Commission published a preliminary report on e-commerce sector inquiry

The preliminary report confirms the growing significance of e-commerce in the EU. The Commission has identified certain business practices that may limit online competition. The Commission encourages companies to review their distribution agreements and bring them into line with EU competition rules unless they already are.

The 290 page preliminary report published on 15 September 2016 follows the launch of the e-commerce sector inquiry in May 2015 in the context of the Commission’s Digital Single Market strategy. In its sector inquiry, the Commission focuses in particular on potential barriers erected by companies to cross-border online trade in goods and services where e-commerce is most widespread such as in the sale of electronics, sports equipment, clothing and shoes, as well as digital content. This sector inquiry aims at obtaining an overview of the prevailing market trends, gathering evidence on potential barriers to competition linked to the growth of e-commerce and understanding the prevalence of certain, potentially restrictive, business practices and the underlying rationale for their use.

The Commission’s preliminary report is based on approximately 1,800 responses submitted by a variety of stakeholders. Additionally, the Commission analyzed 8,000 distribution agreements.

As a part of the sector inquiry, the Commission published in March 2016 its preliminary findings on geo-blocking. Geo-blocking means that companies and online retailers apply barriers and impose restrictions on consumers on the basis of their nationality or place of residence.

Main findings

Concerning consumer products, the Commission notes that manufacturers have responded to the growth of e-commerce by adopting various business practices that allow them to better control product distribution and brand positioning. In particular, the use of selective distribution systems in which products can only be sold by pre-selected authorized sellers has expanded. Manufacturers’ direct online sales to consumers have also increased. The Commission has identified certain sales restrictions and practices that in certain circumstances may make cross-border shopping, or online shopping in general, more difficult. Ultimately, such restrictions and practices may harm consumers by preventing them from benefitting from greater choice and lower prices in e-commerce.

Examples of restrictions that may harm consumers are:

  • cross-border sales restrictions (particularly contractual geo-blocking)
  • resale price restrictions
  • restrictions on the use of price comparison tools
  • restrictions on the use of electronic market places.

With regard to digital content, the Commission has focused particularly on barriers to entry or expansion and innovation. The Commission emphasizes that the availability of licenses from the holders of copyright in content is essential for digital content providers. According to the Commission’s findings copyright licensing agreements are complex and often also exclusive. The exclusivity may be granted in different forms, for example by limiting the territory or technology used by the digital content providers.

The Commission also observes that right holders tend to have relatively long-term agreements with digital content providers. The agreements often also include the possibility of automatic renewal. The Commission finds that this may harm the possibilities for potential new entrants and smaller operators wishing to grow their online digital content business.

Geo-blocking is widespread in the distribution of online content and in e-commerce in general. Where geo-blocking is the result of agreements between suppliers and distributors, it may restrict competition and therefore breach EU antitrust rules. The Commission signals that it will assess on a case-by-case basis whether certain licensing practices restrict competition and whether enforcement is necessary in order to ensure effective competition.

Next steps

The preliminary report is now open for public consultation for a period of two months. Stakeholders are invited to comment on the Commission’s preliminary findings until 18 November 2016 at the following e-mail address: COMP-E-COMMERCE@ec.europa.eu. It is recommended that companies active in the area carefully review the preliminary report and submit their comments to the Commission in order to make the results of the sector inquiry representative.

The Commission is expected to publish its final report in spring 2017. The Commission will take into account the feedback received during the public consultation and further assess the need for potential legislative changes.

It is unlikely that the Commission will propose significant changes to competition law framework. However, the Commission has already published, for example, a proposal for a Regulation on addressing geo-blocking and other forms of discrimination based on a customer’s nationality, place of residence or place of establishment within the internal market. Upon entry into force, Regulations are directly applicable in all EU Member States.

Furthermore, the Commission appears to signal that it can be expected to focus more on vertical restraints in its future enforcement policy. In the past, the national competition authorities have played the main role in the enforcement of competition rules relating to vertical agreements.

The Commission has noted that, on the basis of the preliminary report, companies should already now review their distribution agreements and bring them into line with EU competition rules if they currently are not. It is not excluded that the Commission’s inquiry may lead to the Commission investigating more thoroughly some companies’ business practices and imposing fines on those that are found to have restricted competition.