TOWARDS A DEFINITION OF ONLINE PLATFORMS IN THE EUROPEAN DIGITAL SINGLE MARKET: LINKING TRANSPARENCY ON DATA USE AND PRICING TO MARKET POWER 1

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1 TOWARDS A DEFINITION OF ONLINE PLATFORMS IN THE EUROPEAN DIGITAL SINGLE MARKET: LINKING TRANSPARENCY ON DATA USE AND PRICING TO MARKET POWER 1 Martha Ivanovas ABSTRACT The European Commission s Communication on a Digital Single Market Strategy for Europe of 6 May , stipulates that the conduct of some online platforms warrants closer scrutiny and may give rise to regulatory intervention. Specifically, the Communication states that: Some online platforms have evolved to become players competing in many sectors of the economy and the way they use their market power raises a number of issues that warrant further analysis beyond the application of competition law in specific cases. While the Communication sets out types and examples of online platforms, including search engines, social media, e-commerce platforms, app stores, price comparison websites it does not provide a definition of what an online platform is. Instead, it provides an indicative list of companies, noting that the impact of online platforms depends on the types of platform concerned and their market power. Market power of online platforms is then described as being linked to i) a lack of transparency as to how they use the information they acquire, and ii) strong bargaining power compared to that of their clients, which may be reflected in a) their terms and conditions (particularly for SMEs), b) promotion of their own services to the disadvantage of competitors, and c) non-transparent pricing policies, or d) restrictions on pricing and sale conditions. In a public consultation linked to the Communication 3 the European Commission subsequently defined an online platform as an undertaking operating in two (or multi)-sided markets, which uses the Internet to enable interactions between two or more distinct but interdependent groups of users so as to generate value for at least one of the groups. 1 This paper was written for the eight Annual Conference on Competition and Regulation in Network Industries on 19 November 2015 The views expressed are solely those of the author: martha.ivanovas@coleurope.eu 2 European Commission, A Digital Single Market Strategy for Europe, COM(2015) 192 and SEC(2015)100, 6 May European Commission, open consultation on Regulatory environment for platforms, online intermediaries, data and cloud computing and the collaborative economy, published on 9 September

2 This paper reviews theories of harm that are linked to transparency, both around the use of consumer data and around pricing policies in two or multi-sided markets, which the European Commission has applied in competition cases. The paper regroups the indicative list of online platform types set out by the European Commission in mapping out how accessible their policies on data use and pricing are to a consumer. This paper will not discuss whether competition law is adequate as an instrument for intervention in the presence of market power in two- or multisided markets, or, conversely, whether data protection laws and privacy rules are better-placed to address market power issues in dynamic markets. 2

3 I. INTRODUCTION The role of network effects has transformed the traditional way of looking at consumers valuating a product or service independently of other consumers, and challenges assumptions on how firms make strategic decisions and price their products. Classical economic theory assumes that consumers derive a constant utility from a product, independently of other consumers demand. And that, ceteris paribus, a product s price will increase the more consumers demand it. Those consumers with a reservation price equal to or higher than the product s final price will proceed to buy the product. Where the product consumed is a network, a consumer will value the product higher the more other consumers are also consuming it, or are expected to. Consumers are, as a consequence, willing to pay more to use the network the larger it is. 4 When a market acts as a platform in bringing together two or several groups of consumers, this can give rise to cross-market effects. In such a two- or multisided market, utility and demand of consumers on one side of the market are assumed to be positively linked to utility and demand of consumers on the other side or sides of that market. The European Commission s most recent working definition of an "online platform", featuring in the public consultation on the regulatory environment for platforms, online intermediaries, data and cloud computing and the collaborative economy published on 9. September , makes reference to such a two- or multisided market. The consultation document sets out a definition of online platform as: an undertaking operating in two (or multi)-sided markets, which uses the Internet to enable interactions between two or more distinct but interdependent groups of users so as to generate value for at least one of the groups. Certain platforms also qualify as Intermediary service providers. A list of online platform categories and typical examples cited in the European Commission public consultation document covers: General internet search engines Google, Bing 4 Shapiro, Carl and Varian, Hal, R. Network Effects Information Rules - A Strategic Guide To The Network Economy Harvard Business School Press, Boston, Massachusetts, European Commission, open consultation on Regulatory environment for platforms, online intermediaries, data and cloud computing and the collaborative economy, published on 9 September

4 Specialised search tools Location-based business directories or some maps News aggregators Online market places Audio-visual and music platforms Video sharing platforms Payment systems App stores Collaborative or sharing economy platforms Google Shopping, Kelkoo, Twenga, Google Local, TripAdvisor, Yelp Google or Bing Maps Google News Amazon, Ebay, Allegro, Booking.com Deezer, Spotify, Netflix, Canal play, Apple TV Youtube, Dailymotion PayPal, Apple Pay Apple App Store, Google Play AirBnB, Uber, Taskrabbit, Bla-Bla car II. THEORIES OF HARM LINKED TO TRANSPARENCY IN THE USE OF CONSUMER DATA AND PRICING IN TWO OR MULTI-SIDED MARKETS 1. TRANSPARENCY AND PRICING. The cross-market network effects firms in two or multisided markets face have an impact on the way they set prices on each side of the market they operate in. As optimal pricing strategies are subject to change in the face of crossmarket network effects, so is the assessment of price-setting under competition rules. The standard assessment of market power abuse through exclusionary pricing behaviour under competition rules is difficult to apply to the environment the European Commission has identified as the markets where online platforms operate. Market power abuse such as predatory pricing is typically based on the assumption that a firm forgoes profits by pricing below marginal cost, expecting to recover the forgone profits once a competitor has been forced out of the market over business becoming unprofitable due to low prices. Given two or multisided markets it is difficult to see this assumption hold, as forgoing profits in one side of the market can be recouped by additional revenue generated from consumers in another, or several other sides of the market. A firm s optimal pricing strategy in a two or multisided market might therefore involve imposing prices below marginal cost on some consumers independently of a competitor s strategy. Notably at an early development stage of a two- or multisided market low prices might be the most effective way forward for a firm to penetrate a market and attract first consumers in 4

5 order to attain a critical mass that gives rise to network effects. Moreover, getting that extra consumer on board by imposing a below-marginal-cost price might be the optimal strategy because the network effects resulting from that extra consumer joining will increase incentives for others to join, thus reducing or compensating the cost of offering a belowmarginal-cost price. Given the European Commission definition that places online platforms as operating in a two or multi-sided market and given the presence of network effects, it is difficult to distinguish between pricing strategies geared at competing to win consumers from another firm or at competing for the market by pushing a competitor out of it. Applying different prices for different consumer segments might be the optimal strategy for the firm to capture as many consumers as possible by meeting their reservation price. In the context of two or multi-sided markets it can be argued that charging one consumer her reservation price, even if it is high, also subsidises consumption by another group of consumers who are paying a zero or negative price, which in turn increases the valuation of the network to the first consumer, and in that sense is beneficial. As a French digital campaigns consultancy puts it Google, Apple, Facebook, Amazon have redefined the customer concept. They make no difference between a paying customer and a non-paying one. GAFA set out to make themselves indispensable to as many people as possible 6. According to the consultancy, 91% of apps on the Apple app store and 85% of apps on Google Play are available for free (figures October 2014). Other findings reflect how pricing policies are linked to the exploitation of consumer data, for example that Apple gave away new U2 albums to get new credit card numbers on itunes 7. In other words, online platforms can compete intensely on the non-paid side of a two or multi-sided market place, rather than just focusing on the paid side. The online world makes it possible for firms to increasingly improve the targeting and extracting of data from individuals, allowing firms to almost perfectly price discriminate. And one question that arises is whether such perfect price discrimination, or rather price optimisation, is excessive and amounts to an abuse of market power. 6 FABERNOVEL, GAFAnomics, October 2014, available for download on 7 ibid 5

6 The European Commission considers there is a strong link between how online platforms use data and implement pricing policies. EU Competition Commissioner Margrethe Vestager commented that the profile of big data is the new currency of the Internet when asked at her European Parliament confirmation hearing to describe how competition rules should be approached in the age of big data 8. The commissioner has publicly highlighted that in giving away data you are paying a price, an extra price for the product that you are purchasing and you give away something that was valuable, noting that consumers tend to not realise that when they tick the box they consent to their data being exchanged with third parties 9. The working definition of online platforms put forward by the European Commission 10 a few months after these statements links the availability of information on data use and pricing to market power. Market power, the definition says, is, among other elements, dependent on the lack of transparency around how online platforms use the information they acquire and around what their pricing policies look like. The link between market power and data exploitation on one hand, and pricing policies on the other in the context of the Internet has also been made by the European Data Protection Supervisor (EDPS), which said the collection and control of massive amounts of personal data is a source of market power for the biggest players in the global market for internet services, and that personal information has become a form of currency to pay for so-called 'free' online services 11. One possible theory of harm the European Commission looked at in its investigation of the acquisition of WhatsApp by Facebook was the collection of data from WhatsApp users with a view to improving the accuracy of the targeted ads served on Facebook's social networking platform to WhatsApp users that are also on Facebook. 12 The acquisition could strengthen Facebook's position in the online advertising market, by i) introducing advertising on WhatsApp, and/or ii) using WhatsApp as a potential source of 8 European Parliament, Committee on Economic and Monetary Affairs, hearing of Margrethe Vestager, Commissioner-designate for Competition, Brussels, 2 October 2014, verbatim report available for download on /resources/library/media/ RES75845/ RES75845.pdf 9 Mlex interview with Margrethe Vestager, 22 January 2015 available on 10 European Commission Communication on a Digital Single Market Strategy for Europe, 6 May European Data Protection Supervisor Privacy and competitiveness in the age of big data 26 March 2014, available on 12 European Commission Case No COMP/M FACEBOOK/ WHATSAPP, 3 October

7 user data for the purpose of improving the targeting of Facebook's advertising activities outside WhatsApp, the European Commission sets out the two main theories of harm. As regards the ability of the merged entity to introduce targeted advertising on WhatsApp, this would theoretically be possible, subject to WhatsApp changing its privacy policy the decision notes. Facebook said at the time that the data that WhatsApp has access to is at best of marginal utility for Facebook s advertising purposes and would not enhance Facebook s ability to target advertisements on its services. Facebook has publicly made it clear that it has no current plans to modify WhatsApp s collection and use of user data. The transaction would not impact the type of data that WhatsApp collects and stores the decision also notes. 13 And WhatsApp clarified that the firm s privacy approach would not change. 14 The language used in the current version of WhatsApp s privacy policy continues to exclude that the firm shares personally identifiable information with third parties for commercial or marketing use, as referred to in one of the theories of harm developed for this multi-sided market, namely that of introducing advertising on WhatsApp. We are not fans of advertising. WhatsApp is currently ad-free and we hope to keep it that way forever. We have no intention to introduce advertisement into the product, but if we ever do, will update this section.[ ] We do not sell or share your Personally Identifiable Information (such as mobile phone number) with other third-party companies for their commercial or marketing use without your consent or except as part of a specific program or feature for which you will have the ability to opt-in or opt-out. 15 (emphasis added). The same excerpt of Whatsapp s pre-merger privacy policy read in 2012: We do not use your mobile phone number or other Personally Identifiable Information to send commercial or marketing messages without your consent or except as part of a specific program or feature for which you will have the ability to opt-in or opt-out 16. The language in WhatsApp s new privacy policy no longer excludes that the firm shares consumer data with third parties. A change to a subsequent passage seems to indicate that non-personally identifiable information that was previously used to improve the firm s own quality and design could now be shared with third parties: 13 ibid March Whatsapp Privacy Policy October 2015, available on 16 Whatsapp Privacy Policy 7 July

8 We may use both your Personally Identifiable Information and certain non-personallyidentifiable information (such as anonymous user usage data, cookies, IP addresses, browser type, clickstream data, etc.) to improve the quality and design of the WhatsApp Site and WhatsApp Service and to create new features, promotions, functionality, and services by storing, tracking, and analyzing user preferences and trends. 17 This now reads: We may share non-personally-identifiable information (such as anonymous User usage data, referring / exit pages and URLs, platform types, asset views, number of clicks, etc.) with interested third-parties to assist them in understanding the usage patterns for certain content, services, advertisements, promotions, and/or functionality on the WhatsApp Site. 18 The current privacy policy is in that sense transparent: that consumer data could be passed on to third parties for uses other than commercial or marketing. However, there is no information on the pricing policy linked to potential data sharing. Then there is the question of defining uses other than commercial or marketing. Facebook has previously carried out research involving large amounts of user data, where the firm s researchers tweaked information displayed to thousands of users in order to elicit an emotional reaction, which they recorded. 19. Observers viewed the research as geared at improving Facebook s offering the ability to prompt a user into expressing liking or disliking depending on the information shown to them with one commentary at the time suggesting that the product Facebook was actually testing in the study was the users themselves 20. This seems to link the ultimate purpose of this type of research to a commercial objective - to eventually improve the attractiveness of a service on one side of the market. While this ultimately benefits the consumer in that side of the market, it is not clear how the use of data for this type of research is priced (what is the valuation at the point of data collection, after the research is wrapped up, and how it is passed on to consumers as part of the final 17 ibid 18 Whatsapp Privacy Policy October 2015 available on 19 Washington Post, Sheryl Sandberg not sorry for Facebook mood manipulation study, by Gail Sullivan 3, July, 2014, available on 20 Financial Times We are the product that Facebook has been testing, byjohn Gapper, 2 July, 2014, available on 8

9 service). Moreover, in the case of Facebook, engaging in the type of research that only eventually serves to improve quality means the European Commission s other main theory of harm in the WhatsApp/Facebook case is no longer excluded using WhatsApp as a potential source of user data for the purpose of eventually improving the targeting of Facebook's advertising activities outside WhatsApp. 2. TRANSPARENCY AND PRIVACY POLICIES. To which extent functionalities improve over time feeds into a consumer s valuation of a communications app just as the functionalities of the app do, the European Commission found in its investigation in the WhatsApp/Facebook case. The decision cites as important areas of improvement i) reliability of the communications service, which has a direct impact on the service's reputation and its appeal to users; and ii) privacy and security, the importance of which varies from user to user but which are becoming increasingly valued 21. Improving privacy was therefore identified as a functionality that retains customers over time vis-à-vis competitors. The firms privacy policies and notably to which extent they collect and exploit data for advertising activities was one of the elements the European Commission considered when looking at how Facebook and WhatsApp compete. The decision notes that after the announcement of WhatsApp's acquisition by Facebook and because of privacy concerns, thousands of users downloaded different messaging platforms, in particular Telegram which offered increased privacy protection. Privacy concerns also seemed to have motivated a high number of German users to switch from WhatsApp to messaging service Threema in the 24 hours following the announcement of the acquisition 22.. Google now posts a privacy reminder from Google in the top section of the page displaying search results generated by its search engine. When clicking on the post, this opens an easy-to-read explanation of which data Google uses and how, reminding the user at the end of it that If you sign in to your Google Account before agreeing, we'll remember your choice across all of your signed-in devices and browsers. Further, when clicking on a link entitled Learn how Google uses data to improve your experience, which is part of said privacy reminder post, the user is presented with more details on how Google uses data, as well as a message recalling: And of course, you can always sign in to your Google Account if you want to review and use all the tools and controls we offer to help you control your online experience. 21 European Commission Case No COMP/M Facebook/ WhatsApp, 3 October ibid 9

10 The language indicates that transparency around the use of data and managing privacy preferences is considered part of a consumer s valuation of this online platform. The language also seems to reflect that the convenience of accessing information and controlling the use of data is a feature Google competes on in this multisided market, by offering its existing consumers those with a Google Account more convenience: the individual valuation of privacy is remembered across devices, and more tools are available to understand and control the privacy choice. Offering a qualitative higher, more convenient service as part of competing in a multisided market seems to echo how other online platforms behave: several convenient features of Star Trek could for a while only be used by consumers with Microsoft s Internet Explorer browser 23. The web version of WhatsApp allows use beyond a mobile device. That version currently works on some browsers - Chrome, Firefox, Opera, and Safari - while it does not yet work on Internet Explorer. Mobile support is being offered for Android and Windows Phone users, while support for ios is expected to be added at a later time 24. Preserving the quality of a service is in the interest of a firm operating in a two or multisided market, especially in those parts of the market where the service is being offered at a zero or negative price. In that sense the firm has an incentive to police itself on keeping up quality, notably because lowering the quality of the service might adversely impact other sides of the market. Having investigated the acquisition of DoubleClick by Google, the European Commission said that competition based on the quality of collected data thus is not only decided by virtue of the sheer size of the respective databases, but also determined by the different types of data the competitors have access to and the question which type eventually will prove to be the most useful for internet advertising purposes. 25 Abusing market power in an internet-enabled multisided market is prevented where consumers can switch to another provider if their online platform were to downgrade its service. If consumers are found to have difficulties in switching then that would be an issue. Where a platform acts as gatekeeper there could be refusal of access or refusal of supply, 23 op.cit. Shapiro, Carl and Varian, Hal, R Softpedia Microsoft Edge Browser to Support WhatsApp Web Soon, 2 August 2015, available on 25 European Commission Case No COMP/M.4731 Google/DoubleClick, 11 March

11 which is a known issue in competition law. What is unique to the online sectors is that there are supergates. 26 This makes reference to online platforms and notably search engines as gatekeepers given they act as bottlenecks for the large amount of information that flows through them, and for which they have to make editorial decisions on how to display it. 27 For example, the number of users coming to YouTube who start at the YouTube homepage, similar to the way they might turn on their TV, is up more than 3x y/y 28. And there is a grey area where rather than a direct downgrading, there could be very subtle changes in the way search results are being displayed for example where a purchasebutton is placed on a webpage which can affect consumer spending. A search engine could also downgrade the results of a competitor making the users change their search rather than making them switch. Whether that is an abuse is a different question. 29 From a competition law perspective there is no consensus on how the collection and exploitation of data translate into a coherent theory of harm. The claim that by violating consumer privacy in accessing and using large amounts of data as an asset which competitors are deprived of has been characterised far-fetched at best 30. In the DoubleClick/Google case, the European Commission found that the merged entity would not have access to unique, non-replicable data because the type of information collected by DoubleClick is relatively narrow in scope. Other companies active in online advertising have the ability to collect large amounts of more or less similar information that is potentially useful for advertisement targeting. In the WhatsApp/Facebook decision, the European Commission notes that regardless of whether the merged entity will start using WhatsApp user data to improve targeted advertising on Facebook's social network, there will continue to be a large amount of Internet user data that are valuable for advertising purposes and that are not within Facebook's 26 Ezrachi, Ariel, Slaughter and May Professor of Competition Law, Oxford University, oral evidence before the House of Lords EU Internal Market Sub-Committee, inquiry on Online Platforms and the EU Digital Single Market 26 October Weber, Rolf H, From competition law to sector-specific law in internet markets. A critical assessment of a possible structural change, in Competition Law as Regulation, edited by Josef Drexl, Fabiana Di Porto 28 October op.cit. Ezrachi, October Lerner, Andres V., the role of Big Data in online platform competition, 26 August, 2014, paper available on 11

12 exclusive control. A sufficient number of alternative providers of advertising services, such as Google (comprising Google Search, Google+ and YouTube), Yahoo!, MSN and local providers competing with Facebook were found to still compete with the merged entity. 31 The European Commission has grouped online platforms as internet-enabled firms operating in two- or multisided markets into several categories based on the services they offer. When mapping out (ANNEX) how transparent the various online platforms are on the use of data and on what their pricing policies look like for different sides of the market, however, the categories look different than by service. Those online platforms that do not compete intensely on a free side of the market they have both paying and non-paying consumers are less transparent about their use of data it takes longer (more clicks) to find the privacy terms on their website than those online platforms that do not subsidise the free side of the market with revenue from another side of the market. Without indicating whether this is competition for more consumers or for the market, this could reflect that transparency on privacy has become an element online platforms compete on in the free side of the market. If so, it is likely that those online platforms competing in a free side of the market which monetise consumer data will intensify that effort, for example by starting to be more transparent about how their privacy policy has changed exactly since a previous update. The degree of transparency seems to vary across the categories the European Commission has defined for Ebay and Uber it is more difficult to access privacy information than for Amazon and Task Rabbit. The mapping exercise also reveals that most online platforms on the European Commission s indicative list operate in multiple rather than two sides of a market, in other words they feature free users and paying users (often as buyers and sellers of products and services), as well as third party advertising. The companies appearing on the list tend to be listed companies which already display large network effects, and which are monetising these network effects by having introduced paid business accounts where the platform started with free users (e.g. Linked In, Skype, Tripadvisor, Google maps, Task Rabbit, Youtube). For many online platforms, several types of business accounts exist, each priced differently, with the more expensive ones tending to exploit data from other users on the platform (e.g. Twitter, Yelp, Bing maps). 31 op.cit. European Commission, October

13 It also shows that beyond the granular level of where the privacy policy link is placed on the website, the level of detail that is provided and ease of language in those policies, online platforms have adopted a basic level of transparency on use of data that cuts across the categories outlined in the indicative list. Another characteristic that cuts across and is not consistent within the categories defined by the European Commission, is the extent to which a rating system for users is present on the online platform. Those online platforms that do not dispose of a rating system seem to invest more into being transparent on user data, at least on a topline level of posting their privacy policy so it can be accessed quickly, and in providing information on sharing of data with advertisers and other third parties. Based on these observations, it appears not sufficient to define transparency around the use of data and pricing as a factor of market power of online platforms as a basic level of transparency is present across the online platforms. Therefore, different levels of transparency or a minimum threshold would need to be defined in order to allow a market power assessment of online platforms as defined by the European Commission in the context of the Digital Single Market Strategy Communication. These degrees of transparency, and as a consequence element of market power, would need to reflect whether information is available on how the company behaves on data exploitation and pricing in different sides of a market, as divergences exist currently, for example to which extent companies highlight changes to their privacy policy and disclose in detail how their business partners and advertisers use the consumer data they are being given access to. 13

14 ANNEX Online platform category and company Information available that company uses consumer Information available on how company uses consumer How many clicks needed from main website to display privacy policy? Changes to previous version of privacy policy highlighted? Free user as well as paid services (e.g. paid subscription or service fee for buyer) available? Detailed information available on how business partners and advertisers are given access to Third party advertising present on platform? Online marketplaces Amazon yes yes 1 yes yes yes yes yes Ebay yes yes 2 no yes no yes yes Allegro yes yes 1 no yes no yes yes Booking.com yes yes 1 no no yes yes yes Rating system present? Collaborative or sharing economy platforms Uber yes yes 2 no yes yes yes yes Airbnb yes yes 1 no yes no no yes Taskrabbit yes yes 1 no yes yes yes yes Bla -bla car yes yes 1 no yes no yes yes Communication platforms Skype yes yes 2 no yes yes yes yes Whatsapp yes yes 1 no no no no no Social networks Facebook yes yes 1 no yes yes yes yes Linkedin yes yes 1 no yes yes yes no Twitter yes yes 1 no yes yes yes yes Online platform Information Information How many Changes to Free user as Detailed Third party Rating system 14

15 category and company available that company uses consumer available on how company uses consumer clicks needed from main website to display privacy policy? previous version of privacy policy highlighted? well as paid services (e.g. paid subscription or service fee for buyer) available? information available on how business partners and advertisers are given access to advertising present on platform? Search engines and specialised search tools Google search yes yes 1 yes yes yes yes no Tripadvisor yes yes 1 no yes yes yes yes Twenga yes yes 1 no yes no yes yes Yelp yes yes 1 no yes no yes yes Maps Google maps yes yes 1 yes no no yes yes Bing maps yes yes 1 no yes yes no no News aggregators Google news yes yes 1 yes no no no no Audio-visual and music platforms Deezer yes yes 1 no yes no yes yes Netflix yes yes 1 no no no no yes Spotify yes yes 2 no yes no no yes Canal play yes yes only on parent company website no no yes no yes Apple TV yes yes 1 no yes no yes yes present? 15

16 Online platform category and company Information available that company uses consumer Information available on how company uses consumer How many clicks needed from main website to display privacy policy? Changes to previous version of privacy policy highlighted? Free user as well as paid services (e.g. paid subscription or service fee for buyer) available? Detailed information available on how business partners and advertisers are given access to Third party advertising present on platform? Video sharing platforms Youtube yes yes 1 yes yes no yes yes Dailymotion yes yes 1 no yes no yes yes Payment systems PayPal yes yes 1 no yes no no no Apple Pay yes yes 1 no no no no no App stores Apple App Store yes yes 1 no yes yes (in developer guidelines) Google Play yes yes 1 yes yes yes (in developer guidelines) yes yes Rating system present? yes yes 16