Fairness and competition
GCLC Annual Conference, Brussels, 25 January 2018
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Ladies and gentlemen
It's a great pleasure to be with you all today.
I'm especially glad to join you to look at one of the most fundamental questions in our work. What, exactly, is competition policy for?
That isn't a question we ask ourselves every day. But from time to time, it pays to give it some thought. It's a bit like knitting. When you knit, you spend most of the time following a pattern, moving forward one stitch at a time. But however satisfying that may be, you still need to know that your work has a purpose. That when it's done, you'll end up with a sweater, or a scarf – or maybe an elephant.
And the fact is, the competition rules aren't there just because we think that competition is a good thing in itself. Like any of the other rules that govern our world, we have competition rules because we believe they make our society a better place to live. That they make our markets work more fairly for consumers.
Competition and fairness
In the Louvre in Paris there's a large black stone, shaped a bit like a finger, and nearly four thousand years old. That stone records the laws of the Babylonian king, Hammurabi. There are rules about marriage and taverns and crime – those are separate subjects, just to be clear. There are also rules that are there to regulate the market.
Because for millennia, rulers have seen it as part of their job to make sure that markets work fairly for everyone. They've known it was dangerous to fail in that responsibility. Because when people feel cheated by the market, they very easily lose trust in their whole society.
The Code of Hammurabi sets out to make sure the market works fairly by regulating the prices for things like hiring a ferryboat. Those regulations, of course, could produce mixed results. But today, we have a more refined answer to that question of how to make markets fair – an answer that includes the competition rules.
Because we know that competition gives consumers the power to demand a fair deal. To shop around to find a better price, or a wider choice of products. To seek out better quality, whatever that means to them – whether it's a more reliable car, or a social network that protects their private data better.
That doesn't mean that we at the Commission see ourselves as superheroes, solving all unfairness, and righting every wrong. It doesn't mean that just because something is unfair, it’s automatically also against the competition rules. All it means is that simply by doing our job – simply by enforcing the competition rules in our Treaty – we do our bit to make Europe a fairer place to live.
Striking the right balance with dominant companies
I say “simply”, but applying the competition rules is often anything but simple. Because the very same things that make competition work can also end up undermining it. The very same desire to outdo their rivals, which drives companies to innovate and cut their prices, can also encourage them to try to shut down competition.
So we have a balance to strike.
We should welcome, and encourage, the drive to succeed - as long as it works in a way that's good for consumers. Because when companies compete and succeed on their own merits – when they grow and make profits by serving customers better – then competition is working the way that it should.
That's why we’ve never objected to the success of Google’s search engine. Google has more than 90% of the market for Internet searches in the EU. But that success doesn't mean that the market isn't working. Quite the opposite. It means there are rewards for companies that innovate and compete. Rewards that encourage other companies to try to do the same.
And as long as those markets stay open for competition, even the most dominant company can't be sure to have everything its own way. Even a company as powerful as Google has to reckon with the chance that something better might come along. It has to keep working to serve customers better.
So the real problem comes when dominant companies misuse their power. To avoid the risk that competition will disrupt their business, just as they once disrupted others. To close down the routes that other companies can use to challenge them with new, more innovative products.
So we need to step in, for example, when powerful companies try to stop their rivals breaking into the market, by blocking their access to customers. And that strategy can be most effective when it hits customers in their pockets - when, for example, they get a rebate in return for an exclusive relationship with the dominant company.
The issue for us isn't the rebate itself. We obviously don't object to companies cutting prices. But these rebates can be the price of an exclusive relationship – the price of keeping rivals out of the market. And losing the rebate can be the threat that makes that exclusivity stick. Because the moment that a buyer tries out a different supplier, that can cost it the rebate on everything else it buys.
And that can be a real problem for companies that want to break in to the market, or grow.
Just yesterday, we decided to fine Qualcomm 997 million euros for making payments to Apple in return for Apple’s agreement to buy exclusively from Qualcomm.
Qualcomm is by far the world's biggest maker of baseband chipsets – and those chips are at the heart of every smartphone, and many tablets as well. Baseband chipsets allow devices to connect to the network. They're the difference between a mobile device and a rather pretty paperweight.
And the payments that Qualcomm gave in return for exclusivity hurt competition, by shutting out its rivals.
The main rival involved in this case was Intel, which was trying to compete in the market for baseband chipsets. And it had a chance of landing an important customer. Apple was seriously thinking about switching from Qualcomm to Intel for some of the chips it bought. That would have been a big breakthrough for Intel. Apple is one of the biggest makers of smartphones in the world, and where Apple leads, other companies often follow. Winning part of its business would have been a big success in itself. But it could also have been a step towards supplying more chips for Apple – and maybe other makers of smartphones and tablets as well.
But in the end, Apple decided not to make the change at that time. Because the chance to try out a new chip supplier wasn't worth the cost of losing the rebate on all the chips it got from Qualcomm. So in the end, Intel lost out on the order – and consumers lost the benefit of real competition to produce cheaper, better chips.
Things have changed since then. As it got towards the end of the arrangement with Qualcomm - and as our investigation was going on - Apple did start to use Intel chips. Reports say that last year, after the end of the arrangement, Apple got about half its chips from Intel. So without the exclusive deal, the market has opened up. But consumers would have benefited even more if that had happened years ago.
The Intel judgment
We’ve taken that decision just a few months after the European Court of Justice gave its judgment in another case on exclusivity rebates.
In 2009, it was Intel that had given these rebates. At the time, its rival, a company called AMD, was making excellent products that consumers wanted. But AMD couldn't make headway with the big computer makers. In one case, it even offered to supply one million free chips to a computer maker. And that company said no. Because it didn't want to lose its rebate from Intel.
The Court’s judgment has clarified how we should look at this sort of exclusive rebate arrangement. It's made clear that the Court understands very well how much harm these arrangements can do to competition. So its judgment confirmed the basic rule – that we can presume that this sort of rebate, from a dominant company, is against the competition rules.
But the Court has also made clear that our work doesn't necessarily stop there. It's explained that a company can come to us with concrete evidence, trying to show why a particular exclusivity rebate doesn't harm competition. And if that evidence is substantial enough, then it's up to us to examine whether this particular rebate, in this particular situation, can shut out companies that are just as efficient as their dominant rival.
In the last few months, we’ve looked very closely at how this judgment affects what we do. And in practical terms, our main conclusion is that you won't see fundamental change.
Because for us, there's nothing new about looking at the effects of a rebate before we decide to take action. We’ve been doing that for many years, to help us focus our work on the cases where consumers will benefit the most. In the case of Intel, for instance, the Commission looked in detail at the harm Intel’s actions had done – including whether the rebates could shut out competitors with costs just as low as Intel’s.
To do that, we used a so-called “as efficient competitor test”, with a detailed analysis of costs, prices and quantities. But in other situations, there could be more appropriate ways to show the effect that an exclusivity rebate has. And although the Court has clarified the legal framework for these tests, it’s left it up to us to decide on the best method in each case.
For instance, in our decision against Qualcomm, we looked at a whole series of factors. That included direct proof from Apple’s internal company documents that the payments from Qualcomm did affect its decisions. At the same time, Qualcomm itself presented us with an as efficient competitor test. But there were serious problems with the way it was done, which meant it didn't actually prove that the rebates couldn't harm competition.
Internal documents as evidence
The thing is, there's no one gold standard that always gives the best indication of how a company's actions affect competition.
In the case of Qualcomm, for instance, the internal documents we got from Apple gave us an understanding that we could never have achieved just by looking at prices and costs. And that sort of evidence was also important to our decision last year to fine Google nearly two and a half billion euros, for favouring its own comparison shopping service in search results. Those documents made it clear that Google knew its own service wasn't doing well – and that it decided to show that service more prominently in search results, whilst demoting those of its rivals.
Internal documents can be important for complex mergers too. Last year, when we looked at the merger between Dow and DuPont, the companies’ own documents helped to prove that the merger would reduce their research efforts. And in 2016, internal documents showed us that the merger between Wabtec and Faiveley wasn't likely to reduce competition for complete train braking systems.
So these internal documents can help us make better decisions. They can help us understand the markets, and the companies’ plans for the future.
But of course, in a merger case, timetables are short. We know businesses face serious pressures of time. That's why we’ve decided to start preparing a set of best practices on these requests for internal documents in merger cases, which we aim to publish in the coming months. So we can help businesses handle these requests more efficiently – without compromising on our responsibility to protect consumers.
Because in the end, that's what the competition rules are for. Not to stop companies succeeding on their own merits. Not to switch off the competitive spirit. But to make sure that our markets stay competitive enough to give consumers the power to demand a fair deal.
Talking of fairness like that doesn't make us Don Quixote. Nor does the fact that we take such a lot of decisions about windmills – including the Greek plan we approved a few weeks ago to help cut the cost of supporting renewable energy. It’s not our job to rush around looking for people to rescue, getting involved in anything that looks like it might be unfair.
On the contrary. In our work on competition, like any good knitter, we have a pattern to follow. We have principles, rules, ways of analysing the data that lawyers and economists have been working on for decades.
And that's the way we make Europe a fairer place. Not by tilting at windmills. But by sticking to our knitting.