors ... that
prevent new rivals from timely responding to an increase in price above the
competitive level.”182 As in all competition cases, barriers to entry were scrutinised
using a short-run analysis.183 This short-run analysis, coupled with a static approach
to market definition, has been criticised as inappropriate in IT markets where longrun fears of technological paradigm shifts loom over fragile monopolists. 184 As a
result, neo-Schumpeterians have suggested several alternative approaches to analyse
dominance.
3.2.2 Neo-Schumpeterian Definition of Dominance
This group has suggested that the traditional test of dominance should be replaced by
the following three checks, as this would better reflect the features of the New
Economy industries: firstly whether there are competing networks in existence and
not just competing products; secondly, to discover the history of innovation in the
industry, focusing especially on the rate of innovation; and thirdly, to analyse the
179
Ibid.
US v. Microsoft, supra note 177, 19-24.
181
Ibid..
182
US v. Microsoft, supra note 169.
183
Ibid.
184
Monti, supra note 60, 33.
180
57
barriers to innovation rather than barriers to entry. 185 Although high switching costs
can raise substantial barriers to competition within or across networks, significant
innovation beyond the incumbent standard can make consumers move toward a
better and usually cheaper product. 186 Firms with superior technology have little
difficulty supplanting an incumbent technology. 187 Compact disc technology that
replaced long-playing records is a good example.188 Another example is the VCR
standard. While Betamax technology enjoyed a first-mover advantage, VHS
successfully challenged that standard because its longer playing time offered the
consumer superior technology.189
In the Microsoft case, the US court considered potentially competing
networks, but rejected these as unlikely to threaten Microsoft.190 The argument that
such potential networks should be included depends on the assumption that entry is
fast, but the court found that it would only be in the long run that competing
networks could enter. 191 The history of innovation, such as past displacement of
market leaders, is not a useful measure because the rate of innovation does not follow
any predictable pattern in any industry. 192 Barriers to innovation are useful only
insofar as one is able to predict that the new product will displace the incumbent.193
However, it is a fact that Microsoft has been dominant for several product
generations and no new products have been able to destroy its dominance for many
years.
Harvard Law Review Association, “Antitrust and Information Age,” Harvard Law Review 114
(March 2001): 1637.
186
Ibid., 1638.
187
Harvard Law Review Association, supra note 185, 1638.
188
Ibid.
189
Stan Liebowitz and Stephen Margolis, “Network Externality: An Uncommon Tragedy,” The
Journal of Economic Perspectives 8, no. 2 (Spring 1994): 147-148.
190
US v. Microsoft, supra note 177.
191
Ibid., 14.
192
Richard Schmalensee, “Antitrust Issues in Schumpeterian Industries,” American Economic Review
90, no. 2 (May 2000): 194.
193
Monti, supra note 60, 34.
185
58
Another way of assessing dominance in the New Economy sectors was
suggested by Richard Schmalensee at the Microsoft trial.194 In his view, the structural
approach was irrelevant in dynamic markets where market boundaries were not well
defined. 195 In these markets, it is important to evaluate whether an undertaking’s
dominance is fragile, hence market definition and market shares are not as
important. 196 Instead, a behavioural approach should be adopted which identifies:
first, constraints that limit the ability of firms to behave anti-competitively; and
second whether the accused undertaking acts like a firm with monopoly power.197
The examination of constraints considers past, present and future constraints of
market power.198 Applying this standard, Microsoft faced competition first from its
past behaviour in that consumers who had bought earlier versions of its operating
system, such as MS DOS, would have to be persuaded to buy the upgraded version;
in the present, higher prices would increase the risks of piracy or lead to some
consumers buying other goods, such as LINUX, Mac OS, and Chrome OS; and for
the future, Schmalensee identified a number of companies, such as Google and
Apple, that were Microsoft’s potential competitors in the long term.199 On this basis,
the structure of the market includes Intel compatible operating systems as well as
other operating systems for any chip-based devices. On either the structural or
behavioural approach, Microsoft lacks monopoly power.
200
In considering
Microsoft’s behaviour, Schmalensee said that its prices were much lower than the
monopoly prices. 201 Moreover, in the context of Microsoft’s tactics to exclude
194
Schmalensee, supra note 192, 194.
Ibid.
196
Schmalensee, supra note 192, 194.
197
Ibid.
198
Schmalensee, supra note 192, 194.
199
Ibid., 194-195; They are actual competitors while this thesis is being written in mobile OS and
non-mobile OS markets.
200
Schmalensee, supra note 192, 194.
201
Ibid., 195.
195
59
Netscape, the relevant question is whether Microsoft would be able to recoup the
losses of predation in the long run, but a possibility is precluded by the existence of
many other potential competitors.202
This approach focuses on long term possibilities that are threats to dominance.
Furthermore, the approach does not fit within the methodological approach taken in
dominance and monopolisation cases, either under Section 2 of the Sherman Act or
Article 102 TFEU, because it confuses the concepts of abuse and dominance.203
Neo-Schumpeterian alternatives share two features which make their
adoption unlikely by competition authorities.204 First, they require great faith that the
passage of time will correct anticompetitive practices and second, they consider the
ability to exploit consumers as a test for anticompetitiveness. The main concern of
competition authorities is the unlawful suppression of competitors and thus, a shortrun analysis of the market is more suitable. Consequently, neo-Schumpeterian
alternatives are problematic in two respects: they are difficult to put into practice
because of speculation about long-term effects and are detrimental to the type of
competition culture that exists at present. In addition, the optimal time period in
which markets can correct anticompetitive behaviour is unknown. Thus, neoStructuralist approach is and will be applied to cases in the network industries and
this will be the best to provide market participants with legal predictability.
3.3 Abuse in IT Markets
The competition authorities worry that a dominant firm displays abusive behaviour
towards actual or potential competitors. Traditionally, in the context of the EU this is
202
Schmalensee, supra note 192, 195.
Ibid.
204
Schmalensee, supra note 192, 195.
203
60
defined as:
The concept of abuse is an objective concept relating to the behaviour of an
undertaking in a dominant position which is such as to influence the structure of a
market where, as a result of the very presence of the undertaking in question, the
degree of competition is weakened and which,
through
recourse
to methods
different from those which condition normal competition in products or services on
the basis of the transactions of commercial operators,
has the effect of hindering
the maintenance of the degree of competition still existing in the
market or the
growth of that competition.205
Neo-Schumpeterians argue that it is hard to find how exclusionary tactics,
such as safeguarding dominance, refusal to cooperate with competitors, and
extension of dominance to new markets, are a problem. 206 As long as these strategies
exclude less efficient competitors, consumers do not suffer and more efficient
competitors will be able to enter the market because a paradigm shift will transfer
power to the new technology developers. However, this view is not accepted by the
competition authorities and the courts since they are less interested in improving
consumer welfare than in protecting market access for competitors.207 Also when the
network effects combine with the costs associated with switching, this will force
consumers to lock in specific products or services, meaning potential innovations
may be frustrated in the long term.
3.3.1 Safeguarding a Dominant Position
In the Microsoft case, the US courts found the company guilty of exclusionary
205
Case 85/76 Hoffmann-La Roche , supra note 173, para 91.
Cass and Hylton, supra note 30, 36-37; Levy, supra note 30, 1352-1358.
207
Ibid.
206
61
conduct designed to maintain its monopoly by preventing the distribution of potential
competitors’ products. 208 This was achieved by attempting to deter the Netscape
browser from gaining a significant portion of the Internet browser market. 209
Microsoft’s reason for blocking the establishment of a competing browser was not so
much because it wished to dominate the browser market with Internet Explorer, but
because a browser was so-called ‘middleware’, i.e. another means of access to
applications. 210 Microsoft achieved its aim by placing its browser on to many
consumers’ personal computers and promoting its own browser, Internet Explorer.211
They did this by pre-installing Internet Explorer on personal computers and
encouraging Internet access providers to promote their browser.212 The consequence
was that Netscape’s market share was significantly decreased in the browser market
because of Microsoft’s actions, thereby foreclosing any possibility that Netscape
could challenge the operating system quasi-monopoly. 213 The court noted one
additional circumstance where attempts by a dominant undertaking to bind
purchasers to its products attenuated rapid technological development.214 However, it
may be argued that if Netscape’s strategy had been successful everybody would have
wanted Netscape in order to access the largest range of applications.215 On this basis,
the welfare effects of shifting from “operating system dominance” to “browser
dominance” are non-existent because one dominant undertaking simply replaces
another. 216 Moreover, it can also be argued that it is more efficient to have an
208
US v. Microsoft, supra note 177, 111-112.
Ibid.
210
US v. Microsoft, supra note 177, 111-112.
211
Ibid.
212
US v. Microsoft, supra note 177, 111-112.
213
Ibid.
214
US v. Microsoft, supra note 177, 111-112.
215
Monti, supra note 60, 38.
216
Ibid.
209
62
operating system already equipped with a browser.217 Having said this, competition
in the IT industry is for the market, not within the market so if Netscape were
allowed to compete for the network, this would give incentives to other firms to
challenge Netscape’s future dominance. Conceivably a new operating system could
be devised that runs applications more efficiently than a browser and then the market
would shift back to operating systems. The anticompetitive nature of Microsoft’s
tactics was that it tried to protect its dominance in the operating system market by
forestalling the emergence of a successful browser and such tactics thwarted
innovation by other competitors.218 Microsoft’s licensing practices in the EU during
the early 1990s can also been seen as attempts to protect their dominance. 219
Microsoft forced Original Equipment Manufacturers (OEMs) to pay royalties for
Windows on every personal computer sold, regardless of whether or not Microsoft
software was loaded.220 As many consumers wanted Windows loaded on products,
OEMs were obliged to deal with Microsoft, but its licensing conditions discouraged
OEMs from installing competing software packages. 221 Microsoft subsequently
amended its licensing practices.222 It was argued that it was important to restrict these
tactics because they also foreclosed innovation.223 Thus, a neo-Structuralist approach
does not deny the dynamism of markets, but is concerned about maintaining
dynamism in the market.
A neo-Structuralist approach is also seen in the US Court of Appeals’
217
Monti, supra note 60, 38.
Ibid., 39.
219
Monti, supra note 60, 39
220
Willow Sheremata, “Barriers to Innovation: A Monopoly, Network Externalities, and the Speed of
Innovation,” Antitrust Bulletin 42, no. 4 (Winter 1997): 942-943.
221
Ibid.
222
European Commission. “Following an Undertaking by Microsoft to Change Its Licensing Practices,
the European Commission Suspends Its Action for Breach of the Competition Rules,” IP/94/653, 17
July, 1994. Available at http://europa.eu/rapid/pressReleasesAction.do?reference =IP/94/653&forma
t=HTML &aged=1&language=EN&guiLanguage=en (accessed 1 May, 2007).
223
Maurits Dolmans, “Restriction on Innovation: The EU Antitrust Approach,” Antitrust Law Journal
66 (1998): 455-485.
218
63
approach.224 The court said that “it would be inimical to the purpose of the Sherman
Act to allow monopolists free reign to squash nascent, albeit unproven, competitors
at will, particularly in the industries marked by rapid technological advance and
frequent paradigm shift.” 225 On this view, the court believed that the dynamic
industries needed higher antitrust scrutiny because the better any new innovations
were, the greater an incentive there was for an incumbent to eliminate its
competitors. 226 Thus, the neo-Structuralist approach adopted by the competition
authorities and the courts was designed to facilitate new entry and to protect the
potential future innovation rather than relying on innovation to demolish the
dominant undertaking.227
Critics of this analysis argue that the line between anticompetitive conduct
and aggressive competition policy has been drawn inaccurately. Klein suggested that
the better way to test whether Microsoft’s practices were abusive was to examine
their effect on consumers and whether the practices were efficient.228 On this analysis
it was suggested that both Netscape and Microsoft were able to compete for
distribution of their browsers through Internet access providers but that Netscape
failed to keep up with Microsoft efforts.229 Moreover, it was noted that Microsoft’s
acts merely raised Netscape’s distribution costs but did not make entry
overwhelmingly expensive.230 Combined with the fact that consumers benefited from
a more advanced product manufactured by Microsoft, the tactics used should not be
declared anticompetitive.231 Consequently, the fact that innovation is carried out by
224
US v. Microsoft, supra note 169.
Ibid.
226
US v. Microsoft, supra note 169.
227
Monti, supra note 60, 40.
228
Benjamin Klein, “Did Microsoft Engage in Anticompetitive Exclusionary Behaviour?” Antitrust
Bulletin 46, no. 1 (2001): 108.
229
Klein, supra note 228.
230
Ibid.
231
Klein, supra note 228.
225
64
Microsoft is not of concern to a neo-Schumpeterian, but is of concern to a neoStructuralist.232 Therefore, a neo-Structuralist interpretation of the competition law
seems to embrace considerations of distributive justice.233
3.3.2 Leveraging
There is a related strategy, known as “leveraging,” where a dominant undertaking
uses “its monopoly power in one market to gain a competitive advantage in
another.”234 There are three significant examples of leveraging in the New Economy
markets case law. Firstly, the practice of leveraging in Internet markets was noted by
the US Department of Justice (USDOJ) where a dominant top-tier ISP was able to
enter the market for new internet services and exclude other ISPs, by developing a
proprietary protocol for voice over the Internet, which only its subscribers can use.235
This tactic has two anticompetitive effects in two markets. First, it would further
undermine the position of other ISPs and drive more consumers to join the dominant
firm.236 Second, it would also have an anticompetitive effect in the market for voice
transmission over the Internet because there would only be one firm supplying it.237
Secondly, the Commission’s investigation of Microsoft rested on the theory
of leveraging as well.238 Microsoft was suspected of refusing to disclose information
on its operating system to developers of server software, preventing the possibility of
Franklin Fisher, “Innovation, and Monopoly Leveraging,” in Dynamic Competition and Public
Policy, ed. Jerry Ellig (Cambridge; New York: Cambridge University Press, 2001), 156-157.
233
Monti, supra note 60, 40.
234
Berkeley Photo v. Eastman Kodak 603 F 2d 263, 276 (2nd Cir 1979).
235
WorldCom and Sprint complaint, supra note 150.
236
Ibid.
237
WorldCom and Sprint complaint, supra note 150.
238
COMP/C-3/37.792 Microsoft, Commission Decision of 24 March, 2004 [2005] 4 Common Market
Law Reports 965.
232
65
developing software that works on a computer with Microsoft Windows. 239 The
accusation was that Microsoft was attempting to extend its dominance in the server
OS market.240
Thirdly, using the concept of “tipping”, the US Department of Justice (DOJ)
considered that a dominant top-level ISP could try to drive the customers of
competing top-level ISPs away from them by lowering the quality of the services
offered to competing ISPs.241 This would make users of lower level ISPs migrate to
the top-level ISP, where connectivity was better.242 Top-level ISPs may also raise the
price of transit agreements and then lower level ISPs would pass costs on to
consumers who would then switch to the top-level ISP who would be offering lower
rates.243 As the Commission pointed out, the top-level ISP could pick off competitors
one by one and take over the market gradually.244
Regarding the first example, if a company creates a new service which
consumers want, it will be inefficient to penalise the provision of that service. 245
Furthermore, the exclusion of others from that market should be seen as the reward
that the firm deserves for creating the new service.246 On this basis, the analysis of
the US DOJ is flawed because it failed to take innovation into consideration.247
The theory of network effects might suggest that a dominant network holder
can very easily become dominant in a relevant market.248 This prevents competition
over technological standards. So, although a dominant firm might win the race to
produce the next generation product due to network effects, it is not necessarily an
239
Ibid.
COMP/C-3/37.792 Microsoft, supra note 238.
241
WorldCom and Sprint complaint, supra note 150, para. 35.
242
Ibid.
243
WorldCom and Sprint complaint, supra note 150, paras. 40-41.
244
IV/M. 1069 WorlCom/MCI, supra note 153, 22-23.
245
Monti, supra note 60, 46.
246
Ibid.
247
Monti, supra note 60, 46.
248
Ibid.
240
66
anticompetitive outcome.249 Similarly, the Commission’s evidence against Microsoft
does not make it clear whether any damage was caused to Sun Microsystems. 250 In
the US, for instance, the Federal Court of Appeals takes the view that leveraging
requires an anticompetitive effect in the second market.251 The third scenario also
seems to protect competitors rather than competition.252 If the dominant ISP wanted
to increase its profits, it would be able to raise the transit charges, thus vertical
integration would not raise prices or reduce output any more than transit charges
raised by the dominant undertaking.253
In these cases, the neo-Structuralist approach leads to the protection of
competitors without any apparent benefit to competition in general as
anticompetitive effects are assumed to result from the exclusion of competitors.254 It
is doubtful whether there will be many leveraging cases which fall outside the scope
of the essential facilities doctrine. 255 To date the competition authorities have
preferred to prevent leveraging through merger control and by ensuring that the
market structure does not facilitate the extension of dominance.256
3.4 Objective Necessity: Incentives to Innovate
From a neo-Schumpeterian perspective, all imposition of duties to cooperate and all
David Teece and Mary Coleman, “The Meaning of Monopoly: Antitrust Analysis in HighTechnology Industies,” Antitrust Bulletin 43, no. 3/4 (Fall-Winter 1998): 816.
250
Monti, supra note 60, 47.
251
US v. Microsoft, supra note 169.
252
Monti, supra note 60, 47.
253
Herbert Hovenkamp, Federal Antitrust Policy: The Law of Competition and Its Practice (St.Paul
MN: West Publishing, 1994), 283-285.
254
Data General v. Grunman Sys Support Corp. 36 F 3d 1147 (1st Cir 1994); Aspen Skiing v. Aspen
Highland Skiing 472 US 585 (1985); Eastman Kodak Co. v. Image Technical Services 112 S Ct 2072
(1992).
255
Monti, supra note 60, 47.
256
Monti, supra note 60, 47.
249
67
restrictions on business expansion are inappropriate for two reasons.257 First, even if
it appears that competition looks suffocated, dominance may be diluted quickly.
Second, the imposition of cooperation obligations diminished the incentive to
develop new products since undertakings recognise that they will be forced to share
the fruits of their investment.
The first objection can be countered by considering to what extent
cooperation with the dominant firm is necessary. 258 If technical innovations can
quickly surmount the entry barrier created by the network effects, then cooperation is
unnecessary.259 The second objection, eliminating the incentives to innovate, is that a
too extensive obligation to cooperate and a too far-reaching restriction on extending
new product markets can act as a tax on innovation and suppress future
developments. 260 While intellectual property rights are offered as a reward for
innovation, there is the principle that balances the risks and the potential benefits
which might accrue to consumers between leaving the dominant undertaking
unregulated in order to impede market access and regulated to facilitate market
access.
The innovation justification requires the decision maker to consider whether
the imposition of competition liability or obligation on a dominant undertaking
outweighs the foreclosure effects of the anticompetitive conduct.261 In considering
whether innovation is reduced, one would have to consider both innovations on the
part of the defendant, and also more generally how other undertakings are affected
David Evans and Richard Schmalensee, “Be Nice to Your Rivals: How the Government is Selling
an Antitrust Case without Consumer Harm in United States v. Microsoft,” and “Consumers Lose If
Leading Firms are Smashed for Competing,” in Did Microsoft Harm Consumers: Two Opposing
Views, ed. David Evans, Franklin Fisher, Daniel Rubinfeld, and Richard Schmalensee (Washington:
AEI-Brookings Joint Centre for Regulatory Studies, 2000): 45-86, 97-132.
258
Monti, supra note 60, 47.
259
Monti, supra note 60, 47.
260
Ibid., 48.
261
The Guidance Paper, supra note 43, paras. 19-22, 86, 87.
257
68
by the judgement. There are some cases where the innovation justification has failed,
such as Magill. 262 As AG Jacobs observed, copyright protection afforded to the
information in Magill was hard to justify “in terms of rewarding or providing an
incentive for creative effort.” Here it would be impossible for the defendant to justify
a refusal to license to competitors on the basis that it would impede innovation.
Marginal cases will be more difficult to resolve as current economic theories have no
appropriate suggestions for how to balance the incentives to invest with the costs of
abuse of dominance. 263 However, an accurate balance is unnecessary and a
qualitative analysis will suffice.264 For example, applying the innovation defence to
the Intel scenario, where Intel’s non-participation in Intergraph’s market meant that
granting Intergraph access to the secondary markets would not diminish Intel’s
economic incentives to develop new products. In fact, by allowing others to develop
complementary products, demand for Intel goods should rise due to indirect network
effects.265
This kind of approach will be criticised as being too imprecise to be viable,
but it is necessary to ensure that competition and innovation are both protected.
Furthermore, this approach can be justified on three grounds. First, the lack of a
precise cost benefit analysis is not a fatal weakness. For example, while intellectual
property rights are designed as an incentive to innovate, the level of protection is not
set on a case by case basis but across the board. 266 Second, competition law is
applied to maximise competition and innovation by trying to measure the potential
effects of imposing liability rather than to draw arbitrary lines to distinguish the
262
Case C-241 to 242/91P Radio Telefis Eireann(RTE) and Independent Television Publications Ltd.
(ITP) v. Commission of the European Communities (Magill) [1995] European Court Reports I-743.
263
Richard Brnell, “Appropriability in Antitrust: How Much is Enough?” Antitrust Law Journal 69
(2001): 1-42.
264
Monti, supra note 60, 49.
265
Intergraph Corporation v. Intel Corporation, 241 F. 3d 1353. (Federal Cir. 2001)
266
Richard Posner, Economic Analysis of Law, 5th ed. (New York: Aspen, 1998), 43.
69
lawful from the unlawful,267 as is the case in the field of essential facilities. Third, the
type of imprecise balancing process is common in legal reasoning. It occurs also in
applying the exemption in Article 101(3) TFEU and the efficiency defence in merger
cases.268 Through pragmatic decision making a reliable set of precedents will allow
for the evolution of imperfect but workable criteria for assessing the consequences of
imposing a duty to share on dynamic efficiency.269
IV. Conclusion
The consequence of network effects and lock-in effects is that competition
enforcement in network markets becomes complicated. On one hand, if
anticompetitive conduct is not detected and stopped early, dominant market share
may “tip” in favour of the bad actor. At this point, consumer welfare will be harmed
and may not be able to be undone without yet more costs on consumers. On the other
hand, distinguishing anticompetitive actions from beneficial competitive conduct can
be difficult when firms are competing not just for market share, but for commercial
viability and the market itself. For example, aggressive pricing that looks predatory
in a conventional market may constitute a rational competitive strategy in a market
where one’s future existence depends on early penetration. Thus, network dynamics
may raise the risk of both action and inaction by competition authorities.
Given the confluence of economic forces, Professor Arrow warned that “a
rule of penalising market successes that are not the result of anticompetitive practices
267
Ibid.
IV/M. 993 Bertelsmann/Kirch/Premiere, 1999/153/EC Commission Decision of 27 May, 1998
[1999] Official Journal of the European Communities L 53/1.
269
Monti, supra note 60, 40.
268
70
will, among other consequences, have the effect of taxing technological
improvements and is unlikely to improve welfare in the long run.”270
Two opposite perspectives are still competing. One focuses on three
characteristics amongst several attributes of information technology markets, which
are economies of scale, network effects, and consumer lock-in, and particularly on
the potential dangers of network effects as a reason to justify aggressive competition
enforcement; while the other centres on the dynamic characteristic of these industries,
suggesting that any dominance is temporary as markets are contestable.271 According
to the latter group, the ideal type of competition policy is one of laissez-faire or light
touch.
These opposed viewpoints are reminiscent of more general debates over the
role of competition law. On the one hand the Chicago School argues for a limited
role for competition law because markets tend to be competitive, 272 whilst its
opponents criticise the Chicago School for being overly optimistic about the market’s
abilities to correct itself, noting that certain market structures are likely to lead to
dominance and result in anticompetitive practices. The latter view is supported by the
“neo-Structuralist” approach which favours aggressive competition enforcement
when anticompetitive structures manifest themselves, whereas the former is
advocated by the “neo-Schumpeterian” approach which argues that dominance in the
information technology markets tend to be temporary and short-lived. However,
most competition authorities seem to favour the “neo-Structuralist” approach.
270
Declaration of Kenneth J. Arrow, attached to Memorandum of the United States of America in
Support of Motion to Enter Final Judgment and in Opposition to the Positions of I.D.E. Corporation
and Amici, United States v Microsoft Corp, Civil Action No 94-1564, 5-6 (D DC filed Jan 18, 1995)
(on file with author), 9, Availabel at http://www.justice.gov/atr/cases/f0000/0049.pdf . (accessed 20
February, 2009).
271
Ibid., 268, 17.
272
Richard Posner, “Antitrust in the New Economy,” American Law Institute-American Bar
Association Continuing Legal Education SF 63 (14 September 2000): 115-129; Richard Posner,
Antitrust Law, 2nd ed. (Chicago; London: University of Chicago Press, 2001).
71
Former Commissioner for Competition Mario Monti declares that “even if the pace
of the high-tech sector means that market failures last only for a short time, this does
not mean that we should be less concerned.”273 Similarly, former Chairman of the
Federal Trade Commission, Robert Pitofsky, said that it would be “naïve” to
conclude that there is no role for competition law when market power is based on
intellectual property; rather competition law is flexible enough to play a role in
regulating the Schumpeterian marketplaces.274 In his view, the increasing returns that
a dominant firm enjoys, along with lock-in and other network effects can make
market power durable. 275 It is, though, still debatable whether this approach is
appropriate for the New Economy industries which are competing not “within” the
market but “for” the market.
It is risky to choose one of two opposite views in analysing the information
technology industry. The competition analysis of New Economy markets can be
extremely complex. Moreover, there will be significant uncertainty over the future
evolution of the New Economy markets. Nonetheless, these factors do not imply that
the competition authorities should refrain from intervention until they know all the
answers. Markets with large production and demand-side economies of scale are
prone to tipping. Dominance may be difficult to be restricted due to network effects
in the IT industry. Reducing the dominance will require either the collective
consumers’ migration, which incurs substantial switching costs, or an attempt to
force open the network, which has its own set of problems.
Information technologies create markets that require different economic tools
273
Monti, supra note 5.
Robert Pitofsky, “Antitrust and Intellectual Property: Unsolved Issues at the Heart of the New
Economy,” Berkeley Technology Law Journal 16 (2001): 536.
275
Federal Trade Commission. “Anticipating the 21st Century: Consumer Protection
Policy in the New High-Tech Global Marketplace” May 1996, http://www.ftc.gov /opp/global
/report/gc_v2.pdf. (accessed 16 October, 2006), Chap. 9, 3.
274
72
to examine the behaviour of undertakings. Economists agree that maintaining
competition and promoting innovation is vital, but disagree on how to achieve these;
non-enforcement according to neo-Schumpeterians, more aggressive enforcement
according to the neo-Structuralists. The competition authorities have preferred the
neo-Structuralist approach, and this explains both their preference for narrower
market definitions that seek to ensure the proliferation of participants in the
dynamically competitive markets, as well as their preference for a structural analysis
of dominance. Neo-Schumpeterian concepts are unlikely to gain favours for the
following reasons. Firstly, a lot of optimistic speculation about future market
developments is required. 276 Secondly, neo-Schumpeterians take a narrower view
about the aims of competition law, therefore, the damage that dominant firms can do
to other undertakings is irrelevant unless it can be shown that consumer welfare will
suffer in the long run as a result of these. However, current competition law is
concerned with the elimination of competitors per se, observing that this carries the
risk of the dominant firm being alone in its attempt to deter new entrants. Thus, neoSchumpeterian ideas and theories do not fit easily within the current competition law
culture and analytical framework of traditional competition law. In addition, antitrust
has been analysed by examining the impact on economic incentives to innovate and
balancing them against anticompetitive effects. This balance has usually has been
accomplished with great consideration towards protecting incentives to innovate.
It is important to stress, especially in New Economy markets, that success
achieved through legitimate means such as innovation or superior marketing may
naturally result in market power or even quasi-monopoly power. The very fact that
the New Economy industries is so innovative makes it crucial that success be
276
Monti, supra note 60, 54.
73
restricted to success on merits, and that monopoly power be confined to that which
results from that success. Even an undertaking that has attained dominance through
legitimate means and natural economy effects must not be permitted to retain or
extend that power through anticompetitive means.
The fact that New Economy markets are dynamic and complex does not
imply that these markets are immune from competition law. Rather, it is critical that
competition policy should properly reflect the economic features of the New
Economy industries within the process of competition liability. Network effects
should be closely examined since it may create a durable dominance, rather than a
provisional dominance when combined with overwhelming switching costs. In the
presence of network effects it may be efficient to have a single provider or many
providers of compatible goods. However, the presence of network effects could
increase the likelihood of success of leveraging strategies aimed at foreclosure.
Hence, the concern is related to the fact that, although the market may ultimately tip,
the identity of the undertaking that will win the race is not determined by
competition but is the result of anticompetitive behaviours.
The analysis of competition in the New Economy industries raises some new
issues about the need to apply competition law flexibly. However, this does not mean
that current competition analysis paradigms should be abandoned altogether.
Recently, case law and competition law do appropriately deal with features,
especially network effects, in New Economy markets, although both need to consider
positive network effects much more. And the case law showed the current
competition analysis has well recognised the risk of durable monopolisation and
market leveraging caused by negative network externalities in the New Economy
industries.
74
75
Part III. Minimisation of Leveraging Effects in Technological Integration
I. Introduction............................................................................................................. 77
1.1 Background ...................................................................................................... 77
1.2 Definition and Types of Product Tying and Bundling ..................................... 78
1.3 New Economy and Its Consequences in Product Integration .......................... 81
II. European Legal Approach to Tying ...................................................................... 82
2.1 Forms of Tying ................................................................................................. 83
2.2 European Union Approach to Tying in Case Law ........................................... 86
2.2.1 Dominance ................................................................................................ 87
2.2.2 Two Separate Products.............................................................................. 88
2.2.3 Coercion .................................................................................................... 94
2.2.4 Possibility of Foreclosure.......................................................................... 96
2.2.5 Objective Justifications ............................................................................. 98
III. US Legal Approach to Tying ............................................................................. 100
3.1 Per Se Illegality Approach ............................................................................. 100
3.2 Modified Per Se Approach............................................................................. 105
3.3 Rule of Reason Approach .............................................................................. 110
IV. Economics of Tying: Reasons to Integrate Software ......................................... 114
4.1 Chicago School Explanations ........................................................................ 114
4.1.1 Price-Discrimination ............................................................................... 114
4.1.2 Risk Bearing ............................................................................................ 115
4.1.3 Quality Control ....................................................................................... 116
4.2 Post-Chicago Anticompetitive Explanations ................................................. 118
4.2.1 Monopoly Leveraging ............................................................................. 118
4.2.2 Preservation of Monopoly ....................................................................... 120
4.3 Post-Chicago Pro-competitive Explanations.................................................. 124
4.3.1 Responding to Diversity of Buyer Valuations ........................................ 125
4.3.2 Stimulating Demand for Complementary Products and Features ........... 126
4.3.3 Generating Revenue from Ancillary Services ........................................ 127
4.4 Evaluation of the Economic Theory on Product Integration ......................... 129
V. Evaluation of Elements Constituting Tying in Judicial Tests of the EU and the US
.................................................................................................................................. 129
5.1 Separate Products Test ................................................................................... 130
5.2 Coercion Test ................................................................................................. 137
5.3 Anticompetitive Foreclosure .......................................................................... 143
5.3.1 Foreclosure and the Nature of Bundling ................................................. 143
5.3.2 Anticompetitive Effects: Consumer Detriments ..................................... 155
VI. Framework of Technological Integration in New Economy Markets ............... 162
VII. Remedies in Technological Integration ............................................................ 167
VIII. Conclusion....................................................................................................... 177
76
I. Introduction
1.1 Background
The previous part showed that assessing entry conditions in the presence of network
effects is likely to be a complex and highly fact-intensive process. The mere presence
of network effects does not imply there are anticompetitive behaviours. However,
undertakings with a strong installed base could enhance dominance using network
effects. In other words, network effects could work to undermine a competitor’s
position more rapidly in the New Economy markets. As soon as it becomes evident
that a dominant undertaking’s actions are reducing a competitor’s market share or
growth, application developers might be less keen to invest in developing
programmes that could run on its product. This suggests that a dominant
undertaking’s market power in the New Economy markets characterised by network
effects is to some extent further protected by the presence of network effects, raising
the question, is a dominant undertaking incentivised to extend its dominance into
another market to capture profits or to protect their existing dominance?
Undertakings may be able to leverage their market power in a number of
ways depending on the circumstances and facts of the case, including bundling/tying
and the refusal to supply critical services or inputs such as application programming
interfaces or technical information. In the New Economy market, these practices are
frequently used because the costs of adding technical features are almost zero and
technologies in the IT industry are permitted exclusivity by intellectual property
rights. It is also difficult to discern whether product integration is for product
improvement or illegal tying.
77
Tying/bundling practices can make it easier for consumers to access certain
products. On the other hand, these practices can easily transfer the monopoly from
primary market to secondary market if there are network effects. New Economy
markets have different characteristics from traditional markets and these
characteristics may require competition authorities to treat them differently; for
example, technological integration differs considerably from traditional tying. The
landmark Microsoft case raises the question of whether current competition doctrine
on tying arrangements will appropriately treat product integration in the New
Economy markets.
This part focuses on whether current tying law adequately considers
technological tying in the New Economy markets in which intellectual property
rights play a crucial role. In most cases, product design is the right of undertakings,
and technical integration increases consumer welfare through product improvements.
At the same time, technical integration could be used as a tool to eliminate
competitors, and as a result reduce consumer welfare through the restriction of
consumer choice in the long run.
1.2 Definition and Types of Product Tying and Bundling
Tying occurs when a seller places a condition of sale on a product or service (“the
tying product”) on the purchase of a second product or service (“the tied
product”). 277 Economists refer to “pure bundling” or “tying” when two different
goods are offered only together at a package price. 278 A special form of pure
277
The Guidance Paper, supra note 43, para. 48.
Kai-Uwe Khün, Robert Stillman, and Cristina Caffarra, “Economic Theories of Bundling and their
Policy Implications in Abuse Cases: An Assessment in Light of the Microsoft Case,” European
Competition Journal 1, no. 1 (March 2005).
278
78
bundling arises when the two products are linked technically such that it is physically
impossible for the consumer to separate them.279 This form of pure bundling is called
“technical tying” and involves some form of lasting product design decision.280 Pure
bundling or tying is distinguished from “mixed bundling” where a firm offers the
product together at a bundled price but also offers the component products
individually at stand-alone prices.281 An equivalent form of mixed bundling occurs
when a firm quotes stand-alone prices but gives a discount for buying both products.
Most
economists
now
would
agree
on
three
fundamentals
of
tying/bundling.282 First, tying is a pervasive practice that, in many instances, gives
rise to substantial efficiencies, particularly when it takes the form of product
integration.
283
Second, the circumstances in which tying could lead to
anticompetitive effects are very restricted. 284 Third, not only are those conditions
hard to verify, but also any attempt to balance efficiency gains against possible
anticompetitive effects will prove a complex process. 285 This consensus among
economists has policy implications. That is, the recognition of efficiencies as well as
possible anticompetitive effects suggests that per se prohibition rules are
conceptually inappropriate for the analysis of tying.286
In a competition law context, tying cases often involve the combination of a
“monopoly” and a “competitive” product; however, tying is commonly observed
even where the supplier in question does not enjoy market power over either element
279
Khün, Stillman, and Caffarra, supra note 278, 88.
The Guidance Paper, supra note 43, para 48, footnote 2.
281
Ibid.
282
Christian Ahlborn, David Evans, and Jorge Padilla, “The Antitrust Economics of Tying: A
Farewell to Per Se Illegality,” Antitrust Bulletin 49, no.1/2(Spring-Summer 2004): 339.
283
Ibid.
284
Ahlborn, Evans, and Padilla, supra note 282, 339.
285
Ibid.
286
Ahlborn, Evans, and Padilla, supra note 282, 340.
280
79
in a bundle.287 For instance, shoes are sold in pairs, hotels sometimes offer breakfast,
lunch or dinner included with a room, and there is no such thing as an unbundled
car. 288 In the EU and the US competition law regimes, tying could be a per se
violation on the following grounds: (1) the inherent unfairness to consumers, in that
they are being effectively coerced into accepting a tied product that they do not
necessarily desire;289 (2) a firm with considerable market power in the tying market
may seek to extend its monopoly power into a second, otherwise competitive, market
through the leveraging effects of product tying;290 and (3) tying arrangements create
considerable barriers to entry, thereby enhancing the market power of the
undertaking engaged in tying, by forcing potential entrants to enter the tied market, if
at all, only by entering the tying market at the same time.291
Tying and bundling may be achieved either through technological or
contractual links.292 The effects of tying or various types of bundling on competition
may be similar and the risk of anticompetitive effects exists, although it appears less
strong in the case of mixed bundling where the bundle can also be purchased
separately.293 Thus, the real issue in tying or bundling is to identify the circumstances
under which the anticompetitive effects of bundling or tying are likely to occur and
what criteria should be used in order to come to the conclusion that an unbundling
remedy is justified.
Derek Ridyard, “Tying and Bundling: Cause for Complaint,” European Competition Law Review
26, no. 6 (2003): 316.
288
Ahlborn, Evans, and Padilla, supra note 282, 287.
289
Jefferson Parish Hospital Dist. No. 2 et al. v. Hyde, 466 US 2, 12 (1984).
290
David Evans and Michael Salinger, “Why Do Firms Bundle and Tie? Evidence from
Competitive Markets and Implications for Tying Law,” Yale Journal on Regulation 22, no. 1 (Winter
2005): 38.
291
The Guidance Paper, supra note 43, paras. 50, 52-58.
292
Ibid., para. 48, footnote 2.
293
Pietro Crocioni, “Leveraging of Market Power in Emerging Markets: A Review of Cases,
Literatures, and a Suggested Framework,” Journal of Competition Law & Economics 4, no. 2 (2007):
475.
287
80
1.3 New Economy and Its Consequences in Product Integration
The so-called “New Economy” in which technological progress has led to the
development of markets that predominantly produce output in the form of intellectual
property has created a variety of new questions for competition policy. 294 These
unique economic characteristics of the New Economy industries differ from the
traditional industries in that they require a novel approach for antitrust in product
tying cases. The reason is that traditional antitrust jurisprudence has been aimed at
the industries with eventual rising average costs in production, 295 while the New
Economy industries are characterised by continuously declining marginal costs in
production.296 This is because the product development cycle revolves around initial
capital-intensive investment followed by cheap, or virtually free, dissemination.297
Competition policy in traditional markets aims to increase competition in
production, 298 whereas in the New Economy markets it may be that the most
important form of competition is in establishment.299
It follows that in certain technological markets characterised by network
effects, particular attention must be focused on the possibility of incumbent
monopolists employing exclusionary practices to frustrate new entry or technological
leapfrog. This observation has powerful ramifications for the current focus on
product tying, especially technological integration in the IT industry, as such
294
Richard Posner, Antitrust Law, 2nd ed. (Chicago; London: University of Chicago Press, 2001),
246.
295
Ibid., 245.
296
Alan Devlin, “A Neo-Chicago Perspective on the Law of Product Tying,” American Business Law
Journal 44, no. 3 (Fall 2007): 561.
297
Posner, supra note 294, 246.
298
Devlin, supra note 296, 561.
299
Ibid.
81
practices may be employed for objectionable ends in the high-tech and intellectual
property industries laden with externalities in consumption.
In the situation where consumers may face significant switching costs in
attempting to move from an incumbent firm to a competitor, firms are likely to
provide bundled products in order to increase their customer base and to further
augment the extent to which its customers are locked in. Therefore, tying
arrangements could be employed at a loss by a firm with significant financial
resources so as to acquire a market share ahead of a more efficient competitor.300
Additionally, bundling could easily be employed to reinforce the dominant position
of an undertaking within a market where the customers face switching costs.301 As a
result, tying arrangements must be viewed with additional scrutiny in markets where
consumers may become locked in.
In particular, tying arrangements within high-tech and IP-based markets must
be scrutinised using additional measures to those employed within more traditional
contexts due to the technical complexity, rapid innovation, network effects, and
considerable switching costs present.302 The competitive effects of a product tie-in
within the New Economy markets must be considered with respect to the level of
continuing innovation, increased consumer welfare 303 and in terms of consumer
choice in the long run.
II. European Legal Approach to Tying
300
Devlin, supra note 296, 561.
Ibid.
302
Debra Aron and Steven Wildman, “Economic Theories of Tying and Foreclosure Applied-and not
Applied-in Microsoft,” Antitrust ABA 14 (Fall 1999): 48.
303
“Consumer welfare can be equated with consumer surplus (the aggregate measure of the surplus of
all consumers),” in Competition Policy: Theory and Practice, Massimo Mota (Cambridge;New York:
Cambridge University Press, 2004), 18; However, EU competition law has more diffuse conception of
the consumer welfare, viz. “it is concerned with consumer gains in form of lower prices, better quality
products, and a wider choice of new or improved goods and services,” in The Guidance Paper, supra
note 43, para. 5.
301
82
2.1 Forms of Tying
Tying is a common corporate strategy used in many industries and by many
undertakings to reduce costs, create production efficiencies, and spread the risk when
entering a new market. Tying is specifically mentioned in Article 102(d) TFEU:
…as making the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which, by their nature or according to commercial usage,
have no connection with the subject of such contracts.
Although the form of tying referred to in this Article 102(d) only covers
contractual tying, a broad range of tying practices has appeared in case law. It
includes tying applied as mixed bundling 304 and technological integration. 305 In
contractual tying the buyer is forced to take the additional tied product in order to
purchase the tying product. Cases demonstrate that it has practically been treated by
the Commission and the Courts as illegal per se. 306 However, standards set by
contractual tying cases that have been applied fit less well with other forms of tying
such as technological integration.
Digital Undertaking, XXVIIth Report on Competition Policy 1997 and Commission Press Release
IP/97/868, “The European Commission Accepts an Undertaking from Digital Concerning Its Supply
and Pricing Practices in the Field of Computer Maintenance Services,” (Brussels, 10 October 1997).
305
Case T-201/04 Microsoft Corp. surpa note 40.
306
IV/30.787 and 31.488 Eurofix-Bauco v. Hilti, 88/138/EEC Commission Decision of 22 December,
1987 [1988] Official Journal of the European Communities L 65/19, and confirmed in Case T- 30/89
Hilti v. Commission of the European Communities [1991] European Court Reports II-1439 and on
appeal C-53/92P Hilti v. Commission of the European Communities [1994] European Court Reports
I-667 ; IV/31.043 Tetra Pak II, 92/163/EEC Commission Decision of 24 July, 1991 [1992] Official
Journal of the European Communities L 72 /1, confirmed in Case T- 83/91 Tetra Pak International
SA v. Commission of the European Communities [1994] European Court Reports II-755 (Tetra Pak
II), and on appeal Case C-333/94 Tetra Pak International SA v. Commission of the European [1996]
European Court Reports I-5951 (Tetra Pak II).
304
83
In principle, there is no coercion of the customer in mixed bundling since the
company offers the tying and tied goods in a bundle and separately. However, there
may be a financial incentive upon the customer to purchase the bundle rather than the
items individually and this can result in exclusionary effects.
307
In Digital
Undertaking, the Commission found Digital dominant in the service market for both
the hardware and software of its own products despite the primary market for
computer systems being extremely competitive.308 It indicates that the Commission
will intervene where exceptional price discounts are given when two goods or
services are bought together, but only where the discounts given by the dominant
undertaking make it financially unattractive for the customer to purchase separately
or go elsewhere, and where the discounts are not proportionate to costs.309
Technological integration is where the tying and tied products have been
incorporated into one product, so it is physically difficult for the customer to split the
components up.310 In the IBM case, which was a settlement between the Commission
and IBM, the issue of technological integration was raised for the first time.311 The
Commission used Article 102(d) TFEU as part of the regulatory framework to make
IBM agree to discontinue its practice of integrating its memory devices with the
Central Processing Units (CPU) and bundling its main memory function with the sale
of its System 370 CPU by including the price of its main memory function in the
price of its CPU and refusing to supply the CPU individually. In the case of
Microsoft, the Commission sought to stop Microsoft from tying its Windows Media
Player (WMP) to its Windows operating system (OS). The case raised controversy
Digital Undertaking, supra note 304and Commission Press Release IP/97/868, supra note 304.
Ibid.
309
Philip Andrews, “Aftermarket Power in the Computer Service Market: The Digital Undertaking,”
European Competition Law Review 19, no. 3 (1998): 176-181.
310
Khün, Stillman, and Caffarra, supra note 278, 88.
311
IV/30.849 IBM, 84/233/EEC Commission Decision of 18 April 1984, relating to a Proceeding
under Article 85 of the EEC Treaty [1984] Official Journal of the European Communities L 118/24.
307
308
84
for various reasons. Firstly, it confirmed that the inflexible list of conditions applied
to contractual tying also applies to technological integration despite the Commission
acknowledging that the two forms of tying are different, and economists arguing that
the latter is not always harmful, even though it can induce pro-competitive effects.312
Secondly, it paralleled the US Microsoft case313 although in the US case the alleged
tying was between Microsoft’s OS and its web browser, Internet Explorer (IE).314
While technological integration imposes a risk of foreclosure in the tied
product market, the purpose of technological integration may not be purely
anticompetitive. In the information technology market it is a tool of innovation and
product development commonly applied by firms. From the intellectual property (IP)
owners’ view, a strict approach to technological integration will adversely affect
their ability to develop IP protected products through technological integration,
where only parts of the product are covered by an intellectual property right (IPR) or
are covered by different IPR.315
The different types of tying affect the markets and competition differently
and thus different levels of pro- and anticompetitive effects. Therefore, it is
controversial that the Commission and the EU Courts have chosen to apply only one
approach to all different forms of tying. The competition authorities are mainly
concerned that where an undertaking holds a dominant position tying will be used as
a leveraging device to cause foreclosure a related market, the tied product market, or
to protect the tying product market which could result in limiting consumer choice
and excluding competition. Other anticompetitive incentives include entry deterrence,
312
COMP/C-3/37.792 Microsoft, supra note 238, para. 841; The Guidance Paper, supra note 43, paras.
47, 52.
313
United States v. Microsoft Corp., 253 F 3d 34, 128 (D.C. Cir. 2001).
314
Steve Anderman and Hedvig Schmidt, EU Competition Law and Intellectual Property Rights: The
Regulation of Innovation (Oxford; New York; Oxford University Press, 2011), 129.
315
Ibid., 130.
85
price discrimination, reducing competition and gaining a competitive advantage by
creating network externalities or through technological integration.316
2.2 European Union Approach to Tying in Case Law
In EU competition law a comparatively small number of cases have reached the
Commission and the EU Courts, when compared with other forms of abuse.
However, the majority of the tying cases have involved some form of IPR.317 Tying
is subject to the completion rules under both Article 101 and 102 TFEU. This means
that not only is tying seen as a form of conduct, which can cause severe harm, but it
also signifies that both Articles may apply to the same tying conduct or agreement,
but on their terms.318 The modernisation of Article 101 TFEU has in recent years
created a gap and inconsistencies in the treatment of tying under Article 101 and 102
TFEU respectively. This is because the approach under Article 101 TFEU is more
economic and focused on consumer welfare, compared with the more form-based
approach applied under Article 102 TFEU.319 The Commission views tying as almost
illegal per se under Article 102 TFEU where the following conditions are fulfilled:
An undertaking is in a dominant position in the tying market; the customers are
coerced into buying the two products together; the tying and tied products are distinct
Barry Nalebuff, “Bundling, Tying, and Portfolio Effects: Part I-Conceptual Issues,” DTI
Economics Paper, no. 1, February 2003, available at http://www.dti. gov.uk/ files/file14774.pdf.
(accessed 27 February, 2007), 18.
317
IV/30.787 and 31.488 Hilti, supra note 306; IV/31.043 Tetra Pak II, 92/163/EEC Commission
Decision of 24 July, 1991 [1992] Official Journal of the European Communities L 72 /1.
318
Anderman and Schmidt, supra note 314, 131.
319
Ekaterina Rousseva, “Modernising by Eradicating How the Commission’s New Approach to
Article 81 EC Dispenses with the Need to Apply Article 82 to Vertical Restraints,” Common Market
Law Review 42, no. 3 (2005): 589.
316
86
products; the tying practice is likely to lead to anticompetitive foreclosure; there is no
objective justification or no efficiency.320
2.2.1 Dominance
In all tying cases under Article 102 TFEU, dominance in the market of the tying
product has been a prerequisite for the finding of abusive tying. Case law dictates
that dominance must be found at least in the tying product market. For example,
Tetra Pak was held to have abused its dominant position in the market of machines
for packaging by tying the sales of cartons to the sales of their machines; and British
Sugar had abused its dominant position in the sugar by tying distribution services to
its sales of sugar321 In Hilti, the Commission clarified the importance of dominance
in relation to the abuse as:
The ability to carry out its illegal policies stems from its power on the markets for
Hilti-compatible cartridges strips and nail guns (where its market position is
strongest and the barriers to entry are highest) and aims at reinforcing its dominance
on the Hilti-compatible nail market (where it is potentially more vulnerable to new
competition).322
In certain cases the Commission has defined the market so narrowly that a
finding of dominance was inevitable. 323 Furthermore, the Commission made clear
320
The Guidance Paper, supra note 43, paras. 28, 50; Case 27/76 United Brands, supra note 164, para.
184; Case T- 30/89 Hilti v. Commission of the European Communities [1991] European Court
Reports II-1439, paras 102 to 119; Case T- 83/91 Tetra Pak International SA v. Commission of the
European Communities [1994] European Court Reports II-755, paras. 136, 207; Case C- 95/04P
British Airways v. Commission of the European Communities [2007] European Court Reports I-2331,
paras 69, 86; Case T-201/04 Microsoft Corp. supra note 40, paras. 842, 859 to 862, 867, 869.
321
IV/31.043 Tetra Pak II, supra note 317; IV/30.178 Napier Brown v. British Sugar, 88/519/EEC
Commission Decision of 18 July, 1988 [1988] Official Journal of the European Communities L
284/41.
322
IV/30.787 and 31.488 Hilti, supra note 306, para. 74.
323
IV/30.787 and 31.488 Hilti, supra note 306.
87
that a finding of dominance in the market for consumables (the tied goods) was not
necessarily dependent on a finding of dominance in the primary market (the tying
goods), as evidenced in the Hilti case:
Even if it were correct as Hilti argues that nail guns form part of a wider market and
compete with other fixing methods in general, this would not alter the analysis given
above as far as the relevant markets for Hilti-compatible nails and cartridge strips in
particular are concerned and Hilti’s dominance thereof. For the independent
producers of these consumables the relevant markets on which they compete are
those for Hilti-compatible consumables.324
In case law the finding of dominance has also been influenced by the
presence of IPR. This was clearly illustrated in both Hilti and Tetra Pak II.325 IPRs
have affected the establishment of dominance in two ways: first, indirectly, through
the relevant market definition, which is often curtailed along the scope of the IPR326:
second, directly, through the assumption that an IPR will inevitable confer some
level of market power.327
2.2.2 Two Separate Products
Without the establishment of two separate products there cannot be a tying
arrangement. In identifying two products, the question of whether two products are
separate is generally assessed on the basis of “commercial usage,”328 and consumer
demand.329
324
IV/30.787 and 31.488 Hilti, supra note 306, para. 72.
Case T- 30/89 Hilti, supra note 320, para. 93; Case T- 83/91 Tetra Pak, supra note 320, para. 23.
326
Anderman and Schmidt, supra note 314, 136.
327
Ibid.
328
Article 102 TFEU (2) (d).
329
Case T-201/04 Microsoft Corp. supra note 40, paras. 925, 927.
325
88
The Commission and the General Court discussed the concept of
“commercial usage” in detail in the Tetra Pak II case. Tetra Pak had argued that the
tying of machines and cartons did not contravene Article 102 TFEU on the basis that
the products were connected by commercial usage. In support, Tetra Pak cited its
competitor Elopak, which had stated that the combined sale of machine and cartons
was a more efficient way of competing. However, both the Commission330 and the
General Court331 held that the products were not linked by commercial usage. The
General Court based its view on the fact that there were:
…independent manufacturers who specialise in the manufacture of non-aseptic
cartons designed for use in machines manufactured by other concerns and who do
not manufacture machinery themselves… approximately 12 per cent of the nonaseptic carton sector was shared in 1985 between three companies manufacturing
their own cartons, generally under licence and acting, for machinery, only as
distributors.332
The General Court continued, obiter dictum:
Moreover and in any event, even if such a usage were shown to exist, it would not be
sufficient to justify recourse to a system of tied sales by an undertaking in a
dominant position. Even a usage which is acceptable in a normal situation, on a
competitive market, cannot be accepted in the case of a market where competition is
already restricted.333
Two important points emerge from the Court’s assessment in Tetra Pak II.334 First,
the General Court seems to define “commercial usage” rather narrowly. To establish
330
IV/31.043 Tetra Pak II, supra note 317.
Case T- 83/91 Tetra Pak supra note 320.
332
Ibid., para. 82.
333
Case T- 83/91 Tetra Pak supra note 320, para. 137.
334
Ahlborn, Evans, and Padilla, supra note 282, 313.
331
89
commercial usage it is not sufficient to show that tied sales are the predominant
business practice in the markets in question or comparable markets; as long as some
united sales occur in the relevant markets (in the Tetra Pak II case, 12 %335), the
criterion of commercial usage is not satisfied. 336 Second, contrary to the express
wording in Article 102(d) TFEU, the General Court does not regard absence of
commercial usage as a prerequisite for tying; rather, commercial usage seems to be
treated similarly to “objective justifications” which may or may not take tying
outside the scope of Article 102 TFEU.337
In Microsoft, the General Court described the two separate products
assessment as a two-part test: first, an assessment of the product’s nature, physical
appearance, and commercial usage; and second, a requirement of consumer demand
for the tied product. 338 However, most case law demonstrated that the focus had
primarily been on consumer demand and, in particular, evidence of independent
manufacturers of the tied product had played a crucial role.339 The lack of focus on
the first part of the assessment was due to its closeness to the definition of the
relevant product market, an assessment undertaken in all Article 102 TFEU cases.340
The relevant product market definition provides a framework for the establishment of
dominance, but case law showed that when two products markets were established
under the relevant product market assessment, the finding of two separate products
335
Case T- 83/91 Tetra Pak supra note 320, para. 82.
Ahlborn, Evans, and Padilla, supra note 282, 313.
337
Ibid.
338
Case T-201/04 Microsoft Corp. surpa note 40, paras. 925, 927.
339
Case T- 30/89 Hilti, supra note 320, para. 67; Case C-333/94 Tetra Pak International SA v.
Commission of the European Communities [1994] European Court Reports I-5951, para. 36; Case T201/04 Microsoft Corp. supra note 40, para. 927.
340
Anderman and Schmidt, supra note 314, 132.
336
90
was more or less given.341 Thus, the outcome of a tying case can often already be
determined at this stage.342
In the second part of the separate product assessment, consumer demand is
applied to identify whether the tied goods are distinct from the tying goods. The test
simply asks whether the consumers, given a choice, would purchase the tying and
tied product individually. This can manifest itself in whether there are independent
manufacturers of the tied product, whether non-dominant undertakings in the markets
tend not to tie, especially where the markets are competitive. If so, there is also
considered to be a separate consumer demand for the tied goods.343
In Hilti,344 the Commission had responded to a complaint by Eurofix-Bauco
that Hilti was tying the sales of its cartridge strips to the sale of its nails. The
Commission, applying its policy of a narrow market definition, found that there were
three separate markets - nail guns, cartridge strips, and nails. Three facts influenced
the Commission’s decision. First, Hilti held a patent on the cartridge strips allowing
Hilti legally to exclude competition, and thereby gain market power. 345 Second,
Hilti’s market power was further enhanced by its products being technologically
advanced, its efficient R&D, and a well-organised distribution system in the nail gun
market.346 Third, there were independent nail manufacturers in the market for nails.
This was further confirmed by the fact that the nail guns and consumables (nails and
cartridge strips) were not purchased together. 347 The Commission found that Hilti
was reinforcing the tie-in by a practice of charging excessively high royalties to deter
341
Anderman and Schmidt, supra note 314, 132.
Ibid.
343
Anderman and Schmidt, supra note 314, 132.
344
IV/30.787 and 31.488 Hilti, supra note 306, and confirmed in Case T- 30/89 Hilti, supra note 320,
and on appeal C-53/92P Hilti v. Commission of the European Communities [1994] European Court
Reports I-667.
345
IV/30.787 and 31.488 Hilti, supra note 306, paras. 55, 66.
346
Ibid., para. 67.
347
IV/30.787 and 31.488 Hilti, supra note 306, para. 57.
342
91
independent nail manufacturers from obtaining licences for rights in the cartridge
strips. It concluded that these practices were abusive because they prevented or
limited the entry of independent producers into those markets. The General Court
upheld the Commission’s view. In this case, Article 102(d) TFEU was effectively
used to prevent Hilti from extending the scope of its exclusive exploitation rights
beyond patented product to unpatented products.348 Also, the definition of relevant
product markets appears to reinforce that decision because it separated the patented
and the unpatented goods into separate markets, and provided the foundation for the
findings of dominance.349
A similar approach was taken in Tetra Pak II, the General Court reiterated
that independent manufacturers were free to produce and offer consumables intended
for use in third party products, as long as these did not infringe IPR. 350 The
consequence of this remark is that where goods contain both IP protected and
unprotected components, there is a probability that these will be seen as separate
products and not as one under Article 102(d) TFEU. This strict definition of a
product essentially permits the competition authorities to regulate IPR and ensure
that they are not applied to extend the scope of the IPR itself.351
In the Microsoft case, the Commission identified two product markets: the
market for the operating system and the market for media players. It based its market
definitions on the fact that there were manufacturers of stand-alone media players,352
and barriers to entry into the media player market, such as network effects and
IPR.353 In its Guidance Paper, the Commission confirmed the use of the consumer
348
Anderman and Schmidt, supra note 314, 133.
Ibid.
350
Case T- 83/91 Tetra Pak supra note 320, paras, 34, 83-84.
351
Anderman and Schmidt, supra note 314, 133.
352
COMP/C-3/37.792 Microsoft, supra note 238, para. 405.
353
Ibid., paras. 418-420.
349
92
demand test.354 However, the Guidance Paper does not require that the tying and tied
goods are in separate markets, it merely needs to be distinct:355
Two products are distinct if, in the absence of tying or bundling, a substantial
number of customers would purchase or would have purchased the tying product
without also buying the tied product from the same supplier, thereby allowing standalone production for both the tying and the tied product.356
This statement indicates that where it is still economically viable to produce the tied
product individually, the consumer demand requirement is fulfilled. 357 Such an
interpretation is in line with the approach taken in the US in Jefferson Parish358 and
Eastman Kodak359, where the Supreme Court also demanded that customer demand
should be assessed in relation to economic viability.360 However, it does not consider
technologically integrated products and the benefits these can generate.361
In contrast, the General Court in Microsoft held that only in the absence of
independent demand for the allegedly tied product, can there be no question of
separate products and no abusive tying. 362 In other words, the General Court’s
standard of proof for technological integration requires all demand for the tied
product to have ceased. This is an impossibly high threshold because even though
consumer demand dictates a need for an integrated product, the demand for the
separate components can continue for a significant period after the integrated product
354
The Guidance Paper, supra note 43, para 185.
Ibid., para. 51.
356
The Guidance Paper, supra note 43, para. 51.
357
Anderman and Schmidt, supra note 314, 134.
358
Jefferson Parish Hospital, supra note 289, 21.
359
Eastman Kodak Co. v Image Technical Services, Inc. et al., 504 US 451, 462 (1992).
360
Anderman and Schmidt, supra note 314, 134.
361
Ibid.
362
Case T-201/04 Microsoft Corp. supra note 40, para. 918.
355
93
has become available and until the market has fully adapted.363 For example, when
PCs originally came onto the market, the consumer had to purchase hardware,
software, desktop, screen, keyboard, and mouse separately. Now these are offered in
a simple package, although they can be purchased separately as well.
The problem with the test is two-fold. First, products can continue to be
divided into smaller parts and the question is when is it reasonable to stop the
separation. 364 Second, the test does not sufficiently consider product development
and innovation, and this is of particular concern to IP holders.365 The US Court of
Appeals labelled the test “backward-looking” and thus a “poor proxy” for overall
efficiency in the presence of new and innovative integration.366 As part of effective
competition, undertakings are expected to develop and improve their products, and
one way could be through technological integration. In its Guidance Paper, the
Commission has indirectly acknowledged the product development issue, by stating
that it will be willing to consider whether the combination of two products into a new,
single product may benefit the consumer.367
2.2.3 Coercion
Under the EU competition law, coercion to purchase two products together is a key
element in establishing abusive tying.368 Coercion may take many forms. It is clearly
shown when the dominant firm makes sales of one product an absolute condition of
363
Anderman and Schmidt, supra note 314, 134.
Robert Bork, Antitrust Paradox: A Policy at War with Itself (New York: The Free Press, 1993),
378-379.
365
Anderman and Schmidt, supra note 314, 135.
366
Microsoft Corp., supra note 313, 89.
367
The Guidance Paper, supra note 43, para. 62.
368
Ahlborn, Evans, and Padilla, supra note 282, 313.
364
94
another product. 369 This condition may be explicit in an agreement 370 or de
facto. 371 However, lesser forms of coercion, such as price incentives or the
withdrawal of benefits may also be sufficient, if they are so powerful that customers
would not choose to buy products individually.372
Coercion may be contractual as it was in Hilti and Tetrapak; or financial,
where the customer is awarded so great a discount that he is left no commercial
meaningful choice but to accept the second, the tied goods;373 or by removing certain
benefits where customers have used third party products. 374 Finally, through
technological integration, coercion may occur due to the fact that the products are
physically integrated, and therefore the consumer is left with no choice to purchase
the combined product.375 The test applied by the Commission and the EU Courts has
been whether the customer is permitted a choice between purchasing the bundle of
products or separately.376
In the Microsoft case, the Commission stated that it was inconsequential
whether consumers were not forced to purchase or use Windows Media Player
(WMP), as long as WMP was automatically obtained, even for free, because
alternative suppliers were at a competitive disadvantage. 377 The General Court
upheld this, noting that integration of WMP would deter Original Equipment
Manufacturers (OEMs) from pre-installing a second media player on the PCs as well
369
Ahlborn, Evans, and Padilla, supra note 282, 313.
IV/31.043 Tetra Pak II, supra note 317.
371
IV/30.787 and 31.488 Hilti, supra note 306.
372
Ahlborn, Evans, and Padilla, supra note 282, 313; IV/30.787 and 31.488 Hilti, supra note 306.
373
Digital Undertaking, supra note 304 and Commission Press Release IP/97/868, supra note 304.
374
IV/30.787 and 31.488 Hilti, supra note 306, para. 75.
375
COMP/C-3/37.792 Microsoft, supra note 238.
376
IV/30.787 and 31.488 Hilti, supra note 306, para. 75; Case T- 83/91 Tetra Pak supra note 320,
para. 137.
377
COMP/C-3/37.792 Microsoft, supra note 238, paras., 833-834.
370
95
as encouraging the consumers to use only the WMP rather than a later downloaded
media player, notwithstanding that the latter may be of better quality.378
2.2.4 Possibility of Foreclosure
It is not clear to what extent it has to be demonstrated under the EU competition law
that tying leads to anticompetitive effects in a particular case. However, the EU
Courts and the Commission seemed to have applied the generally low threshold of
the conduct being capable of having, or likely to have, an anticompetitive effect
without necessarily excluding all competition from the market.379 According to the
British Sugar case, tying did not need to have any actual effects on the tied market.380
British Sugar tied the supply of sugar to the service of delivering the sugar. The
Commission did not regard it as necessary to assess whether the delivery of sugar
was part of a wider transport market, and whether the tying foreclosed any
significant part of such market. The fact that British Sugar had reserved for itself the
separate activity of delivering sugar was sufficient as an anticompetitive effect.381
In Microsoft, the Commission engaged in an exceptionally detailed analysis
of the anticompetitive effects of Microsoft’s tying and concluded that tying had the
potential to risk foreclosure of the media player market in the future. 382 The
Commission argued that an extensive analysis was necessary because it was unclear
378
Case T-201/04 Microsoft Corp. supra note 40, paras. 968-971.
Case T-219/99 British Airways plc. v. Commission of the European Communities [2003] European
Court Reports II-5917, para. 293, and confirmed in Case C-95/04 British Airways plc. v. Commission
of the European Communities [2007] European Court Reports I-2331.
380
IV/30.178 Napier Brown v. British Sugar, supra note 321.
381
Ibid., para. 70.
382
COMP/C-3/37.792 Microsoft, supra note 238, paras. 841-954.
379
96
whether the tie-in was anticompetitive since consumers could still obtain a third
party media player through download.383
However, the General Court did not find the downloading option significant
enough to eliminate the risk of foreclosure. 384 Its main concern was the pressure
Microsoft put on OEMs to preinstall WMP at Windows which prevented them from
offering third party media players to their customers, and resulted in Microsoft being
given a competitive advantage not pertinent to the quality of the product and likely to
affect related markets.385 Although the General Court confirmed the conclusion of
the Commission assessment, it indicated that a less extensive analysis would have
brought forth the same result.386 It thereby confirmed the low threshold applied first
in British Sugar and held that where there was a reasonable likelihood that the tying
arrangement would lead to the lessening of competition so that the maintenance of an
effective competition structure would not be ensured in the foreseeable future, the
anticompetitive effects requirement was fulfilled.387
The implication of the General Court’s low standard of proof for tying is that
once two distinct products have been identified, abuse can be established relatively
easily. 388 The Guidance Paper notes that where the tie-in is a lasting one, i.e.
technological integration, the risk of anticompetitive foreclosure is considered to be
even greater. 389 However, it is unclear whether this will result in an even lower
standard of proof for anticompetitive effects, albeit such an interpretation is not
unlikely.390
383
COMP/C-3/37.792 Microsoft, supra note 238, para. 841.
Case T-201/04 Microsoft Corp. surpa note 40, paras. 1045-1050.
385
Ibid., paras. 1058-1069, 1076.
386
Case T-201/04 Microsoft Corp. surpa note 40, paras. 1058-1059.
387
Ibid., para. 1089.
388
Anderman and Schmidt, supra note 314, 138.
389
The Guidance Paper, supra note 43, para. 53.
390
Anderman and Schmidt, supra note 314, 138.
384
97
2.2.5 Objective Justifications
Unlike Article 101 TFEU, Article 102 TFEU does not contain a general exemption
clause. However, Article 102(d) TFEU does indicate that the nature of the products
or their commercial usage can make it acceptable to sell the products tied together. It
is unclear though how the wording of Article 102(d) TFEU should be interpreted.
One way could be to see the absence of commercial usage as a prerequisite for seeing
tying as abusive.391 An alternative reading would be to see commercial usage and the
nature of conduct as a form of objective justification.392
Although the EU Courts and the Commission allowed the defendants to
adduce objective justifications for the alleged abusive behaviour, which would then
be balanced with the anticompetitive effects of the conduct, so far all undertakings
facing a tying as an abuse claim have failed the high standard of proof of objective
justifications set by the Commission and the EU Courts.393 The shortage of cases
causes difficulty in assessing whether the rejection of the objective justifications is
due to insufficient evidence and poor defence by the dominant firm or if the applied
threshold is significantly too high for these types of cases.394 Three types of objective
justifications have been attempted: public health,395 product safety,396 product quality
and cost reduction.397
In Microsoft, in particular, Microsoft attempted to rely on three defences.
First, it claimed that having WMP as a default option on the OS reduced time and
391
Ahlborn, Evans, and Padilla, supra note 282, 315-316.
Case C-333/94 Tetra Pak, supra note 335, paras. 34-35.
393
Anderman and Schmidt, supra note 314, 139.
394
Ahlborn, Evans, and Padilla, supra note 282, 314.
395
Case C-333/94 Tetra Pak, supra note 335.
396
Case T- 30/89 Hilti, supra note 320.
397
Case T-201/04 Microsoft Corp. supra note 40.
392
98
confusion for consumers.398 The Commission rejected this argument, holding that the
pre-installed media player did not need to be the WMP.399 Second, Microsoft argued
that shipping WMP and OS together reduced transaction costs by saving on
maintaining a separate distribution system for the second product, and this reduction
in costs was passed on to the consumers.400 Although the Commission accepted the
defence as valid, it found that the efficiency gains were insufficient to outweigh the
anticompetitive effects. 401 Third, Microsoft argued that Windows and WMP were
technologically integrated. This argument was dismissed by the Commission because
Microsoft had not demonstrated that the integration was indispensable to achieve the
works of application developers.402 On the other hand the General Court seemed to
have applied a slightly lower standard of proof.403 It held that Microsoft’s reason for
integrating was to ensure a stable and well-defined Windows platform for the benefit
of both software developer and Web creators but this was not an acceptable defence
as it was the main cause of foreclosure.404 The General Court relied on the fact that
the integration of WMP into Windows did not lead to “superior technical product
performance.” 405 Microsoft argued that Windows operated faster with WMP
integrated, but it never provided clear evidence of this.406
Although the General Court rejected the objective justification for integration
of WMP with Windows OS, it provided guidelines as to what can constitute a valid
justification for technological integration of products by dominant undertakings,
398
COMP/C-3/37.792 Microsoft, supra note 238, para. 956.
Ibid., paras. 956-957.
400
COMP/C-3/37.792 Microsoft, supra note 238, para. 958.
401
Ibid.
402
COMP/C-3/37.792 Microsoft, supra note 238, para. 963.
403
Anderman and Schmidt, supra note 314, 141.
404
Case T-201/04 Microsoft Corp. supra note 40, para. 1146, 1151.
405
Ibid., para. 1159.
406
Case T-201/04 Microsoft Corp. supra note 40, para. 1160.
399
99
albeit not very elaborate. 407 It is clear that the firm must demonstrate that
technological integration adds some superior technological which is more value than
what the consumers could have achieved themselves by merely combining the tying
and tied goods together.
III. US Legal Approach to Tying
Although recent economic research provides useful grounds for legal theories of
anticompetitive behaviour, that research also provides a rich basis upon which courts
could find that consumer benefits might plausibly result from the bundling of
software.408 The challenge to legal theories that such economic analysis presents is to
formulate a competition rule for software integration that can reconcile existing case
law with the unique supply and demand characteristics that influence the nature of
competitive rivalry in technologically dynamic markets. 409
3.1 Per Se Illegality Approach
The Harvard Structural School 410 influenced antitrust policy during the 1960s. It
developed the Structure-Conduct-Performance paradigm, whereby the structure of
407
Case T-201/04 Microsoft Corp. supra note 40, para. 1159: The General Court noted that the
integration of WMP in Windows should create technical efficiencies, in other words it should lead to
superior technical product performance.
408
Gregory Sidak, “An Antitrust Rule for Software Integration,” Yale Journal on Regulation 18, no. 1
(Winter 2001): 19.
409
Ibid., 19-20.
410
For more detailed explanations, see Edward Mason, Economic Concentration and the Monopoly
Problem (Cambridge, MA; Harvard University Press, 1959); Joe Bain, Barriers to New Competition:
Their Charater and Consequences in Manufacturing Industries (Cambridge, MA: Harvard University
Press, 1956) and Industrial Organisation, 2nd ed. (New York: John Wiley1968); Carl Turner Kaysen
and Donald Turner, Antitrust Policy: An Economic and Legal Analysis (Cambridge, MA: Harvard
University Press, 1959); William Kovacic, “The Intellectual DNA of Modern US Competition Law
for Dominant Firm Conduct: The Chicago/Harvard Double Helix,” Columbia Business Law Review
100
the market determines a firm’s conduct, and that conduct determines market
performance, such as profitability, efficiency, technical progress, and growth. 411
Thus, the model sought to establish that certain industry structures lead to certain
types of conduct which then lead to certain kinds of economic performance. 412 In
particular, highly concentrated industries cause the conduct which leads to poor
economic performance, especially reduced output and monopoly price. 413 This
conclusion caused a belief that competition law should be concerned with structural
remedies, such as divestiture, rather than behavioural remedies.414 It embraced the
view that competition law promotes the well-being of small businesses and the basic
principles of fairness. 415 The Harvard School Interventionists wanted competition
law to promote goals such as guaranteeing free access to markets, providing
customers with the widest choice of suppliers, and preventing abuse of economic
power.416
Early legal cases in the US, such as Standard Oil417 and Northern Pacific
Railway,418 viewed tying arrangements largely as a means of restricting competition
with few redeeming features. In the US Steel case, the Court held that tying
arrangements generally serve no legitimate business purpose that cannot be achieved
in some less restrictive way.419 Given the assumption that tying had no redeeming
features, a per se prohibition was an almost inevitable policy conclusion. Any tying
2007, no. 1 (2007): 1-80; Lawrence Sullivan, “Monopolisation: Corporate Strategy, the IBM Cases,
and the Transformation of the Law,” Texas Law Review 60, no. 4 (April 1982): 587-647. For Modern
Harvard School, see, Areeda and Turner, supra note 32.
411
Jones and Sufrin, supra note 3, 22.
412
Ibid.
413
Jones and Sufrin, supra note 3, 22.
414
Ibid.
415
Devlin, supra note 296, 527; Brown Shoes Co. v. United States, 370 US 294 (1962).
416
Andreas Kirsch and William Weesner, “Can Antitrust Law Control E-Commerce? A Comparative
Analysis in Light of US and EU Antitrust Law,” U.C Davis International Law and Policy (2006):
304-305.
417
Standard Oil Co. et al. v. United States, 337 US 293 (1949).
418
Northern Railway Pacific Co. et al. v. United States, 356 US 1 (1958).
419
Fortner Enterprises, Inc. v. United States Steel Corp. et al., 394 US 495, 503 (1969).
101
arrangement by a seller with significant market power in the market for the tying
product was per se illegal provided the effects of the arrangements in the market of
the tied product exceeded a certain de minimis threshold (“a ‘not insubstantial’
amount of commerce”).420
Despite the fact that tying has generally been considered under Section 1 of
the Sherman Act, a certain degree of market power by the seller in the market of the
tying product has consistently been one of the prerequisites of illegal tying. 421
However, the seller’s market power does not have to amount to monopoly power
within the meaning of Section 2 of the Sherman Act.422 According to the Supreme
Court, the relevant question was whether a party has “sufficient economic power”
with respect to the tying product to appreciably restrain free competition in the
market for the tied product. 423 Early Supreme Court cases were concerned with
sellers forcing customers to accept unpatented products in order to be able to use a
seller’s patent, and the patent rights were deemed to give the seller “sufficient
economic market power.”424 In later cases, sufficient economic power was “inferred
from the tying product’s desirability to consumers or from uniqueness in its
attributes”425 or from the fact that “the seller has some advantage not shared by his
competitors.”426 Further, as in Northern Pacific Railway, the mere “existence of a
host of tying arrangements in itself” was regarded as “compelling evidence of a
firm’s great power” in the absence of other explanations.427
420
Jefferson Parish Hospital, supra note 289, 16; Northern Railway Pacific, supra note 418, 11.
Ahlborn, Evans, and Padilla, supra note 282, 292.
422
Ibid., 292, 311.
423
Northern Railway Pacific, supra note 418, 2.
424
International Salt Co., Inc. v. United States, 332 US 392, 395-396 (1947); International Business
Machines Corp. v. United States, 298 US 131 (1936).
425
United States v. Loew’s Inc. et al., 371 US 38, 45 (1962).
426
United States Steel Corp. et al. v. Fortner Enterprises, Inc., 429 US 610, 620-621 (1977).
427
Northern Railway Pacific, supra note 418, 8.
421
102
Undertakings with significant market power were prohibited from entering
into tying arrangements, i.e. to ‘force’ customers to purchase a tied product along
with the ‘separate’ tying product. 428 The firms were subject to this prohibition
independently of any anticompetitive effects of efficiency gains.429 In the Microsoft
case, the Court of Appeals pointed out that “the requirement that a practice involve
two separate products before being condemned as an illegal tie started as a purely
linguistic requirement: unless products are separate, one cannot be tied to the
other.”430
In previous cases,431 the issue of separate products arose but was addressed in
an ad hoc manner - on the basis of a wide range of different factors, such as whether
the bundled products were generally sold as a unit with fixed proportions,432 whether
components were charged separately and whether other players in the industry sold
products individually or as a bundle.433 The courts did not develop any systematic
standard, nor did their reasoning consider the underlying policy considerations of
tying, such as foreclosure and efficiencies. 434 However, establishing separate
products is not enough to differentiate illegal tying from legal bundling. A key
element of tying is the forced purchase of a second distinct commodity.435 In other
words, what distinguishes illegal tying from legal bundling is the sellers’ exploitation
of their control over the tying product, forcing the buyer into the purchase of a tied
product that the buyer either did not want or might have preferred to purchase
428
Ahlborn, Evans, and Padilla, supra note 282, 293.
Ibid.
430
Microsoft Corp., supra note 313.
431
Times-Picayune Publishing Co. et al. v. United States, 345 US 594 (1953); Arlie Mack Moore et al.
v. Jas. H. Matthews & Co. et al., 550 F. 2d 1207 (9th Cir. 1977).
432
Arlie Mack Moore, supra note 431, 1215.
433
Times-Picayune Publishing Co, supra note 431, 614.
434
Ahlborn, Evans, and Padilla, supra note 282, 294.
435
Times-Picayune Publishing , supra note 431, 614.
429
103
elsewhere on different terms.436 Therefore, where the buyer is given the option to
purchase products individually or as a bundle and the option to purchase individual
products is economically feasible, no anticompetitive tying occurs.
In addition to the previous two factors – sufficient economic power and
separate product markets - for a tying arrangement to be illegal under the per se
approach, “a not insubstantial amount of interstates commerce” in the tied product
had to be affected. 437 The Supreme Court said that the relevant question was
“whether a total amount of business substantial enough in terms of dollar volume so
as not to be merely de minimis, is foreclosed to competitors by tie-ins.”438
Although the three elements were satisfied, in certain circumstances the US
Courts accepted justifications for tying arrangements that would otherwise be
considered illegal by the prohibition. 439 During the development period of a new
industry, a tying arrangement was held to be justified for a limited period on the
basis that selling an integrated system would help in assuring the effective
functioning of the complex equipment.440 However, the Supreme Court also held that
the protection of goodwill may not serve as a defence for tying the purchase of
supplies to a leased machine where such protection can be achieved by less
restrictive means, for example, through quality specifications to third parties.441
Under the per se illegality approach, the courts accepted that some form of
economic or market power was a necessary condition for harmful tying. In light of
their assumption that tying did not have any redeeming features, they did not address
436
Jefferson Parish Hospital, supra note 289, 12.
Ibid., 2.
438
Fortner Enterprises, supra note 419, 501.
439
Ahlborn, Evans, and Padilla, supra note 282, 295.
440
Jerrold Electronics Corp. et al. v. United States, 365 US 567 (1961).
441
Ibid.
437
104
whether market power was also a sufficient condition,442 nor did they appear to have
recognised that tying was a ubiquitous phenomenon among firms with little or no
market power and therefore must have served some purpose beyond the suppression
of competition.443
Nevertheless, the hostility against tying was largely directed against
contractual tying while technological integration frequently escaped the per se
prohibition. In ILC Peripherals Leasing v. IBM, IBM’s integration of magnetic discs
and a head/disc assembly was not held to amount to an unlawful tying
arrangement. 444 Similarly, IBM in the 1970s integrated memory into its CPU
platform. IBM was challenged by a peripheral manufacturer. The District Court
dismissed the tying claim on the basis that courts were not well-placed to decide on
product design decisions.445
The hostile approach toward tying was revised in the Jefferson Parish case,
where the Supreme Court accepted that tying could have some merits but struggled
to devise a test that distinguished good tying from bad tying.
3.2 Modified Per Se Approach
In the Jefferson Parish case, the majority took an approach that kept per se
prohibition but indicated some willingness to recognise efficiency.446 In this case, the
Supreme Court recognised that tying may, at least in certain circumstances, be
welfare enhancing:
442
Ahlborn, Evans, and Padilla, supra note 282, 295.
Ibid.
444
ILC Peripherals Leasing Corp. v. International Business Machines Corp., 448 F. Supp. 228, 233
(N.D. Cal. 1978).
445
Telex Corp. v. International Business Machines Corp., 367 F. Supp. 258 (N.D Okla. 1973).
446
Jefferson Parish Hospital, supra note 289.
443
105
Not every refusal to sell two products separately can be said to restrain competition.
If each of the products may be purchased separately in a competitive market, one
seller’s decision to sell the two in a single package impose no unreasonable restraint
on either market, particularly if competing suppliers are free to sell either the entire
package or its several parts…. Buyers often find package sales attractive; a seller’s
decision to offer such package can merely be an attempt to compete effectively – a
conduct that is entirely consistent.447
The Supreme Court focused on the underlying rationale of the rule against
tying, namely impairing competition on the merits in the tied market, and approached
the definitional questions in relation to the tying criteria, for example, whether two
separate products were involved or whether the seller had market power in the tying
market, from the position of whether the arrangement may have the type of
competitive consequences addressed by the rule.448 In effect, the criteria for illegal
tying were used as proxies for anticompetitive harm to provide a safe harbour for
some tying arrangements, and to thereby screen out some false positives where noninfringing undertakings are found to have infringed competition rules.449
In determining whether one or two products were involved, the Supreme
Court rejected an approach that relied on the functional relationship. Instead, the
Court focused on the character of demand for the two products:
In this case, no tying arrangement can exist unless there is a sufficient demand for
the purchase of anesthesiological services separate from hospital services to identify
a distinct product market in which it is efficient to offer anesthesiological services
separately from the hospital services.450
447
Jefferson Parish Hospital, supra note 289, 19.
Ibid., 21.
449
Ahlborn, Evans, and Padilla, supra note 282, 297.
450
Jefferson Parish Hospital, supra note 289, 22.
448
106
To answer the question of whether there is sufficient demand for the tied product
separate from demand for the tying product, the Supreme Court looked at actual
market practices for hospitals that did not insist on providing a package including
anesthesiological services.451
The use of the tying criteria as proxies for anticompetitive harm also led the
Supreme Court to use a definition of economic power that was more focused on the
economic concept of market power: “We have condemned tying arrangements where
the seller has some special ability – usually called ‘market power’ – to force a
purchaser to do something that he would not do in a competitive market.”452 In the
Jefferson Parish case, the 30% market share led the Court to conclude that the
defendant did not have the requisite market power. 453 It was in this way that the
hospital escaped per se illegality.
While the Supreme Court in the Jefferson Parish case viewed its separateproduct test as a proxy for anticompetitive harm, the Court of Appeals in the
Microsoft case454 pointed out that the separate-product test could also be viewed as a
proxy for the net welfare effect of a tying arrangement.455 The reasoning of the Court
of Appeals was as follows. Firstly, consumers value choice, “assuming choice is
available at zero cost, consumers will prefer it to no choice.” For consumers to
relinquish choice and to buy products as a bundle, bundling must provide efficiencies,
such as a reduced transaction cost or better performance that will compensate for this
reduction in choice. Secondly, the share for consumers buying a bundle rather than
individual products gives an indication of the relative strengths of the tying
efficiencies compared to the benefits of choice. Where all or almost all consumers
451
Jefferson Parish Hospital, supra note 289, 24.
Ibid., 13-14.
453
Jefferson Parish Hospital, supra note 289, 7-8.
454
Microsoft Corp., supra note 313.
455
Ibid.
452
107
prefer to buy bundles, there is a strong presumption that the tying efficiencies
dominate the consumer choice benefits. Thirdly, it was stressed that “on the supply
side, firms without market power will bundle two goods only when cost savings from
joint sales outweigh the value consumers place on choice. So bundling by all firms
implies strong net efficiencies.”456
The Jefferson Parish case was followed by the Eastman Kodak case457 which
dealt with the claim that Kodak had illegally tied the sale of replacement parts for its
high-volume photocopier and micrographics equipment (tying product) to the
purchase of Kodak’s repair services (tied product). The Supreme Court accepted the
possibility of illegal tying even in the absence of market power in the primary market,
significantly expanding the scope of illegal tying.458
The modified per se approach under these two cases clearly raised the
standard for establishing illegal tying and reduced the risk of false positives. 459
Nevertheless, it remained fundamentally a per se approach.460 It did not assess the
impact of the individual tying arrangements in the circumstances of a given case.
Moreover, it assumed that on average the anticompetitive harm of tying
arrangements is greater than their efficiency gains, at least where the criteria for
tying are satisfied.461
As developed in the Jefferson Parish case, the separate-product test acted as a
proxy for the effects of tying arrangements on both harm to competitors and
consumer welfare. 462 If the separate-product test is not satisfied, i.e. there is no
separate demand for the tied product, then this leads to the conclusion that there is no
456
Microsoft Corp., supra note 313, 135.
Eastman Kodak, supra note 359.
458
Ibid.
459
Ahlborn, Evans, and Padilla, supra note 282, 300.
460
Ibid.
461
Jefferson Parish Hospital, supra note 289; Eastman Kodak, supra note 359.
462
Ahlborn, Evans, and Padilla, supra note 282, 300.
457
108
anticompetitive harm, given that there is no separate market for tied products that
could be foreclosed. Moreover, tying is welfare-enhancing. Conversely, if the
separate-product test is satisfied, it leads to the conclusion that there could be some
anticompetitive harm, and that tying is unlikely to be welfare enhancing. However,
whilst a negative result of a separate-product test leads to strong conclusions
regarding anticompetitive harm and efficiencies, neither of these is dependent on
particular assumptions, a positive result does not lead to any particular conclusion
about anticompetitive harm other than that the possibility exists.463 Indeed, the fact
that there is separate demand for the tied product, i.e. that customers are willing to
purchase the tied product separately, and that some undertakings are offering the tied
product separately, only comes to the conclusion that tying is not efficient if both of
the two following conditions hold.464
First, the market for the tied product is static and not characterised by
innovation. 465 This condition is due to the fact that the separate-product test is
backward looking, as the Court of Appeals stated in the Microsoft case:
The direct consumer demand test focused on historic consumer behaviour, and the
industry custom test looks at firms that may not have integrated the tying and the
tied goods. Both tests compare incomparable – the [tying firm’s] decision to bundle
in the presence of integration, on the one hand, and the consumer and competitor
calculations in its absence, on the other.466
Thus, the more dynamic the industry, the greater the expected error under the
separate-product test.467
463
Ahlborn, Evans, and Padilla, supra note 282, 300.
Ibid.
465
Ahlborn, Evans, and Padilla, supra note 282, 301.
466
Microsoft Corp., supra note 313, 140.
467
Ahlborn, Evans, and Padilla, supra note 282, 301.
464
109
The second condition is that all undertakings in the market for the tied
products have similar characteristics, such as homogeneous cost structure, and they
operate in the same circumstances, for instance having an almost identical client
base.468 Without this condition it would not be possible to draw any conclusions from
the fact that the majority of undertakings in a particular market did or did not bundle
certain products, as any difference in strategy could be attributable to differences in
characteristics or circumstances.469
In practice, most industries do not satisfy the above conditions. This is
particularly true for the information technology industry, which is characterised by a
high degree of innovation as well as considerable asymmetry in the characteristics
and circumstances of the market players. 470 Therefore, the Microsoft case 471 was
predestined to highlight the weakness of the modified per se approach under the
Jefferson Parish case due to these underlying assumptions.472
3.3 Rule of Reason Approach
The post-Chicago school adopts Chicago’s central principle that consumer welfare is
the sole and relevant consideration, but places less faith in the functioning of the
marketplaces. 473 As a result of that, post-Chicago scholars advocate a more
interventionist approach, believing that the legal system is capable of correcting
distortions more quickly than the market. 474 However, the post-Chicagoan model
468
Ahlborn, Evans, and Padilla, supra note 282, 301.
Ibid.
470
Ahlborn, Evans, and Padilla, supra note 282, 301.
471
Microsoft Corp., supra note 313.
472
Ibid.
473
Devlin, supra note 296, 526.
474
Hovenkamp, supra note 253, 267.
469
110
does not provide support for a per se prohibition of tying by dominant firms. 475
Instead, their thinking endorses a rule of reason approach. 476 The classic definition
of the rule of reason dates back to 1918:
The court must ordinarily consider the facts peculiar to the business to which the
restraint is applied; its condition before and after the restraint was imposed; the
nature of the restraint and its effect, actual or probable. The history of the restraint,
the evil believed to exist, the reason for adopting the particular remedy, the purpose
or end sought to be attained, are all relevant facts.477
Therefore, analysis under the rule of reason is effectively open-ended. A full-scale
market investigation is necessary and no justifications brought forward by the
defendants are excluded a priori. 478 This approach is based on “the renewed
recognition of the fact that markets are much more varied and complex.” 479 This
corresponds to the increasing refinement of theoretical models and empirical
research in industrial economics, which shows that many business practices can in
principle have both positive and negative welfare effects.480
The US Department of Justice and 21 States raised a number of antitrust
charges against Microsoft, ranging from monopoly leveraging to monopoly
475
Ahlborn, Evans, and Padilla, supra note 282, 328.
For more details, David Evans, Jorge Padilla, and Michelo Polo, “Tying in Platform Software :
Reason for a Rule-of-Reason Standard in European Competition Law,” World Competition 25, no. 4
(2002): 509-514; Thomas Piraino Jr., “Reconciling the Per Se and Rule of Reason Approaches to
Antitrust Analysis,” Southern California Law Review 64 (1991): 685- 739; Ernst Steindoff, “Article
85 and the Rule of Reason,” Common Market Law Review 21 (1984): 639-646; Richard Posner, “The
Rule of Reason and the Economic Approach: Reflections on the Sylvania Decision,” University of
Chicago Law Review 45, no. 1 (Fall 1977): 1-20; George Stocking, “The Rule of Reason, Workable
Competition, and Monopoly,” Yale Law Journal 64, no. 8 (July 1955): 1107-1162; Walter Adams,
“The “Rule of Reason”: Workable Competition or Workable Monopoly?” Yale Law Journal 63, no. 3
(January 1954): 348-37
477
Board of Trade of Chicago v. United States, 246 US 231 (1918).
478
Arndt Christiansen and Wolfgang Kerber, “Competition Policy with Optimally Differentiated
Rules instead of “Per Se Rules v. Rules of Reason’”” Journal of Competition Law & Economics 2006
(2006): 217.
479
Herbert Hovenkamp, “Post-Chicago Antitrust: A Review and Critique,” Columbia Business Law
Review 2001, no. 2 (2001): 268.
480
Christiansen and Kerber, supra note 478, 218.
476
111
maintenance and exclusive distribution.481 The plaintiffs also alleged that Microsoft
had violated US antitrust law by contractually and technologically bundling Internet
Explorer with its Windows operating system.482 The District Court, applying the test
under Jefferson Parish, held that the combination of Internet Explorer and Windows
met the Jefferson Parish conditions and was therefore illegal.483 However, the Court
of Appeals rejected the Jefferson Parish test and concluded that software platforms
such as Windows should be subjected to a rule of reason balancing anticompetitive
effects and efficiencies.484 In particular, it held that integration of new functionality
into platform software was a common practice and that rigid application of per se
rules in this litigation may cast a cloud over platform innovation for PCs, network
computers and other information appliances.485
According to the Court of Appeals, the Microsoft case was fundamentally
different from the previous tying cases addressed by the Supreme Court in at least
two respects. This was the first time the tied goods were physically and
technologically integrated with the tying goods, and also the first time that it was
argued that the tie-in improved the value of the tying product to users and to makers
of the complementary goods. 486 As a result of these specific characteristics, the
general policy conclusions reached, such as that the efficiencies of tying could be
achieved by other less restrictive means, were questionable.487 While the Court of
Appeals did not take any view on the validity of the efficiency claims, it came to the
conclusion that judicial experience provided little basis for believing that, because of
481
Direct Testimony of Frederick Warren-Boulton, 18 November 1998, United States v. Microsoft
Corp., Civil Action Nos. 98-1232 and 98-1233 (TPJ), paras.,19-20, 40-60.
482
Direct Testimony of Franklin Fisher, 5 January 1999, United States v. Microsoft Corp., Civil
Action Nos. 98-1232 and 98-1233 (TPJ), paras., 79-81.
483
United States v. Microsoft Corp., 87 F.Supp.2d 30 (D.D.C 2000).
484
Microsoft Corp., supra note 313.
485
Ibid., 159.
486
Microsoft Corp., supra note 313, 144.
487
Ahlborn, Evans, and Padilla, supra note 282, 303.
112
the pernicious effect on competition and lack of any redeeming virtue, a software
undertaking’s decision to sell multiple functionalities as a package should be
conclusively presumed to be unreasonable and therefore illegal without elaborate
inquiry as to the precise harm that they have caused or the business excuse for their
use.488
In the separate-product test of Jefferson Parish, it operates under the narrow
assumption that all competitors are in a similar situation and the markets are static.489
The Court of Appeals argued that the per se rule’s direct consumer demand and
direct industry custom inquiries were, as a general matter, backward looking and
therefore systematically poor proxies for overall efficiencies in the presence of new
and innovative integration.490 It therefore concluded that, in fact, there was merit to
Microsoft’s broader argument that Jefferson Parish’s consumer demand test would
stifle innovation to the detriment of consumers by preventing undertakings from
integrating into their products new functionality previously provided by standalone
products, and hence, by definition, subject to separate consumer demand.491
However, Jefferson Parish still represents the general position with respect to
US tying cases as the scope of Microsoft was limited by the Court of Appeals to
product integration in platform software markets and only then, as a matter of law, in
the D.C. Circuit. Thus, it is unclear whether the Microsoft decision can be applied to
other tying cases in the IT industry. The criticism of the Court of Appeal concerning
the Jefferson Parish test is of a general and universal nature.
The rule-of-reason approach may cause legal unpredictability due to its caseby-case consideration, an unpredictability that will be magnified in the fast-moving
488
Microsoft Corp., supra note 313, 144.
Ahlborn, Evans, and Padilla, supra note 282, 304.
490
Microsoft Corp., supra note 313, 140.
491
Ibid., 139.
489
113
and complex IT industry. Thus, it is necessary for competition authorities to provide
the legal predictability as well as to consider the specific characteristics of the IT
industry. This suggests that the rule of reason perspective based on the modified per
se approach should be the favoured approach in the IT industry.
IV. Economics of Tying: Reasons to Integrate Software
Some of the traditional economic explanations for product tying or bundling are a
better fit for the traditional industries than the New Economy industries. 492 The
network effects, low marginal costs, and rapid technological change in the New
Economy markets create rationales for product integration that are both less familiar
and more subtle than the tying or bundling arguments that courts have previously
encountered. 493 It is important to establish the range of economic benefits to
consumers that may flow from the integration of software products, because those
consumer-welfare effects will be the criterion by which courts select the optimal
competition rule in this area.494
4.1 Chicago School Explanations
The Chicago School of antitrust analysis produced several economic rationales for
why product integration might be pro-competitive or efficiency-enhancing.
4.1.1 Price-Discrimination
492
Sidak, supra note 408, 6.
Ibid.
494
The Guidance Paper, supra note 43, para. 5.
493
114
The original motivation for product bundling offered by Chicago School economists
was price-discrimination.495 The court in the Jefferson Parish case496 recognised that
tie-ins between products used in variable proportions may be motivated by the desire
to price-discriminate. A tie-in can be used to price-discriminate if: (1) the tying firm
possesses market power in the tying product market; (2) the tied and tying products
are used in variable proportions and are complementary; and (3) the willingness of
consumers to pay for a system depends on, at least to some extent, the number of
times they intend to use it.497 The use of tying to bring about price-discrimination is
likely to enhance social welfare 498 because it tends to induce the monopolists to
increase output to a socially optimal level, which would be obtained under
competitive conditions, thus, eliminating the deadweight loss of a single-price
monopoly strategy.499 An undertaking that successfully price-discriminates manages
to make each consumer pay the most that they are willing to spend for a given
product, that is, the consumer’s reservation price.500
4.1.2 Risk Bearing
A strategy of price-discrimination through product bundling may have desirable
welfare effects other than the tendency to reduce deadweight loss by increasing
George Stigler, “United States v. Loew’s Inc.: A Note on Block Booking,” Supreme Court Review
1963 (1963): 152-157.
496
Jefferson Parish Hospital Dist. v. Hyde, 466 US 2, 14-15 (1984).
497
Jefferson Parish Hospital, supra note 496, 14-15.
498
“The economic concept of social (or total) welfare is the sum of consumer surplus and producers
surplus and that it does not encompass value judgements about how the surplus should be distributed.
This does not appear to be the standard or objective used in EU competition law,” in EU Competition
Law: Text, Cases, and Materials, 4th ed. Alison Jones and Brenda Sufrin (Oxford; New York: Oxford
University Press, 2011), 47.
499
Sidak, supra note 408, 7.
500
Hal Varian, Microeconomic Analysis, 3rd ed. (New York; London: Norton, 1992), 153, 416.
495
115
output to the competitive level.501 Because of limited information and risk aversion,
consumers might actually favour a pricing strategy for a new product system that
would discriminate on the basis of intensity of use.502 For some products, especially
brand new ones, a consumer will be uncertain how heavily they will use the product
so that ex ante the producer cannot accurately ascertain the price elasticity of demand
for the new system, and thus would have trouble identifying a single profitmaximising price. 503 This is especially true for a newly-invented product system
since the consumer can only fully evaluate the product’s utility ex post, by actually
using the system. This asymmetry of information between producers and consumers
is another example of Kenneth Arrow’s general insight that “there is a fundamental
paradox in the determination of demand for information; its value for the purchaser is
not known until he has the information, but then he has in effect acquired it without
cost.” 504 Although it is plausible that a software manufacturer seeks to reduce
consumer risk of this sort and that product bundling may facilitate that objective, this
result does flow from a strategy of price-discrimination based on metering, as none
appears to take place.505
4.1.3 Quality Control
A tie-in can be used to ensure proper performance of a product system, and the
usefulness of this quality-control function, which is intended to preclude the
consumer’s use of the possibly inferior or incompatible components of other
producers, does not depend on whether the tie-in is of a fixed or variable
501
Sidak, supra note 408, 8.
Ibid.
503
Sidak, supra note 408, 9.
504
Kenneth J. Arrow, Essay in the Theory of Risk-Bearing (Chicago: Markham, 1971), 152.
505
Sidak, supra note 408, 9.
502
116
proportion.506 In the United States v. Jerrold Electronics Corporation case, the court
held that service contracts tied to a new antenna system were lawful during the
period of the product’s “inception” for quality control. 507 This quality-control
function is important when the consumer has a limited understanding of how the
system works, and thus might erroneously blame the producer of the system for a
malfunction caused by an inferior or incompatible component manufactured by a
competitor. 508 In the case of Teleflex Industrial Products, Inc. v. Brunswick
Corporation, the court observed:
Although there have been no examples presented by either side of specific
incidents of engine failure resulting from the plaintiffs [compatible]
instruments malfunctioning, there is ample indication that if and when this
may occur, the delineation of responsibility between the plaintiff and
defendant regarding who will ultimately bear the liability is far from clear,
thus resulting either in customer dissatisfaction, or in the defendant assuming
a disproportionate share of the liability, rather than jeopardise its consumer
goodwill.509
If the courts are willing to acknowledge the possible value of product bundling when
the products are as straightforward as engines and instruments, then this economic
rationale in defence of tying should hold with even greater force when the products
are software.510
However, for the following reasons, the traditional Chicago School analysis
of tying as price-discrimination does not shed light on the technological integration
506
Bork, supra note 364, 379-381.
United States v. Jerrold Electronics Corp., 187 F.Supp. 545, 560-561 (E.D. Pa. 1960), aff’d per
curiam, 365 US 567 (1961).
508
Jerrold Electronics Corp, supra note 507, 560-561.
509
Teleflex Industrial Products, Inc. v. Brunswick Corporation, 293 F.Supp. 106, 110 (E.D. Pa. 1968).
510
Sidak, supra note 408, 10.
507
117
of the New Economy industries. An example of this is Microsoft’s integration of
Internet Explorer and Windows Media Player (WMP) into the Windows operating
system. Firstly, in the traditional tying case there is a significant incremental cost in
adding the tied product to the tying product, and these costs are not reduced
substantially as a result of bundling, 511 whereas in the case of software, the
incremental costs of adding features or functionalities are low. These low
incremental costs can make possible consumer-welfare-enhancing strategies which
are not possible for firms that face relatively high incremental costs of product
integration. 512 Secondly, the incremental price that Microsoft charged for the
integration of Internet Explorer or WMP into Windows operating system was zero.513
So at least in the Microsoft case, it is not the case that product tying enabled the
producer to charge supra-competitive prices for the tied good. 514 Thirdly, such
bundling does not fit the traditional Chicago School explanation that a tying
arrangement facilitates price-discrimination by metering consumer demand. 515 The
consumer with a low price elasticity of demand does not purchase multiple Internet
Explorer Web browsers or WMPs, nor is their web browser or streaming player
priced on the basis of the frequency or intensity of use.516
4.2 Post-Chicago Anticompetitive Explanations
4.2.1 Monopoly Leveraging
511
Direct Testimony of Professor Richard Schmalensee on behalf of Microsoft Corp., 522, United
States v. Microsoft Corp., (No. 98-1233) (D.D.C. 1999).
512
Sidak, supra note 408, 8.
513
Ibid.
514
Direct Testimony of Professor Richard Schmalensee, supra note 511.
515
Sidak, supra note 408, 8.
516
Ibid.
118
The idea that bundling could extend market power into a second market was largely
discredited by the Chicago School.517 In particular, an undertaking with a monopoly
in good A gains no advantage by selling good A only as part of a bundle with a
competitively supplied good B.518 Because good B is freely available at its marginal
cost (as a result of perfect competition), a consumer who buys the bundle would also
be willing to buy good A alone at the same profit margin for the monopolist. 519
However, Professor Michael Whinston put forward the Chicago School critique and
produced a model showing that this critique of leveraging theory only applies when
the tied market is perfectly competitive.520 Whinston’s model shows that tying could
be used to deter entry into the tied product market, and thereby monopolise this
market if: (1) the selling firm is a monopolist in the tying product market; (2) the tied
product market has decreasing average costs over the relevant range of output; and (3)
the tied and tying products are used in variable proportions.521 That is, tying commits
the monopolist to being more aggressive than the entrant, and this commitment
discourages entry.522 In addition, bundling may also give the monopolist a greater
incentive to engage in cost-cutting R&D, and thus help to preserve and extend its
advantageous position.523 However, Whinston finds that the predicted welfare effects
of even that specialised case of tying are ambiguous.524 Since bundling reduces the
entrant’s potential profits while mitigating the incumbent’s profit loss if entry occurs,
517
Bork, supra note 364; Posner, supra note 294.
Sidak, supra note 408, 10.
519
Ibid., 10.
520
Michael Whinston, “Tying, Foreclosure, and Exclusion,” American Economic Review 80, no. 4
(September 1990): 837-859.
521
Ibid., 854.
522
Whinston, supra note 520, 837-859.
523
Jay Pil Choi and Christodoulos Stefanadis, “Tying, Investment, and the Dynamic Leverage
Theory,” RAND Journal of Economics 32, no. 1 (Spring 2001): 52-71.
524
Whinston, supra note 520, 855-856.
518
119
it is credible even without any commitment device .525 It is also demonstrated that
even if there are no cost savings or value-creating synergies, the incumbent firm still
has an incentive to engage in bundling for its entry-deterrence effect.526 A software
suite is a good example of this kind of bundling because the marginal costs of
producing software are nearly zero. 527 As marginal costs rise, bundling creates
inefficiency because some consumers are forced to buy the bundle even though they
value the components at below their production costs.528
4.2.2 Preservation of Monopoly
According to Carlton and Waldman, the tying of complementary products can be
used to preserve a monopoly position in the market for one of the products. 529,530
Under their work, a monopoly undertaking has an incentive to tie if there is a threat
of entry by the alternative producer into the primary market.531 They find tying will
preserve monopoly power in the primary market whenever the alternative producer
in the tied market faces entry costs, or the demand for the complementary good
characterised by network effects. 532 However, both suggest that the competition
authorities would have to weigh any potential efficiency from the tying with possible
losses. 533 Much of the US government’s economic theory in the 1999 trial of
Barry Nalebuff, “Bundling as an Entry Barrier,” Quarterly Journal of Economics 119. no. 1
(February 2004): 159-187.
526
Ibid., 161.
527
Nalebuff, supra note 525, 162.
528
Ibid.
529
One commentator has dubbed this strategy “dynamic leveraging,” Crocioni, supra note 293, 449;
“defensive leveraging,” Robin Feldman, “Defensive Leveraging in Antitrust,” Georgetown Law
Journal 87 (1999): 2098-2099.
530
Dennis Carlton and Michael Waldman, “The Strategic Use of Tying to Preserve and Create Market
Power in Evolving Industries,” RAND Journal of Economics 33, no. 2 (Summer 2002): 194-220.
531
Ibid.
532
Carlton and Waldman, supra note 530.
533
Ibid., 215.
525
120
Microsoft focused on an elaborate version of this theory of anticompetitive tying.534
In this case, one of the economists on behalf of the US government, Sibley, proposed
that Microsoft’s actions to put in place contracting restrictions and to distribute the
Internet Explorer (IE) browser tied to its Windows operating system (OS) for free
were an attempt to preserve its OS monopoly.535 To support his argument, he referred
to a monopoly with alleged exclusionary practices in a complementary market that it
services, where the general conclusion has been that:
... if the price level in the complement’s market is limited by competitive
forces, then in the absence of efficiency justifications ..., the monopolist’s
control over the bottleneck input does not give it any profit incentive to
restrict or exclude a competitor’s product in the complement’s market. The
reason is that control over the bottleneck input allows the monopolist to
extract value from consumers no matter whose version of the complementary
good the consumer buys. 536
Applied to the Microsoft case, the bottleneck input is Microsoft’s OS and the
complementary product is the browser. 537 He explained the competitive threat to
Microsoft’s operating system monopoly was led by the competitive browser
platform. 538 That is, because the browser can serve as a software applications
platform independent of the underlying OS, which means that browsers provide their
own application programming interfaces (APIs) for developers, the existence of a
competing platform would reduce the applications barrier to entry, especially the
installed base entry barrier and the switching costs entry barrier in the Intel534
United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998) (No. 98-1233).
Declaration of David Sibley, United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir. 1998) (No.
98-1233), para. 49.
536
Declaration of David Sibley, supra note 535, para. 44.
537
Ibid., para. 45.
538
Declaration of David Sibley, supra note 535, para. 49.
535
121
compatible PC operating systems market. 539 Therefore, a new entrant in the OS
market would not have to create a substantial installed base of software applications
complementary to its OS in its size and use in order to succeed. 540 However, the
applications written to the browser platform (perhaps using Sun Microsystems’ Java
programming technology) would be accessible to a user using any OS that supported
that browser.541
In distributing browsers for free, profits from browsers are usually generated
from Internet-related businesses, such as referral fees from Internet access providers
(IAPs) and advertising revenues. 542 Professor Sibley proposed that Microsoft had
incurred an opportunity cost by foregoing the additional value it could have extracted
from consumers, or from original equipment manufacturers (OEMs), IAPs, and
Internet content providers (ICPs) that wanted to use Navigator.543 In his proposal,
Microsoft was willing to incur that opportunity cost to preserve its alleged OS
monopoly: If these restrictions were aimed solely at expanding Microsoft’s profits in
Internet-related markets by increasing Internet Explorer (IE) browser usage, it could
do better by capturing such profits through the price of its OS, or through selling
Internet products tied to the OS (such as desktop space and ISP referral fees).544
At trial, one of the government’s principal critics, Dr. Frederick R. WarrenBoulton, described the basis for the monopoly preservation theory as follows:
Because of the nature of the barriers to entry created by network effects, the most
likely long-term threat to Microsoft’s monopoly power does not come directly from
other operating systems, but rather from the spread of cross-platform technologies,
539
Declaration of David Sibley, supra note 535, para. 50.
Ibid.
541
Declaration of David Sibley, supra note 535, para. 50.
542
Ibid., para. 45.
543
Declaration of David Sibley, supra note 535, para. 48.
544
Ibid., para. 52.
540
122
that can serve (like Microsoft’s operating system) as a platform to which application
developers write…. Although browsers may never develop into full-fledged
operating systems, browsers can serve as a platform to which application developers
write. Should application vendors use a browser platform other than the Windows
platform, the applications barrier to entry that protects Microsoft’s monopoly could
be diminished, and competition in the PC operating system market created.545
In addition Professor Fisher places emphasis on the leveraging theory. He
concludes in his direct testimony that:
Microsoft’s conduct has created, preserved, and increased barriers to entry into both
the PC operating system market and the Internet browser market and includes tying
its browser to the operating system, thereby requiring undertakings to enter
successfully the already monopolised operating system market in order to compete
successfully with Microsoft in supplying browsers and thus severely hampering
Netscape in browser competition.”546
Later, the theory was extended to product integration to preserve the PC operating
systems monopoly.547 It was claimed that only in the absence of monopoly power
was “bundling … likely to be harmless and…serve legitimate business purposes,
because bundling is not a rational anticompetitive strategy for a firm that lacks
significant market power.”548 It was contended that Microsoft had an incentive to
engage in anticompetitive and unprofitable bundling of its Internet Explorer Web
545
Direct Testimony of Frederick Warren-Boulton, United States v. Microsoft Corp., 147 F.3d 935
(D.C. Cir. 1998) (No. 98-1233), paras. 8-9.
546
Direct Testimony of Franklin Fisher, United States v. Microsoft Corp., 147 F.3d 935 (D.C. Cir.
1998) (No. 98-1233), paras. 22.
547
Franklin Fisher and Daniel Rubinfeld, “United States v. Microsoft: An Economic Analysis,” in Did
Microsoft Harm Cinsumers? , ed. David Evans, Franklin Fisher, Daniel Rubinfeld, and Richard L.
Schmalensee (Washington D.C.: AEI-Brookings Joint Centre for Regulatory Studies, 2000), 28-29.
548
Ibid.
123
browser into the Windows operating system because it had monopoly power over PC
operating systems.549
4.3 Post-Chicago Pro-competitive Explanations
The inclusion of Internet-related features in the operating system of a personal
computer potentially makes the operating system a better product for Internet service
vendors (ISVs) and consumers: adding on various features is ubiquitous in
information technology software. Almost all word processor packages have basic
spreadsheet components that enable users to perform simple calculations and convert
data into various charts and graphics. In these cases, consumers are charged a single
price for the product and do not pay extra for particular features of that product, even
if earlier versions of that product did not include those features.
There are at least three economic reasons why firms in the unquestionably
competitive industry bundle features. 550 First, bundling allows the undertaking to
respond to the diversity of valuations across software customers; second, bundling
stimulates demand for the undertaking’s complementary features and products; and
third, bundling generates revenue for the undertaking’s ancillary services.551 In each
case, bundling tends to increase demand even if the combination of features included
in a product does not improve the performance or quality of the product in a strictly
technical sense. Bundling tends to expand output and is therefore pro-competitive.552
549
Fisher and Rubinfeld, supra note 546, 14-15.
Steven Davis, Jack MacCrisken, and Kevin Murphy. “Economic Perspective on Software Design:
PC Operating Systems and Platform,” August 2001. National Bureau of Economic Research, NBER
Working Paper 8411. Available at: http://www.nber.org/papers/w8411.pdf (accessed 27 August,
2009).
551
Sidak, supra note 408, 15.
552
Ibid., 15-16.
550
124
4.3.1 Responding to Diversity of Buyer Valuations
Bundling features together increases the number of consumers who will buy a
product at a given price. 553 Manufacturers can increase sales by increasing the
diversity of buyers to which a product appeals, especially for information goods for
which the additional cost to the manufacturer of including and distributing features is
low.554 According to Sidak, using newspapers as an example, it can be explained
why it makes economic sense for the publisher to include the myriad of sections in
The Observer.555 The marginal cost to the newspaper of providing the book review
section to someone interested only in the sports section is zero.556 That condition
holds regardless of the fact that the Observer Review of Books can exist as a freestanding (unbundled) substitute for the Observer of Book Review. 557 Indeed, the
marginal cost to the Observer of stripping the Observer Book Review from the
newspaper going to subscribers who read only the sports section would be
significant.558 If priced on an avoided-cost basis, the stripped-down Observer would
cost more than the fully integrated newspaper.559
Schmalensee explains why this rationale is even more powerful for
Microsoft’s bundling of its Windows operating system and Internet Explorer Webbrowsing software:
It is virtually costless to distribute Web-browsing software with the operating system.
Although some users may not want to browse the Web or may not want to use the
553
Sidak, supra note 408, 16.
Yannis Bakos and Erik Brynjolfsson, “Bundling Information Goods: Pricing, Profits, and
Efficiency,” Management Science 45, no. 12 (December 1999): 1613-1630.
555
Sidak, supra note 408, 16.
556
Ibid.
557
Sidak, supra note 408, 16.
558
Ibid.
559
Sidak, supra note 408, 16.
554
125
Web-browsing software that is included with the operating system, others will want
to browse the Web with the included software. The operating system vendor can
therefore increase sales by including Web-browsing software with the operating
system. In fact, all major operating system vendors include Web-browsing software
with the operating system at no extra charge.560
For example, for a fixed price, Internet Service Providers, such as AOL, provide
unlimited access to a wide range of services, including financial market information,
weather reports, chat rooms, and e-mail, as well as Internet access. Indeed, AOL and
other Internet portals can be regarded as electronic shopping malls that present the
consumer with a pre-selected portfolio of services. One would expect Microsoft to
integrate additional features into its Windows operating system for the same reason.
4.3.2 Stimulating Demand for Complementary Products and Features
Undertakings also have an incentive to bundle products if they are complements.
Suppose that the demand for product B increases if consumers also have product A.
If a company produces both products, it has an incentive to lower the price of
product A to stimulate sales of product B.561 The company may actually have an
incentive to give product A away for free under some conditions. 562 Schmalensee
suggests several ways in which demand complementarities give Microsoft incentives
to include Internet-related functionality in the Windows operating system. First,
demand complementarities may plausibly exist between the operating system and
applications software produced by Internet service vendors (ISVs). By including
Internet-related functionality in the Windows operating system, Microsoft, in effect,
560
Direct Testimony of Professor Richard Schmalensee, supra note 511, para. 241.
Sidak, supra note 408, 17.
562
Richard Schmalensee, “Monopolistic Two-Part Pricing Agreements,” Bell Journal of Economics
12, no. 2 (Autumn 1981): 445-466.
561
126
increases the demand for the operating system that runs those applications.563 Second,
demand complementarities may plausibly exist between the Windows operating
system and applications software produced by Microsoft. By including Internetrelated functionality in the operating system, Microsoft increases the demand for its
own applications products that make use of this Internet-related functionality. 564
Third, demand complementarities may plausibly exist between various features
within the Windows operating system. The demand for file management and
hardware driver features of the operating system may be higher for users who use the
Internet. Therefore, by providing Internet-related functionality at no additional cost,
Microsoft can increase the demand for the other features of the Windows operating
system and thereby increase sales.565
4.3.3 Generating Revenue from Ancillary Services
An undertaking that persuades consumers to use its Web-browsing software can
obtain revenue from several different sources. 566 For example, both Netscape and
Microsoft sell Internet and intranet server software, Internet commerce applications,
and Internet development tools. Similarly, the free distribution of a particular Web
browser may enable the firm to generate “revenue streams ‘adjacent’ to the browser
itself.”567 The demand for PC operating system software is highly complementary
with applications software and Web use and the marginal cost of software production
is low, such that pricing these complementary functionalities at zero may be efficient.
563
Direct Testimony of Professor Richard Schmalensee, supra note 560, para. 244.
Direct Testimony of Professor Richard Schmalensee, supra note 511, para. 245.
565
Ibid., para. 246.
566
Benjamin Klein, “An Economic Analysis of Microsoft’s Conduct,” Antitrust ABA 14 (Fall 1999):
40.
567
Shapiro and Varian, supra note 48, 294.
564
127
Therefore, product integration may be the most efficient means of distribution for the
consumer because it “eliminates the time and effort [required] to obtain and install
the zero-price item.”568
Schmalensee observed in his 1999 testimony in the Microsoft trial that,
during its first two years in business, Netscape earned 27.6 percent of its gross
revenues from the sales of such software to undertakings. 569 Because advertising
prices rise as more consumers are reached by the advertising and all other factors are
held constant, Netscape can earn more advertising revenue from the “free”
integration of Navigator into other software products. 570 As a result of these
additional revenue sources, the marginal opportunity cost to Microsoft of distributing
another copy of Web-browsing software may be negative:
It costs virtually nothing to distribute another copy of the Web-browsing software.
But that copy results in nontrivial additional revenue from the sales of ancillary
products. It is plausible that the additional revenues exceed the direct cost of
distribution, so that the effective cost of distribution of another copy is less than zero
(that is, it “pays” rather than “costs” to distribute another copy) …. The “negative
marginal cost” of distributing Web-browser software is a further pro-competitive
reason for why Microsoft would include such software with its operating system.571
However, Judge Jackson rejected this reasoning when he concluded in April 2000
that Microsoft’s integration of Internet Explorer into Windows 98 constituted
attempted monopolisation in violation of Section 2 of the Sherman Act.572
Steve Davis and Kevin Murphy, “A Competitive Perspective on Internet Explorer,” American
Economic Review Papers and Proceedings of Ninety-Seventh Annual Meeting of the American
Economic Association 90, no. 2 (May 2000): 185.
569
Direct Testimony of Professor Richard Schmalensee , supra note 511, para. 247.
570
Ibid.
571
Direct Testimony of Professor Richard Schmalensee , supra note 511, para. 248.
572
United States v. Microsoft Corp., 87 F. Supp. 2d 30, 38, 44 (D.D.C 2000).
568
128
4.4 Evaluation of the Economic Theory on Product Integration
The Chicago School’s influence over competition law has set the consumer
welfare573 standard as the benchmark for competition inquiries. The Chicago School
approach is aimed at maximising consumer welfare and efficiency. 574 To achieve
these goals, Chicagoans look to price theory as the means by which to inform the
construction of efficiency and wealth-maximising rules. 575 Therefore, harm to
individual competitors and rising market concentration do not raise competition
concerns for them.576 Instead, they focus on the question of whether price and quality
will be rendered inferior or superior on the basis of the challenged conduct.577 The
classic Chicagoan argument is that almost all unilateral business practices do not
raise competition concerns, 578 believing that natural market forces provide an
appropriate remedy that is superior to the law.579
V. Evaluation of Elements Constituting Tying in Judicial Tests of the EU and the US
The judicial test for tying practices in the European Union follows similar steps to
that for tying in the United States.580 There is anticompetitive tying if: (i) the tying
and the tied products are two separate (distinct) products; (ii) the undertaking
concerned is dominant (or has market power) in the market for the tying product
573
Consumer welfare means total surplus in the Chicago School’s perspective, but in EU competition
analysis it means only consumer surplus.
574
Devlin, supra note 296, 526.
575
Ibid.
576
Ball Memorial Hospital, Inc. v. Mutual Hospital Insurance, Inc., 784 F.2d 1325, 1333-1334 (7th
Cir. 1986).
577
Alan Meese, “Price Theory and Vertical Restraints: A Misunderstood Relation,” UCLA Law
Review 45, no. 1 (October 1997): 152.
578
Richard Posner, “Antitrust in the New Economy,” Antitrust Law Journal 68, no. 3 (2001): 932.
579
Ibid.
580
Nicolas Economides and Ioannis Lianos, “The Elusive Standard on Bundling in Europe and in the
United States in the Aftermath of the Microsoft Cases,” Antitrust Law Journal 76 (2009): 518.
129
(there is market power in the market for the tying product); (iii) the practice (an
agreement or technological integration) does not give customers a choice to obtain
the tying product without the tied product (coercion); and (iv) the practice in question
forecloses competition (there are anticompetitive effects in the tied market).581 The
General Court also accepted in the Microsoft case that the Commission correctly
examined the objective justifications of the conduct that were advanced by
Microsoft582 and referred to this condition as the fifth step of the analysis.583
The separate/distinct product test fulfils two objectives: first, it is a proxy for
efficiency gains, thus excluding from further antitrust assessment practices that have
an obvious efficiency justification that benefits consumers; and second, it sets the
boundaries of the bundling antitrust category, as opposed to practices involving a
single product.584 As for the utility of the coercion requirement, its function is merely
to distinguish between different forms of bundling practices, such as technological
tying, contractual tying, and mixed bundling (commercial tying).585
5.1 Separate Products Test
The separate products test is the first step of the analysis of anticompetitive tying for
the purposes of Articles 101 and 102 TFEU. It is also a requirement in US antitrust
law for tying arrangements. This derives from the Jefferson Parish case, one of
Section 1 of Sherman Act cases, although case law does not seem to require a
separate products test for non-contractual tying under Section 2 of the Sherman Act.
581
Jefferson Parish Hospital, supra note 289; Case T-201/04 Microsoft Corp. supra note 38; The
Guidance Paper, supra note 43, paras. 28, 50.
582
Case T-201/04 Microsoft Corp. supra note 40, para. 858.
583
Ibid., para. 869.
584
Economides and Lianos, supra note 580, 519.
585
Ibid.
130
The main function of the two distinct products requirement is to serve as a screening
device to take into account apparent efficiency gains that follow from the bundling of
the two separate products.586 Two items may be considered to be a single product for
the purposes of the law of tying when they are subject to certain economies of joint
production or distribution that can be achieved only if all customers can be forced to
take the entire package.587 In Tetra Pak II, the Court of Justice observed that:
… even where tied sales of two products are in accordance with commercial usage
or there is a natural link between the two products in question, such sales may still
constitute abuse within the meaning of Article [102 TFEU] unless they are
objectively justified.588
This arguably suggests that even if the two items are considered to be a single
product for the purposes of tying, it is still possible that Article 102 TFEU will apply
if the other conditions of anticompetitive tying are fulfilled. This interpretation finds
support in the Microsoft case where the General Court remarked that it is difficult to
speak of “commercial usage or practice in an industry that is 95% controlled by
Microsoft.”589 The condition of the existence of two separate products will become
devoid of purpose if the commercial usage is defined by the practice of a dominant
firm in the market.590 Therefore, it seems that if this requirement also applies to the
application of Article 102 TFEU in situations of quasi-monopoly position,591 as in
the Microsoft case, it is because it fulfils an additional objective other than simply
586
Economides and Lianos, supra note 580, 519.
Ibid.
588
Case C-333/94 Tetra Pak, supra note 335, para. 37.
589
Case T-201/04 Microsoft Corp. supra note 40, para. 910.
590
Economides and Lianos, supra note 580, 520.
591
Case C-395/96 Compagnie Maritime Belge Transports SA v. Commission of the European
Communities [2000] European Court Reports I-1365, paras. 114-120.
587
131
being a screening device for the efficiency of the bundling practice.592
As for the definition of what constitutes a distinct product, the Commission
advanced the position in the Microsoft decision that “products are distinct if, in the
absence of tying or bundling, from the customers’ perspective, the products are or
would be purchased separately.” 593 However, the distinct product test does not
necessarily constitute a relevant market test.594 The Guidance Paper relies on direct
evidence on the distinctiveness of the products, such as “when given a choice,
customers purchase the tying and the tied products separately from different sources
of supply.”595 According to the General Court in the Microsoft case, the distinctness
of products for the purpose of applying Article 102 TFEU “has to be assessed by
reference to customer demand”, and “in the absence of independent demand for the
allegedly tied product, there can be no question of separate products and no abusive
tying.”596
Nevertheless, in the Microsoft case the Commission did not focus only on
customer demand but accorded at least equal importance to the supply side of the
tied product’s market:
The distinctness of products for the purposes of an analysis under Article
[102 TFEU] therefore has to be assessed with a view to consumer demand. If
there is no independent demand for an allegedly “tied” product, then the products at
issue are not distinct and a tying charge will be to no avail. The fact that the market
provides media players separately is evidence for separate consumer demand for
media players, distinguishable from the demand for client PC operating systems.
There is, therefore, a separate market for these products. There are vendors who
592
Economides and Lianos, supra note 580, 520.
Case T-201/04 Microsoft Corp. supra note 40, para. 910.
594
Economides and Lianos, supra note 580, 520.
595
The Guidance Paper, supra note 43, para. 51.
596
Case T-201/04 Microsoft Corp. supra note 40, para. 917-918.
593
132
develop and supply media players on a stand-alone basis, separate from PC
operating systems.597
The General Court rejected Microsoft’s argument that the Commission should have
examined instead if the tying product was regularly offered without the tied product
or whether customers wanted Windows without media functionality. If this were the
case, complementary products could not constitute separate products for the purposes
of Article 102 TFEU.598 It was the General Court’s view that “[i]t is quite possible
that customers will wish to obtain the products together, but from different
sources.” 599 The existence of different sources of supply and, in particular, of
competing suppliers of the alleged tied product were influential factors in concluding
that the products were distinct.600 The General Court followed previous case law of
the Court of Justice holding that the presence in the market of independent
companies specialising in the manufacture and sale of the tied product constituted
serious evidence of the existence of a separate market for that product. 601 The
Guidance Paper emphasised again the supply side:
Two products are distinct if, in the absence of tying or bundling, a substantial
number of customers would purchase or would have purchased the tying product
without also buying the tied product from the same supplier, thereby allowing
standalone production for both the tying and the tied product.602
The approach of the General Court makes sense if one considers this element in light
597
COMP/C-3/37.792 Microsoft, supra note 238, paras. 803-804.
Case T-201/04 Microsoft Corp. supra note 40, para. 921.
599
Ibid., para. 922.
600
Case T-201/04 Microsoft Corp. supra note 40, para. 932.
601
Case C-333/94 Tetra Pak, supra note 335, para. 36.
602
The Guidance Paper, supra note 43, para. 51.
598
133
of the interpretation of the fourth condition in tying - foreclosure of competition.603
The Court of Justice assumed that the foreclosure of competitors in the specific
circumstances of this case led to consumer detriment - in the sense that consumers’
choice and innovation were restricted.604 The General Court also noted that IT and
communications industries develop rapidly and, over time, separate products might
become converged.605 This did not prevent the Court from assessing the existence of
distinct products “by reference to the factual and technical situation that existed at
the time when ... the impugned conduct became harmful.” 606 The supply-oriented
character of the distinct product test is directly related to the emphasis the Courts put
on the exclusion of rival suppliers of streaming media players, and it constitutes one
of the main points of difference in the interpretation of this test in US antitrust law.607
In US antitrust law, the tying and tied products are separate if “the tying item
is commonly sold separately from the tied item in a well functioning market.”608 The
test is whether there is sufficient consumer demand in the marketplace to support
independent markets despite any efficiencies tying may bring.609 The D.C. Circuit
mentioned in the Microsoft case that “perceptible separate demand is inversely
proportional to net efficiencies.”610 Separate demand for the tied product indicates
that the efficiencies provided by the bundling practice to consumers are limited.
However, the existence in the market of independent companies specialising in the
manufacture and sale of the tied product does not in itself constitute adequate
evidence of a distinct product under US antitrust law.611 Bundling can be efficiency
603
Economides and Lianos, supra note 580, 522.
Case C-333/94 Tetra Pak, supra note 335, para. 36.
605
Case T-201/04 Microsoft Corp. supra note 40, para. 913.
606
Ibid., para. 914.
607
Microsoft Corp., supra note 313.
608
Hovenkamp, supra note 253, 415.
609
Microsoft Corp., supra note 313, 87-88.
610
Ibid.
611
Microsoft Corp., supra note 313, 87-88.
604
134
enhancing if the tying and the tied products are used in fixed proportions and have no
separate utility as the dominant firm has the incentive to tie into the competitive
market only if the combination is more efficient.612 By contrast, tying with variable
proportions may be a vehicle for price discrimination, and thus lead to a reduction of
consumer surplus by profitably extracting consumer surplus from individual
buyers.613 This explains why in the US Microsoft case, where Internet Explorer and
Windows were used in fixed proportions, the D.C. Circuit found merit in Microsoft’s
argument that, in the circumstances of the case, an abstract consumer demand test
would stifle innovation to the detriment of consumers by preventing firms from
integrating into their products some new functionality that was previously provided
by stand-alone products.614 The D.C. Circuit found the Jefferson Parish’s separate
products test to be inappropriate:
The per se rule’s direct consumer demand and indirect industry custom inquiries are,
as a general matter, backward-looking and therefore systematically poor proxies for
overall efficiency in the presence of new and innovative integration. The direct
consumer demand test focuses on historic consumer behaviour, likely before
integration, and the indirect industry custom test looks at firms that, unlike the
defendant, may not have integrated the tying and tied goods. Both tests compare
incomparables - the defendant’s decision to bundle in the presence of integration, on
the one hand, and consumer and competitor calculations in its absence, on the
other …. [b]ecause one cannot be sure beneficial integration will be protected by the
other elements of the per se rule, simple application of that rule’s separate-products
test may make consumers worse off.615
However, the position of the General Court in the Microsoft case can hardly be
612
Economides and Lianos, supra note 580, 523.
Ward S. Bowman, Jr., “Tying Arrangements and the Leverage Problem,” Yale Law Journal 67, no.
1 (November 1957): 20-23.
614
Microsoft Corp., supra note 313, 89.
615
Ibid, 89.
613
135
explained by the objective to protect market innovation through product
integration. 616 If this were the case, the General Court should have balanced the
benefits, from the point of view of the consumers, in having a new integrated product
and the costs of the immediate reduction of consumer choice that the bundling of the
alleged “distinct products” would have brought. 617 This test could essentially be
performed under the step of the analysis of anticompetitive effects (foreclosure of
competition). 618 The negative effects on consumers should be balanced against
efficiency gains that could be passed on to consumers in the form of new products or
those of better quality. 619 The existence of a full “rule of reason test” for
technological tying in the United States makes possible the full consideration of
these efficiencies without necessarily applying the distinct products test. 620 If the
General Court adopted a supply-oriented definition of the distinct product test in the
Microsoft case, it is because the main focus of the enquiry was to establish whether
competitors could viably (profitably) operate in the tied product market.621 This is
relatively easy to prove as the presence in the tied product market of undertakings
that offer only the tied product indicates that there is sufficient consumer demand for
the tied product without the tying product, and therefore that the two products are
distinct.622 There is no point in having a distinct product test if the benefits of the
single product for the consumers would in any case be examined in the next step of
the analysis under a rule of reason standard.623
Consequently, the General Court assumed that the presence of independent
616
Economides and Lianos, supra note 580, 524.
Ibid., 524.
618
The Guidance Paper, supra note 43, paras. 19-22
619
Ibid., para. 30.
620
Economides and Lianos, supra note 580, 524.
621
Ibid.
622
Case T-201/04 Microsoft Corp. supra note 38.
623
Microsoft Corp., supra note 313, 96.
617
136
suppliers of the alleged tied product indicated the existence of two distinct
products.624 In this sense, the presence of rivals in the tied market constitutes a proxy
for potential anticompetitive foreclosure.625 This explains why the General Court did
not only focus on identifying an independent consumer demand for the tied product
but also looked for evidence that the market included independent companies
specialising in the manufacture and sale of the tied product that could have been
marginalised or excluded with the tying practice. The distinct product test is
therefore intrinsically linked to the General Court’s specific approach in interpreting
the requirement of anticompetitive foreclosure.626 This test in EU cases operates as a
proxy for anticompetitive effects, whilst the similar test in the US cases indicates the
presence of efficiency gains.627
5.2 Coercion Test
It is a common feature in both EU competition law and US antitrust law that
bundling of two distinct products does not constitute tying unless there has been an
effective limitation of the consumers’ choice or coercion to purchase the products
separately.628 The main function of the coercion test is to distinguish between the
different forms of bundling, such as by contract, by technological integration, or by
financial incentives, and their effects on consumers.629
In EU competition law, there is a tying violation if the undertaking concerned
does not give customers a choice to obtain the tying product without the tied
624
Case T-201/04 Microsoft Corp. supra note 38.
Economides and Lianos, supra note 580, 525.
626
Ibid.
627
Economides and Lianos, supra note 580, 525.
628
Case T-201/04 Microsoft Corp. supra note 38; Jefferson Parish Hospital, supra note 289, 12-18.
629
Ibid.
625
137
product.630 Coercion may arise in several ways. It can result from the refusal of the
dominant firm to sell the tying product without the tied one, either as a contractual
clause or de facto; from the unavailability of the products separately; from pressure
exerted on the customer through the promise of favourable treatment to customers
who take both products or threats to those who do not, or from pricing incentives that
may be so powerful that no rational customer would choose to buy the products
separately.631 In the Microsoft case the General Court took the view that the analysis
of whether the dominant undertaking does not give customers a choice to obtain the
tying product without the tied product is “merely expressing in different words the
concept that bundling assumes that consumers are compelled, directly or indirectly,
to accept ‘supplementary obligations,’ such as those referred to in Article 102(d)
TFEU.”632
For the General Court, Microsoft had contractually and technically coerced
the Original Equipment Manufacturers (OEMs). First, it was not possible for the
OEMs to obtain a license on the Windows operating system without Windows Media
Player (WMP). Second, it was not technically possible for the OEMs to uninstall
WMP. The General Court also noted that coercion of OEMs indirectly restricted the
choice of the end consumers.633 Although Microsoft alleged that customers were not
required to pay anything extra for WMP, the Court rejected this argument noting that
the price of WMP was included in this case in the total price of the Windows client
PC operating system. 634 This argument seems paradoxical because the Court had
already accepted that the two products were distinct, and it should have therefore
630
Case T-201/04 Microsoft Corp. supra note 38.
Hovenkamp, supra note 253, 410-415.
632
Case T-201/04 Microsoft Corp. supra note 40, para. 864.
633
Ibid, para. 965.
634
Case T-201/04 Microsoft Corp. supra note 38.
631
138
examined Microsoft’s arguments from that perspective.635
The General Court adopted a broad definition of coercion, stating that
“neither Article 102(d) TFEU nor the case law on bundling requires that consumers
must be forced to use the tied product or prevented from using the same product
supplied by a competitor of the dominant undertaking.”636 The theoretical possibility
that consumers were not prevented from installing and using other media players
instead of Windows Media Player (WMP) was not sufficient to conclude that there
was no coercion as the end consumers had a strong incentive to use WMP.637 The
General Court seemed to consider that the alternative offered to consumers to install
media players other than WMP should be equivalent with regard to its effectiveness
to the pre-installation of media players by the OEMs, which implies a rather strict
standard for dominant firms.638
In contrast, the requirement of coercion is not mentioned for tying/bundling
practices in the Guidance Paper,639 although it implicitly internalises this condition
when it treats technical tying more restrictively than contractual tying, by
considering that the risk of anticompetitive foreclosure is expected to be greater in
this case.640 Instead, the Commission seems to retain the following four criteria for
the application of the bundling test:
(i) The company concerned is dominant in the tying market; (ii) the tying
and tied goods are two distinct products; (iii) the tying practice is likely to
have a market distorting foreclosure effect; (iv) the tying practice is not justified
635
Economides and Lianos, supra note 580, 529.
Case T-201/04 Microsoft Corp. supra note 40, para. 970.
637
Ibid., para. 1042.
638
Economides and Lianos, supra note 580, 530.
639
The Guidance Paper, supra note 43, para. 50.
640
Ibid., para. 53.
636
139
objectively or by efficiencies.641
However, the position of the Commission cannot be explained by the case law of the
General Court, which does not establish such a distinction between contractual and
technical tying.
The requirement of coercion is also present in US antitrust law on tying.
According to Herbert Hovenkamp:
… this coercion should result from (1) an absolute refusal to sell the tying
product without the tied product; (2) a discount, rebate or other financial incentive
given to buyers who also take the tied product; (3) technological design that makes
it impossible to sell the tying product without the tied product.642
From this it is possible to infer that coercion applies to situations involving
commercial tying as well as contractual or technological tying. However, in Cascade
Health Solutions, the court distinguished bundled discounts from tying practices by
requiring evidence of coercion for tying but not for bundled discounts: “One
difference between traditional tying by contract and tying via package discounts is
that the traditional tying contract typically forces the buyer to accept both products,
as well as the cost savings.” Conversely, the court said that “the package discount
gives the buyer the choice of accepting the cost savings by purchasing the package,
or foregoing the savings by purchasing the products separately.” The package
discount thus does not constrain the buyer’s choice as much as the traditional tying.
For that reason, it was stated that:
European Commission, “DG Competition Discussion Paper on the Application of Article 82 of the
Treaty to Exclusionary Abuses,” December 2005, Brussels, Available at http://ec.europa.eu/compet
ition/ antitrust/ art82/discpaper2005.pdf (accessed 12 August, 2009). (Hereafter, ‘Competition
Discussion Paper’).
642
Hovenkamp, supra note 253, 410.
641
140
… a variation of the requirement that prices be ‘below cost’ is essential for the
plaintiff to establish one particular element of unlawful bundled discountingnamely, that there was actually ‘tying’- that is, that the
purchaser
was
actually
‘coerced’ (in this case by lower prices) into taking the tied-up package.643
When the Ninth Circuit examined the same facts under the tying claim, the
court included financial incentives as a form of coercion that could be qualified as
unlawful tying, if their effect was to coerce the customers to buy the tying and the
tied product.644 Persuasion by financial incentives and coercion have similar effects
and the Ninth Circuit was quick to find that PeaceHealth’s practice of giving a larger
discount to insurers who dealt with it as an exclusive preferred provider “may have
coerced some insurers to purchase primary and secondary services from PeaceHealth
rather than from McKenzie.” 645 Indeed, “the fact that a customer would end up
paying higher prices to purchase the tied products separately does not necessarily
create a fact issue on coercion” and, “additional evidence of economic coercion” is
required.646
If coercion can also be established by evidence of economic incentives which
have the potential to induce a rational consumer to buy the tying and the tied product
together, there is little difference between a tying and a bundled discount claim.647
The Ninth Circuit recognised the problem when it accepted that economic coercion
through inducement could be an alternative reason why McKenzie presented its tying
claim;
643
Cascade Health Solutions v. PeaceHealth, 515 F.3d 883, 900-901 (9th Cir. 2008).
Cascade Health/PeaceHealth, supra note 643, 914.
645
Ibid.
646
Cascade Health/PeaceHealth, supra note 643, 914.
647
Economides and Lianos, supra note 580, 532.
644
141
… such a claim might raise the question of whether, to establish the coercion
element of a tying claim through a bundled discount, McKenzie must prove that
PeaceHealth priced below a relevant measure of its costs. Some commentators
would require a plaintiff alleging that a bundled discount amounts to an illegal tie to
prove below-cost prices … It is unclear whether the AMC intended its three-part test
to apply when a plaintiff alleging an illegal tying arrangement asserts that the
defendant’s pricing practices coerced unwanted purchases of the tied product ... The
parties have not briefed this issue to us, and the parties did not raise the issue before
the district court. We therefore leave it to the district court, if necessary, to decide
the issue in the first instance on remand.648
This demonstrates the internal contradiction of the court’s decision. How is it
possible to think that coercion distinguishes tying from bundled discounts while
considering, at the same time, that bundled discounts may constitute a form of
coercion?
The Ninth Circuit’s adoption of a different standard for bundled discounts
and tying practice is based on unstable grounds, both in terms of law and policy.649
Adopting the modified predatory cost/price standard for bundled discounts would
imply the abandonment of the anticompetitive foreclosure test for all exclusionary
practices, such as tying and exclusive dealing, in favour of a cost/price predation test
or, in other words, of an “as efficient as competitor” test. 650 Although in the
Microsoft case the D.C Circuit acknowledged exceptional situations of predatory
pricing, it did not apply the predatory pricing test or a modified version of it for the
non-price exclusionary practices and bundling. 651 The choice between the two
analogies, price predation versus anticompetitive foreclosure, is an issue that is not
only linked to the apparent need to build safe harbours for “efficient” pricing
648
Cascade Health/PeaceHealth, supra note 643, 916.
Ibid.
650
Economides and Lianos, supra note 580, 533.
651
Microsoft Corp., supra note 313, 96-97.
649
142
practices of dominant undertakings but is also related to the theory of competition
that underscores the enforcement of Section 2 of the Sherman Act and Article 102
TFEU.652
5.3 Anticompetitive Foreclosure
The competitive assessment of bundling practices requires analysis of the foreclosure
of competition in the tying or tied market in both EU and US competition laws. The
meaning of the concept of anticompetitive foreclosure has been one of the most
controversial issues in antitrust law enforcement, not only for bundling but also for
all types of exclusionary practices. An important aspect of this debate has been the
definition of a limiting principle for competition law enforcement.653 For bundling
practices, the debate over the adequate standard of foreclosure has focused on the
following two questions: (i) should the foreclosure effect be presumed from the
nature of the bundling practice and/or the existence of a tying market power
(dominant position)?; and (ii) in what circumstances does the foreclosure of a
competitor from the tied product market harm consumers?654
5.3.1 Foreclosure and the Nature of Bundling
There are two competition law standards, the effect-based approach and the formbased approach, which can be employed to evaluate bundling practices. The former
requires an examination of the effects of a practice before concluding that it is
anticompetitive, whilst the latter focuses on the nature of the practice before arriving
652
Economides and Lianos, supra note 580, 533-534.
Ibid., 533-534.
654
The Guidance Paper, supra note 43, para. 30.
653
143
at any conclusion with regard to its anticompetitive effects. 655 A form-based
approach is not necessarily incompatible with the analysis of the anticompetitive
effects of a practice.656 Nevertheless, instead of analysing the effects of the specific
practice within the specific market context (an ex post and concrete analysis), the
competition authorities or the judges characterise the practice as falling within an ex
ante pre-defined category of practices that are generally deemed, from previous
practical experience or because of their opposition to a fundamental aim of
competition law, to produce anticompetitive effects (abstract/categorical analysis).657
Both jurisprudence on tying and bundling practices illustrate the evolution of
competition standards towards a more effects-based approach although judicial
decisions have often developed without much concern for analysing anticompetitive
effects.658 . In the Jefferson Parish case, the Supreme Court adopted a modified per
se test for contractual tying.659 There was a presumption of anticompetitive effects
whenever an undertaking with market power employed bundling practices that had
the effect of foreclosing competitors from a significant market share in the tied
product market,660 of extracting consumer surplus,661 or of raising barriers to entry in
both the tying and the tied markets.662 In the Microsoft case, the D.C. Circuit moved
to a rule of reason test for software bundles that required plaintiffs to demonstrate
that the benefits of the tying practice were outweighed by the damage to the tied
product market.663 This is essentially a cost/benefit analysis test that fully takes into
account the efficiency gains to the benefit of consumers and allocates the legal
655
Economides and Lianos, supra note 580, 534.
Ibid.
657
Economides and Lianos, supra note 580, 534-535.
658
Ibid., 535.
659
Jefferson Parish Hospital, supra note 289, 12-18.
660
Fortner Enterprises, supra note 419.
661
Jefferson Parish Hospital, supra note 289, 14-15.
662
Eastman Kodak,supra note 359.
663
Microsoft Corp., supra note 313, 95-97.
656
144
burden of proof to the plaintiff. The plaintiff “must demonstrate that the
anticompetitive harm of the conduct outweighs the pro-competitive benefit.” 664
However, it is on the defending monopolist to “proffer a ‘pro-competitive
justification’ for its conduct.”665 The burden then shifts back to the plaintiff to rebut
that claim and to prove that “the anticompetitive harm of the conduct outweighs the
pro-competitive benefit.”666 This cost/benefit analysis test, and accompanying burden
shifting, also applies to bundled discounts. 667 In essence, the anticompetitive
foreclosure test in the United States looks to the anticompetitive effects of the
practice and concludes that there is anticompetitive foreclosure only when the
benefits of a practice do not outweigh its costs, from the point of view of the
consumers.
The position of EU competition law was initially quite hostile to any form of
tying.668 In Hilti and Tetra Pak II, the Commission and the EU Courts applied a
quasi-per se test and found that by imposing on their customers numerous
obligations that had no link with the purpose of the contracts, the dominant
undertakings in question had restricted the market access of their competitors and
had deprived consumers of any freedom to make their own choices.669 Consequently,
if there were independent producers in the tied product market, it was required that
dominant undertakings abstain from any conduct, such as contractual tying or
technological integration, which would have the effect of restricting the freedom of
these independent producers to compete in the tied market.670
664
Ibid., 59.
Microsoft Corp., supra note 313, 59.
666
Ibid., 59.
667
LePage’s Inc. v. 3M, 324 F.3d 141, 163-164 (3rd Cir. 2003).
668
Valentine Korah, An Introductory Guide to EC Competition Law and Practice, 8th ed. (Oxford:
Hart Publishing, 2004), 142.
669
IV/30.787 and 31.488 Hilti, supra note 306, para. 75; Case T- 83/91 Tetra Pak supra note 320,
para. 140; Case C-333/94 Tetra Pak, supra note 335, para. 36.
670
Economides and Lianos, supra note 580, 536.
665
145
Dominant undertakings may argue that there is an objective justification for
their conduct. However, older case law has restrictively interpreted this concept,
believing that it only has broad non-economic public policy concerns such as safety
or health factors related to the dangerous nature of the product in question and does
not actually include an efficiency defence.671 The two steps in the abuse control test
of Article 102 TFEU are as follows:
Article [102 TFEU] covers practices which are likely to affect the structure of a
market where, as a direct result of the presence of the undertaking in question,
competition has already been weakened and which, through recourse to methods
different from those governing normal competition in products or services based on
traders’ performance, have the effect of hindering the maintenance or development
of the level of competition still existing in the market.672
As a first step, the abuse test involves assessing whether the conduct is of a type
“likely” or “such as” to affect the structure of an otherwise concentrated market and
which constitutes a business method “different from those governing normal
competition
in
products
or
services
based
on
traders’
performance”
(abstract/categorical analysis) that would initially require the classification of the
practice into a specific antitrust category. In the second step, the competition
authorities or courts will examine the anticompetitive effects of the specific practice
(fact-based analysis). 673 The first prong of this abuse test, abstract/categorical
analysis, implies that for certain practices there is a prima facie presumption of
anticompetitive effect when the firm has a dominant position.674
Albertina Albors-Llorens, “The Role of Objective Justification and Efficiencies in the Application
of Article 82 EC,” Common Market Law Review 44 (2007): 1727-1761.
672
Case 322/81 NV Nederlandishe Banden Indstrie Michelin v. Commission of the European
Communities [1983] European Court Reports 3461, para. 70.
673
Giorgio Monti, EC Competiotn Law (Cambridge: Cambridge University Press, 2007), 171.
674
Economides and Lianos, supra note 580, 537.
671
146
The case law of the EU Courts is ambiguous as to which practices are
presumptively anticompetitive in the abstract/categorical analysis part of the abuse
test.675 Certain forms of practices, such as tying, loyalty rebates, predatory prices,
and exclusive dealing obligations imposed by dominant firms, are often analysed as
being anticompetitive and therefore infringing Article 102 TFEU by their nature and
effect.676 It is true that the case law does not always require the examination of the
existence of actual anticompetitive effects, as these follow from the qualification of
the conduct as being tying, a loyalty rebate, or predatory pricing.677 In other words, it
is sufficient to show that the abusive conduct of the undertaking in a dominant
position tends to restrict competition or that the conduct is capable of having that
effect.678 This classification or characterisation process that precedes the assessment
of the anticompetitive effects of the conduct plays an important role.679 However, it
is not clear what the Court of Justice meant by “methods different from those
governing normal competition in products or services based on traders’
performance.”680 The Guidance Paper, in fact, refers to certain circumstances where
it would not be necessary to carry out a detailed assessment before concluding that
the conduct in question is likely to result in consumer harm.681
It is true that the Commission considers that the anticompetitive effect will be
inferred in this case, as that type of conduct can only raise obstacles to competition
without adding any efficiency gain. One could argue, however, that these points
made by the Commission do not affect the theoretical possibility of dominant
675
Ibid.
Case C-468/06 to C-478/06 Sot. Lélos kai Sia EE v. GlaxoSmithKline AEVE Farmakeftikon
Proionton [2008] European Court Reports I-7139, para. 50.
677
Case T-203/01 Macnufacture Française des Pneumatiques Michelin v. Commission of the
European Communities [2003] European Court Reports II-4071, para. 239.
678
T-203/01 Michelin, Ibid., para. 239.
679
Economides and Lianos, supra note 580, 538.
680
Ibid.
681
The Guidance Paper, supra note 43, para. 22.
676
147
undertakings citing efficiencies, particularly as it remains possible for conduct
leading to anticompetitive foreclosure to be justified by the objective necessity
defence and efficiencies, before finding the existence of an abuse of a dominant
position. 682 The Commission does not explicitly exclude these practices from
objective necessity and efficiencies in the Guidance Paper. Although, in practice, it
seems unlikely that these supposed efficiencies will be accepted, as they fail to
comply at the very least with the first two cumulative conditions of the efficiency
defence under EU competition law.683
The Court of Justice implicitly recognised that certain types of conduct, such
as a restriction of parallel trade, may create a presumption of negative effects on
consumers and therefore shift the burden of proof to the defendant, without it being
necessary for the claimant to bring additional evidence on the causal link between the
specific conduct and consumer harm.684 Despite the language employed, however,
the Court of Justice immediately recognised that this does not amount to an absolute
presumption of consumer harm or a per se prohibition. 685 The presumption of
anticompetitive effects may still be rebutted by the defendant in limited
circumstances. For example, a company must be “in a position to take steps that are
reasonable and in proportion to the need to protect its own commercial interests.”686
The first prong of the abuse test, abstract/categorical analysis, does not therefore
establish a per se prohibition of certain commercial practices, including tying or
bundling.687
682
The Guidance Paper, supra note 43, paras. 83, 84.
Ibid., paras. 83, 84.
684
Case C-468/06 to C-478/06 GlaxoSmithKline, supra note 676, paras. 56-57.
685
Ibid., para. 57.
686
Case C-468/06 to C-478/06 GlaxoSmithKline, supra note 676, para. 69.
687
Economides and Lianos, supra note 580, 539.
683
148
In theory, many commercial practices may have the effect of excluding
competitors from the market or substantially hindering their ability to compete. The
test is unworkable without a limiting principle that could provide dominant
undertakings with the ability to identify, ex ante, whether their commercial practices
could be considered illegal.688 This is where recourse to an effects-based approach
makes a difference.
In an effects-based approach, the identification of a specific practice as
coercive or abnormal should not lead to a presumption of anticompetitive effects and
consumer harm.689 It only indicates that the fact finder should examine the existence
of consumer harm according to different markers other than purely non-coercive
unilateral abuses such as refusals to deal. 690 The latter are subject to a test of
indispensability as access is provided only if the resource is considered indispensable
for the continuation of the activity of the excluded undertaking, or of a price/cost test
measuring the relative efficiency of the excluded or marginalised undertaking as a
filter for a more detailed competition law assessment.691 There is no such filter for
coercive abuses, as there is a greater likelihood that consumer choice is affected.692
However, this is only the case if there is an identifiable detriment to the consumer,
either direct, empirically verified, or indirect, involving a plausible theory of
consumer harm that the practice could be contrary to Article 102 TFEU. 693
Identifiable efficiency gains such as lower costs or better quality inputs that are likely
to be passed on to the final consumer should mitigate anticompetitive effects. This
balancing test or cost/benefit analysis will ensure that practices that could enhance
688
Ibid. 545.
Economides and Lianos, supra note 580, 545.
690
Ibid.
691
Economides and Lianos, supra note 580, 545-546.
692
Ibid., 546.
693
Economides and Lianos, supra note 580, 546.
689
149
consumer choice in the long run are not prohibited under Article 102 TFEU without
a more careful analysis of their effects on the final consumer.694
In the Microsoft case, the Commission, did not base its decision on the
traditional theory of tying which advocates a quasi-per se illegality test if the
undertaking employing the tying practices holds a dominant position, thus inferring
anticompetitive foreclosure from these two elements. Instead it proceeded to the
second limb of the abuse test:
There are indeed circumstances relating to the tying of WMP which warrant a closer
examination of the effects that tying has on competition in this case. While in
classical tying cases, the Commission and the Courts considered the foreclosure
effect for competing vendors to be demonstrated by the bundling of a separate
product with the dominant product, in the case at issue, users can and do to a certain
extent obtain third party media players through the Internet, sometimes for free.
There are therefore indeed good reasons not to assume without further analysis that
tying WMP constitutes conduct which by its very nature is liable to foreclose
competition.695
In the Microsoft case, in relation to technological tying, the Commission thus seemed
to apply a structured rule of reason approach by examining the anticompetitive
effects of the practice, including the efficiency justifications argued by Microsoft and
its incentives to foreclose, before concluding that this conduct infringed Article 102
TFEU. 696 The General Court accepted the position of the Commission, but used
language that limited the scope of the structured rule of reason approach in situations
of technological tying.697 It stated that:
694
Economides and Lianos, supra note 580, 546.
COMP/C-3/37.792 Microsoft, supra note 238, para. 841.
696
COMP/C-3/37.792 Microsoft, supra note 238.
697
Case T-201/04 Microsoft Corp. supra note 38.
695
150
… while it is true that neither [the] provision nor, more generally, Article [102
TFEU] as a whole contains any reference to the anticompetitive effect of bundling,
the fact remains that, in principle, conduct will be regarded as abusive only if it is
capable of restricting competition.698
The General Court referred to the Michelin case to substantiate this point. This case
stood for the proposition that “establishing the anticompetitive object and the
anticompetitive effect are one and the same thing.”699 The following paragraph from
the Microsoft decision also illustrates the ambivalence of the General Court’s
approach with regard to the applicable competition standard for technological tying:
The applicant cannot claim that the Commission relied on a new and highly
speculative theory to reach the conclusion that a foreclosure effect exists in the
present case. As indicated at recital 841 to the contested decision, the Commission
considered that, in light of the specific circumstances of the present case, it could not
merely assume, as it normally does in cases of abusive tying, that the tying of a
specific product and a dominant product has by its nature a foreclosure effect. The
Commission therefore examined more closely the actual effects which the bundling
had already had on the streaming media player market and also the way in which
that market was likely to evolve.700
It follows that although the General Court did not reject the structured rule of reason
approach of the Commission with regard to technical tying, it maintained its previous
quasi-per se illegality approach for all other forms of bundling, essentially
contractual tying.
In sum, in examining the existence of the fourth step of a tying claim, the
General Court did not presume that there was foreclosure of competition from the
simple fact that a dominant undertaking tied two distinct products. Instead, it found
698
Ibid., para. 867.
T-203/01 Michelin, supra note 672, para. 241.
700
Case T-201/04 Microsoft Corp. supra note 40, para. 868.
699
151
that one had to determine if the foreclosure of competitors led to anticompetitive
effects and if there were objective or efficiency justifications.701 It seems, therefore,
that the analysis of objective or efficiency justifications constitutes a necessary
complement to the analysis of an anticompetitive foreclosure. 702 This in turn
implicitly injects a structured rule of reason approach into the analysis of
technological tying.
Objective or efficiency justifications raise the issue of who has the burden of
proof of the anticompetitive effects and objective justifications, and how much
evidence is required.703 The Court explained the position clearly with regard to the
issue of the burden of proof:
Although the burden of proof of the existence of the circumstances that constitute an
infringement of Article 102 TFEU is borne by the Commission, it is for the
dominant undertaking concerned, and not for the Commission, before the end of the
administrative procedure, to raise any plea of objective justification and to support it
with arguments and evidence. It then falls to the Commission, where it proposes to
make a finding of an abuse of a dominant position, to show that the arguments and
evidence relied on by the undertaking cannot prevail and, accordingly, that the
justification put forward cannot be accepted.704
The General Court seems to distinguish between the legal burden of proof that is
borne by the plaintiff and the evidential burden of proof of objective justifications
that is borne by the defendant. If the defendant raises these objective justifications,
the burden shifts to the plaintiff. The position is not very different from that
prevailing in US antitrust law.705 There are, however, important dissimilarities with
701
Case T-201/04 Microsoft Corp. supra note 40, para. 852.
The Guidance Paper, supra note 43, paras. 28-31.
703
Economides and Lianos, supra note 580, 550.
704
Case T-201/04 Microsoft Corp. supra note 40, para. 1144.
705
Microsoft Corp., supra note 313, 59.
702
152
regard to the standard of proof for objective justification, that is, the amount of
evidence required by the defendant to substantiate efficiency gains.706 The Guidance
Paper subjects efficiencies justifications to four cumulative requirements:
The dominant undertaking will generally be expected to demonstrate, with a
sufficient degree of probability, and on the basis of verifiable evidence, that the
following cumulative conditions are fulfilled:
- The efficiencies have been, or are likely to be, realised as a result of the conduct.
They may, for example, include technical improvements in the quality of goods, or a
reduction in the cost of production or distribution;
- The conduct is indispensable to the realisation of those efficiencies: there must be
no less anticompetitive alternatives to the conduct that are capable of producing the
same efficiencies;
- The likely efficiencies brought about by the conduct outweigh any likely negative
effects on competition and consumer welfare in the affected markets;
- The conduct does not eliminate effective competition, by removing all or most
existing sources of actual or potential competition.707
According to the Guidance Paper, the dominant undertaking should provide all the
evidence in order to objectively justify its alleged conduct, and then the Commission
should make an assessment by weighing up anticompetitive effects and
efficiencies.708 In practice, it would be very difficult for a dominant undertaking to
prove the existence of objective justifications, the control and the conditions for such
a defence being at least as restrictive as the conditions of Article 101(3) TFEU.709 In
contrast, the standard of proof for anticompetitive foreclosure and consumer harm is
particularly low as there is no need to prove the existence of an actual or direct
706
Microsoft Corp., supra note 313.
The Guidance Paper, supra note 43, para. 30.
708
Ibid., para. 31.
709
Case C-95/04 British Airways, supra note 379, para. 86.
707
153
consumer detriment.710 Thus, there is an important asymmetry between the standard
of proof that is required from the plaintiff and the standard of proof required by the
defendant, to the benefit of the former.711
This asymmetry of the standard of proof between the plaintiff and the
defendant in EU competition law is the principal reason why it is normatively
undesirable to adopt a presumption of consumer harm when an undertaking with a
dominant position employs tying/bundling practices subject to the assessment of
efficiency justifications.712 Relying only on market power and absence of objective
justifications may increase the risk of false positives because of the asymmetry of the
standard of proof between anticompetitive effects and objective justifications in EU
competition law. 713 Hence, because of this specific asymmetry in the standard of
proof, the requirement of anticompetitive foreclosure on top of market power and/or
a dominant position, may reduce the risk of over-inclusive antitrust standards for
tying/bundling practices. 714 This approach will be compatible with the emphasis
given by EU competition law to consumer welfare and competition as a process of
rivalry rather than on consumer surplus and competition as an efficient outcome,
which explains the first prong of the abuse test in Article 102 TFEU.715 The plaintiff
should bring evidence that the competitors will be excluded or marginalized as a
consequence of the tying/bundling practice. It is true that this requirement will not
take into account two of the “power effects” of tying, which are that “tying can
profitably allow price discrimination among buyers of the tying product”, and that
710
Ibid., para. 106.
Economides and Lianos, supra note 580, 551.
712
Einer Elhauge, “Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory,”
Harvard Law Review 123 (December, 2009): 442-451.
713
Economides and Lianos, supra note 580, 552.
714
Ibid.
715
Economides and Lianos, supra note 580, 552.
711
154
tying can “profitably permit price discrimination across buyers of both products.”716
Since Article 102 TFEU does not prohibit the acquisition or exercise of market
power but only its abuse, proof of foreclosure of rivals should form a necessary step
of the analysis of tying/bundling or loyalty rebates.717 However, foreclosing on a
competitor is not sufficient for inferring consumer harm.718
5.3.2 Anticompetitive Effects: Consumer Detriments
Proving anticompetitive foreclosure requires an analysis of the concrete effects of the
practice adopted by the alleged monopolist or dominant undertaking719 although the
EU Courts have rejected this. It is therefore necessary to analyse how the specific
practice may affect consumers. Merely excluding or foreclosing on competitors is
not sufficient to substantiate a claim of anticompetitive foreclosure. The denial of
market access to rivals does not in itself constitute evidence of anticompetitive
foreclosure, but only a starting point for the analysis of exclusionary abuses.720 Both
EU competition law and US antitrust law require a case to show anticompetitive
harm that links the exclusion of the competitors to the existence of a consumer
detriment or to a negative consumer welfare effect. “Leveraging”, for example,
constitutes anticompetitive harm in Europe, although it seems to be controversial in
the United States. 721 Anticompetitive leveraging was one of the main theories of
harm advanced by the Commission in the Microsoft case.722 The General Court also
716
Elhauge, supra note 712, 404-405.
Ibid.
718
Elhauge, supra note 712, 404-405.
719
Guidelines on the Assessment of Non-Horizontal Mergers under the Council Regulation on the
Control of Concentrations between Undertakings [2008] Official Journal of European Union C256/6,
para. 18.
720
Economides and Lianos, supra note 580, 553.
721
COMP/C-3/37.792 Microsoft, supra note 238.
722
Ibid., para. 982.
717
155
relied on the same theory of anticompetitive harm723 and confirmed, on this basis, the
substantial fine imposed by the Commission.724
In the US case against Microsoft, Judge Jackson of the D.C. District Court
dismissed the separate claim of monopoly leveraging.725 Although the US Supreme
Court revived a version of the leverage theory in the Eastman Kodak case,726 it has
recently held in the Trinko case where for a leverage claim to succeed there must be
a “dangerous probability of success in monopolising a second market.” 727 The
existence of market power in an adjacent market does not seem to be a requirement
for the application of the leverage theory in the European Union.728 Consequently,
the standard of proof for leverage claims is higher in the United States than in
Europe.729
The EU and the US approaches also diverge with respect to the analysis of
the anticompetitive effects. The Commission claimed in its Microsoft decision that
the tying of WMP had not only foreclosed competition in the media player market730
but also had “spill-over effects on competition in related products such as media
encoding and management software (often server-side)”, as well as “in client PC
operating systems for which media players compatible with quality content are an
important application.” 731 The Commission found the following anticompetitive
effects:
Microsoft uses Windows as a distribution channel to ensure for itself a significant
723
Case T-201/04 Microsoft Corp. supra note 40, paras. 1344 and 1447.
Ibid., para. 1363.
725
United States v. Microsoft Corp., No. CIV.A. 98-1232 (TPJ), 1998 WL 614485 (D.D.C. September
14, 1998).
726
Eastman Kodak, supra note 359.
727
Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP., 540 US 451, 497 (2004).
728
Case T-201/04 Microsoft Corp. supra note 40, para. 599.
729
Economides and Lianos, supra note 580, 554.
730
COMP/C-3/37.792 Microsoft, supra note 238, paras. 835-954.
731
COMP/C-3/37.792 Microsoft, supra note 238, para. 842.
724
156
competitive advantage on the media players market; because of the bundling,
Microsoft’s competitors are a priori at a disadvantage even if their products are
inherently better than Windows Media Player; Microsoft interferes with the normal
competitive process which would benefit users by ensuring quicker cycles of
innovation as a consequence of unfettered competition on the merits; the bundling
increases the content and applications barriers to entry, which protect Windows, and
facilitates the erection of such barriers for Windows Media Player; Microsoft shields
itself from effective competition from vendors of potentially more efficient media
players who could challenge its position, and thus reduces the talent and capital
invested in innovation of media players; by means of the bundling, Microsoft may
expand its position in adjacent media-related software markets and weaken effective
competition, to the detriment of consumers; by means of the bundling, Microsoft
sends signals which deter innovation in any technologies in which it might
conceivably take an interest and which it might tie with Windows in the future.732
The General Court conducted a limited analysis of the alleged anticompetitive effects.
It concluded that “there was a reasonable likelihood that tying Windows and
Windows Media Player would lead to a lessening of competition so that the
maintenance of an effective competition structure would not be ensured in the
foreseeable future.”
733
The General Court used the expression “reasonable
likelihood” of anticompetitive effects, instead of the expression “capable of having”
anticompetitive effects, which it had used in previous decisions.734 It also used the
expression “actual effects” when it referred to the Commission’s analysis of the
anticompetitive effects of bundling. 735 However, the General Court revealed that
most of these negative effects on consumers were indirect and emanated from the
fact that Microsoft, as compared with its media player competitors, benefited from an
“unparalleled advantage with respect to the distribution of its product” that
732
Case T-201/04 Microsoft Corp. supra note 40, para. 1088.
Ibid., para. 1089.
734
Case T-219/99 British Airways, supra note 379, para. 293.
735
Case T-201/04 Microsoft Corp. supra note 40, para. 1035.
733
157
“inevitably had significant consequences for the structure of competition” on the
streaming media player market.736
Specifically, the bundling of Windows and WMP allowed WMP to benefit
“from the ubiquity of that operating system on client PCs, which cannot be
counterbalanced by the other methods of distributing media players.”737 There was a
risk that Windows Media Player would become the de facto standard for the media
player market as a result of Microsoft’s leveraging of its quasi-monopoly from the
PC operating system market to the media player market. Although the General Court
accepted that “standardisation may effectively present certain advantages”, it did not
accept that an undertaking in a dominant position could impose that by means of
tying.738 The emergence of a de facto standard should be the result of competition
between the “intrinsic merits” of the products and depends on the consumers’ choice
rather than being due to the arbitrary decision of a dominant undertaking which
imposes its own standard.739
Secondly, Microsoft’s bundling practice would have restricted consumers’
access to similar or better quality products than WMP.740 Because of the bundling
practice, “consumers have an incentive to use Windows Media Player at the expense
of competing media players, notwithstanding that the latter players are of better
quality.” 741 The General Court based this finding on the comparative reviews of
media players presented by Microsoft during the administrative procedure before the
Commission’s decision. These comparative reviews indicated that WMP was of
736
Ibid., para. 1054.
Case T-201/04 Microsoft Corp. supra note 40, para. 1036.
738
Ibid., para. 1152.
739
Case T-201/04 Microsoft Corp. supra note 40, paras. 1040 and 1046-1047.
740
Ibid., para. 1356.
741
Case T-201/04 Microsoft Corp. supra note 40, para. 971.
737
158
lower quality than some of the other excluded media players, having achieved a
lower rank than RealPlayer in more than half of these reviews.742
Thirdly, the ubiquity of WMP as a result of its bundling with Windows was
capable of having “an appreciable impact on content providers and software
designers” because of the significant “indirect network effects” (“positive feedback
loop”) that existed in the WMP market.743 It was thought that the greater the number
of users of a given software platform there are, the more will be invested in
developing products compatible with that platform, which in turn will reinforce the
popularity of that platform with users (Application Barriers).744 There is evidence
that content providers and software developers choose the technology for which they
develop their own products on the basis of the percentage of consumer installation
and use. 745 Because of additional development and administrative costs, the
developers are inclined to use only one technology for their products. Encoding
streamed content in several formats is expensive and time-consuming, and these
costs may not be outweighed by the advantages of increasing the potential reach of
content providers and software developers’ products.746
The General Court concluded that the ubiquity of WMP on Windows PCs
“secured Microsoft a competitive advantage unrelated to the merits of its products”
and erected a barrier to entry to new “contenders”, not only on the media players
market but also “on other adjacent markets”, such as “media players on wireless
information devices, set-top boxes, digital rights management (DRM) solutions and
on-line music delivery.”747 The evolution of the market consistently pointed to “a
742
COMP/C-3/37.792 Microsoft, supra note 238, paras. 949-951.
Case T-201/04 Microsoft Corp. supra note 40, paras. 1060-1061.
744
Ibid.
745
Economides and Lianos, supra note 580, 557.
746
Case T-201/04 Microsoft Corp. supra note 40, paras. 1065-1066.
747
Case T-201/04 Microsoft Corp. supra note 40, paras. 1069 and 1076.
743
159
trend in favour of usage of [WMP] and Windows Media formats to the detriment of
the main competing media players (and media technologies)”, such as RealPlayer
and QuickTime Player.748 Furthermore, RealPlayer’s installed base was significantly
lower than that of WMP, as it was present on only 60 to 70 percent of home PCs in
the United States, while the rate of installation of WMP was 100 percent on
Windows client PCs and more than 90 percent on all client PCs, including nonWindows machines.749
Significantly, the General Court does not discuss the existence of direct
consumer harm, but it instead seems to infer consumer detriment from the alteration
of the competitive structure of the media player market.750 This is in conformity with
the approach generally followed by the EU Courts for exclusionary abuses under
Article 102 TFEU. 751 The preservation of the competitive process constitutes an
important objective of EU competition law. 752 Thus, the Court of Justice and the
General Court take a long-term view of consumer detriment, and favour the
protection of competitors instead of short-term efficiencies. 753 This approach
contrasts with the dominant approach of the US courts that require evidence of at
least an increase in prices or a reduction of output in the market.754
The perspective of the EU Courts is that competition is a process of
discovering the most efficient solution that benefits consumers, and that restricting
competition, in the sense of less rivalry in the market, is presumed to reduce
efficiency and be detrimental to consumers in the long term, in particular if the
undertaking has an overwhelmingly dominant position. The obvious shortcoming of
748
Ibid., paras. 1078-1081.
Case T-201/04 Microsoft Corp. supra note 40, para. 1087.
750
Ibid., para. 1087.
751
Case C-95/04 British Airways, supra note 379, para. 106.
752
Opinion of Advocate General Kokott in Case C-95/04 British Airways, supra note 379, para. 68.
753
Economides and Lianos, supra note 580, 558.
754
Microsoft Corp., supra note 313, 84.
749
160
this approach is the absence of clear boundaries for competition law enforcement.755
This approach may also explain why EU competition law considers that
anticompetitive effects may result not only from practices that restrict output or
increase prices, but also those that restrict more broadly consumer choice or
sovereignty.756 However, it is not clear if consumer choice is valued as such, or if it
is preserved only when more choice is likely to lead to identifiable consumer benefits,
such as better quality products, low prices, and/or additional services.757
The General Court’s Microsoft decision seems to indicate that choice was
valued with the purpose of preserving the continuing offer in the market of media
players that was at least of similar, if not better, quality than WMP.758 The language
used by the General Court seems to indicate that the preservation of consumer choice
is linked to the preservation of the competitive structure of the market and the
protection of competitors.759 If this interpretation is correct, then there is ultimately
little difference between the previous quasi-per se illegality approach for tying and
the General Court’s position in Microsoft on technological tying.760
A possible limiting principle to the expansive approach of the General Court
with regard to the scope of Article 102 TFEU is the unique character of the Microsoft
case. 761 The General Court considered that the ubiquity of Windows granted
Microsoft’s WMP an overwhelming distribution advantage, compared to other media
players. 762 In other words, the existence of important network effects provided
Microsoft with the opportunity to extend its quasi-monopoly to other markets and to
755
Economides and Lianos, supra note 580, 558.
The Guidance Paper, supra note 43, para. 19.
757
Economides and Lianos, supra note 580, 559.
758
Case T-201/04 Microsoft Corp. supra note 40, para. 1356.
759
Economides and Lianos, supra note 580, 559.
760
Ibid.
761
Economides and Lianos, supra note 580, 559.
762
Case T-201/04 Microsoft Corp. supra note 38.
756
161
exclude even products of equal or superior quality. 763 Without employing the
essential facilities terminology, the General Court concluded that it would have been
very difficult, or even impossible for other media players to compete on equal terms
with WMP without having effective access, meaning without additional costs to the
final consumer, to the Windows platform. 764 The protection of the competitive
process seems in this case to be intrinsically linked to the concept of consumer
sovereignty as consumers’ effective choice would have been limited by Microsoft’s
“artificial selection” of media player.765 The emphasis given to the protection of the
competitive process is therefore explained by the presumption that the extension of
Microsoft’s quasi-monopoly to the media player market would marginalise all
existing or potential competition and could therefore lead to consumer harm.766 The
assumption is that competition guarantees consumer sovereignty or choice, and,
ultimately consumer welfare in the long term, while a monopoly does not.
VI. Framework of Technological Integration in New Economy Markets
In the New Economy markets, it is misguided and potentially harmful to consumer
welfare to dwell on the question of whether tying products and tied products are or
are not “separate products” for the purposes of tying law, since the very definition of
the relevant product may be in a state of continuous change.767 There are two broad
difficulties with such inquiry. First, merely to cast the legal analysis in terms of the
separateness or cohesiveness of two “products” is to inject an implicit and biased
economic assumption that technology in the market in question is static rather than
763
Ibid.
Case T-201/04 Microsoft Corp. supra note 38.
765
Ibid.
766
Economides and Lianos, supra note 580, 559.
767
Sidak, supra note 408, 26.
764
162
dynamic. 768 Second, the question of separate products has become an intellectual
exercise which is required to do all the heavy lifting for a competition standard that
otherwise fails to ask the pertinent economic questions that affect consumer
welfare.769 This deficiency in the doctrinal intellectual method becomes especially
apparent in cases involving technologically dynamic markets, where courts seem to
struggle to prevent obvious consumer harm by engaging in increasingly metaphysical
inquiries into the integration and separability of products. 770
Therefore, the
competition standard to identify separability of products reflects dynamic and
flexible characteristics in the New Economy markets. These should include a
technology convergence in these markets as well.
In a technologically dynamic market, a more specialised competition analysis
of product integration would be required after the four elements of tying in both
jurisdictions had been proven. The inherent flexibility, in particular, of software
design should be considered. The first additional step must ask whether the market in
question is technologically mature or technologically dynamic. 771 If the market is
technologically mature, then the traditional four-part test for tying applies.772 In such
a market, products are well-defined, both by the consumer demand that they satisfy,
and by the production technology through which undertakings supply them. 773 In
such a market, as opposed to a technologically dynamic market, it is far more likely
that a court can conclude with confidence that the tying product and the tied product
are indeed separate products. On the other hand, if the market is technologically
dynamic, additional elements are required before an instance of product integration
768
Ibid.
Sidak, supra note 408, 26.
770
Ibid.
771
Sidak, supra note 408, 26.
772
Ibid.
773
Sidak, supra note 408, 26.
769
163
can be found to be anticompetitive. 774 In such a case, competition exists for the
market in a Schumpeterian sense. Consumer welfare will depend to a greater extent
on competiveness with respect to non-price variables, such as quality and
innovation. 775 Competition for the market can be viewed as a contest to define
entirely new demand curves or to push existing demand curves outward with vastly
improved combinations of price and performance.776 Jefferson Parish’s analysis of
the “character of demand” is incomplete and ambiguous. 777 Consumers and
producers are still in the midst of discovering what the “character of demand” is
likely to be.778 Any tying rule that ignores this condition of demand uncertainty runs
a great risk of harming consumers.779
A second additional step, must ask whether it is plausible that consumers will
benefit from the product integration in question.780 Such consumer benefits can come
from lower costs, increased demand, or both. 781 Increased demand results from
product integration if there is superadditivity of demand across two outputs, when
they are produced as an integrated product. 782 The increased demand may result
because the product definition has changed as a result of the integration in a manner
that produces more satisfaction or utility for consumers.783 Otherwise, it may result
because the integration of two goods reduces the cost to the consumer of engaging in
additional product assembly or integration. 784 Alternatively, the increased demand
may result from some factor that is impossible to predict a priori, but which is
774
Ibid.
Schmalensee, supra note 190, 192-196.
776
Sidak, supra note 408, 28.
777
Ibid.
778
Sidak, supra note 408, 28.
779
Ibid..
780
Sidak, supra note 408, 28.
781
Ibid., 30.
782
Sidak, supra note 408, 30.
783
Sidak, supra note 408, 30.
784
Ibid.
775
164
reflected, ultimately and objectively, in consumers’ willingness to pay more. 785
Lower costs result from product integration if there is subadditivity of costs across
two outputs.786 Subadditivity of costs is present if an undertaking with a given cost
function “has lower costs than would an allocation of output among two or more
undertakings using the same cost function.”787 In other words, it is more efficient for
the single undertaking to produce two items as an integrated product than it is for
multiple undertakings to produce one separately from the other.788 Such efficiencies
are also known as economies of scope. The undertaking’s technology is said to
exhibit economies of scope when it is less costly for one firm to produce a set of
goods jointly than for distinct firms to produce individual goods or subsets of goods
separately.789 The analysis of cost subadditivity also implicitly answers the question
of who, the producer or the consumer, is the more efficient integrator of individual
functionalities.790 Although it may be feasible for the consumer to integrate separate
functionalities, the consumer may not be the lower-cost integrator.791 The superior
efficiency of the producer depends on economies of scale and scope, as well as
learning-by-doing effects that allow the producer’s unit cost of product integration to
fall over time with its level of cumulative output.792 Although the government agreed
that there was some benefit to Microsoft’s product integration, it seemed to regard
such a benefit as insufficient or illegitimate. This was because the integration created
a monopoly that impeded competition. This in turn denied consumers access to some
alternative market structure in which the government hypothesised that software
785
Sidak, supra note 408, 30.
Ibid.
787
Gregory Sidak and Daniel Spulber, Deregulatory Takings and the Regulatory Contract: The
Competitive transformation of Network Industries in the United States (Cambridge: Cambridge
University Press, 1997), 20.
788
Sidak, supra note 408, 30.
789
Sidak and Spulber, supra note 787, 22.
790
Sidak, supra note 408, 30.
791
Ibid., 30.
792
Sidak, supra note 408, 30.
786
165
would be even more advanced and prices even lower than what Microsoft had
actually produced through its integration of software.793
Some may argue that, even though an instance of product integration benefits
consumers by achieving subadditive costs, superadditive demand, or both, such
integration will preserve a monopoly that the producer possesses over the tying
product.794 This concern rests on the theoretical possibility that software integration
may tend to preserve a Windows OS monopoly over PC operating systems by
discouraging the development of alternative platforms made possible by middleware.
Of course, if no reduction in competition in the tying product’s market is discernible,
then the inquiry ceases and the tying arrangement is deemed lawful. On the other
hand, if a reduction in competition is discernible, then the court’s inquiry advances to
the next step, which concerns the ultimate impact of the product integration on
consumer welfare.795
The final supplemental element in establishing an unlawful tying arrangement
in a technologically dynamic market is a net loss in consumer welfare. 796 This
determination requires the court to compare the welfare losses to consumers from
reduced competition in the market for the tying product with the welfare gains to
consumers from the creation of subadditive costs, superadditive demand, or both.797
A finding of liability follows only if the first amount outweighs the second.
Williamson demonstrated the effects on consumer welfare of a merger that restricts
output by raising prices and lowers marginal costs by achieving certain productive
793
Ibid.
Crocioni, supra note 293, 461.
795
Sidak, supra note 408, 31.
796
Ibid.
797
Sidak, supra note 408, 31.
794
166
efficiencies.798 To defend a merger, according to Williamson, the merging parties
must demonstrate that the cost savings achieved through greater efficiencies exceed
the deadweight loss (the amount above costs that consumers would be willing to pay
for the lost output) to consumers.799 The Department of Justice and the Federal Trade
Commission have since embraced the Williamsonian welfare trade-off for both
vertical and horizontal merger analysis. 800 Also, Robert Bork has stated that
Williamson’s insight can be extended to any antitrust analysis.801
VII. Remedies in Technological Integration
Computer software is frequently distributed in two versions; a basic version that may
be free and a full-featured version at a cost. The actual software delivered may be
identical for both the basic and full-featured versions. An end user upgrades from the
basic version by paying a fee and receiving a password to unlock the additional
features. The Microsoft antitrust cases emphasise the importance of how access and
permission is organised. The tying claim in the US case turned on how Microsoft had
organised the relationship, both technical and financial, between Windows OS and
Internet Explorer. In the EU case, the focus was on the same questions regarding
Windows OS and Windows Media Player (WMP). However, it is argued that the
ideas of tying and bundling are too crude to help understand these situations.802 The
software with zero marginal cost increments to the good makes tying and bundling
Oliver Williamson, “Economies as an Antitrust Defense: The Welfare Tradeoffs,” American
Economic Review 58, no. 1 (1968): 21.
799
Ibid., 18-36.
800
Section 4 of 1984 Merger Guidelines, US Department of Justice, Available at
http://www.justice.gov/atr/hmerger/11249.htm (accessed 27 August, 2009)
801
Bork, supra note 364, 108.
802
Randal Picker, “Pursuing a Remedy in Microsoft: The Declining Need for Centralised
Coordination in a Networked World,” Journal of Institutional and Theoretical Economics 158 (2002):
134.
798
167
particularly elusive.803 It is suggested that presence, visibility, and price should be
focused on.804 Presence is about where software is located, whether it comes on the
Windows CD, or it is preinstalled by an Original Equipment Manufacturer (OEM).805
In other words, it is the way the software is distributed. Prior to the Internet,
Microsoft enjoyed a substantial distributional advantage in being able to incorporate
new software into Windows. The existence of the Internet, where software can be
downloaded easily, should diminish that advantage. However, the evidence in the EU
case suggests that Microsoft still enjoys a powerful distributional advantage over its
software competitors.806 Microsoft can easily make software present by just folding
new software into Windows.807 Visibility is distinct from presence, i.e. software can
be present but invisible.808 Microsoft Word comes with numerous features, but the
average user only ever sees a handful.809 Indeed, the current interface of Microsoft
Word recognises this and “evolves” to track a customer’s usage patterns by only
showing on menus features that a customer uses frequently.810 Software can also be
visible but not present.811 Some features in software are listed as being available for
use, but in truth they need to be installed on first use, either from a CD or over the
network. Finally, price focuses on the question of whether a separate charge is
required to use the software.812 Windows is designed as a trademarked product sold
for one price. Microsoft does sell what it calls a “personalisation pack” and an
“enhancement pack” for Windows operating system, such as “Home” edition and
Randal Picker, “Unbundling Scope-of-Permission Goods: When Should We Invest in Reducing
Entry Barriers?” University of Chicago Law Review 72, no. 1 (Winter 2005): 198.
804
Picker, supra note 802, 134.
805
Picker, supra note 803, 198.
806
COMP/C-3/37.792 Microsoft, supra note 238.
807
Ibid.
808
Picker, supra note 803, 199.
809
Ibid.
810
Picker, supra note 803, 199.
811
Ibid.
812
Picker, supra note 803, 199.
803
168
“Professional” edition. An end-user cannot buy Windows operating system a la carte
and pay a reduced price if, for example, a customer never wants to print anything.
The distinction between visibility and presence with regard to Windows
Media Player is one of the key lines of separation between the US and EU Microsoft
cases.813 In the EU case, Microsoft argued that the US case remedy sufficed as to
media players.814 Under the US remedy, OEMs could sell computers without visible
access to WMP and could make other media players the default installation. 815
Critically, at least from the EU’s perspective, this meant that the underlying code for
WMP would continue to be present on the machines shipped by OEMs.816 The US
approach limits the extent to which courts intrude into product design. Although the
District Court had proceeded on an analysis of per se liability, the D.C. Circuit had
overturned the original finding of liability for tying Internet Explorer to Windows.817
The Court of Appeals had found that Microsoft’s commingling of browser
functionality code with operating system code was monopolising conduct that
violated Section 2, lacking any efficiency justification. 818 The case for requiring
unbundling was particularly true given the presumed cost of requiring Microsoft to
redesign Windows, a cost the government plaintiffs had acknowledged when they
proposed the original decree to Judge Jackson.819 Further, there was the technical
problem of specifying exactly what code constituted “the browser” and how one
would specify it in a way that would enable Microsoft to comply with an injunction
813
Ibid.
COMP/C-3/37.792 Microsoft, supra note 238, para. 796.
815
State of New York v. Microsoft Corp. 231 F. Supp. 2d 144, 177 (D.D.C. 2002).
816
Ibid., para. 798.
817
Microsoft Corp., supra note 313, 89.
818
Microsoft Corp., supra note 313.
819
Plaintiff’s Memorandum in Support of Proposed Final Judgement, United States v. Microsoft Corp.,
97 F.Supp.2d 59 (Nos. 98-1232 & 98-1233), Available at http://www.justice.gov/atr/cases /f219100
/219107.pdf (accessed 28 August, 2009).
814
169
that required such code to be removed from Windows without disabling it.820 Thus,
Microsoft is free to commingle software codes at will and to reuse chunks of code to
provide different functionalities. 821 At the same time, the remedy controls the
visibility of pieces of the code.822 This is one approach to software; the user has the
right to use the code that is present, but the transaction costs of using it are higher
because the code is not visible to the end user.823 By making it possible for computer
sellers to reduce the visibility of software functions such as Internet Explorer, the
ability of browser competitors to place their software on the desktop may be
enhanced.824
In the EU case, the Commission sought to create competition at the computer
seller level by requiring Microsoft to create two different versions of Windows, one
with WMP and one without (“Windows and Windows-N”). 825 Under the remedy,
Microsoft would not be required to charge different prices for the “with” and
“without” versions, and Microsoft would be allowed to negotiate with OEMs to have
the “with” version installed on desktops. 826 As a consequence of that, Microsoft
would have to bargain with OEMs to get WMP on the desktop, just as RealNetworks,
Apple, and all of the other media player companies currently bargain to get their
software distributed. Notwithstanding the fact that Windows is one of the best
possible vehicles for distributing software, Microsoft enjoyed a huge competitive
advantage in being able to fold WMP into Windows. When it added software to
Windows it could be assured that software would become widely distributed as the
Harry First and Andrew Gavil, “Re-framing Windows: The Durable Meaning of the Microsoft
Antitrust Litigation,” Utah Law Review 2006 (2006): 692.
821
Picker, supra note 803, 200.
822
Ibid.
823
Picker, supra note 803, 200.
824
Ibid.
825
COMP/C-3/37.792 Microsoft, supra note 238.
826
Ibid., para. 959.
820
170
next version of Windows rolled out, prior to the recent antitrust actions. One measure
of this is the distributional deal cut by RealNetworks with Compaq. 827 The
Commission characterised that deal as “a revenue sharing model of not insignificant
relevance”,828 and RealNetworks’ revenue sharing as an example of “the significant
additional cost that tying imposes on Microsoft’s rivals.”829
With WMP already on the system, an OEM will focus on the incremental
costs and benefits of adding a second media player. Incremental benefits could arise
if the second media player has more features than WMP or taps into music not
released in a format supported by WMP. The incremental costs of the second media
player are typically extra support and training costs. 830 Without WMP installed,
adding RealPlayer would almost certainly be a net positive; with WMP installed,
adding RealPlayer may very well be a net negative for the OEM.831 The power to
distribute is valuable, and firms routinely get paid for distribution. Therefore, the
deal between RealNetworks and Compaq looked much like a standard carriage deal.
However, with Windows, Microsoft has its own distribution channel, and Microsoft
does not have to strike separate distribution deals. WMP’s presence does make it
somewhat more expensive for a media player competitor to enter,832 but it would be a
mistake to measure that entry barrier by the size of the observed payments by media
player firms to OEMs.833 Pure distribution payments probably represent the lion’s
share of those payments, viz. in the Commission’s versioning remedy, the
distribution payments suggest that media player software is under-distributed.834 In a
827
COMP/C-3/37.792 Microsoft, supra note 238, para. 856.
Ibid.
829
COMP/C-3/37.792 Microsoft, supra note 238, para. 856.
830
Ibid., para. 852.
831
Picker, supra note 803, 204.
832
Ibid., 205.
833
Picker, supra note 803, 205.
834
Ibid.
828
171
competitive market, the price of distribution should reflect the marginal cost of
distribution.835 If hard disk space is free, the key cost of distribution is the extra
support calls that come with having more than one media player installed. If it is
right that RealNetworks’ payments to Compaq exceed those costs, then market
power is exercised in distributing ‘free’ software such as media players, and that
software is under-distributed.836
A second route available to the Commission was a mandatory versioning.837
This is a ‘must-carry’ remedy, meaning that Microsoft would have to distribute one
or more media players with Windows if Microsoft wanted to bundle WMP with
Windows. The must-carry remedy would directly mitigate the ubiquity advantage
that the Commission thought would tip the media platform format war. It would also
mitigate the market power that may be being exercised by OEMs in the deals that
they strike to distribute software. However, there is the concern about market
engineering in the must-carry. In the US Microsoft case, the court held that “the
Department of Justice explained its decision not to pursue the States’ proposed Java
must-carry provisions: “It is not the proper role of the government to favour one
competitor over others, or one potential middleware platform over others.”838 Media
player distributors may not just choose media player developers and give them mustcarry rights in perpetuity.839 They must also decide the number of media player slots
in Windows and the mechanism to allocate the rights to those slots. This is a way of
835
Picker, supra note 803, 205.
Ibid.
837
European Commission Press Release, Commission Gives Microsoft Last Opportunity to Comment
Before Concluding Its Antitrust Probe (Europa 6 August, 2003), Available at http://europa.eu.int/
rapid/pressReleasesAction.do? reference=IP/03/1150 (accessed 10 December, 2004).
838
Microsoft Corp., 373 F.3d 1199, 1239-1240. (Nos. 02-7155 and 03-5030) (Decided 30 June, 2004).
839
Picker, supra note 803, 205.
836
172
deciding who will get the gains from the slots’ allocation. Certainly, OEMs would be
compensated for the extra support costs.840
In the US, under the Telecommunications Act of 1996, a new entry to
telecommunication market has sought to create facilities-based competition, that is,
competition between telecommunications companies each of which has its own
equipment and lines. That has proved hard to do and most of the facilities-based
competition that has emerged is intermodal competition, that is, competition between
the local telephone incumbent and cable companies and new wireless systems.841 The
must-carry remedy is a lower-cost facilities-based competition in the computer
software industry as compared with the standards of telecommunications.842 There
will be a little extra support costs in having multiple media players installed on a
computer. 843 By bundling other media players with Windows, Window Media
Player’s competitors would have the same “reach” as WMP. Furthermore the
problem of missing Application Programming Interfaces (APIs) would be avoided.844
That means developers would be encouraged to write for various media players.
However, the mandatory versioning approach fragments the media player base,
making it harder for any developer to rely on a particular API.845 Hence, the mustcarry approach would have to be applied whilst somehow circumventing the
fragmentation problem.846
840
Ibid.
Douglas Lichtman and Randal Picker, “Entry Policy in Local Telecommunications: Iowa Utilities
and Verizon,” Supreme Court Review 2002 (2002): 90-91.
842
Picker, supra note 803, 206.
843
Ibid.
844
Picker, supra note 803, 206.
845
Ibid.
846
Picker, supra note 803, 206.
841
173
Another concern is that the must-carry could be regarded as compelled
speech.847 In Microsoft’s case, the state and federal antitrust authorities sought to
impose on Microsoft an obligation to carry Netscape. That injunction would be
analogous to requiring The Times or The Daily Mail, perhaps because of the size of
its “installed base” of subscribers, to carry the stories or editorials or advertisements
of a less-read newspaper, such as the Manchester Evening News. The mandatory
access that the US Department of Justice sought for Netscape’s Internet browser on
Microsoft’s Windows platform would directly regulate the content of protected
speech. 848 The injunction sought by the Department of Justice against Microsoft
would compel Microsoft “to utter the speech of another” by requiring Microsoft to
publish
and
advertise
Netscape’s
Internet
browser
on
the
Windows
platform. 849 Indeed, in its complaint against Microsoft, the Department of Justice
itself remarked upon “the valuable real estate that the [Windows] desktop screen
represents for the provision of software, advertising and promotion.”850 The mustcarry provision of the desired injunction against Microsoft would be “a direct,
purposeful regulation of the content of fully protected speech.” 851 The injunction
would tell Microsoft what applications it must include on the Windows platform,
“even though [Microsoft] would not voluntarily carry such programming and even
though its forced inclusion may lead to the exclusion of programming unfavoured by
[the government].” 852 Thus, it would not be in accordance with the constitutional
Abbott Lipsky Jr. and Gregory Sidak, “Essential Facilities,” Stanford Law Review 51, no. 5 (May
1999): 1187-1248.
848
Ibid.
849
Lipsky and Sidak, supra note 847, 1242.
850
Complaint, para. 100, in United States v. Microsoft Corp., No. 98-1232 (D.D.C. filed 18 May,
1998).
851
Appellant National Cable Television Association, Inc.’s Brief, Turner Broadcasting Systems Inc. v.
Federal Communications Commission, 819 F. Supp. 32, 16 (D.D.C. 1993) (No. 93-44).
852
Ibid.
847
174
principles to impose the mandatory carry remedy on Microsoft.853 With respect to
competing in the marketplaces, while the cable system may have common carriage
aspects, restricted freedom of speech, Microsoft’s Windows does not need, as a
prerequisite to conducting business, any license, franchise, certificate of public
convenience and necessity; nor does Windows use any government-licensed
spectrum or public right of way. 854 Microsoft is not a common carrier, and the
injunctions sought by the Department of Justice and the states attorneys general
would not have the practical effect of making Microsoft one, as those desired
remedies would impose on Microsoft the duty to carry only the Internet browsers of
Netscape and at most one other company. Thus, an alternative approach will be
needed, since freedom of speech strictly limits the power of government to order
Microsoft to open the Windows platform to third parties wishing to disseminate their
own messages (browsers or media players) over that medium of expression
(Windows).
The third route is that Microsoft be required to produce two versions of
Windows, viz. one with Windows Media Player completely unbundled, and a second
that would include new features yet to be developed, called “Media Player Centre”
that would permit consumers to access and download media player software of their
choice.855 Although the Commission also required Microsoft to offer an unbundled
853
Lipsky and Sidak, supra note 847, 1244.
Ibid., 1246.
855
English Version of the Korea Fair Trade Commissions Microsoft Decision, The Findings of the
Microsoft Case (7 December, 2005), 3-4, Available at http://ftc.go.kr/data/hwp/micorsoft_case.pdf
(accessed 24 August, 2009); The Koera Fair Trade Commission (KFTC) also investigated Microsoft’s
specific practices in Korea: (1) Microsoft’s tying of its Window Media Service to the Window Server
operating system, where Microsoft has market dominance; (2) tying WMP to the Windows PC OS,
where Microsoft has monopoly power; and (3) tying of its instant messaging programme to the
Windows PC OS, where Microsoft has monopoly power. The KFTC concluded that Microsoft had
abused its dominant position in violation of the Korean Monopoly Regulation and Fair Trade Act. For
remedying these conducts, the KFTC chose a different and more tailored path than the Commission.
With respect to bundling of Windows Media Service with Windows Server OS, the KFTC ordered
Microsoft to completely unbundle. For tying WMP and instant messaging to Windows PC OS, the
854
175
version to provide OEMs and consumers with the option of purchasing Windows
without Media Player, it permitted Microsoft to continue marketing its Media Player
bundled with its Windows operating system at the same time.856 The remedy to date
appears to have been a failure in the sense that there has been little interest in
licensing the unbundled version.857 This may be largely due to the fact that there was
no requirement that the stripped down version be licensed with more favourable
pricing.858 Priced equally, the choice between the bundled and unbundled product is
no choice at all and as a consequence of that, Microsoft perpetuates the strategy of
raising rivals’ costs to gain access to the desktop.859
These new additions to Windows would “contain links to web-pages that
allow consumers to download competing media players, so that competing software
can be equally installed into Windows PC operating system.”860 Media Player Centre
would function as a portal to the competitive offerings of many suppliers, including
Microsoft. 861 Instead of being bound to Microsoft’s offerings, consumers would
make their own choices conveniently from the desktop. Although this remedy could
be faulted for foisting a choice upon consumers that some might not want, it would
directly lower the transaction costs associated with accessing alternative media
players and thus neutralise any inherent benefit Microsoft possessed by virtue of its
KFTC took a different approach . Like the Commission, it ordered Microsoft to produce two versions
of its PC OS, but instead of requiring an equally priced bundled and unbundled version, it required an
unbundled version, for consumers that prefer not to have an instant messenger or a media player, and
another version to include “Media Player Centre” and “Messenger Centre,” Thus consumers can
download competing media players and instant messengers.
856
COMP/C-3/37.792 Microsoft, supra note 238.
857
First and Gavil, supra note 820, 717.
858
Ibid.
859
First and Gavil, supra note 820, 717.
860
English Version of the Korea Fair Trade Commissions Microsoft Decision, The Findings of the
Microsoft Case (7 December, 2005), 3-4, Available at http://ftc.go.kr/data/hwp/micorsoft_case.pdf
(accessed 24 August, 2009).
861
First and Gavil, supra note 820, 717.
176
monopoly control of the desktop.862 Not content with ignoring the installed base of
customers with bundled software, the remedy also called for Microsoft to provide
Media Player Centre via CD or Internet updates, so all Windows users would benefit
from the newly accessible alternatives. 863 This kind of complete unbundling
approach reflects in part the way that the Commission’s approach was not working to
reinvigorate competition impaired by Microsoft’s conduct, but it also reflects the fact
that neither was the United States’ hands-off approach in the context of browser
competition. 864 The complete unbundling approach was similar in spirit but less
invasive than the “must-carry” remedy that was originally sought by the US
government plaintiffs in the US Microsoft case.865
VIII. Conclusion
Under Article 102 TFEU, EU competition regime views technological integration as
almost illegal per se if certain conditions are present. First, there must be two
separate products. Second, the undertaking must be dominant in the tying product
market. Third, the customer must be coerced into purchasing the two products
together. Fourth, the tying must be likely to foreclose effective competition, and
finally, there must be no objective justification for technological integration. The US
assessment is more or less the same as the EU’s.866 However, their argument remains
862
First and Gavil, supra note 820, 717.
English Version of the Korea Fair Trade Commissions Microsoft Decision, The Findings of the
Microsoft Case (7 December, 2005), 4, Available at http://ftc.go.kr/data/hwp/micorsoft_case.pdf
(accessed 24 August, 2009).
864
First and Gavil, supra note 820, 718.
865
Ibid.
866
Microsoft Corp., supra note 313.
863
177
that antitrust enforcement was a crude and slow tool, ill-suited for rapidly changing
IT markets.867
In the Microsoft case, the feared foreclosure on the tied market was mainly
due to Microsoft’s quasi-monopoly in the operating systems markets and network
effects in this market. Many presumed that owing to the fast pace of technological
change, the evolution of the software industry would easily outpace antitrust
litigation. 868 It was believed that the industry was operating on “Internet Time”,
whilst the courts were operating on “Legal Time.” 869 However, since the US
Department of Justice brought its Microsoft case in May 1998, for more than a
decade Microsoft’s share of the Intel-compatible PC operating system market has
remained above ninety percent. Similarly, despite the more recent challenge from
Mozilla’s Firefox and Google’s Chrome Internet browsers, Microsoft’s share of the
browser market has remained around fifty percent.870 The hailstorm of innovation
once predicted by Microsoft’s own witnesses, from the Internet and from Linux,
simply has not developed into any serious challenge to Microsoft’s market hegemony
in the PC operating system market. More recently, Apple was using its nearmonopoly in the MP3 player market to achieve a monopoly in the music download
market by tying Apple’s media gadgets, such as iPod, iPhone, and iPad, with iTunes,
its online music store. Technological advances have surely been significant during
that time, but from a competition perspective, little of importance has changed.871
Competition policy did move too slowly to protect effective competition. 872 The
867
First and Gavil, supra note 820, 721.
Ibid.
869
Cusmo and Yoffie, supra note 99.
870
Netmarketshare, Available at http://www.netmarketshare.com/browser-market-share.aspx?qprid=0
(accessed 21 August, 2011):Total global market share is Microsoft Internet Explorer-52.71%, Firefox21.47%, Chrome-13.49%, Safari-8.10%, Opera-1.65%, Opera Mini-1.25%, Other-1.31% (Data
provided by RealTimeStats.com)
871
First and Gavil, supra note 820, 722.
872
Ibid.
868
178
nascent competitive threat of Netscape’s Navigator and Sun’s Java was successfully
extinguished by Microsoft. Excess caution by competition authorities and courts at
that moment, for fear of a ‘false positive’ or Type 1 error, inherently favours the
incumbent at the expense of competition.873 An approach more sensitive to both the
cost of lost competition and the difficulty of reconstructing it once vanquished would
recognise that to some degree “the defendant is made to suffer the uncertain
consequences of its own undesirable conduct.”874
Technological integration could have anticompetitive as well as some
efficiency justifications in New Economy markets. Because of this, competition
authorities are increasingly looking at this practice in technologically dynamic
markets on a case-by-case or rule of reason basis.875 However, this type of approach
might cause legal uncertainty or unpredictability for market participants. Lacking a
definitive standard, courts will not be able to provide consistent outcomes in markets
that tend toward monopoly. Thus a more structured standard is needed to make the
boundary of legal integration clear, where the reduction in consumer choice is
considered to be like the reduction of consumer welfare in the long term. Also it is
crucial for competition authorities to recognise that the consumer welfare effects of
product integration in technologically mature markets differ considerably for those in
technologically dynamic markets. As long as the law of tying arrangements fails to
make that distinction, it is as likely to harm consumer welfare in the New Economy
as to enhance it.
Andrew Gavil, “Exclusionary Distribution Strategies by Dominant Firms: Striking a Better
Balance,” Antitrust Law Journal 72 (2004): 80.
874
Microsoft Corp., supra note 313, 79.
875
European Commission, Competition Discussion Paper, supra note 641; OFT, “Assessment of
Conduct – Draft Competition Law Guidelines for Consultation,” 2004, OFT414a.
873
179
Part IV. Interoperability and Compulsory Licensing in Technologically
Dynamic Markets
I. Introduction........................................................................................................... 181
1.1 Background .................................................................................................... 181
1.2 Interfaces between Competition Law and Intellectual Property Rights......... 183
II. European Approach to Refusal to License .......................................................... 187
2.1 Refusals to Supply and Refusal to License .................................................... 188
2.2 The Commission’s Essential Facilities Doctrine ........................................... 194
2.3 Magill TV Guide and the Exceptional Circumstances ................................... 196
2.4 Extension of Exceptional Circumstances/Essential Facilities after Magill.... 200
III. Exceptional Circumstances/Essential Facilities in Information Technology Sector
.................................................................................................................................. 206
3.1 Microsoft Case in the EU and Exceptional Circumstances ............................ 206
3.1.1 Commission’s Incentives Balance Test .................................................. 206
3.1.2 EU Courts’ Modification and Extension of Exceptional Circumstances 211
3.1.2.1 Judgement ........................................................................................ 211
3.1.2.2 Modification and Extension of the Exceptional Circumstances ...... 214
3.2.3 Implications for Future Cases ................................................................. 216
3.2 Microsoft Case in the US ............................................................................... 217
VI. Analysing Elements of Essential Facilities/Exceptional Circumstances ........... 224
4.1 Evolution of Leveraging: Two-Market Theory v. Single-Market Theory ..... 224
4.1.1 Market Foreclosure effects...................................................................... 224
4.1.2 Competitive Relationship ........................................................................ 227
4.2 Exceptional Circumstances ............................................................................ 231
4.2.1 Indispensability ....................................................................................... 231
4.2.2 Risk of Elimination of Effective Competition ........................................ 232
4.2.3 New Product Criterion: Limiting Technological Development .............. 234
4.2.4. Objective Justification and Proportionality............................................ 236
V. Conclusion........................................................................................................... 237
180
I. Introduction
1.1 Background
In the previous parts it was shown that strong network effects may facilitate a
dominant undertaking to tip the market in its favour by means of anticompetitive
leveraging, such as tying, which increases the access of customers to products.
Another way of leveraging market power from one product to another
complementary product is to hinder interoperability i.e. where a dominant
undertaking makes the products of competitors incompatible with its own product i.e.
restriction of access. This implies technical refusal to supply. The effects of
incompatibility are particularly important in the presence of network externalities.
The latter are relevant to market power leveraging if there is a link between primary
and complementary products. In other words, by refusing to make a primary product
interoperable with secondary and dependent products, the dominant network would
gain a competitive advantage and be able to exploit consumers through network
effects in a complementary and dependent market.
Although Article 102 TFEU may appear to be primarily concerned with
exploitative abuses, 876 the Court of Justice has interpreted it to apply to conduct
causing damage to competitive structure of markets already weakened by the
presence of a dominant undertaking. In other words, it has been interpreted to protect
competitors as well as consumers and customers.877 This widened concept of abuse
under Article 102 TFEU raises important issues in the context of IPRs. For example,
how can it be reconciled with the entitlement of eliminating competition which is an
John Lang, “Monopolisation and the Definition of Abuse of a Dominant Position Under Article 86
EEC Treaty,” Common Market Law Review 16, no. 3 (1979): 345-364.
877
Case 322/81 Michelin, supra note 672, para. 70.
876
181
inherent part of the grant of the exclusivity of an IPR? Further, to what extent does
the concept of normal exploitation of IPRs constitute competition on the merits or on
an objective justification?
The answers to these questions appear to be shaped by the determination of
the EU Courts and the Commission to prove whether an abuse is committed in a
primary or a secondary market. In principle, the exclusive exploitation of an IPR is
acceptable in the market for a specific product in order to reward inventors for their
investments and to encourage innovation although it can lead to a dominant position
under competition law. Attempts to extend the method of exclusive exploitation into
neighbouring markets or related products could be caught by Article 102 TFEU, as a
specific abuse such as a refusal to supply or license in cases where the dominant
status precludes alternative sources of supply. In other words, exclusive exploitation
could be legitimate competition on the merits in the primary market, but could
become abusive in a secondary, complementary market in certain exceptional
circumstances because of the leveraging of dominance from one market to the other.
Where an IP holder enjoys a de facto monopoly in a product market, and the
exploitation of the IPR is used in conjunction with a practice designed to foreclose
new entrants or drive out existing competitors in ancillary markets, the EU
competition regime is prepared to restrict an IPR if it is contrary to the requirements
of Article 102 TFEU.
In Magill, it was clear that the exercise of IPRs was within the scope of
national law by itself as it offered no defence to complaints of anticompetitive
abuse.878 In effect, the Commission is entitled to draw the borderline between IPRs
878
Joined Case C-241/91P and C-242/91P Independent Television Publications Ltd (ITP), and Radio
Telefis Eireann (RTE) v. Commission of the European Communities (Magill) [1995] European Court
Reports I -743.
182
and competition law in its definition of abuse with reference to its definitions of
relevant products markets.
In several cases the EU competition regime has applied the essential facilities
doctrine or exceptional circumstances test to IP licensing. In this part, these cases
will be compared with the Microsoft case. It will show that the criteria of Microsoft
have been modified and lowered the previous standards for a compulsory licensing.
Thus, it will be argued whether these lenient conditions for compulsory licensing
have adequately dealt with the information technology (IT) sector where strong
network effects, switching costs, and economies of scales cause high entry barriers.
Although the Court of Justice ruled that the application of competition rules were not
dependent on whether the market concerned was mature or not,879 it does not seem
that the specific criteria will uniformly apply to all industries without considering
their characteristics. Therefore, it will be concluded that the more modified and
relaxed conditions of Microsoft should apply to the IT sector rather the stricter
conditions of earlier cases, such as Magill.
1.2 Interfaces between Competition Law and Intellectual Property Rights
With the advent of the New Economy industries, legal cases in the interface between
intellectual property rights (IPRs) and competition/antitrust law have increased. In
the same way, intellectual property rights have been extended to include new
categories of works. These increases of interfaces have arisen from technological
advances, as well as the stated need to preserve the ability of owners to take
advantage of their investments, and thereby their incentives to innovate for the
879
Case C-52/09 Teliasonera Sverige AB, supra note 1, paras. 105-108.
183
benefit of society.880 As intellectual property rights are more strongly and extensively
protected, there is increasing concern that intellectual property owners have an
unprecedented ability to distort competition in the marketplace.
The rationale of the principles and doctrines applicable to the interface
between competition law and intellectual law may be difficult to comprehend. This is
because such principles reflect different underlying theories. In the field of
economics, competition law looks mainly at the short term and promotes practices
that tend to drive prices toward increased costs, squeezing excess profits out of the
economy.881 In order to achieve this, competition law develops rules that encourage
entry and duplication. 882 In general, the more firms offer a product, the more
competitive its output and price will be. By contrast, the policy of intellectual
property law takes a longer view and encourages innovation by giving people limited
periods of exclusive rights, or freedom from copying.883 In at least some situations,
the result is that firms earn profits considerably higher than short-run costs, and
intellectual property rights have enabled a few firms to earn monopoly profits for
very long periods. 884 These different regimes have sometimes been identified to
reflect the tension between incentives and competition, or intellectual property and
monopoly.885
David Lim, “Beyond Microsoft: Intellectual Property, Peer Production and Law’s Concern with
Market Dominance,” Fordham Intellectual Property, Media, and Entertainment Law Journal 18
(Winter 2008): 292.
881
Herbert Hovenkamp, “The Intellectual Property-Antitrust Interface,” University of Iowa Legal
Studies Research Paper No. 08-46; Issues in Competition Law, ABA, 2008. Available at SSRN:
http://ssrn.com/abstract=1287628. (accessed 18 November, 2008), 1979.
882
Ibid.
883
Hovenkamp, supra note 881, 1979.
884
Ibid.
885
Donald Chisum and Michael Jacobs, Understanding Intellectual Property Law (New York, NY:
Matthew Bender, 1992), 1-6.
880
184
The exclusive rights have long been regarded as desirable and practical
recompense for the innovators, such as inventors and creators. 886 In IP law, the
primary driver for reward is the necessity to encourage innovation through
incentives, 887 such as granting IPRs. On the contrary, competition law exists to
ensure that free market competition facilitates an efficient allocation of resources and
prevents the development of monopolistic power.888
Where intellectual property law and competition law overlap, questions are
raised as to whether the holder of an exclusive right may use it to completely exclude
others or to cause additional insurmountable costs to competitors. The US courts
have recognised an inevitable conflict between the two legal regimes:
The conflict between the antitrust and the [IP] laws arises in the methods they
embrace that were designed to achieve reciprocal goals. While the antitrust laws
proscribe unreasonable restraints of competition, the [IP] laws reward the inventor
with a temporary monopoly that insulates him from competitive exploitation of his
patented art.889
Without some exclusion, competition by unlicensed borrowers would undermine
incentives to invest resources. Yet exclusion introduces deadweight losses and may
stifle the productive use of intellectual resources. 890 Thus, IP law has to strike a
balance and facilitate both exclusion and effective competition or open access.
In competition law, ‘the essential facilities doctrine’ or ‘exceptional
circumstances principle’ holds that dominant undertakings may incur anticompetitive
886
Ilkka Rahnasto, Intellectual Property Rights, External Effects, and Antitrust Law: Leveraging IPRs
in the Communications Industry (Oxford; New York: Oxford University Press, 2003), 19.
887
Ibid.
888
Lara Glasgow and Alicia Vaz, “Foreword: Beyond Microsoft: Antitrust, Technology, and
Intellectual Property,” Berkley Technology Law Journal 16 (Spring 2001): 525.
889
SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1203 (2nd Cir. 1981).
890
Brett Frischmann and Spencer Waller, “Revitalising Essential Facilities,” Antitrust Law Journal 75
(2008): 2.
185
liability if they do not provide access to their unique facilities, even to actual or
potential competitors, on a ‘fair, reasonable, and non-discriminatory’ (FRAND) basis
where sharing/interoperability is feasible and the competitors cannot obtain or create
the facility on their own. 891 These essential facilities are often described as
infrastructure. While traditional infrastructure includes bridges, highways, ports,
electrical power grids, and telephone networks, infrastructure can also include nontraditional items, such as ideas, the Internet, and other assets that are vital inputs to
the production of value at later stages of production on a basis disproportionate to
their actual use. 892 Sometime these essential facilities require the owners of
infrastructure to permit open access. The significant positive externalities that open
access produces make such access socially desirable and internalisation through
exclusive property rights inefficient.893
However, in the competition field, all debates are abstract until a dominant
firm controls such a unique infrastructural asset and unreasonably refuses to grant
access to a competitor that needs access in order to compete with the dominant
undertaking at some other stages of production. This could include, for example, a
long-distance telephone company that requires interconnection to the local phone
system;894 a wholesale power company that requires physical interconnection with
the local power transmission or distribution system;895 or an application provider that
requires interoperability with the operating system.896 When refusal to grant access to
infrastructure or essential input is a means of either acquiring or maintaining illegal
891
Image Technology Services Inc., v. Eastman Kodak Co., 125 F2d 1195, 1216 (9th Cir. 1997).
Frischmann and Waller, supra note 890, 4.
893
Ibid.
894
MCI Communications Corp. v. American Telephone & Telegraph Co., 708 F.2d 1081 (7th Cir.
1983).
895
Otter Tail Power Co. v. United States, 410 US 366 (1973).
896
Case T-201/04 Microsoft Corp. supra note 38; COMP/C-3/37.792 Microsoft, supra note 238.
892
186
dominance, anticompetitive liability should ensue.897 Software firms frequently use
copyright law to forestall intra-standard competition, and change their software
interfaces to be proprietary in order to preserve competitive advantages. For example,
in IBM, the Commission reached a settlement that required the undertaking to
provide information on interface changes well in advance. 898 The Commission
maintained that IBM’s software changes, made without notice, had stifled
competition.899
II. European Approach to Refusal to License
Notwithstanding the fact that the common objectives of intellectual property
law and competition law are to promote innovation and enhance consumer
welfare,900 competition authorities recognise that in exceptional circumstances IPRs
can restrict competition. The unrestrained exercise of these rights may, in exceptional
situations, be found to be incompatible with the policy goal of competition rules. In
recent years, the most controversial aspect concerns whether and in what
circumstances a refusal to license an intellectual property right may constitute an
abuse of a dominant position contrary to competition law. In some cases, competition
authorities have developed a series of principles to address this question. However,
the way in which a refusal to license has become intertwined with the question of
essential facilities is a controversial issue. Neither the EU Courts nor the
897
Frischmann and Waller, supra note 890, 4.
Commission, “Fourteenth Report on Competition Policy,” 1984, paras. 94-95, Available at
http://bookshop.europa.eu/en/fourteenth-report-on-competition-policy-pbCB4184822/ (accessed 12
August, 2009).
899
IV/30.849 IBM, supra note 314.
900
Opinion of Advocate General Gulmann, 1 June, 1994 in Joined Cases C-241/91 P and C-242/91 P,
Radio Telefis Eireann and Independent Television Publications Ltd. v. Commission of the European
Communities [1995] European Court Reports I-743, footnote 10; Atari Games Corp. v. Nintendo of
America, Inc., 897 F.2d 1572 (Fed. Cir. 1990).
898
187
Commission has explicitly applied the phrase ‘essential facilities’ to IPRs but in the
Magill case, a leading case on IPRs, and the Bronner case901 they showed in which
exceptional circumstances undertakings may be required to share facilities that
cannot be duplicated by competitors. These exceptional circumstances are similar to
the conditions of essential facilities. These cases were subsequently relied upon in
the IMS Health case.
2.1 Refusals to Supply and Refusal to License
From an early stage, the Court of Justice was prepared to give strong support to the
Commission’s policy of treating a refusal by a dominant undertaking to supply
existing, dependent customers as an abuse of a dominant position. In Commercial
Solvents,
902
the defendants, an American company, Commercial Solvents
Corporation (CSC), and its Italian subsidiary, Istituto Chemioterapico ItalianoS.p.A
(ICI), dominated the market for aminobutanol, a raw material used in the production
of another chemical, ethambutol, which was a compound used in producing antituberculosis drugs. The subsidiary also sold and used the finished product within the
EU.903 Aminobutanol was an essential material in the production of ethambutol. CSC
used to have a patent in the method of production of an element for aminobutanol.
The patent had expired, but CSC held a de facto monopoly due to its know-how, and
the substantial barriers to entry to the market in the form of high sunk costs and the
complexity of the necessary equipment.
901
Jones and Sufrin, supra note 3, 497.
Joined Cases 6/73 and 7/73 Istituto Chemioterapico ItalianoS.p.A & Commercial Solvents
Corporation v. Commission of the European Communities [1974] European Court Reports 223.
903
Ibid., paras. 6-7, 23.
902
188
After a period of supplying the raw material to Laboratorio Chimico
Farmaceutico, Giorgio Zoja (Zoja), a company that was active in the downstream
market for ethambutol, found alternative suppliers for aminobutalnol due to a price
increase for a raw material by CSC/ICI. These alternative supplying undertakings
bought the raw materials from CSC for producing paints. Zoja’s supply of cheaper
raw materials eventually ran out because CSC forced its buyers in the paint market
not to resell the raw materials for pharmaceutical use.904 CSC then announced that it
would no longer sell the raw material for anti-tuberculosis drugs and decided to
produce the drug itself. When Zoja tried to reorder the raw material from CSC/ICI, it
refused to take the order it was following its new commercial strategy.
On receiving the complaint from Zoja, the Commission found that there were
no other significant sources of, or practical substitutes for, aminobutanol, and
concluded that CSC had abused its dominant position under Article 102 TFEU, by
refusing to supply aminobutanol (primary market) to a former customer, Zoja. It
ordered the resumption of supplies of the raw material. The Court of Justice affirmed
the Commission’s decision and held that the dominant firm’s plans to begin
producing ethambutol itself did not justify its refusal to continue to supply the raw
material to its long-standing customer, even though it would now be a competitor,
when the refusal would eliminate the competitor who was one of the principal
manufacturer of ethambutol, from the market.
On this point, the Court of Justice seemed to be protecting a small market
player, rather than allowing competition on merit. 905 Possibly, the successful
entrance of the CSC and ICI to the secondary market might increase the consumer
Eleanor Fox, “Monopolization and Dominance in the United States and the European Community:
Efficiency, Opportunity, and Fairess,” Notre Dame Lawyer 61 (1986): 994.
905
Liza Gormsen, A Principled Approach to Abuse if Dominance in European Competition Law
(Cambridge; New York: Cambridge University Press, 2010), 79.
904
189
welfare in the form of more choices while continuing to supply the raw material to
Zoja.906 However, it is also likely that the vertical integration of CSC and ICI would
have eliminated Zoja from the downstream market if CSC had provided the raw
material to ICI at a lower price than to Zoja.
The Court of Justice was particularly concerned about the dominant firm’s
use of its market power in the dominated market to acquire dominance in the
downstream market. The abuse consisted of refusing to supply an existing customer
with the aim of reserving raw material for manufacturing its own derivatives.907 In
effect, the special responsibility of a dominant undertaking under Article 102 TFEU
could be used in the circumstance to restrict its freedom of contract and place limits
on its company strategy to vertically integrate.
What was less clear in this case were the responsibilities of a dominant firm
to a new entrant to such a market.908 Nor was it clear from this case whether and to
what extent the obligation of a dominant company not to refuse to supply of a
product could be extended to a refusal to license where the dominant undertaking
held IPRs, entitling the company to exclusive exploitation. However, one of the
important points in this case was that the Commission recognised that the intellectual
property could create high barriers to entry.909
The same logic was used in the Télémarketing case where the Court of Justice
interpreted Article 102 TFEU in the frame of a preliminary ruling.910 In 1984 the
company running Luxembourgian television refused to transmit advertisements
906
Liza Gormsen, surpa note 905, 79.
Joined Cases 6/73 and 7/73 Commercial Solvents, supra note 902, paras. 250-251.
908
Anderman and Schmidt, supra note 314, 94.
909
IV/26.911 Zoja/CSC-ICI, 72/457/EEC Commission Decision of 14 December, 1972 [1972]
Official Journal of the European Communities L 299/51.
910
Case 311/84 Centre Belge d’Études de Marché – Télémarketing (CBME) v. SA Compagnie
Luxembourgeoise de Télédiffusion (CLT) & Information Publicité Benelux (IPB) [1985] European
Court Report 3261.
907
190
where its agent’s telephone number did not appear, thus excluding Centre Belge,
who was engaged in the telemarketing business. The Court of Justice advanced the
principle, which it had developed in Commercial Solvents case, to include cases in
which not a specific source, but rather a specific service, is a precondition for
operating on a downstream market.911
By the time of the IBM case,912 the Commission had begun to formulate a
view that in special circumstances an IP-holding undertaking in a dominant position
could have a positive obligation both to allow new competition to enter, as well as to
ensure that existing competition was not illegitimately lessened in markets in which
the company was dominant.913 This obligation to supply was applied more widely
than Commercial Solvents since it was applied to all competitors, existing ones and
new entrants. However, it was argued that the Commission gave little weight to the
right of IBM as the inventor of the mainframe system to prevent competing
manufacturers of peripheral applications for the IBM system from enjoying the
position of free riders who had not contributed to the costs of researching and
developing the system.914
For IP owners, a key feature in the development of the EU Courts’
determination of the entitlement of dominant undertakings to refuse to license under
Article 102(b) is the distinction made between primary and secondary markets for
the purpose of defining abuses. 915 Undertakings can enjoy the exclusivity of their
IPRs in the primary product or technology market in which they are dominant.
911
Case 311/84 Télémarketing , supra note 910, paras. 25-26.
Case 60/81 International Business Machines Corporation v. Commission of the European
Communities [1981] 3 Common Market Law Reports 635, (Memorex SA intervening).
913
Romano Subito, “The Right to Deal with Whom One Pleases under EEC Competition Law: A
Small Contribution to a Necessary Debate,” European Competition Law Review 13, no. 6 (1992): 234244.
914
Anderman and Schmidt, supra note 314, 111.
915
Ibid., 95.
912
191
However, in a secondary market or aftermarket where the dominant product or
technology is an essential input, the Court of Justice has limited the freedom of
exclusive exploitation.
This guideline to Article 102 TFEU was introduced in AB Volvo v. Erik Veng
(UK) Ltd,916 which was the first case where the Court of Justice recognised a refusal
to license an IPR as an abusive conduct under Article 102 TFEU. Volvo held a U.K.registered industrial design right for the front wing panels of its 200 series of
automobiles.917 Without Volvo’s authorisation, Veng imported imitations of Volvo’s
wing panels in the United Kingdom from other Member States.918 Volvo alleged that
the importation and sale of front wing components for Volvo cars infringed U.K.registered industrial design right and refused to license Veng even for a reasonably
royalty.919 Veng argued that Volvo was abusing its dominant position on the market
for spare parts by refusing to grant Veng a licence for its IP that would enable the
company to market car components in the United Kingdom lawfully.920
The Court of Justice held that in the primary market for which Volvo had a
monopoly due to its design right, the exclusive right to make or sell would be fully
respected since this was the very purpose of the IPR protection. The mere failure to
refuse to license IPRs in the primary market did not, in itself, constitute an abuse of
dominant position and the reasoning was that:
...the right of the proprietor of a protected design to prevent third parties from
manufacturing and selling or importing, without its consent, products incorporating
916
Case 238/87 AB Volvo v. Erik Veng (UK), Ltd. [1988] European Court Reports 6211.
Ibid., para. 3.
918
Case 238/87 Volvo/ Veng, supra note 916, para. 3.
919
Ibid., paras. 3-4.
920
Case 238/87 Volvo/ Veng, supra note 916, para. 4.
917
192
the design constitutes the very subject-matter of his exclusive right. In the present
921
case no instance of any such conduct has been mentioned by the national court.
It was clear that in the primary market for the product, there was normally no
requirement for a dominant company to license competitors to manufacture or sell
IP-protected products. On the other hand, the Court of Justice warned that in the
secondary market and dependent market for Volvo spare parts, Volvo as the
monopolistic supplier of spare parts could not always refuse to supply competitors in
the maintenance market. Nor could it raise the price so high as to make supplies of
the protected product inaccessible to the secondary market. The concern of Article
102 TFEU was to maintain access and prevent abuse of dominance in one market to
foreclose competitors in the secondary market. As the Court of Justice noted in its
ruling, the exercise of an exclusive right by IP holder may be prohibited by Article
102 TFEU if it involves certain abusive conduct.922
The Court of Justice gave three examples of such abuse: first, if IPR holder
arbitrarily refuses to supply spare parts to an independent repairer; second, if it fixes
prices for spare parts at an unfair or excessively high level; third, if it decides no
longer to produce spare parts for a particular model though many cars of the model
are still in use.923
These three examples in Volvo of additional circumstances for the illegitimate
exercise of IPRs under Article 102 TFEU were not meant to be exhaustive. 924
Particularly, in the third example, if the IP holder has refused to license, such
conduct would be abusive under Article 102 TFEU, and ultimately susceptible to a
remedy of compulsory licence. Similarly, dominant firms which exploit their IPRs by
921
Case 238/87 Volvo/ Veng, supra note 916, paras. 9-10.
Ibid., para. 9.
923
Case 238/87 Volvo/ Veng, supra note 916, para. 9.
924
Anderman and Schmidt, supra note 314, 97.
922
193
discriminatory licensing, or by demanding unreasonable high royalties would
commit an abuse of its dominance despite exercising IPRs allowed under national
law.
In the Volvo case, the abusive behaviour of the IP owner in the secondary
market seemed to consist of leveraging its dominance in the primary market to
exclude existing competitors in the secondary market and to deny access to new
entrants to that market.925 The Volvo case indicated that in exceptional situations
where a dominant undertaking refused to supply with the aim of preventing
competition on a secondary market, competition authorities might order compulsory
licence or supply of an IP protected good under Article 102 TFEU.
2.2 The Commission’s Essential Facilities Doctrine
In its refusal to deal cases, the Commission had begun to formulate a view based on
the reasoning of the Court of Justice in Commercial Solvent and Télémarketing, that
the preservation of effective competition required dominant undertakings to offer
access to their essential facilities to competitors as well as customers on a FRAND
basis. One of the first cases where the doctrine was explicitly mentioned was Sea
Container v. Stena Sealink,926 In this case, Sea Container, wishing to introduce a
high-speed ferry service form Holyhead to Ireland, demanded access to specific
facilities of the port of Holyhead, the only port in the United Kingdom serving
Ireland in the market for the transport of passengers and cars on the central corridor
925
Joined Cases 6/73 and 7/73 Commercial Solvents, supra note 902.
IV/34.689 Sea Containers v. Stena Sealink, 94/19/EC Commission Decision of 21 December,
1993[1994] Official Journal of the European Communities L 15/8.
926
194
route.927 Stena Sealink, the owner and operator of the port of Holyhead, refused to
grant access to the extent demanded by Sea Containers.928
In its decision on whether Stena Sealink abused the dominant position in the
relevant market, the Commission established the following principle:
An undertaking which occupies a dominant position in the provision of an essential
facility and itself uses that facility (i. e. a facility or infrastructure, without access to
which competitors cannot provide services to their customers), and which refuses
other companies access to that facility without objective justification or grants access
to competitors only on terms less favourable than those which it gives its own
services, infringes Article [102 TFEU] if the other conditions of that Article are
met.
929
The Commission found that Stena Sealink’s refusal was inconsistent with the
duties of a firm which enjoyed a dominant position in relation to essential facilities.
It had ensured that the principle of access to essential facilities applied to new
entrants in the relevant market, particularly where it was offering a new service.
Abuse could be defined in terms of a dominant undertaking impeding the
development of growth in competition in a market as well as the maintenance of the
degree of existing competition in that market.930
The Commission justified its development of the essential facilities doctrine
by reference to the judgements of the Court of Justice in Commercial Solvent and
Télémarketing. However, Stena Sealink differs from those cases in two respects. First,
the Commission’s decision in Stena Sealink appears to suggest that where a company
controls essential facilities it is under a stricter duty not to discriminate, stemming
927
IV/34.689 Sea Containers v. Stena Sealink, supra note 926, para. 15.
Ibid.
929
IV/34.689 Sea Containers v. Stena Sealink, supra note 926, para. 66.
930
Anderman and Schmidt, supra note 314, 101.
928
195
from its dual roles both as an administrator of an infrastructure and an operator on a
market utilising that infrastructure.931 For example, in Port of Rødby decision932 the
Commission indicated that even if the existing facilities at the port were fully utilised
and could not accommodate additional sailings, it would be desirable to introduce
competition by providing access to a new entrant. Secondly, there may be additional
obligations on undertakings that control essential facilities. In Stena Sealink, for
instance, the fact that Stena Sealink had failed to negotiate and consult with its
customers as an independent operator contributed to the finding of abuse.
The development of essential facilities in the EU competition regime applied
to a wide range of commercial sectors: airlines, seaport facilities, railways,
telecommunications, and energy. It was not directed solely at IPRs. However, if
ownership of IPRs amounted to essential facilities, and unlicensed competitors could
not enter into the market, then from the Commission’s view, compulsory licensing of
IPRs could be an appropriate remedy.
2.3 Magill TV Guide and the Exceptional Circumstances
The first Commission case to apply the idea of the essential facilities doctrine in the
intellectual property area was Magill. 933 In this case, three TV companies, Radio
Telefis Eireann (RTE), the British Broadcasting Corporation (BBC), and the
Independent Broadcasting Authority (IBA), used their copyright in listings of TV
programmes to enjoin Magill from publishing a comprehensive weekly TV guide in
931
Anderman and Schmidt, supra note 314, 101.
Port of Rødby, 94/19/EC Commission Decision of 21 December, 1993 [1994] Official Journal of
the European Communities L 55/52.
933
IV/31.851 Magill TV Guide v. Independent Television Publications Ltd(ITP), BBC, and Radio
Telefis Eireann (RTE), 89/205/EEC Commission Decision of 21 December, 1988 Relating to a
Proceeding under Article 86 of the EEC Treaty [1989] Official Journal of the European Communities
L 78/43.
932
196
Ireland and Northern Ireland. 934 Each of the broadcasters published their own
individual weekly programme guide and provided their listings to newspapers for
daily publication, but there was no weekly programme guide that combined them.935
The Commission found that the broadcaster’s refusal to provide the
copyrighted listings information was an abuse of their dominant position. 936 It
reasoned that TV programme listings constitute the essential raw materials for any
types of TV guides; 937 that the third party could not supply reliable listings for
publishing their own TV guides; 938 and that the ‘factual monopoly’ which the
broadcasters held over their own listings was enhanced by the copyright laws in the
United Kingdom and/or Ireland.939
On appeal, affirming a judgement of the General Court which upheld the
Commission’s decision, on the issue of abuse, the Court of Justice began by
emphasising that it was wrong to presuppose that all forms of exercise of copyright
which were legitimate under national law could never be reviewed under Article 102
TFEU,940 although it noted that the ownership of intellectual property rights does not
necessarily confer dominant position. 941 It admitted that the exclusive right of
reproduction was part of the author’s rights, so a refusal to grant a licence, even by
an undertaking in a dominant position, could not in itself constitute abuse of a
dominant position.942 Nevertheless, it insisted that in exceptional circumstances, the
exercise of such an exclusive right by a holder might amount to abusive behaviour.943
934
IV/31.851 Magill , supra note 933, para. 5.
Ibid., paras. 14-15.
936
IV/31.851 Magill , supra note 933, para. 23.
937
Ibid., para. 20.
938
IV/31.851 Magill , supra note 933, para. 22.
939
Ibid., para. 22.
940
Joined Case C-241/91P and C-242/91P Magill, supra note 878, para. 48.
941
Ibid., para. 46.
942
Joined Case C-241/91P and C-242/91P Magill, supra note 878, para. 49.
943
Ibid., para. 50.
935
197
The Court of Justice upheld the General Court’s finding that exceptional
circumstances made a refusal to license TV listings to Magill abusive conduct on the
basis of three circumstances. The first circumstance was that there was no actual or
potential substitute for a comprehensive weekly guide for which there was a strong
potential consumer demand. This meant that the TV broadcasters’ refusal to provide
raw information prevented the emergence of a new product which they did not offer.
This forced viewers to buy a weekly guide individually from the three TV firms. This
was an abuse under Article 102(b), i.e. “limiting production, markets or technical
development to the prejudice of consumers.’944 Secondly, the Court of Justice found
that there was no objective justification for the refusal, either in the activity of TV
broadcasting or in that of publishing TV magazines. This implied that, in the face of
a violation of Article 102(b) TFEU, the mere possession of the IPR was not an
objective justification for exclusionary behaviour. There must be evidence of other
objective justifying factors such as creditworthiness, safety, and public health.
Thirdly, TV broadcasters reserved for themselves the secondary market for weekly
TV guides by excluding all competition on that market because of their denial of
access to the basic information which was indispensable to the publication of such a
guide. This was the type of abuse prohibited in Commercial Solvent. On this point,
the Court of Justice effectively endorsed the basis of the essential facilities doctrine
promoted by the Commission, albeit under certain conditions. One precondition was
that the company holding facility in the first market was not merely dominant; it was
a quasi-monopoly. Secondly, the facility must be an indispensible input to the
secondary market. There was no substitution. Thirdly, the refusal must directly result
in maintaining a monopoly for the dominant undertaking on the secondary market.
944
Joined Case C-241/91P and C-242/91P Magill, supra note 878, para. 54.
198
The new product test suggests that if an IP holder owns the indispensable
component for a new product with actual or potential consumer demand, and (1) that
input is a de facto monopoly, i.e. there are no existing or potential alternatives for it;
(2) there is no objective justification to prevent the emergence of that new product;
(3) which the dominant firm does not offer itself, then the refusal to supply or license
the component could be an abuse of the dominance. In such a case, the limiting
conditions are cumulative.945
In the same way, if the essential facilities test, the second test of Magill, is to
offer a separate test of abuse, there must be a showing of indispensability, a de facto
monopoly, and the exclusion of all competition in the secondary market.
However, what remains unclear after Magill is when a product will be
regarded as an essential input or facility for another product or market as opposed to
being simply part of another product. This issue can arise at different stages of
production prior to the final product phase in cases of the novel industries.
In addition, commentators pointed out the ambiguity inherent in the decision,
namely, whether all four of the conditions (indispensability, preventing the
appearance of a new product for which there is consumer demand, lack of
justification, and elimination of competition in the downstream market) need to be
satisfied in a case involving intellectual property rights.946
However, the case provided two lines of guidance to IP holders. First, if an IP
owner has a dominant position by virtue of the IPR, its exercise of the IPR is limited
by prohibition in Article 102 TFEU. Secondly, if the IP holder has dominance in the
form of an essential facility, it will have certain positive duties towards competitors
945
Anderman and Schmidt, supra note 314, 105.
Thomas Cotter, “The Essential Facilities Doctrine,” University of Minnesota Law School Legal
Studies Research Paper Series, Research Paper No. 08-18, p 8, Available at SSRN:
http://ssrn.com/abstract=1125368, (accessed 07 May, 2008);
946
199
which may be inconsistent with the full exclusive exploitation of the IPR in a
downstream or secondary market.
The Court of Justice’s decision in the Magill case did not contain a general
essential doctrine. This case set the stage for the view that the refusal to grant access
to protected information might be an abuse of dominant position; at least where the
information was an essential or indispensable input and the refusal to license it
adversely affected competition in some other market. 947 Viewed in this way, the
exceptional circumstances test is merely a restatement and application of the
essential facilities doctrine.948
2.4 Extension of Exceptional Circumstances/Essential Facilities after Magill
Although the Oscar Bronner 949 case did not actually involve IPRs, the Court of
Justice had an opportunity to develop the exceptional circumstances test developed in
Magill and its reasoning is important for IP licensing cases. In this case the Court of
Justice reinterpreted the Magill case in a non-IPR context.
The decision dealt with the access to a distribution service for newspapers in
Austria. 950 The company Mediaprint operated the only nationwide home delivery
scheme for daily newspapers in Austria and additionally published two newspapers,
which had a combined market share of 46.8% of the national daily newspaper market
in terms of circulation.951 The company Oscar Bronner, a publisher of a newspaper
Harry First, “Microsoft and the Evolution of the Intellectual Property Concept,” Wisconsin Law
Review 2006 (2006): 1400.
948
Maurits Dolmans, Robert O’Donoghue, and Paul-John Loewenthal, “Article 82 EC and Intellectual
Property: The State of the Law Pending the Judgment in Microsoft v. Commission,” Competition
Policy International 3, no. 1 (Spring 2007): 119.
949
Case C-7/97 Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs-und Zeitschriftenverlag
GmbH & Co. KG. [1998] European Court Reports I -7791.
950
Case C-7/97 Oscar Bronner, supra note 949, para. 8.
951
Ibid, para. 6.
947
200
with a small circulation within Austria, argued that the home delivery scheme
constituted an essential facility and, hence, Mediaprint’s refusal to distribute its
newspaper constituted an abuse of Mediaprint’s dominant position. 952 On referral
from the national court, the Court of Justice advised the national court to establish
whether there existed a separate market for home delivery of newspapers, or whether
other means of distributing newspapers were sufficiently substitutable.953
The Court of Justice assumed a related market to be the newspaper market
and held that a refusal to supply or give access to a facility would only be unlawful if
(1) it would eliminate all competition on the secondary market; (2) there was no
actual or potential alternative; and (3) therefore access to an existing system would
be indispensable. In this case, the Court of Justice made an important remark
regarding indispensability. It held that the requirement of indispensability could only
be met if there were no technical, legal, and economic obstacles capable of making it
impossible. 954 It continued: “For such access to be capable of being regarded as
indispensible, it would be necessary at the very least to establish … that it is not
economically viable to create a second [service] with a [production] comparable to
that of…the existing [service].”955
As Bergman notes, these criteria could be interpreted in two ways.956 First, it
could mean that the entrant would be unable to establish a competing facility even if
it were to capture half of the market. Alternatively, it could mean that the entrant
must be unable to establish such a facility even if it were to attract a similar number
of customers as the incumbent currently had. The first interpretation can be
952
Case C-7/97 Oscar Bronner, supra note 949, para. 8.
Ibid., para. 34.
954
Case C-7/97 Oscar Bronner, supra note 949, para. 44.
955
Ibid., para. 46.
956
Mats Bergamn, “The Role of the Essential Facilities Doctrine,” Antitrust Bulletin 46, no. 2
(Summer 2001): 427.
953
201
reformulated as a requirement that at the current size of the market, a symmetric
duopoly is not economically viable. The second interpretation potentially sets an
even stricter requirement. Assuming that the incumbent was also a monopolist in the
related market, the requirement would be that a symmetric duopoly is not
economically viable even if the market were to increase to twice its current size.
In other words, these criteria seem to mean that the essential facilities
doctrine is applicable if a symmetric duopoly with two vertically integrated firms is
not economically viable.957 Or they appear to confine the application of the essential
facilities doctrine to markets where two or more undertakings would not be
economically viable without applying the essential facilities concept.958
Since it was for Oscar Bronner to prove the economic unviability, the criteria
of essential facilities seems to be applied more restrictively here than in earlier
cases. 959 Although this case did not deal with IPRs, it introduced the exceptional
circumstances test to the essential facilities doctrine which originally did not include
IPRs.960 In addition, the Court of Justice confirmed Magill by building its ruling in
Oscar Bronner upon Magill, clarifying its view on indispensability and the
requirements needed for such a claim.
In IMS Health, the Court of Justice applied the criteria developed in the
earlier cases and clarified the condition that competition on a downstream market
must be eliminated. 961 The IMS case concerned competition in the market for
providing
pharmaceutical
manufacturers
with
marketing
data
on
retail
Mats Bergamn, “When Should an Incumbent Be Obliged to Share its Infrastructure with an Entrant
Under the General Competition Rules?” Journal of Industry, Competition, & Trade 5, no. 1 (March
2005): 8-9.
958
Mats Bergamn, “The Bronner Case- A Turning Point for the Essential Facilities Doctrine,”
European Competition Law Review 21, no. 2 (2000): 61-62.
959
Inge Graef, “Tailoring the Essential Facilities Doctrine to the IT Sector: Compulsory Licensing of
Intellectual Property Rights After Microsoft,” Cambridge Student Law Review 2011 (2011) : 4.
960
Case C-7/97 Oscar Bronner, supra note 949, para. 41.
961
Ulf Müller and Anselm Rodenhausen, “The Rise and Fall of the Essential Facility Doctrine,”
European Competition Law Review 29, no. 5 (2008): 325.
957
202
pharmaceutical sales in Germany.962 Pharmaceutical wholesalers collected this data
for the various database service companies. 963 The data was then checked and
formatted in a brick structure, with each brick constituting a small and useful
geographic area related to the number of pharmacies and prescribing physicians.964
IMS Health had been developing brick structures for a number of years and evolved
the copyright-protected ‘1860 Brick Structure.’965 This structure divided the German
territory into 1860 geographic bricks that were carefully designed to group doctors,
patients, and pharmacies so as to allow the reporting of pharmaceutical sales data in a
way that was useful for calculating the compensation of pharmaceutical company
sales representatives. 966 Pharmaceutical companies adopted this structure as a
standard,967 and competitors’ efforts to organise their data with a different brick were
unsuccessful in the market.968 In 2000, two companies established in Germany by
National Data Corporation Health Information Services GmbH (NDC) and Azyx
Deutschland GmbH (Azyx) entered the German market. It soon became apparent to
IMS Health that the brick structures used by the data service offerings of these
companies infringed IMS Health’s copyright in the 1860 Brick Structure. As a result,
IMS Health sued these undertakings for infringement and obtained injunctions
against NDC and Azyx from the German courts. 969 When IMS Health refused to
962
COMP D3/38.044 NDC Health GmbH & Co. KG/IMS Health GmbH & Co. OHG, 2003/741/EC
Commission Decision of 3 July, 2001 relating to a proceeding under Article 82 of the EC Treaty
(Interim Measures) Available at http://ec.europa.eu/competition/antitrust/cases/dec_docs/38044 /
38044_15_5.pdf. (accessed 03 November, 2007), para. 6.
963
Ibid., para. 15.
964
COMP D3/38.044 IMS Health, supra note 962, paras. 15-19.
965
Ibid., para. 22.
966
COMP D3/38.044 IMS Health, supra note 962, paras. 24-26.
967
Ibid., paras. 22-23
968
COMP D3/38.044 IMS Health, supra note 962, para. 20.
969
Ibid., para. 29.
203
grant NDC a licence to use the brick structure, NDC complained to the
Commission.970
NDC presented the case as an essential facilities case, and the Commission
treated it as such.971 Although recognising that the EU Courts had not yet explicitly
referred to the essential facilities doctrine, the Commission decided that intellectual
property could be a facility and that a refusal to license could be an abuse of a
dominant position under Article 102 TFEU.972 This required finding that the refusal
of access would eliminate all competition in the relevant market and that the facility
was indispensable for carrying out the business, in the sense that there were no actual
or potential substitutes. 973 The Commission assumed that IMS Health’s copyright
was valid974 because copyright holders normally have the right to refuse to license.975
Nevertheless, the Commission found that the 1860 Brick Structure was an
indispensable input for producing the data services involved and that IMS Health’s
refusal to license would exclude all competition in a dependent market that was not
otherwise objectively justified.976
In the meantime, the German court requested a preliminary ruling from the
Court of Justice. It confirmed that all three main conditions of Magill’s exceptional
circumstances test had to apply. They were cumulative, i.e. that in order for a refusal
to license new entrants to a market dependent upon an indispensible IP protected
input to be abusive, the refusal must meet three conditions: (1) the undertaking that
“requested the licence intends to offer, on the market for the supply of the data in
question, new products or services not offered by the owner of the intellectual
970
COMP D3/38.044 IMS Health, supra note 962, paras. 5-6.
Ibid., paras. 63-71.
972
COMP D3/38.044 IMS Health, supra note 962, paras. 64-70.
973
Ibid., para. 70.
974
COMP D3/38.044 IMS Health, supra note 962, para. 36.
975
Ibid., para. 167.
976
COMP D3/38.044 IMS Health, supra note 962, paras. 169, 185
971
204
property right and for which there is a potential consumer demand”; (2) “the refusal
is not justified by objective considerations”; and (3) the refusal reserves to the IPR
owner the secondary market by excluding all competition on that market.977
In drawing boundaries on the exceptional circumstances, the Court of Justice
considered the Magill criteria not ‘necessary’ conditions but ‘sufficient’ conditions
for finding an abuse.978 That proposition would seem to follow from the purpose of
Article 102(b) TFEU which in principle prohibits as abusive, behaviour by dominant
firms which limits technical development of markets to the detriment of
consumers.979 Limiting technical development is a wider concept than the particular
factual circumstances and conditions of the Magill case. Hence, both the language of
Article 102(b) TFEU and the Court of Justice in IMS Health provide good grounds
for concluding that other types of abuse can also fall within the category of
exceptional circumstances.980
Both the General Court and the Court of Justice in IMS Health had
emphasised an investment theory of IPRs stressing the entitlement that an IPR holder
has to the rewards that flow from its investments in innovation, rather than taking an
incentives theory of IPRs, which stresses that IPRs are given only to the extent
necessary for the societal purpose of encouraging innovation.981 The requirement of
exceptional circumstances appeared to indicate that a holder of IPRs would have
fairly wide latitude, even if not complete freedom, to refuse to license its protected
information.982
977
COMP D3/38.044 IMS Health, supra note 962, para. 52.
Case C-418/01 IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG. [2004] European
Court Reports I -5039, para. 18.
979
Anderman and Schmidt, supra note 314, 109.
980
Ibid.
981
First, supra note 947, 1403.
982
Ibid., 1403-1404.
978
205
The IMS Health interpretation of the exceptional circumstances test base on
Volvo and Magill could be seen as offering a reconciliation between competition law
and IPRs based on their mutual interest in innovation by stressing that the
exceptional circumstances for a compulsory licence for new entrants to a market is
limited to cases of new products or follow-up innovation.983 The refusal to license in
such a situation would clearly be a case of limiting technical development under
Article 102(b) TFEU.
III. Exceptional Circumstances/Essential Facilities in Information Technology Sector
3.1 Microsoft Case in the EU and Exceptional Circumstances
3.1.1 Commission’s Incentives Balance Test
In February 1998, Sun Microsystems lodged a complaint before the Commission
accusing Microsoft of breaching competition rules by denying access to essential
information on its Windows client PC operating system. Six years later, the
Commission concluded its investigation by finding Microsoft guilty.984 According to
the Commission, Microsoft had infringed Article 102 TFEU by refusing to supply
Sun Microsystems and other rivals with relevant interface information, that is,
software codes underlying interoperability between non-Microsoft workgroup server
operating systems and Windows client PC operating systems. 985 The Commission
followed two lines of argument in demonstrating that the refusal to supply was
abusive. Firstly, it attempted to establish that information on an interface was an
983
Anderman and Schmidt, supra note 314, 109.
COMP/C-3/37.792 Microsoft, supra note 238.
985
Ibid.
984
206
essential facility.986 Secondly, it advocated that Microsoft’s behaviour in refusing to
supply reflected a leveraging and foreclosure conduct.987 To remedy the abuse the
Commission ordered Microsoft to give access to specifications of interface
protocols.988 This obligation, however, would not and did not include disclosure of
the source code that Microsoft used to implement the protocols. 989 Microsoft’s
disclosures had to be made on reasonable and non-discriminatory terms in a timely
manner.990 If users decided to use the disclosed specifications in workgroup server
operating system products, Microsoft’s royalty rates could not reflect the strategic
value to Microsoft of those protocols.991 In other words, Microsoft could not charge
monopoly rates.992 This remedy of compulsory disclosure of interface information
was reminiscent of the remedy in the IBM undertaking of 1984.993 It was noteworthy
that the remedy of compulsory disclosure was not restricted to a specific complainant
but appeared to be aimed at all participants in the workgroup server market.994
There was little doubt that Microsoft satisfied the threshold of a test of a
monopoly which was an indispensible input to a secondary market. If a dominant
undertaking with a monopoly on an IP-protected product which is an indispensable
input chose to compete on its merits, it would have to continue to license the relevant
interface information to its competitors and compete directly in the secondary market
on the basis of quality and price. For a dominant firm with a quasi-monopoly which
is an indispensable input to other products to be allowed to use its power in any other
way would have a chilling effect on innovation by competitors in the dependent
986
COMP/C-3/37.792 Microsoft, supra note 238, para. 1064.
Ibid., paras. 1063-1065.
988
COMP/C-3/37.792 Microsoft, supra note 238, paras. 998-1004.
989
Ibid., para. 999.
990
COMP/C-3/37.792 Microsoft, supra note 238, para. 1007.
991
Ibid., para. 1008.
992
First, supra note 947, 1397.
993
IBM Undertaking, XIVth Report on Competition Policy 1984 (Commission, 1984), paras. 94-95.
994
Anderman and Schmidt, supra note 314, 112.
987
207
market and limit technical development in that market. Without access to interface
information, competitors in a workgroup server market would be gradually deprived
of their opportunity to develop severs with new or added functionality that Microsoft
did not offer to the consumer.
In addition, by initially opting for an open system as a strategy to grow and
achieve dominance, the owner of an IP-protected technology standard has created an
expectation that it will continue to share interface information. In such cases, Article
102(b) TFEU can be infringed when a company like Microsoft with industrial
standards limits technical development by refusing to continue to license interface
information, and thereby prevents competitors on related markets from developing
their interoperable systems. If Microsoft had initially opted for a closed system, the
circumstances might have been different because the firm would have achieved its
dominance on the basis of originally integrated products and it would normally have
been entitled to continue to compete on the basis.995
Microsoft argued that the information required by Sun Microsystems was
protected by IPRs and such a protection justified its refusal to license.996 However,
the Commission pointed out that the pure presence of intellectual property rights was
not sufficient to justify the refusal to license. 997 In order to assess whether
Microsoft’s arguments regarding its incentives to innovate outweighed the negative
effects on technical development to the prejudice of consumers, the Commission
applied the Incentives Balance Test.998 In this test, the effects of the refusal on the
innovative behaviour of the firms in the relevant market were determined and
weighed against the effects of a compulsory license on the innovative conduct. Thus,
995
Anderman and Schmidt, supra note 314, 114.
COMP/C-3/37.792 Microsoft, supra note 238, para. 709.
997
Ibid., para. 712.
998
COMP/C-3/37.792 Microsoft, supra note 238, para. 712.
996
208
the commission concluded that a compulsory license could be appropriate when the
negative effects of a license on the dominant firm’s incentives to innovate were
balanced against the positive effects on the innovative climate in the whole
market.999
In the application of the test, the Commission focused on Microsoft’s fear
that it would be cloned as soon as it disclosed its interface information. In the
opinion of the Commission, Microsoft’s competitors were disadvantaged regarding
the quality of the implementation of the relevant specifications in comparison to
Microsoft’s own product. Furthermore, Microsoft would have a time advantage
compared to its competitors as it would disclose the specifications only when it
already had a working implementation. Thus, to compete with Microsoft, the other
software undertakings would have to offer an additional service to the customers to
convince them to buy their products instead of those of Microsoft. The
interoperability of their products with Windows OS would not in itself be enough to
be successful on the market. However, there was no reasonable explanation for
Microsoft’s fear of being cloned.1000 Furthermore, concentrating on the accusation of
cloning implies restricting innovation on interoperability and the underlying
specifications. 1001 The Commission stressed that it was important to consider
“Microsoft’s incentives to innovate its products as a whole, not only in the design of
its products’ interfaces.”1002 Above all, it was necessary to compare the effects on
innovation of a compulsory license with a situation in which Microsoft maintained
its refusal to supply. If Microsoft continued with its abusive behaviour, competition
could be eliminated and this would have negative effects on Microsoft’s innovative
999
COMP/C-3/37.792 Microsoft, supra note 238, para. 783.
Ibid., paras. 721-722.
1001
COMP/C-3/37.792 Microsoft, supra note 238, para. 723.
1002
Ibid., para. 724.
1000
209
conduct. If, by contrast, Microsoft were obliged to disclose its interface information,
its workgroup server operating systems would have to compete with the
implementations of other firms. Thus, consumers would no longer be locked-in to
Microsoft’s products. Consequently, Microsoft would have more incentives to
innovate in order to keep and, even better, to extend the numbers of its
consumers.1003
Therefore, after examining the circumstances of the Microsoft case and
applying the Incentives Balance Test, the Commission came to the conclusion that in
the short term a compulsory license would have negative effects on Microsoft’s
incentives to innovate. However, these negative effects on Microsoft were
outweighed by the positive impact on the innovative behaviour of its competitors.1004
Moreover, in the long run, this would also strengthen Microsoft’s incentives to
innovate as it needed to defend its leading position in the market against its
competitors. Thus, the Commission concluded, the positive effects of the disclosure
on innovation incentives would outweigh the negative effects on Microsoft’s
incentives to innovate. As a result of this, the Commission rejected that Microsoft’s
refusal to supply the interface information was objectively justified.1005
Both the Commission and Microsoft accepted that interoperability was a
question of degree, and that various software products in a system interoperate when
they are able to exchange information and mutually use it once exchanged.1006 Apart
from this point, the opinions of both parties diverged. Microsoft claimed that if it was
forced to license its communications protocols as the Commission envisaged, the end
result would not be competition, but instead, the development of ‘clones’ of
1003
COMP/C-3/37.792 Microsoft, supra note 238, para. 725.
Ibid., paras. 693-700.
1005
COMP/C-3/37.792 Microsoft, supra note 238, para. 783.
1006
Case T-201/04 Microsoft Corp. supra note 40, para. 158.
1004
210
Microsoft workgroup servers with perfect substitutability (or ‘plug replaceability’)
for a Windows-based server operating system.1007 Microsoft conceded that there was
a minimum level of interoperability with Windows PC OS that was required for
effective competition, but it said that this level was not difficult to achieve,
technically (i.e. by using reverse engineering).
3.1.2 EU Courts’ Modification and Extension of Exceptional Circumstances
3.1.2.1 Judgement
Upholding the Commission’s decision, the General Court highlighted the fact that
disclosure of information which is necessary for interoperability is quite usual in this
industry and that so far no claims had occurred regarding its negative effects on
innovation.1008 In reverse engineering, also, it pointed out that this method does not
constitute ‘viable substitute’ for disclosure of the interoperability information at
issue.1009 Regarding the individual examination steps, the General Court agreed with
the Commission’s assessment of the facts. For its analysis, the General Court
retained the four following criteria developed in the Magill and IMS Health cases
which had to be fulfilled cumulatively: indispensability, elimination of competition,
new product, and objective justification.1010
Taking the indispensability criterion, Microsoft rejected the opinion of the
Commission that the interface information was indispensable to compete in the
1007
Case T-201/04 Microsoft Corp. supra note 40, para. 121.
Ibid., para. 702.
1009
Case T-201/04 Microsoft Corp. supra note 40, para. 362.
1010
Ibid., para. 332-333.
1008
211
market. 1011 According to Microsoft, at least five other ways existed to ensure the
interoperability of working group server operating systems which were already used
by suppliers of competing systems. Even though these methods did not ensure
perfect substitutability to the required interface information, they were sufficient to
ensure effective competition. 1012 However, the General Court agreed with the
Commission that it was necessary that the competitor’s operating systems provided a
comparable interoperability to Windows domain architecture like Microsoft’s own
products. 1013 Furthermore, the General Court found that due to the very narrow
linkages between the Windows client PC and the workgroup server operating
systems, Microsoft had established a de facto standard for working group
computing.1014 Therefore, the Commission was correct in its appraisal that the full
provision of the interface information had to be warranted. According to the General
Court, the arguments put forward by Microsoft that the Commission’s assessment
was wrong had not been convincing.1015
Concerning the requisite of ‘elimination of competition’, Microsoft had
argued that the refusal to license would not eliminate all competition in the
secondary market. It complained that even the Commission had only mentioned the
mere risk of elimination of competition in the market. It was observed that there were
still other competitors on the market for workgroup server operating systems. 1016
Pointing out that it was not in line with Article 102 TFEU to wait until the
elimination of competition had been realised, the General Court rejected this plea.
The existence of competitors in some niches would not be sufficient to maintain
1011
Case T-201/04 Microsoft Corp. supra note 40, para. 337.
Ibid., para. 345.
1013
Case T-201/04 Microsoft Corp. supra note 40, para. 374.
1014
Ibid., para. 392.
1015
Case T-201/04 Microsoft Corp. supra note 40, paras. 378-381, 388-391.
1016
Ibid., paras. 374-442.
1012
212
effective competition. As the market was characterised by significant network effects,
the Commission was correct in intervening before competition was eliminated.1017
Furthermore, Microsoft challenged the development of a new product
depending on the interoperability information. Accordingly, the Commission failed
to identify a new product which would be developed on the basis of this information.
Moreover, the Commission could not prove that there was a consumer demand for
this product. Microsoft suspected that its products would be copied.1018 However,
the General Court emphasised that Article 102(b) TFEU prohibited abusive conduct
which limited production, markets or technological developments to the prejudice of
consumers.1019 Following this line, the previous decision in Magill and IMS Health
had indeed emphasised the requirement of a new product. But this criterion has to be
seen in the light of consumer interests. That is, the new product condition in the
above-mentioned cases was an indicator as to whether the prevention of competition
in a secondary market was to the prejudice of the consumers. But as Article 102(b)
TFEU states, it is not only the prevention of markets and products that may constitute
a prejudice to consumers but also the limitation of technological development. Thus,
the decisive criterion in this context was whether consumer welfare had been
reduced.1020 In the Microsoft case, due to the lack of interoperability, consumers are
locked into Windows products and thus, competitors cannot successfully offer their
own innovative products. Hence, the General Court explained that due to these
circumstances the resultant effect was similar to the prevention of a new product.1021
Contrary to Microsoft’s plea in which Microsoft blamed the Commission for
using a new and legally unfounded test to analyse the objective justification, the
1017
Case T-201/04 Microsoft Corp. supra note 40, paras. 561-563.
Ibid., paras. 621-625.
1019
Case T-201/04 Microsoft Corp. supra note 40, para. 643.
1020
Ibid., paras. 645-655.
1021
Case T-201/04 Microsoft Corp. supra note 40, parsa. 655-665.
1018
213
General Court argued that Microsoft had misread the decision of the Commission
which was not based on Balancing Test.1022 In fact, the Commission showed that
there was no evidence for its objective justification to refuse licensing. According to
the General Court, the Commission, firstly, established that the exceptional
circumstances defined by the Court of Justice in the cases of Magill and IMS Health
were present. Secondly, it proceeded to analyse the arguments put forward by
Microsoft. The Commission assessed whether the justifications put forward by
Microsoft outweighed the exceptional circumstances which establish the
infringement of competition.1023
3.1.2.2 Modification and Extension of the Exceptional Circumstances
Upon appeal by Microsoft, the General Court gave its judgement modifying and
extending the exceptional circumstances established in the Magill 1024 and IMS
Health1025 judgements. In both cases, the Court of Justice maintained that where an
IPR was involved, it was necessary to show that there must be exceptional
circumstances present before Article 102 TFEU could be used to override the free
exercise of an IPR. The exceptional circumstances established in these two cases
consisted of three cumulative conditions. The first condition was that the undertaking
requesting a compulsory licence must offer a new product for which there was
potential or demonstrable consumer demand. Secondly, the Commission needed to
show that the refusal to license would lead to an elimination of all competition on the
1022
Case T-201/04 Microsoft Corp. supra note 40, parsas. 704-710.
Ibid., para. 709.
1024
Joined Case C-241/91P and C-242/91P Magill, supra note 878.
1025
Case C-418/01 IMS Health, supra note 978.
1023
214
secondary market. Thirdly, it had to be shown that the dominant firm had no
objective justification for a refusal to license.
Microsoft argued that there should be a strict test based on the new product
rule set out in IMS Health.1026 However, this argument was not convincing since the
Court of Justice held in IMS Health that the facts of Magill were sufficient to meet
the exceptional circumstances test, implying that other categories of exceptional
circumstance could exist.1027
Microsoft also insisted that competitors would clone Windows server OS
instead of providing a new product and thus, the consumers would not be harmed by
its refusal to share interface information. The Commission successfully argued that
competitors could use the interface information to develop the advanced feature of
their own products1028 and encourage innovation competition.1029 Therefore, it argued
that the refusal to continue to supply interface information hampered follow-on
innovation.
In its argument on appeal, the Commission refined the new product test by
arguing that the new product was defined to add to substantial features arising from
competitors’ own research efforts. It reiterated that IMS Health had not established
an exhaustive list of exceptional circumstances. It also added the point that the
framework for analysing the test of refusal to license was provided by Article 102(b)
TFEU which states that it is an abuse to limit technical development to the prejudice
of consumers. It continued that the refusal to share the indispensible interface
information became a block of interoperability in the IT sector and an obstacle to
1026
Case T-201/04 Microsoft Corp. supra note 40, para. 301.
Case C-418/01 IMS Health, supra note 978, para. 107.
1028
Case T-201/04 Microsoft Corp. supra note 40, para. 695.
1029
Ibid., para. 725.
1027
215
follow-on innovation in the secondary market. This is what makes this situation
different from IMS Health and Magill type cases.1030
The General Court upheld most of the Commission’s arguments. It
emphasised that the new product test must be considered under Article 102(b)
TFEU.1031 It concluded that the Magill and IMS Health new product rule could not be
the only parameter which determined whether a refusal to license an IPR was capable
of causing prejudice to consumers within the meaning of Article 102(b) TFEU.1032
The General Court went on to find that the refusal to supply interoperability
information would prevent competitors from developing the advanced features of
their products and thus caused prejudice to consumers.1033
3.2.3 Implications for Future Cases
It is clear that after Microsoft, the exceptional circumstances test has wider
parameters than the new product principle in Magill. Now the only issue is how wide
the parameters are. Probably the parameters are not as wide as is suggested by a
literal reading of Microsoft judgement1034 which stated that:
Article [102 TFEU] covers not only those practices which may prejudice consumers
directly but also those that which indirectly prejudice them by impairing an effective
competitive structure.1035
1030
Case T-201/04 Microsoft Corp. supra note 40, para. 305.
Ibid., para. 644.
1032
Case T-201/04 Microsoft Corp. supra note 40, para. 647.
1033
Ibid., paras. 651-656.
1034
Anderman and Schmidt, supra note 314, 117.
1035
Case T-201/04 Microsoft Corp. supra note 40, para. 664.
1031
216
It should be noted that, first of all, the exceptional circumstances test
established by the EU Courts presupposes that the IP-protected product in the
primary market must be both a monopoly and an indispensible input in the secondary
market. Secondly, the conduct of the IP holder must create a risk of eliminating
effective competition in the secondary market.
After Microsoft, the crucial test of exceptional circumstances is to discern
how the new product test has been redefined.1036 In this case two factors seem to be
influential. The test was to ensure that the demonstrable plural sources of innovation
should be continued and these sources were also demonstrably satisfying consumer
needs which were not satisfied by a dominant undertaking. The category of
exceptional circumstances when applied to new entrants will continue to require that
the new entrant offers a new product, however, that is defined by the case law.
Following Microsoft, it can be assumed that where an incumbent has already
been dealing with undertakings operating in a dependent secondary market and the
competitor in the secondary market already has advanced features in its own product
and requires access to the interface information in order to viably continue to develop
this advanced feature, Article 102(b) TFEU will apply.
3.2 Microsoft Case in the US
The antitrust action against Microsoft was an attempt by the US Department of
Justice to mandate interoperability between a platform owner and applications
developers.1037 The US Department of Justice challenged a number of Microsoft’s
1036
Anderman and Schmidt, supra note 314, 117.
United States v. Microsoft Corp., 84 F.Supp.2d 9 (D.D.C. Findings 1999) (Findings of Facts);
United States v. Microsoft Corp., 87 F.Supp.2d 30 (D.D.C. 2000) (Conclusions of Law); Microsoft
Corp., supra note 313.
1037
217
actions as part of an effort to maintain its monopoly in the market for desktop
computing operating systems.1038 In particular, it claimed that Microsoft sought to
exclude Netscape’s Navigator browser as well as Sun’s Java technology in order to
prevent them from serving as middleware that would affect Microsoft’s operating
system and displace Microsoft’s monopoly power.
Middleware was important to the plaintiffs’ case because of its relationship to
one of the most critical barriers to entry into the operating system market,1039 the
existence of a substantial number of applications programmes that work with
Windows operating system.1040 This large array of programmes had become an entry
barrier because consumers were reluctant to buy an operating system for which there
were few applications and software developers were reluctant to write applications
for operating systems for which there were few users.1041 This kept consumers and
developers attached to Windows. The middleware focused on in the litigation,
however, was ‘cross-platform’, that is, it would be capable of running with any
operating system, not just Microsoft’s Windows OS. 1042 It indicated that if
applications developers could write software to interoperate with such middleware,
rather than with Windows, the applications barrier to entry into the operating system
market might be lowered or eliminated.1043
At the liability stage of the plaintiff’s case against Microsoft, Microsoft
refused to share protected information in a way that might have harmed competition,
i.e. a four-month delay in 1995 in releasing the specifications for a so-called
1038
United States v. Microsoft Corp., 84 F.Supp.2d 9 (D.D.C. Findings 1999) (Findings of Facts);
United States v. Microsoft Corp., 87 F.Supp.2d 30 (D.D.C. 2000) (Conclusions of Law); Microsoft
Corp., supra note 313.
1039
United States v. Microsoft Corp., 84 F.Supp.2d 9, 28 (Civil Action Nos. 98-1232 & 98-1233).
1040
Ibid., 19-20.
1041
Microsoft Corp. (Findings of Facts), supra note 1037, 20.
1042
Ibid., 28-30 and 34-38.
1043
Microsoft Corp. (Findings of Facts), supra note 1037, 28-30 and 34-38.
218
application programming interface (API) to Netscape. 1044 In 2001, the litigants
agreed on a settlement which was finally approved by the US Appeals Court in 2004.
This agreement obliged Microsoft to share, in certain circumstances, the APIs and
related documentation used by Microsoft middleware to interoperate with Windows
(mandatory disclosure). 1045 The access to this interface would enable software
companies to establish a full technical compatibility of their software applications
with the Windows operating system. 1046 Furthermore, Microsoft was required to
license, on reasonable and non-discriminatory terms, communications protocols
installed on a personal computer and used to interoperate with a Microsoft server
operating system (compulsory licensing).1047
The reason for requiring the disclosure of APIs is that if middleware were to
be a competitive threat to Windows, it would have to be able to work with Windows
as well as with other operating systems, that is, it could not be cross-platform unless
it worked on the dominant platform as well as on others in the future.1048 Requiring
disclosure of APIs helps ensure this interoperability, making relief justifiable
although the required disclosure was not clearly directed towards a specific finding
of liability, but instead, was aimed at eliminating the effects of illegal conduct.1049
Disclosure of communications protocols between Windows and Microsoft server
operating systems could also be justified. The theory was that servers might be the
new middleware, in the sense that future applications might run on servers rather
than on personal computers. 1050 Server operating systems thus might become a
platform that would challenge Microsoft’s dominance in the desktop operating
1044
United States v. Microsoft Corp., 84 F.Supp.2d 9, 33 (D.D.C. Findings 1999).
Microsoft Corp., supra note 313
1046
Ibid.
1047
United States v. Microsoft Corp., 2002-2 Trade. Cas. (CCH) P73, 860, at 95, 110.
1048
United States v. Microsoft Corp., 231 F.Supp.2d 144, 186-187 (D.D.C. 2002).
1049
Ibid., 189.
1050
New York v. Microsoft Corp., 224 F.Supp.2d 76, 172-173 (D.D.C. 2002).
1045
219
systems market, but only if servers were able to communicate with the desktops.1051
Such communication requires knowledge of the protocols that Microsoft builds into
Windows OS.1052
In applying a traditional manufacturing industry-type duty to deal theory to
the technologically dynamic markets of the New Economy, the Microsoft case
suggests that a platform monopolist must exercise special care in terms of the type of
cooperation, or lack thereof, it offers to competitors.1053 In the Microsoft case, both
the District Court and the Court of Appeals concluded that inter alia the strong
network externalities inherent in operating systems meant that any rival operating
system would find it extraordinarily difficult to displace Microsoft’s dominance and
encourage application developers to create software programmes to run on a platform
other than Windows OS.1054
In holding a platform monopolist liable under the antitrust law, the D.C.
Circuit concluded that Microsoft engaged in exclusionary conduct by pressuring
developers to use Microsoft’s own non-compatible version of a Java Virtual Machine
(JVM), deceiving them about its lack of compatibility with Sun’s JVM, and
pressuring Intel not to support Sun’s JVM.1055 In so doing, the Court found that a
rival had no duty to make a competing platform compatible, particularly in this case
where Microsoft’s product worked more effectively on Windows than Sun’s JVM.
Nevertheless, the use of anticompetitive tactics to gain an advantage violated the
antitrust law. 1056 Moreover, where a firm engages in a practice designed to
1051
Microsoft Corp., supra note 1048, 189.
Ibid., 189-190.
1053
Philip Weiser, “Regulating Interoperability: Lessons from AT&T, Microsoft, and Beyond,”
Antitrust Law Journal 76 (2009): 280.
1054
Microsoft Corp., supra note 313, 55-56.
1055
Ibid., 74-77.
1056
Microsoft Corp., supra note 313, 74.
1052
220
disadvantage a rival, and cannot justify that practice on efficiency grounds, it
infringes Section 2 of the Sherman Act.1057
Since the purpose of the final decree was to achieve a high degree of
interoperability of Microsoft software, the result might be that non-Microsoft
software could result in operating in a way that would be functionally
interchangeable with Microsoft’s products. In other words, the compulsory
disclosures would have permitted competitors to offer clones of Microsoft’s software,
specifically of Windows operating system.1058 Judge Kollar-Kotelly recognised that
cloning a programme’s functionality is not the same as copying a programme’s
code. 1059 Indeed, the District Court acknowledged that not all information in the
software industry is protected by intellectual property law1060 and even stated, albeit
without any specific legal analysis, that the mandatory disclosure provisions would
allow Microsoft’s competitors to clone many features of Microsoft’s software
without violating intellectual property laws. 1061 Nevertheless, the District Court
referred to the proposed compulsory licensing provision as an intellectual property
‘grab’ by Microsoft’s competitors. 1062 Intellectual property law gives its holders
some very specific and bounded rights to exclude others from using the holder’s
property, 1063 but there is no clear examination in Judge Kollar-Kotelly’s opinion
regarding whether Microsoft protects its APIs or communications protocols through
copyright, patent, trade secret, or even trademark, or the extent to which intellectual
property laws might provide no protection at all to the information.1064
1057
Weiser, supra note 1053, 281.
Microsoft Corp., supra note 1048, 228.
1059
Ibid.
1060
Microsoft Corp., supra note 1048, 229.
1061
Ibid.
1062
Microsoft Corp., supra note 1048, 229.
1063
Microsoft Corp., supra note 483, 40.
1064
First, supra note 947, 1389.
1058
221
In general, the protection of intellectual property rights encourages
innovation by rewarding the innovator’s investment in creating something new,
while making the innovation available to the public. 1065 The fact that the Court
allowed Microsoft’s products to be cloned was a contradiction of the terms of IPRs;
Microsoft was to be denied the returns from its investment in innovation and to be
effectively divested of its IP value.1066 There needs to be some legal protection for
intellectual property without which intellectual products could be freely appropriated
by others, at low or no cost. The real questions are, however, how much protection is
necessary and what the costs of that protection might be.1067 For example, a fuller
calculation of the effects of compulsory disclosure on Microsoft’s incentives to
innovate would also have considered the stimulus to innovation that competition
might provide; the competition that would be increased by making it easier for other
software to interoperate with Windows; and, indeed, the competition that would
come from permitting other software to mimic its functionality.1068 In this respect,
the final decree’s mandatory disclosures, and compulsory licensing of any
intellectual property rights necessary to secure interoperability would seem to raise a
direct conflict between antitrust law and intellectual property law.
The most obviously regulatory aspect of the decree entered by Judge KollarKotelly was the requirement that the compulsory protocol licenses be offered on
reasonable and non-discriminatory terms. 1069 Essential facilities or public utilities
traditionally have been required to provide service to all who ask, without
discrimination, and to offer services at fair and reasonable rates. 1070 These
1065
First, supra note 947, 1390.
Microsoft Corp., supra note 1050, 176.
1067
First, supra note 947, 1390.
1068
Ibid.,.
1069
United States v. Microsoft Corp., 2002-2 Trade. Cas. (CCH) P73, 860, at 95, 110.
1070
First, supra note 947, 1391.
1066
222
obligations have been overseen by regulatory agencies, but the Microsoft decree
gave the District Court this review function.1071 The decree also required the court to
supervise the quality of Microsoft’s compliance with the protocol-disclosure
requirement, with the assistance of an outside technical committee. 1072 In fact,
supervision of this disclosure requirement has proved to be a substantial regulatory
burden, as the adequacy of Microsoft’s protocol documentation has been a constant
point of contention between the parties, leading the District Court to require periodic
reporting and hearings in an effort to force Microsoft to perform adequately.1073
Although antitrust authorities generally avoid such regulatory decrees,
preferring remedies that restore competition and then permit the market to do its
work, the regulatory direction of the final decree can be seen as consistent with the
economic and institutional assumptions that the IP-related product can be the
essential facilities.1074 As an economic issue, Windows OS, an intellectual property
product, is now seen as a twenty-first century natural monopoly, with economies of
scale on the supply side (subject to declining average costs because of near-zero
short-run marginal costs) and economies of consumption on the demand side (the
network effects arising from its ubiquity). 1075 By the end of the case, since the
government plaintiffs appeared to fear fragmentation of the platform more than a
continuation of Microsoft’s monopoly, the decree left Microsoft in its monopoly
position but imposed on it at least some of the duties traditionally imposed on a
1071
United States v. Microsoft Corp., 231 F.Supp.2d 144, 100-202 (D.D.C. 2002).
United States v. Microsoft Corp., 2002-2 Trade. Cas. (CCH) P73, 860, at 95, 113.
1073
United States v. Microsoft Corp., 2002-2 Trade. Cas. (CCH) (Civil Action No. 98-1232 (CKK));
United States v. Microsoft Corp., 2006-2 Trade. Cas. (CCH) P75, 418 (D.D.C. 2006) (modified
decree).
1074
First, supra note 947, 1393.
1075
United States v. Microsoft Corp., 87 F.Supp.2d 30, 40 (D.D.C. 2000) (Civil Action Nos. 98-1232
(TPJ) & 98-1233 (TPJ), Declaration of Kenneth J. Arrow, 5-6; John F. Duffy, “The Marginal Cost
Controversy in Intellectual Property,” University of Chicago Law Review 71 (2004): 39-40.
1072
223
regulated monopoly, including the duty to deal on reasonable, non-discriminatory
terms, instead of as a restructured Microsoft (subject to competitive markets).1076
In conclusion, it is noteworthy that the Supreme Court used legal terms such
as ‘monopolisation’ in Section 2 of the Sherman Act,1077 although the approach taken
in the remedial phase seemed to deal with essential facilities in the Microsoft case; an
undertaking which possesses dominance in a primary market, i.e. the market for
Intel-compatible PC operating system, and tries to control a downstream market, i.e.
the market for Internet browsers. 1078 In fact, the D.C. Circuit Court of Appeals
pointed out the essential function of the API for the downstream market for personal
computer application software.1079 This judicial practice of focusing on the specific
misconduct rather than determining whether the requirements of a certain doctrine
are fulfilled is in accordance with the former decisions of the US Supreme Court.1080
VI. Analysing Elements of Essential Facilities/Exceptional Circumstances
4.1 Evolution of Leveraging: Two-Market Theory v. Single-Market Theory
4.1.1 Market Foreclosure effects
The principle of Commercial Solvent is based on a situation where there are two
vertically different markets, upstream market A and downstream market B: the
undertaking which is dominant in market A may not, by withholding supply of
1076
United States v. Microsoft Corp., Civil Action No. 98-1232 (CKK) (D.D.C. 9 February 2005)
(Statement of Counsel for the Department of Justice), Transcript of Hearing, 17.
1077
United States v. Microsoft Corp., 345 F.3d 49 (2004).
1078
First, supra note 947, 1376-1394.
1079
Microsoft Corp., supra note 1075.
1080
Muller and Rodenhausen, supra note 961, 327.
224
product A, extend its market share in market B, in which it is also present. This was
the factual setting of most cases decided under the Commercial Solvent paradigm.
However, in a few cases the Commission and the EU Courts have imposed a
duty to supply on a dominant undertaking in market A, in order to enhance
competition in market B, despite the fact that this undertaking is not present in the
derivative market. Especially, in the Magill case, access to TV listings was ordered
because no product was being offered in market B (weekly comprehensive TV
guides), despite there being demand for such a product. Thus, it is clear that not all
essential facilities cases fit the Commercial Solvents case which needed to leverage
market power from an upstream or primary market to a downstream or secondary
market.
1081
Market foreclosure, rather than market leveraging, may provide
underlying justification for the application of the essential facilities doctrine in the
EU.1082 Similarly, in the Oscar Bronner case, the Court of Justice expressly deferred
to the national court on the issue of whether home delivery schemes for newspapers
constituted a service market. 1083 However, the evidence showed not only that
Mediaprint, the newspaper publisher in question, introduced and maintained a home
delivery system for its own use,1084 but also that there was no “access market” in the
home delivery system created by Mediaprint for the purposes of this case, in that it
had never licensed access to it, as such, to any newspaper publisher.1085 These facts
demonstrated that the Court of Justice in the Oscar Bronner case did not consider the
Frank Fine, “NDC/IMS: A Logical Application of Essential Facilities Doctrine,” European
Competition Law Review 23, no.9 (2002): 458.
1082
Ibid.
1083
Case C-7/97 Oscar Bronner, supra note 949, para. 34.
1084
Opinion of Advocate General Jacobs, in Case C-7/97 Oscar Bronner, supra note 949, para. 70.
1085
Case C-7/97 Oscar Bronner, supra note 949, para. 9.
1081
225
absence of two markets an impediment to the application of Article 102 TFEU,
provided that the other elements were satisfied.1086
Moreover, even if there were a market in home delivery systems for
newspapers, the Court of Justice in the Oscar Bronner case was not concerned with
any leveraging by Mediaprint from that market to the market in newspaper
publishing. Rather, the Court of Justice assumed for the purposes of the case that
Mediaprint held a dominant position in the Austrian market for daily newspapers
even before Bronner sought access to its home delivery system. 1087 The Court of
Justice’s concern was therefore not with leveraging from that system to a market
already dominated by Mediaprint, but rather, with whether Bronner was being denied
access to a facility, which might have been necessary for the distribution of
newspapers “with a circulation comparable to that of the daily newspapers
distributed by [Mediaprint’s] scheme.”1088 In other words, the Court of Justice was
concerned about potential market foreclosure by Mediaprint, rather than leveraging
from one market in which it exercised power to a secondary market in which such
power was absent.1089 The Court of Justice’s real concern was whether Mediaprint,
the dominant newspaper publisher in Austria, in refusing access to its home delivery
system, enabled it to obtain, or maintain, a “genuine stranglehold” on the Austrian
newspaper market.1090 The situations in the cases of Magill and Oscar Bronner were,
therefore, devoid of market leveraging because there was only one true market which
was relevant in both cases, and the effect of the relief sought, if indispensability of
access were demonstrated, was to prevent market foreclosure rather than market
1086
Fine, supra note 1081, 459.
Case C-7/97 Oscar Bronner, supra note 949, para. 16.
1088
Ibid., para. 46.
1089
Fine, supra note 1081, 459.
1090
Opinion of Advocate General Jacobs, in Case C-7/97 Oscar Bronner, supra note 949, para. 65.
1087
226
leveraging.1091 Finally, the Commission in the IMS case for the first time explicitly
rejected the need to prove the existence of two markets in an essential facilities
case.1092
4.1.2 Competitive Relationship
The Seventh Circuit’s decision in the MCI Communications case contains the most
frequently cited list of elements of an essential facilities claim:
(1) control of the essential facility by a monopolist; (2) a competitor’s inability
practically or reasonably to duplicate the essential facility; (3) the denial of the use
of the facility to a competitor; and (4) the feasibility of providing the facility. 1093
Most importantly, the Seventh Circuit explicitly relied upon the leveraging theory
that permitted the owner of the essential facility to monopolise or restrict competition
in a related but distinct market:
A monopolist’s control of an essential facility (sometimes called a ‘bottleneck’) can
extend monopoly power from one stage of production to another, and from one
market into another. Thus, the antitrust laws have imposed on firms controlling an
essential facility the obligation to make the facility available on non-discriminatory
terms.1094
The MCI court’s incorporation of a vertical element into its essential facilities
analysis, i.e., AT&T’s use of its monopoly in local telephony to exclude MCI from
1091
Fine, supra note 1081, 459.
COMP D3/38.044 IMS Health, supra note 962, paras. 183-184.
1093
MCI Communications Corp. supra note 894.
1094
Ibid., 1132.
1092
227
the market for long-distance telephone services, is echoed by numerous appellate
decisions. For example, according to the Second and Seventh Circuits:
The policy behind prohibiting denial of an essential facility to a competitor, at least
in part, is to prevent a monopolist in a given market (here, bodybuilding magazines)
from using its power to inhibit competition in another market (here, nutritional
supplements for bodybuilders).”1095 “The point of the essential facilities doctrine is
that a potential market entrant should not be forced simultaneously to enter a second
market, with its own large capital requirements.
1096
Professor Hovenkamp’s treatise described the role of the vertical relationship in the
essential facility doctrine as follows:
It should be clear that the essential facility doctrine concerns vertical integration-in
particular, the duty of a vertically integrated monopolist to share some input in a
vertically related market, which we call market #1, with someone operating in an
upstream or downstream market, which we shall call market #2. If the facility is
truly “essential.” then the #1 monopoly facility also establishes a #2 monopoly …
Understanding the “vertical” nature of essential facility claims helps to focus the
analysis: the essential facility claim is about the duty to deal of a monopolist who is
able to supply an input for itself in a fashion that is so superior to anything else
available that others cannot succeed unless they can access this firm’s input as
well.1097
As a matter of antitrust jurisprudence and policy, this two-market analytical approach
is set by the underlying notion of legitimate market power found in Section 2 of the
precedents of the Sherman Act: market power acquired “as a consequence of a
superior product, business acumen, or historic accident” does not offend the antitrust
1095
Twin Labs, Inc. v. Weider Health & Fitness, 900 F.2d 566, 568 (2nd Cir. 1990).
Fishman v. Estate of Wirtz, 807 F.2d 520, 540 (7th Cir. 1986).
1097
Herbert Hovenkamp, “Unilateral Refusals to Deal, Vertical Integration, and the Essential Facility
Doctrine,” 1 July, 2008. University of Iowa Legal Studies Research Paper No. 08-31, p. 1. Available
at SSRN: http://ssrn.com/abstract=1144675. (accessed 20 April, 2010).
1096
228
law.1098 Thus, there is no basis under the essential facilities or any other doctrine for
compelling the sharing of legitimately acquired advantages which are absent from
exclusionary abusive conduct in or affecting an adjacent market.
1099
This
fundamental principle is not limited to intellectual property.1100 Antitrust law does
not, for example, require a manufacturer who achieves economies of scale that
cannot be matched by its rivals to share its more efficient plant.1101
However, the Tenth Circuit’s opinion in Aspen Skiing clearly deviated from
the two-market logic of the essential facilities doctrine.1102 In that opinion, the Tenth
Circuit explicitly held that vertical integration into two markets was not necessary to
an essential facilities case.1103 In other words, there is no requirement that a plaintiff
alleging anticompetitive denial of access to an essential facility should demonstrate
the existence of two separate relevant product markets.1104 Instead, according to the
Tenth Circuit in Aspen Skiing, parties making essential facilities claims may
simultaneously be customers and competitors of the alleged monopolists in a single
market. 1105 As some cases suggest, 1106 the essential facilities doctrine does not
require a plaintiff to neatly order the relevant levels of production into two separate
relevant product markets. It is sufficient to prove that the parties compete, or would
compete if the plaintiff were permitted access to the defendant’s asset, in the same
market. This is not to say that the essential facilities doctrine does not apply where
two vertically-related markets are involved. Obviously, it captures such situations as
1098
United States v. Grinnell Corp., 384 US 563, 571 (1966).
Paul Marquardt and Mark Leddy, “The Essential Facilities and Intellectual Property Right: A
Response to Pitofsky, Patterson, and Hooks,” Antitrust Law Journal 70 (2003): 852.
1100
Ibid.
1101
Marquardt and Leddy, supra note 1099, 852.
1102
Aspen Highlands Skiing Corporation v. Aspen Skiing Company, 738 F.2d 1509 (10th Cir. 1984).
1103
Ibid., 1518, footnote 11.
1104
Robert Pitofsky, Donna Patterson, and Jonathan Hooks, “The Essential Facilities Doctrine Under
US Antitrust Law,” Antitrust Law Journal 70 (2002): 458.
1105
Ibid.
1106
Sunshine Cellular v. Vanguard Cellular Systems, Inc.,810 F.Supp. 486 (S.D.N.Y. 1992);
Delaware & Hudson Railway Co. v. Consolidated Rail Corp., 738 F.2d 1509 (10th Cir. 1984).
1099
229
well. 1107 The courts require only that the plaintiff prove that the facility is
indispensable for competition in a relevant product market, is controlled by a
monopolist who could practically make access available, and is not capable of
duplication.1108
The aim of the policy is simply to ensure competition in the market where the
two parties could compete but for the refusal to provide access to the essential asset;
any characterisation of the essential facility would be superfluous and artificial.1109
Thus, the vital issue in applying the essential facilities doctrine is whether the
plaintiff has a competitive relationship with the alleged monopolist in the relevant
product, not what the relationship is between the plaintiff and the defendant with
respect to the asset alleged to be “essential.” 1110 In other words, the competitive
relationship between the parties, not the relationship between the essential facility
and the relevant market, is the criterion of liability under the essential facilities
doctrine.1111
However, the Supreme Court in Aspen Skiing case expressly declined to
reach the essential facilities reasoning relied upon by the Court of Appeals.1112 The
Supreme Court’s opinion clearly distinguished between a refusal to enter into a new
cooperative arrangement and a sudden change in market practice by the dominant
firm that seemed squarely aimed at eliminating its lone, remaining competitor:
The monopolist did not merely reject a novel offer to participate in a cooperative
venture that had been proposed by a competitor. Rather, the monopolist elected to
1107
American Telephone & Telegrph Co. v. North American Industries, Inc., 772 F.Supp. 777
(S.D.N.Y. 1991); Advanced Health-Care Services, Inc. v. Radford Community Hospital, 910 F.2d 139
(4th Cir. 1990); Twin Labs, Inc. v. Weider Health & Fitness, 900 F.2d 566 (2nd Cir. 1990).
1108
MCI Communications Corp. supra note 894.
1109
Pitofsky, Patterson, and Hooks, supra note 1104, 460.
1110
Ibid., 461.
1111
Pitofsky, Patterson, and Hooks, supra note 1104, 461.
1112
Aspen Skiing Company v. Aspen Highlands Skiing Corporation, 472 US 585, 611 fn. 44 (1985).
230
make an important change in a pattern of distribution that had originated in a
competitive market and had persisted for several years.1113
Although in its decision the Supreme Court distanced itself from the reasoning of the
lower court, the opinion of the Tenth Circuit in Aspen Skiing can mark the first step
on a new path for the essential facilities doctrine, the duty to license for obtaining
interoperability.1114 In particular, the one-market theory can provide justification in a
situation where a competitor intends to produce goods or services of a different
nature, which answer specific consumer requirements not satisfied by existing goods
or services.1115
4.2 Exceptional Circumstances
4.2.1 Indispensability
Indispensability implies that the input or information in question is essential for the
exercise of a viable activity on the market for which access is sought.1116 The test is
whether the creation of substitute inputs or information is impossible or extremely
difficult. In other words, whether there are technical, legal or economic obstacles
capable of making it impossible or at least unreasonably difficult to create
alternatives, or to create them within a reasonable timeframe.1117 Thus, it must be
shown that the cost of duplicating the allegedly essential facility constitutes a barrier
1113
Aspen Skiing, supra note 1112, 603.
Marquardt and Leddy, supra note 1099, 855.
1115
Case IMS Health, supra note 976, Opiniion of Advocate General Tizzano, para. 62. Available at
http://curia.europa.eu/jurisp/cgi-bin/form-.pl?lang=en (accessed 20 April, 2008).
1116
Case T-504/93 Tierce Ladbroke SA v. Commission of the European Communities. [1997]
European Court Reports II -923,para. 130.
1117
Case C-418/01 IMS Health, supra note 978, para. 28; Case T-374/43 European Night Service v.
Commission of the European Communities. [1998] European Court Reports II -3141,para. 209,
footnote 34.
1114
231
to entry such that there are no viable alternatives to the dominant firm’s input,1118 or
the cost of such alternatives is “prohibitively expensive and would not make any
commercial sense.1119
In the case of intellectual property rights, similar considerations apply. Due to
the legal restrictions, the test is whether competitors can turn to any workable
alternative technology of the right in question in such a way that they can remain
effective competitors without the supply. 1120 The Commission’s Discussion Paper
states that the indispensability requirement “would likely be met where the
technology has become the standard or where interoperability with the right holder’s
IPR protected product is necessary for a company to enter or remain on the product
market.” 1121 This is the case for any interoperability information that may be
protected by intellectual property rights in regard to products that have become de
facto standards or where interoperability is necessary to compete in the market.1122
Indispensability is not required for an abuse not involving a (constructive)
refusal to license a rival, where a compulsory license may be an appropriate remedy,
but where dominance in addition to some other abusive behaviour may be enough for
the application of Article 102 TFEU.1123
4.2.2 Risk of Elimination of Effective Competition
The refusal to share the indispensable input must entail the elimination or substantial
reduction of competition to the detriment of consumers in both the short and the long
1118
Case T-374/43 European Night Service, supra note 1117, para. 227.
COMP/37.685 GVG/FS, 2004/33/EC Commission Decision of 27 August, 2003[2004] Official
Journal of the European Communities L 11/17, paras. 109, 120, and 148.
1120
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 128.
1121
European Commission, Competition Discussion Paper, supra note 641.
1122
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 128.
1123
Ibid., 129.
1119
232
term. 1124 This condition is the corollary of the condition that the dominant firm’s
input is indispensable for competition. If the input is not indispensable, the refusal to
share would not have substantial effects on competition.1125 Conversely, if an input is
essential for competition, it would, ultimately, allow the undertaking or undertakings
that own or control it to exclude all competition on the relevant downstream market
in which the input is used.1126 The Commission has explained this underlying policy
rationale for imposing a duty to deal in the following terms:
The duty to provide access to a facility arises if the effect of the refusal to supply on
competition is objectively serious enough: if without access there is, in practice, an
insuperable barrier to entry for competitors of the dominant company, or if without
access competitors would be subject to a serious, permanent and inescapable
competitive handicap …1127
However, there should be no requirement to show that the rival who wishes to have
access to the information is already excluded from the market before the refusal to
supply can be found to risk substantially eliminating competition. 1128 Rather, the
Commission said that the relevant legal test is not whether each and every competitor
has irreversibly exited, but whether there is some present basis for identifying a
“serious risk of foreclosing competition and stifling innovation.” 1129 This makes
sense, since, otherwise, competition authorities and courts would have to stand idly
by and wait for actual exclusion and anticompetitive effects to materialise before
they could act, even where the long-term harm caused by exclusion would be serious
1124
Opinion of Advocate General Jacobs, in Case C-7/97 Oscar Bronner, supra note 949, para. 61.
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 129.
1126
Ibid.
1127
Organisation for Economic Cooperation and Development, “The Essential Facility Concept,”
(1996): 94, Available at http://www.oecd.org/dataoecd/34/20/1920021.pdf (accessed 19 April, 2011).
1128
European Commission, Competition Discussion Paper, supra note 641.
1129
COMP/C-3/37.792 Microsoft, supra note 238, para. 842.
1125
233
or even irreversible owing to very high barriers to re-entry.1130 Moreover, in a case of
‘monopoly maintenance’ the anticompetitive effect is not the mere exclusion of
competitors, but harm caused to consumers from the continuation of a substantial
degree of market power and reduction of product diversity.1131
In addition, the mere presence of a competitor does not mean that no
elimination of competition has occurred.1132 Especially in markets where significant
investments are required to compete through innovation, effective competition does
not mean the mere presence of one or more niche rivals. It implies a meaningful
process of competition whereby firms have an effective opportunity to compete on
merits based on price, quality, and innovation.1133
4.2.3 New Product Criterion: Limiting Technological Development
There is no requirement that the refusal must always prevent the emergence of a
product that has not existed before in any form. The situation where consumers are
deprived of a specific new product for which they have present and unsatisfied
demand, as occurred in the Magill case, is one example of a limitation of innovation
to the prejudice of consumers.1134 The General Court indicated that the new-product
test could justify imposition of a duty to deal under Article 102 TFEU, but that other
criteria could also justify such a duty. 1135 This was confirmed again in the IMS
Health case, where the new-product criterion was mentioned as merely one of
several sufficient conditions, thereby suggesting, implicitly but clearly, that this
1130
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 130.
COMP/C-3/37.792 Microsoft, supra note 238.
1132
European Commission, Competition Discussion Paper, supra note 641.
1133
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 130.
1134
Joined Case C-241/91P and C-242/91P Magill, supra note 878.
1135
Case T-504/93 Tierce Ladbroke, supra note 1116, para. 131.
1131
234
criterion (together with the other elements) is sufficient but not necessary.1136 The
new-product test applied in the IMS Health case must be understood as a proxy to
identify conduct that stifles innovation and reduces consumer welfare, or that “limit[s]
production ... or technical development to the prejudice of consumers” within the
meaning of Article 102(b) TFEU.1137 This thinking appears to underpin the following
statement:
A refusal to licence an IPR protected technology which is indispensable as a basis
for follow-on innovation by competitors may be abusive even if the licence is not
sought to directly incorporate the technology in clearly identifiable new goods and
services. The refusal of licensing an IPR protected technology should not impair
consumers’ ability to benefit from innovation brought about by the dominant
undertaking’s competitors.1138
In the Magill case the Court of Justice required proof of unsatisfied consumer
demand and not merely the prospect of future innovation, and assessed the relevant
market in which the follow-on innovation would compete. 1139 Consumers can be
harmed in many ways other than the narrow case of suppression of existing new
products.1140 One example of consumer harm is where rival software vendors lack
access on equal terms to essential interoperability information and cannot offer
products which are even better, more functional or more innovative and which have
full interoperability with a virtual monopoly standard.1141 Interoperability is a policy
goal designed to provide users with the freedom to combine ‘best-of-breed’
1136
Case C-418/01 IMS Health, supra note 978.
François Lévêque, “Innovation, Leveraging and Essential Facilities: Interoperability Licensing in
the EU Microsoft Case,” World Competition 28, no. 1 (2005):71-91.
1138
European Commission, Competition Discussion Paper, supra note 641.
1139
Joined Case C-241/91P and C-242/91P Magill, supra note 878.
1140
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 132.
1141
Ibid., 132
1137
235
components of a system or network in any way they wish.1142 The non-disclosure of
essential information in such a case not only deprives users of that freedom, but it is
also an artificial handicap to rivals’ products that otherwise could evolve in
innovative ways, creating product diversity, or could directly or indirectly foster
innovation that challenges the dominant firm’s monopoly.
1143
Restriction of
innovation and lack of interoperability can prejudice consumers even if there are no
new products yet, but incentives and opportunity to innovate are stifled to such an
extent that rivals who in the past have shown a propensity to innovate are being cut
out of the market.1144
There is unsatisfied consumer demand for third-party products with full
interoperability with Windows and Office. There is substantial consumer prejudice,
in particular, where the rivals’ activities could directly or indirectly foster innovation
that challenges the dominant firm’s monopoly; or rivals’ products themselves can be
expected to evolve in innovative ways, creating product diversity.1145 In these cases,
there will be little scope for innovation, except, possibly, innovation coming from
Microsoft, and even Microsoft’s incentives are reduced in the absence of pressure
from rivals. 1146 Thus, the scope for competitive harm in cases of denial of
interoperability is far greater than in any previous case that involved only one new
type of product.1147
4.2.4. Objective Justification and Proportionality
1142
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 132.
Ibid., 132.
1144
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 133.
1145
Ibid.
1146
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 133.
1147
Ibid.
1143
236
Objective and proportionate efficiencies or other justifications can safeguard
behaviours from liability.1148 The elements to be proven for an objective justification
analysis under Article 102 TFEU are four-fold. Firstly, the refusal seeks to attain a
legitimate goal. The range of acceptable justifications for a refusal to deal will vary
from case to case depending on the facts. In the case of IPRs the desire to recover
past R&D expenses and to underpin investments in future innovation may be
provided as a legitimate goal. In the second place, the conduct is effective, in that it
is reasonably capable of achieving that legitimate goal; the objective must not be a
theoretical or a subterfuge for exclusionary intent. Thirdly, the conduct is necessary
to achieve the pro-competitive goal. If this is convincingly alleged, the plaintiff must
show that there are less restrictive and effective alternatives. Fourthly, the use of the
intellectual property right is proportionate in light of the pro-competitive goal and the
anticompetitive effect, called the balance-of-interest test. This test should focus on
the essential function of IPRs, that is, to foster innovation. If the IPR is used in a way
that reduces overall innovation, the balance of interest should arguably fall in favour
of compulsory licensing.1149 An inquiry of this kind is similar to the rule-of-reason
analysis applied in the Section 2 offence of the Sherman Act.
V. Conclusion
Although the objectives of competition law and intellectual property policy are
complementary in that both seek to create a set of incentives to encourage an
innovative, and vigorously competitive marketplace that enhances efficiency and
improves consumer welfare, there appears to be a tension between competition law
1148
Joined Case C-241/91P and C-242/91P Magill, supra note 878; Case C-7/97 Oscar Bronner, supra
note 949; Case 311/84 Télémarketing, supra note 910.
1149
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 134.
237
and IP law in practice because IPRs are characterised as exclusive and
anticompetitive with regard to competition for and within the market. In the case of
conflicts, arguably competition law ought to take supremacy since the dominance in
the IT industry can be durable due to network effects, switching costs, and
economies of scale. This relationship of competition law as a second measure of the
exercise of IPRs was reinforced by Microsoft. However, there should be limitations
and the exceptional circumstances test, or the essential facilities doctrine may delimit
boundaries between effective competition and IPRs. Indeed IPRs should not be
regarded as protecting their owners from competition; rather, IP rights should be seen
as encouraging undertakings to engage in effective competition.
Whilst the conditions of compulsory licensing have not changed, their
application and interpretation by the EU Courts have.
The different factual
circumstances of legal cases have required that the exceptional circumstances test or
the essential facilities be differently applied in each case.
In New Economy markets characterised by network effects, switching costs,
and lock-in, IPRs over a de facto standard cause substantial entry barriers in the
primary market. As a result right holders are provided with the dominant power to
control the degree of competition through the use of interface information in
secondary and complementary markets. Thus, effective competition in IT markets
may be harder to achieve than in other markets. In such a situation, the scope of the
exceptional circumstances or the essential facilities should be more widely
interpreted. In addition, it is necessary to relax the conditions of the exceptional
circumstances test in IT markets. This was exactly what the General Court did in the
Microsoft case.
238
In Magill and IMS Health, the EU Courts followed the previous judgments by
developing the exceptional circumstances test or the essential facilities. However,
despite that the General Court in Microsoft referred to the previous IP licensing cases
in its adjudication, its interpretation considerably departed from the structured
conditions applied in the earlier cases. Although the General Court did not directly
explain the reasons for doing so, its statements in the case implied that it recognised
the exceptional characteristics of the relevant market. Thus, it can be argued that the
General Court lowered the standards to impose the compulsory licensing in the
Microsoft case owing to its special market situation.
However, the EU did not relax the scope of the exceptional circumstances
and lower the standard to impose the compulsory licence in general. The higher
standards of Magill and IMS Health may still be applied to relevant markets with no
substantial entry barriers. Thus, it is suggested that a Microsoft-type standard may
apply only to the specific markets with strong network effects and enormous
switching costs in order to protect innovation and effective competition.
When considering the possible compulsory licensing of IPRs for innovation
and effective competition, there are clear dangers if the competition authorities and
the courts intervene rashly, as this can unjustly share the fruits of the innovation and
reduce the incentive to innovate in the future. There is also a risk in failing to
intervene in cases where there truly is a market failure, both because this will allow
the holder of the IPRs to reap additional profits from the market failure, and because
it will reduce or eliminate the incentive for further innovation in the downstream
market.1150
Christopher Stothers, “IMS Health and Its Implication for Compulsory Licensing in Europe,”
European Intellectual Property Review 26, no. 10 (2004): 470.
1150
239
IPRs themselves do not create an economic monopoly that can be defended in
all circumstances and at all costs. Therefore, interference with any intellectual
property should be limited and proportionate and should not materially affect its
wider incentives for innovation.1151 This is not to say that abusive and exclusionary
conduct does not occur in IT markets, particularly when the presence of network
effects, lock-ins, and barriers to entry make market self-correction difficult. However,
abuse in the IT industry must be assessed by the damage which it causes to new
market entrants who may replace the incumbent monopolist.
There should be an internal balance between exclusivity and access within
IPRs and the possibility of an external restriction set by the competition law. In other
words, IPRs should be carefully examined so that the conflict between competition
and intellectual property is minimised. Further, the economics of intellectual
property and IP products should be carefully understood in each case so that the
impact of anticompetitive liability on those rights and on the incentives provided by
intellectual property can be properly assessed. Finally, the benefits provided by the
competitors that want access to IP should be appreciated, particularly for the ability
of such undertakings to stimulate innovation.
Competition law does not correct the exercise of IPRs, but only corrects the
market situation which has been caused by IPRs. In other words, competition rules
apply when IPRs are used as a tool of abuse or as a means of impeding effective
competition. 1152 It is noteworthy that in general the exercise of IPRs will distort
effective competition for a limited time, but in certain circumstances a dominant
firm’s monopoly over products or services may lead to the permanent elimination of
1151
Dolmans, O’Donoghue, and Loewenthal, supra note 948, 136.
Case 85/76 Hoffmann-La Roche , supra note 173, para. 6; Case 262/81 Coditel v. Ciné Vog Films
[1982] European Court Reports 3381, para. 14.
1152
240
effective competition in the relevant market.1153 In such a situation, the possibility of
permanent distortion of competition in a whole market may exceed the degree of
restriction inherent in IPRs.
It is impossible to establish a single principle that can be uniformly applied to
all industries, since each industry has its own specific characteristics. The imposition
of a compulsory licence may have different effects on innovation and competition in
each market. Therefore, the interpretation of the conditions of the exceptional
circumstances test should be adapted to the specific sector. That is what the current
EU competition regime has done.
1153
The Opinion of Advocate General Jacobs in Case C-7/97 Oscar Bronner, supra note 949, para. 64.
241
Part V. Conclusion
I. Summary of Findings .........................................................................................................242
II. Consideration of Findings .................................................................................................245
III. Per Se Approach to Article 102 TFEU and Its Consequences in IT Markets..................248
IV. Implications of Applying the Current European Legal Analysis to IT Markets..............251
V. Contribution to the Discussion on the New Economy and Article 102 and its
Limitations .............................................................................................................................255
I. Summary of Findings
This thesis discusses whether the current European competition principles are
adequate to protect consumers in the New Economy industries, such as IT markets,
in their application of Article 102 TFEU. The aim of the research question was to
establish the adequacy of the Commission’s approach based on the European
consumer welfare definition when reviewing exclusionary or exploitative abuses
under Article 102 TFEU and to provide legal predictability to undertakings in the
information technology market.
In order to answer the research question, the thesis has examined the
approaches behind network effects and the theories and legal doctrine behind
significant tying and interoperability cases in the EU and the US. It has assessed the
legal principles which have been shaped by early jurisprudence where tying
arrangements and interoperability were found. Finally it has scrutinised how these
242
formulas fit with the current Commission approach to IT markets in the context of
broader consumer welfare. Based on these considerations, this thesis has found:
1. Network effects, which are a crucial feature of the New Economy
industries, increase the legal complexity of a case and make the previous
competition analysis changed;
2. in IT markets, network externalities, switching costs, economies of scale,
and lock-in cause substantial entry barriers, which have similar effects to
natural monopolies;
3. neo-Schumpeterians regard network effects as an incentive to enter the
market, whilst neo-Structuralists regard network effects as an entry barrier
because switching costs combined with network effects lock consumers into a
specific product or service;
4. neo-Schumpeterians prefer a laissez-faire policy because rapid innovation
can easily replace a dominant incumbent within a relatively short period. On
the other hand, neo-Structuralists prefer a policy of intervention because there
may be a risk of a durable monopoly resulting from strong network effects,
relatively high switching costs, economies of scale, and lock-in;
5. the case law analysis has showed that the competition authorities have
considered that the presence of network effects in primary markets increases
the likelihood of the success of a leveraging strategy aimed at foreclosure and
the elimination of effective competition in secondary/downstream markets;
6. technological integration in the New Economy markets are used as a tool
to leverage a dominant undertaking’s market power in primary markets to
secondary markets as well as to protect its dominance in the primary market;
243
7. the EU competition authorities generally take a structured rule of reason
approach to technological integration;
8. the definition of consumer welfare is broader in the EU regime than in the
US regime, as consumer choice and the quality of the product are included;
9. technological integration can be regarded as an anticompetitive behaviour
whilst it can be justified by efficiency gains, such as the increase of
compatibility and access for consumers. However, the EU competition
authorities have been very reluctant to entertain such arguments;
10. the current framework of tying is adequate to the New Economy market,
although technological maturity and its characteristics should be considered
within the European consumer welfare analysis;
13. unlike tying which facilitates access to a product or service, refusal to
supply/license restricts access to a product or service and can be a means of
anticompetitive leveraging;
14. the current analysis of a compulsory licensing under the exceptional
circumstances test/essential facilities is adequate for interoperability cases
since the provision of interoperability increases consumer choice.
15. the judgement of the General Court in Microsoft drew attention to the
fact that the language and the purpose of Article 102(b) TFEU provide the
guidance to define the outer limits of competition rules in the IT sector.
16. a Magill-type test and a Microsoft-type test can be applied to IP-related
cases, and a Microsoft-type test which has the more relaxed standards should
be applied to the IT sector.
244
These findings are important when assessing whether the current European
competition analysis is adequate for protecting consumers in the New Economy
industries in its application of Article 102 TFEU and to evaluate the adequacy of the
Commission’s decision to embrace a broad definition of consumer welfare.
Based on the findings, this thesis has demonstrated that there seemed to be no
critical conflicts between the New Economy markets and current EU competition
analysis. It has concluded that there were no fundamental defects in the current EU
competition analysis. However, current competition analysis needs to be more
flexible when considering market behaviour in the New Economy industries. In
addition, the Guidance Paper should clarify which one is more important between the
better product quality justification and product differentiation defence, also known as
consumer choice. Cases implied that product differentiation takes priority over better
product quality.
II. Consideration of Findings
With regard to the legal complexities produced by specific characteristics in IT
markets, this thesis has considered two conflicting schools of thought – neoSchumpeterianism and neo-Structuralism. The former argued that the fact that
markets with network effects are tipping towards a dominant technology or product
does not necessarily imply that consumers are worse off. On the contrary, by
definition consumers immediately benefit if they all use the same network and can
therefore communicate each other. However, consumers will be worse off if they
become locked into that network in the long term. Several cases in the New
245
Economy industries indicated that in that situation an incumbent’s dominance can be
durable and cannot be overcome by other superior products or services.
In most cases the Commission was influenced by neo-Structuralist theory,
embracing a broad consumer welfare definition. Thus, it seems to protect market
access for competitors as well as consumers. The Guidance Paper states:
Consumers benefit from competition through lower prices, better quality and a
wider choice of new or improved goods and services.1154
The Commission has applied a broad definition of consumer welfare to several cases
in the information technology market. As a result of that, the Commission took a
structured rule of reason analysis, and applied more leniently the competition
principles to IT markets. This analysis is more suitable for fast-moving markets due
to the difficulties in predicting technology path. In addition, the concept of an
optimal time period in which markets can cure anticompetitive conducts and restore
effective competition in these markets is unknown.
The presence of network effects, relatively high switching costs, economies
of scale, and lock-in could increase the likelihood of the success of anticompetitive
leveraging strategies, such as technological integration or refusal to license, aimed at
foreclosure. Part III and IV showed that when network externalities, switching costs,
and lock-in are present, a dominant undertaking in a primary market could
monopolise a secondary or complementary market more quickly. Therefore, it is
justified that EU Courts have relaxed the competition principles and have expanded
the scope of the exceptional circumstances to IT markets.
1154
The Guidance Paper, supra note 43, para. 5.
246
In terms of the broad consumer welfare, competition law may restrict the
excise of IPRs if it is exclusionary or exploitative. At the juncture of IP law and
competition law, there have been fierce debates about whether a holder of IPRs may
use them to completely exclude others or cause additional insurmountable costs to
competitors.
Without exclusivities, competition by unlicensed borrowers could undermine
incentives to invest resources in the first place. Yet exclusion introduces deadweight
losses and may stifle productive use of intellectual resources. In the end, intellectual
property law is required to strike a balance and create a semi-common arrangement,
i.e. a complex mix of private rights and commons designed to facilitate both
exclusion and competition.
Notwithstanding the fact that the common objectives of intellectual property
law and competition law are to promote innovation and enhance consumer welfare,
competition authorities have recognised that in exceptional circumstances IPRs can
restrict effective competition. The unrestrained exercise of IPRs may, in these
exceptional circumstances, be found to be incompatible with the policy goal of
competition rules. In recent years, the most controversial aspect of this concerns
whether and in what circumstances a refusal to license an intellectual property right
may constitute an abuse of a dominant position contrary to competition law.
Whether a refusal to license has become intertwined with the question of
essential facilities is hotly disputed. In the case law analysis, neither the Commission
nor the EU Courts had applied the phrase ‘essential facilities’ to IPRs. However, the
leading case on IPRs, the Magill case, featured significantly in the Bronner case,
which in exceptional circumstances requires dominant undertakings to share facilities
247
that cannot be duplicated by competitors. 1155 And in turn, the Bronner case was
relied upon in the intellectual property case IMS Health.1156
In the analysis of both tying and refusal to license case law, the Commission
has confirmed that the cases in the New Economy industries may be examined in
terms of increasing consumer welfare including consumer choice, improved quality,
and better products/services.
III. Per Se Approach to Article 102 TFEU and Its Consequences in IT Markets
The strategic use of IPRs in the IT markets has been a challenge to the competition
authorities in enforcing Article 102 TFEU. Although the current competition analysis
recognises the positive nature of IPRs in competition, the treatment of IPRs is
different depending upon the stages of analysis of anticompetitive behaviour. In the
relevant market definition and the dominance assessment, IPRs are assessed in the
extent of the restriction of competition in the form of entry barriers. At this stage,
innovative features of IPRs can contribute to enhancing dominance. Although the
Commission no longer assumes that IPRs are automatically related to the dominance,
its methodology considers the possibility that IPRs can be related to an asset that
enjoys dominance in a market. On the other hand, in defining abuse, innovative
features are considered as pro-competitive ones within the logic of competition rules.
The concept of abuse under Article 102 TFEU relies on per se rules due to
the influence of the EU Courts. The logic of the EU competition law is to protect
effective competition. The first result of this logic is that the Commission follows the
form-based or the weak effect approach, although it has recently argued that the
1155
1156
Case C-7/97 Oscar Bronner, supra note 949.
Jones and Sufrin, supra note 3, 497.
248
Commission intends to take a more effects-based approach to the interpretation of
Article 102 TFEU.1157 It has stated that it will not take the effects-based approach in
cases where behaviour seriously restricts competition because of the need to
prioritise existing effective competition as the best guarantee of productive and
innovative efficiencies in the long run.1158 Moreover, the effects-based approach has
been called into question by the General Court in Microsoft, and the Court of Justice
made it clear that it preferred a form-based approach to Article 102 TFEU.1159 The
Court of Justice reiterated in British Airways that behaviour to which objective
abusive intention could be attributed created a plausible risk of the harm of
elimination of effective competition.1160
The second consequence of an approach based on per se rules is that the EU
Courts have tended to confine innovative efficiencies arguments to the category of
objective justification rather than allow efficiency gains to offset current harms in a
more balanced way.1161 This approach reduces the scope of arguments based on the
dynamic efficiency defence. In Microsoft, the defendant asserted that it would have
less incentive to innovate technology if it would be required to license its IPR to
competitors. The Commission attempted to contend this argument by a balancing test.
That is, it balanced the negative effect of a compulsory licensing on Microsoft’s
incentives to innovate against the counter-argument that the compulsory licensing
would increase innovative efficiency for the industry as a whole because
interoperability would maintain plural sources of innovation. However, the General
Court made it clear that what was called for was not a balancing exercise of the two
theories of innovation but a more legally structured assessment of Microsoft’s
1157
The Guidance Paper, supra note 43, para. 19.
The Discussion Paper, supra note 641, para. 91.
1159
Case C- 95/04P British Airways, supra note 321.
1160
Ibid.
1161
Case T-201/04 Microsoft Corp. supra note 38.
1158
249
assertions, holding that Microsoft’s innovation defence could only be raised under
the heading of objective justification as an integral part of the proof of abuse.1162 This
suggests that the test of abuse gives a priority to real effective competition in the
short term and ignores less easily provable assertions about dynamic efficiencies in
the long term. Therefore, the innovation defence will be negated if behaviour
deprives consumers of a new product or creates a risk of elimination of effective
competition in IT markets. There is no sign of judicial acceptance in the EU of an
approach that treats pro-competitive and anticompetitive arguments equally in a
balancing test and moves toward the rule of reason analysis that US antitrust has
applied.
The third consequence of a form-based approach seems to be that if the
conduct of IP owners has reached the stage of offending the competition law, it will
attract competition remedies rather than IP remedies, such as decompilation/reverse
engineering.
The use of a more effects-based approach to the enforcement of Article 102
TFEU is designed to help avoid Type 1 errors, i.e., errors where non-infringing
undertakings are found to have infringed competition rules. However, the EU courts
would appear to be affirming that the avoidance of Type 2 errors, i.e., errors where
infringing undertakings are found not to have infringed competition rules, is of
greater concern than the reduction of Type 1 errors. Insofar as this continues to be
the case, Article 102 TFEU will apply as a relatively robust limit to abuses of
dominance and ensure that compliance with the competition rules will be taken more
seriously.
1162
Case T-201/04 Microsoft Corp. supra note 40, para. 659.
250
IV. Implications of Applying the Current European Legal Analysis to IT Markets
The effects of leveraging can be more pronounced when there are network effects,
switching costs, and lock-in in the market. Network effects can be either direct or
indirect. The former refers to products whose value to each individual increases
when the number of users increases, while the latter arises when the value of a
network increases with the number of providers of complementary services or
applications over the network.
In IT markets where there are strong network effects with relatively high
switching costs, anticompetitive leveraging may allow a dominant undertaking to tip
the market in its favour in a way that is difficult to reverse. In practical terms, this
means that, unless deterred, anticompetitive behaviour may result in consumer harm
not only more quickly than in other cases, but also at a greater scale. The costs of
failing to intervene, or intervening too late, may be considerable.
In IT markets where innovation is particularly important, consumers may
place a higher value on receiving new or better products/services than the price of
these products/services. In these markets, most of the value to consumers is created
by maintaining the undertaking’s incentive to innovate. These benefits may not be
immediate, but may only emerge in the relatively long term. When leveraging takes
place in such markets, intervention by competition authorities often means imposing
remedies that may, on the one hand, alter, distort, or reduce, and on the other hand,
eliminate the incentives to innovate. In these cases, the risks and costs of intervening,
when the authorities should not (Type 1 error), could be more serious than in other
cases (Type 2 error).
251
Thus, the key message is that by their own nature, in IT markets, the
probability of committing errors is greater. Undertakings with substantial market
power often have the ability to engage in behaviour that can have anticompetitive
effects and sometimes they also have the incentive to do so. In other words, it is
possible that an undertaking with market power in one market may have an incentive
and the ability to leverage this market power into other markets. These could be
vertically or horizontally related markets that have certain links either on the demand
side or on the supply side.
Leveraging of market power may not be solely aimed at extending market
power from a primary/upstream market to a secondary/downstream one, but also
could be about protecting a dominance enjoyed in a primary/upstream market from
entry threats. It might wish to prevent the emergence of strong competitors in the
downstream or related market who could in the future enter the upstream markets or
vertically integrate backwards into a primary market.
In the US Microsoft case, the allegation centred on Microsoft’s alleged
anticompetitive actions to eliminate competition in Internet browsers and restrain the
availability of the cross-platform Java technology thus protecting its current and
future dominance of its Windows OS in PC operating systems market. Microsoft
recognised the possibility that its dominance in PC operating systems could be
eroded by these developments and engaged in a number of actions to weaken the
position of rivals’ Internet browsers by:
• integrating its browser to its operating system;
• giving its browser, Internet Explorer (IE) away for free or paying OEMs to
take it;
252
• excluding browser competitors from the most efficient distribution
channels;
• requiring OEMs not to remove or substitute IE; and
• imposing agreements on online services, ISPs, and Internet Content
Providers requiring them to pass over or boycott Netscape, its rival Internet
browser
Microsoft’s concern was due to the fact that Netscape’s Internet browser was
capable of supporting applications that were ‘operating-system-independent.’
Microsoft also allegedly attempted to contain the cross-platform threat from Java by
gradually polluting Java designed to lure software developers into writing Java
programmes, which would not run except with Windows.
In the EU, only some of the concerns were related to leveraging. The
Commission concluded that Microsoft abused its dominant position in PC operating
systems by leveraging it into the workgroup server operating system market, by
refusing to provide interoperability information and, in the media player market, by
bundling its own media player (Windows Media Player) and PC operating systems to
stave off the threat by an independent provider, Real Player. The contested abuse in
the workgroup server operating system market was Microsoft’s alleged refusal to
license information about the APIs, which would allow workgroup servers running
competing operating systems to interact with client PCs and workgroup servers
running Microsoft’s Windows 2000 operating systems.
In its rejection of the “one monopoly profit” theory advanced by Microsoft in
the contested tying case, the Commission noted that the theory does not apply when
the goal of foreclosure is to raise barriers to entry that would defend the original
253
monopoly by creating another one for the complementary product. In the context of
streaming media player bundling, the Commission also noted that dominance of the
media player market can also become a barrier to entry in the PC operating systems
market, both because the Windows Media Player’s API could be extended into a
complete (possibly Java-based) general purpose platform1163 and because “not being
able to guarantee consumers the availability of a complementary media player which
supports (the most) popular application programmes and content makes entry and
business in the PC operating system market harder and less likely to be
successful.”1164
Technological integration is likely to enhance consumer welfare when it
reduces distribution costs, lowers the cost of ensuring compatibility, and enhances
accountability in the case of product malfunction. The refusal to license may be
necessary to protect intellectual property and provide a competitive response. Both
technological integration and refusal to license have ambiguous effects when they are
employed. However, it is clear that they are anticompetitive when they aim at
monopolising the competitive segment or at protecting the monopoly segment.1165
The fact that monopoly leveraging can be assisted by innovation may require
it to consider the trade-off between inefficiencies caused by leveraging and the
possible gains that may result from a greater incentive to innovate if doing so brings
the ability to leverage monopoly power.
It is dubious whether any innovation should have the power to restrain the
beneficial effects of competition and allow for anticompetitive inefficiencies to gain
hold. Moreover, it is very important not to lose sight of the fact that permitting a
1163
COMP/C-3/37.792 Microsoft, supra note 238, para. 972.
Ibid., para. 973.
1165
Jean Tirole, “The Analysis of Tying Cases: A Primer,” Competition Policy International 1, no. 1
(Spring 2005): 3.
1164
254
dominant undertaking to leverage its monopoly through innovation may increase the
dominant undertakings’ incentive to innovate, but at the same time may impair or
prevent innovation by competitors.
Given all the findings in this thesis, it is hard to see any merit in a
competition exemption permitting monopoly leveraging even if done through
innovation. There can certainly be innovations that necessarily involve the extension
of dominance and these perhaps cannot be realised in any other way that is less
restrictive of competition and can bring consumers benefit. These innovations should
be allowed following the principle of competition and broad consumer welfare.
However, innovations that do not meet such a standard should not be encouraged.
V. Contribution to the Discussion on the New Economy and Article 102 and its
Limitations
While competition law should protect effective competition and increase consumer
welfare, the Commission has been criticised for protecting competitors rather than
competition itself. It has been suggested that the adoption of a more structured rule of
reason approach should consider industry characteristics or technological
maturity.1166 Thus, Article 102 TFEU would ensure that the provision was enforced
to consistently protect effective competition and consumers in the long term. To
obtain these, the Commission has suggested that the main objective of Article 102
TFEU when assessing exclusionary abuses should be broad consumer welfare which
includes lower prices, better quality, and a wider choice of new or improved goods
1166
See Sub-chapter VI of Part III.
255
and services.1167 That suggestion enshrines more than consumer surplus and seems to
ignore a short-term economic efficiency in the Article 102 TFEU jurisprudence of
the New Economy industries where the product differentiation or consumer choice
has been interpreted by the Commission and EU Courts as a means to protect
consumer welfare.
There appears to be a tension between the current European competition
regime and the New Economy industries. However, it is not serious enough to
completely change the current competition principles in the way that Schumpeterians
argue. Rather, in general competition policy this seems to have had a positive impact
on dynamic competition in the New Economy markets by protecting effective
competition and defending consumers within the terms of broad consumer welfare.
Competition in the New Economy industries and the current European competition
policy generally work as an effective tool to promote innovation and to ultimately
protect consumers.
However, it would be a mistake to completely ignore the fact that the New
Economy industries are characterised by dynamic competition, where the threats to
existing products comes from new products. Over-reliance on market share should be
avoided where New Economy markets are concerned. Instead, it is necessary to put
more focus on the durability of dominance and easy access to the market.
The fact that this was a fast-growing market could not preclude application of
the competition rules. However, it should be understood that the New Economy
markets have to be looked at from a dynamic perspective by assessing potential as
well as actual effective competition.
1167
The Guidance Paper, supra note 43, para. 5.
256
It is noteworthy that it is impossible to establish a single principle that can be
applied to all industry sectors in an identical manner, because each sector has
different characteristics and these have different effects on competition and
innovation process.
The New Economy markets will continue to be an issue in the current
European competition regime and future developments cannot be perfectly predicted.
It is also unlikely that all the characteristics of the New Economy industries can ever
be considered. Thus, this thesis, in much the same way as the Commission, has
attempted to provide a minimum level of legal clarity for these industries.
257
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