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Competition in digital ecosystems:
the Google Android judgment
Bristows LLP
European Union, United Kingdom October 12 2022
In the Google Android judgment of 14 September 2022, the EU
General Court addresses the treatment of competition in and
between digital 'ecosystems' under EU competition law.
At the heart of the €4.6 billion fine under appeal in the case, was
the European Commission’s finding that Google held a dominant
position in the market for licensable operating systems (OS) for
smart mobile devices. Google argued that this narrow market
definition failed to take into account the competition between, on
the one hand, the Android ecosystem, comprising mobile devices
and apps based on Google's Android OS, and on the other, the
Apple ecosystem based on Apple's proprietary iOS operating
system.
The General Court acknowledged both the potential difficulties in
applying the standard competition law principles of market
definition in the digital economy, and the need to take proper
account of out-of-market constraints. Nonetheless, it ultimately
upheld the Commission’s approach.
The starting point for the Commission’s position on market
definition and dominance was the observation that smart phone
manufacturers (OEMs) wishing to license-in an OS effectively had
only one choice, Android. Apple had its own proprietary OS for
iPhones (iOS), but Apple chose not to license iOS to other OEMs.
Google argued that the narrow focus on the choice open to OEMs
ignored the lively downstream competition between devices using
the Android OS and Apple’s iOS.
The Court agreed that, since Apple did not license iOS, iOS and
Android were not substitutable from the point of view of OEMs.
The competitive relevance of Apple’s iOS therefore had to be
assessed at the level of the downstream markets for phone users
and app developers.
As regards users, the Court found that users’ choice between
ecosystems was based on multiple factors and could not be reduced
to the OS alone. The OS was an important factor in the choice of a
smart phone, but not the only factor. Switching between ecosystems
was prompted mainly by new device launches, not OS changes.
Android users did show significant loyalty to the Android
ecosystem: 82% declined to switch to Apple when purchasing a
new device in 2015. But that loyalty did not appear to be driven by
the quality of the OS. Figures for May 2017 showed that only 7.1%
of Android users were running the latest version of the Android OS
on their devices, six months after it had become available.
Similarly, only a very small proportion of users that had switched to
an Apple device said they had done so due to OS quality.
Instead, user loyalty could be attributable to the difficulties
encountered when switching ecosystems, for example in porting
personal data, having to repurchase apps, or having to relearn the
way their device works. The fact that Apple had launched an app to
facilitate the move from Android to iOS tended to show that
switching costs were a concern. For users of lower-end devices,
Apple’s pricing policy also appeared to operate as an obstacle to
switching, with at least 50% of Android devices being sold at
prices below those of Apple devices.
As regards a possible constraint from app developers, the Court
found that to the extent users were unlikely to switch to another
mobile OS, the same would be true of app developers, who could
not reasonably abandon the majority of their customers.
Overall, the Court concluded the Commission had been justified in
treating the Apple ecosystem as an “indirect constraint” on Google
and finding that constraint was insufficient to call Google’s
dominance into question. In assessing the significance of the
constraint, the Commission examined the likelihood that users (and
app developers) would switch in response to a small but significant
non-transitory reduction in quality (SSNDQ). This is different from
the traditional small but significant non-transitory increase in price
(SSNIP) test. However, the Court upheld the approach.
Competition can take place in terms of quality and innovation as
well as in terms of price. And this was a case of a product unlikely
to lend itself to a traditional, price-based, SSNIP test. Indeed,
Google appears to have argued that, for an OS, quality was the
determining factor in consumer choice.
Conclusions and comments
In this, as in all cases, the outcome on market definition and
dominance was highly fact dependent. However, for those
considering how to treat competition between digital ecosystems –
or even more traditional fore- and after-market systems like razors
and razor blades or copiers and toner cartridges – the approach of
the General Court seems instructive. The Court was quick to define
separate markets at the OEM and user levels. It then asked whether
the competition taking place at the user level was driven only (or at
least very largely) by OS quality. Once the Court had determined
that multiple factors, including but not limited to OS quality, were
relevant to user choice, Google was facing an uphill battle to
demonstrate that the indirect constraint from Apple was sufficient
to avoid a finding of dominance.
within the digital economy... traditional parameters such as
the price of products or services or the market share of the
undertaking concerned may be less important
curia.europa.eu/...
Bristows LLP - Sean-Paul Brankin