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Competition Authorities and Regulators Should not Worry too much about Data as a Barrier to Entry into Digital Markets

· May 7, 2015

Data is often presented as the lifeblood of our digital economy (please see here why it should not be referred to as the ‘oil’ of the 21st century). Data is everywhere and is collected by Internet companies as well as more traditional businesses like banks. Data has been used by industries for years – think about grocery store reward cards – but advances in the speed of data analysis and the quantity of data available today brought new attention to its use. Of course, data analytics and processing help companies to better understand their customers, providing them with services and products tailored to their needs and preferences.

At the same time, it has been suggested that the possession and accumulation of big data ought to result in more rigorous competition law enforcement. But this argument fails to take into account the low barriers to entry in this market and the disruptive nature of Internet businesses that quickly allow a startup to topple even the most entrenched incumbents. One also needs to remember that the existence of barriers to entry does not in itself mean that competition authorities need to intervene. Competition law is concerned with anticompetitive conduct causing consumer harm. Hence, a competition law analysis of barriers to entry only becomes relevant in merger cases and in determining whether a given company is dominant in a relevant market. Traditional barriers to entry include for example exceptionally large capital investments into a sophisticated distribution network, economies of scale and even the need for large marketing investments (for a discussion of these traditional barriers to entry see the CJEU’s judgment in United Brands v Commission).

In the context of digital markets, the supporters of greater competition law enforcement (and/or regulation) claim that data can be a significant barrier to entry into digital markets, as newcomers cannot overcome currently successful firms that base their business model on the analysis of its collected data.

However, the reality is that data is not needed to launch a successful Internet business and in fact, many online entrants don’t have any data at all when they launch. Their business model is often based on offering the most attractive product in order to attract customers, which only then allows them to collect and analyze data. An online entrepreneur’s primary concern is to build the best “mousetrap” around a great idea — not capital investments into distribution networks, brick-and-mortar shops or advertising campaigns. For example, Telegram, a messaging app, was able to attract 50 million users in less than a year and a half, by creating a system with stronger privacy protections than WhatsApp. Twitter and Instagram started with almost no data, but became successful by attracting and keeping users. Data became the result of their success, not the cause of it.

No other sector of the economy is characterized by such a high level of market dynamism and competitive pressure as online markets. It is for this reason that Facebook was able to overtake MySpace in social networking even though MySpace surely had a “data advantage”. Google overtook Yahoo! as the leading search engine even though Yahoo! was considered the king of search at the time of launching. Germany-based Zalando, founded only seven years ago in 2008, did not have any problems with taking on Amazon and others in e-commerce. It now operates in 14 European countries. As these examples show, the product itself is more important than what supports it.

New entrants are constantly able to win users through increasingly diversified business models and target groups. Take the example of social networking: companies like Pinterest or Twitter managed to build successful businesses around a different way of user interaction and experience. Obviously, there are professional online networks like LinkedIn and Xing. But there is also an ever-increasing number of professional social networks dedicated to specific professions like doctors, teachers or even soldiers.  And, not to be forgotten, more established companies are increasingly integrating social functions into their offers. Spotify, for example, does not only allow its users to share music but also enables them to communicate through their platform. None of these companies had huge amounts of data at their disposal when starting out. Innovation in online services in order to attract ever more sophisticated consumers is the only viable strategy to be successful (and to survive).

No one can predict whether there will be a new online service that overtakes today’s most popular services, but it’s clear that competitive pressure in this market continues to increase and regularly disrupts current market leaders.

At least with regard to online communication applications, the European Commission has shown to be very clearly of the same opinion. In its recent clearance of the Facebook/WhatsApp merger, it emphasized that:

“[t]he consumer communications apps market has been characterized by disruptive innovation. […] [T]he Commission has found in its market investigation that there are no significant “traditional” barriersfor a new consumer communications app to enter the market, that is, to be offered to users for download […] [because] the market for consumer communications apps dynamic and fast-growing.” [emphasis added]. (para. 116 – 118)

Some respondents to the Commission’s market investigation specifically raised concerns as to a concentration of data within Facebook’s control if it used data from WhatsApp users. The competition concern related to Facebook’s potentially strengthened position in the provision of online advertising services as a result of ‘pooling’ both companies’ user datasets. The Commission dismissed these concerns and highlighted that:

“there will remain a sufficient number of alternative providers of online advertising services […] [and] 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 exclusive control”. (para. 188 – 189)

Why will there be a large amount of Internet user data not within Facebook’s exclusive control? Because digital markets produced a plethora of companies active in online advertising. Why do we have such a competitive marketplace? Precisely because data accumulation by today’s successful companies has never prevented tomorrow’s online companies to market attractive services which enable their own data collection. The success of these businesses is based on their ability to disrupt entrenched companies and attract customers. From Facebook to Zalando, this has happened countless times in the Internet’s short history. There are, in other words, healthy market dynamics leading to continuous innovation.

European Union

DisCo is dedicated to examining technology and policy at a global scale.  Developments in the European Union play a considerable role in shaping both European and global technology markets.  EU regulations related to copyright, competition, privacy, innovation, and trade all affect the international development of technology and tech markets.