Merger control and Art 102 CLA evening discussion

1. Merger control and Art 102CLA evening discussion Dr Cristina Caffarra

2. Merger Control vs Art 102 • Issue most acute with vertical/conglomerate mergers, where theory of harm revolves around foreclosure/hold up arising from tying/bundling or refusal to supply Note: less likely to arise with conglomerate mergers à-la Tetra/Sidel or GE/Hon, where concern was mixed bundling / contractual bundling: high standard of proof, Court said Commission needs to show more than mere possibility of the conduct (i.e. ability) and potential for exclusion arising from these forms of mixed bundling is remote • However 3 recent mergers motivate interest in this topic, all in IT space • Intel/MacAfee – cleared in Ph 1 with interoperability remedy • Microsoft/Skype – cleared unconditionally in Ph.1 – but clearance now under appeal • Google/Motorola – cleared unconditionally in Ph 1, Art 102 investigation on Motorola opened back-to-back

3. Why IT markets ? Some key features… • High technology markets may be prone to dominance • Barriers to entry, high sunk entry costs , IP rights • Potential for tipping: winner takes all • Brand-specific network effects, investment in platforms, ec.of scale • Multiple components – systems – complementarities – importance of interoperability • Benefits from integration of verticals/complements • BUT foreclosure potential through exclusion/foreclosure AND exclusion can have significant long-term effects • High margins • Unilateral effects concerns for horizontal mergers • Innovations protected by many small patents • Proliferation of patent thickets

4. …leading to common concerns • High market share becoming persistent • Might be a sign of anti-competitive practices: in a world of fast-moving technology, hard to always be best on merits… • Anti-competitive tactics • Locking consumers into the current technology: control of interfaces, pricing of upgrades,… • Linking today’s technology to the dominant firm’s own version of the next technology: control of upward compatibility, contractual tying of old and new technology… • Slowing down other firms’ innovation: aggressive (abusive) enforcement of IP, exclusionary contracts… Can have large effects quite fast Is there a better case for “early” intervention in these cases?

5. Intel/MacAfeeInteroperability revisited • Intel (“dominant in x86 CPUs”) seeking to improve security – armslength not worked (typical two-sided investment issue – so integration makes sense) • Buys McAfee – stated objective integrating security software more deeply • Complaints: McAfee’s competitors (Symantec etc.) concerned that Intel might downgrade interoperability with their products post-merger in order to favour its new subsidiary McAfee • Parallel with Microsoft server case? MSFT degraded interop between its OS and rival server OS in order to protect its monopoly in PC and non-PC environments. • Remedy in both cases about disclosing information protocol • Arguably Intel Phase 1 remedy even more extensive: provide full interoperability to McAfee’s competitors on a royalty-free basis, including for merger-specific innovations jointly developed by Intel/McAfee post-deal

6. A reasonable case for ex ante intervention? • From one point of view, ex ante intervention makes sense: • Quite a bit of competition in one market, strong dominance in CPUs • Explicit objective of the merger was to integrate security into the chip – in effect a technical tie, bolting software onto the chip to improve security –need fairly deep level of integration– refusing/degrading interoperability can be a powerful exclusion mechanism • Very different from GE/Hon: MIGHT be able to bundle in the future but no real concern about physically integrating – just a contractual tie – makes sense to pursue that ex post • With a technical tie, issue is more urgent

7. BUT low standard of proof… for a far-reaching remedy which undermines merger rationale? • Vocal complaints in Phase 1 • Downside of interoperability remedies is they may stall innovation. Commission did not think was a huge issue, perhaps in light of MSFT experience, butremedy here more far reaching than in MSFT server case • Remedy arguably defeats KEY purpose of the merger – creating synergies between software and hardware in designing security solutions • Efficiencies highly merger-specific as they relate to innovations that cannot be induced through arms-length contracts. By definition internal to the merging parties, and may place the merging entity at a competitive advantage • Post-merger product improvements can be misconstrued as a source of “foreclosure” by rivals - unrestricted/free access for competitors to McAfee joint innovations with Intel seems a high “tax” in this light

8. Microsoft/SkypeA possible Media Player ? • Skype: software for communications over the Internet (IM, voice/video for consumers/small businesses); Microsoft: communication services to consumers (Windows Live Messenger) and businesses (Lync) • Horizontal overlap for consumer video calls on PCs (share 80-90%), but Commission saw no concern in consumer market (services free of charge and consumers are very price sensitive, entry barriers are low, Google / Facebook, network effects small as consumers communicate with 4-6 people… ??) • Cleared unconditionally, but appealed by Cisco • Possible foreclosure concern: Two-sided market. Money is on business side. Monopolising consumer market can be very lucrative even if cannot extract rents directly there : if can refuse to interoperate Skype with all business communication software except Microsoft’s Lync, this makes Lync the exclusive platform able to reach private persons through video call. Then can extract the rent with Lync

9. Similarities to Media Player? • Similar story was told in the Media Player case: monetisation on consumer side was not really possible for Media Player, however monopolisation of Media Player market (through bundling/tying with OS) may allow to extract rents on the other side of the market (businesses using Media Player format to transmit media). • Similar idea: monopolise price-sensitive side of the market and then extract rent on the price-insensitive side of the market • Commission however clearly cautious as Media Player remedies strongly criticised as ineffective (nobody bought unbundled version of Windows, and today’s media player market is very competitive) • Foreclosure concerns based on two-sided market stories more difficult to rely on ex ante

10. Google/Motorola Tooling up for the mobile wars? Overlaps? IP portfolio overlap?

11. A range of foreclosure complaints? • “Exclusion of other mobile device manufacturers from full Android access to promote MMI” (traditional foreclosure concerns) • “Using MMI’s IP to force licensees to provide Google Search on their devices (rather than another engine)” • “Using MMI’s IP to harm other platforms (= operating systems – Msoft, Apple, Rim) through • Refusal to licence MMI’s IP • • Insistence on Android-wide agreements • Eventual consensus: Google “arming itself” for the ongoing patent wars… • Merger specificity? MMI already engaged in litigation. Why would Google be “more aggressive” than MMI in litigating its IPs? • Theory of harm? Does the transaction “tilt the scale” or “restore balance” in terms of patent wars? Why and how? • Merger cleared, Art. 102 investigation opened

12. Any tentative themes? • Mechanisms through which anticompetitive harm may occur substantively the same, indeed convergence in substance between NHMG and Guidance paper • Unlikely to see ex ante concerns arising from contractual tying/bundling • Mergers in IT space a growing area of interface because of pervasive complementarities in IT - IT an “add on” industry (unlike eg pharma) • A spectrum? Ex ante behavioural remedies more likely with mergers that come close to a technical tie (though this may undo the efficiencies…), less likely for leveraging stories where “wait and see” has more limited downside • The enforcer’s dilemma: self-correction? will Intervention dampen incentive to innovate? Information constraints? Timing for behavioural remedies? Can “equal treatment” of rivals be reasonable?

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