The Dual Nature of High-Technology
Markets
Merger and Antitrust Analysis in High-Technology
Markets:
Current Issues
July 2010
 Rapid technological change requires a dynamic (as opposed to static) competitive
assessment
  Leapfrogging may render high shares irrelevant (or less relevant)
  Dynamic efficiencies more important than static efficiencies
 High-tech markets also exhibit characteristics that can favour entrenchment of first
movers
  Network effects
  Two-sided markets
  Standards and/or IP rights can foreclose new technologies
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Implications for Market Definition and
Market Power
Oracle/PeopleSoft (M.3216, 26 Oct
2004)
  Principal overlap: Enterprise Application Software (EAS)
 Market definition
  Market definition should not focus only on short-term demand substitution but also on
long term supply-side substitution and potential entry
 Market power
  Existing shares may underestimate or overestimate market power
  Need to make a more comprehensive assessment of other criteria beyond market shares
to identify
  Network effects that can be exacerbated in two-sided markets
  Use of standards and/or IP rights to foreclose competition
  Case decided under the dominance standard (Regulation 4064/89)
  Market definition was a key point to determine whether the merger was a ‘3 to 2’
  After extensive market investigation, bid data analyses, and materials from parallel U.S. proceedings the
Commission concluded that
  High-function FMS (financial management systems) and HR (Human Resources) EAS for complex
organizations/companies constitute separate markets
  In addition to Oracle, SAP and PeopleSoft, other vendors (SAP, Intentia, IFS and Microsoft) constituted
credible alternatives
  Commission concluded that the transaction would not give rise to the creation of a dominant position through
coordinated or non-coordinated effects
  EC’s simulation model was irrelevant given that it was based on assumption that the merger was a 3 to 2
  Unconditional Phase II clearance
  Extensive reliance on market definition as basis for analysis of theory of harm
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Google/DoubleClick (M.4731, 11
March 2008)
Oracle/Sun (M.5529, 21 Jan 2010)
  Combination of leading proprietary database vendor (Oracle) with largest open source database provider
(Sun/MySQL)
  Case decided under the SIEC standard (139/2004)
  Commission analysis focused on elimination of competitive constraints in online search advertising and ad intermediation
  No horizontal effects given that Google and DoubleClick did not exercise a significant competitive constraint on each
other’s activities
  Foreclosure concerns based on Google’s market position in search advertising and ad intermediation services
  Dismissed on the basis that any foreclosure strategy would be very unlikely to cause competitors such as Microsoft,
Yahoo and AOL to cease offering ad serving or search ad services
  Foreclosure concerns based on DoubleClick’s market position in display ad serving
  “Diagonal” effects: price increase of DoubleClick’s ad serving tools could lead to price increase in downstream
market for display ads, which could be profitable if Google had the ability and incentive to increase prices for search
ads to diverted customers
  Dismissed on the basis that Double Click lacked market power for display ad serving and its ad serving solution had
no impact on the pricing of display ads given that it represented a de minimis portion of the total cost of display
advertising
  Unconditional Phase II clearance
  Market defined as ‘all RDBMS’, but Commission analysed impact of transaction in RDBMS subsegments ‘given the differentiated nature of RDBMS’
  Comparison of post-merger situation vs. counterfactual in each of the RDBMS segments
  MySQL found to exert an ‘important and growing’ constraint on Oracle and other proprietary
database vendors, particularly in the web, SME and embedded RDBMS segments
  Unconditional Phase II clearance on the basis that Oracle would not have the ability or incentive to
undermine MySQL as a competitive force
  open source nature of MySQL
  Oracle’s 14 Dec 2009 public announcements
  Less emphasis on market definition; more emphasis on competitive constraints and comparison of pre vs.
post-merger situation
  Less emphasis on market definition; more emphasis on competitive constraints
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  Key concern: elimination of MySQL as a competitive constraint on Oracle and other proprietary database
vendors
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Microsoft/Yahoo! (M.5727, 18 Feb
2010)
Key Takeaways for Market Definition
and Market Power in the Sector
  ‘3 to 2’ in paid search
  SIEC test gave the Commission more flexibility in its enforcement
  Online paid search characterized by high barriers to entry and network effects
  Very positive third party feedback
  Market definition is just the starting point in the analysis
  Market definition left open, but in fact the Commission’s analysis focused on competitive effect in paid
search
  Increased emphasis on assessment of competitive constraints and counterfactual
  Counterfactual: neither MSFT nor Yahoo! alone would become an effective competitive to Google in paid
search
  Increased reliance on concrete factual, economic and econometric evidence
  Google ~90% share in search in the EEA – must have search platform
  Yahoo! – weak and declining position in search globally, even more so in Europe
  MSFT: remains insignificant in search despite huge investments
  Theories of harm not limited to foreclosure: increasing emphasis on price effects
  Conclusion: increased scale will increase value for both advertisers and publishers
  Combined firm will be able to compete more effectively against Google; In reality, a ‘1 to 2’
  Unconditional Phase I clearance
  Less emphasis on market definition; more emphasis on competitive constraints and comparison of pre vs.
post-merger situation
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