Spielberg’s antitrust: Netflix, Amazon and the Draft Digital Markets Act

The recent legislative reform proposals presented by the European Commission (“EC”) have revived the debate on how Competition Law should deal with potentially abusive conduct in digital markets. Drawing upon the case law concerning violations of Art. 102 TFEU, the draft Digital Markets Act (“Draft DMA”) tries to re-design the structure of digital markets by codifying a series of dos and don’ts for undertakings falling under the definition of “Gatekeeper” (see below). The Draft DMA diverts from the traditional Competition Law regime, imposing ex ante obligations on Gatekeepers regardless of the assessment of their dominance and of the object or effect of their conducts. This post will try and examine the Subscription Video on Demand (“SVOD”) market in the hypothetical framework of the Draft DMA. Indeed, given the presence of two potential Gatekeepers (i.e., Netflix and Amazon Prime Video), this market could serve as a useful case-study.

  1. Competition on the SVOD market

In the SVOD market, actors such as Netflix and Amazon Prime Video – in their dual role of platforms and content creators – are currently competing with the traditional players who initially were the only suppliers of content for SVODs. The market is witnessing a change, with traditional players trying to build their own SVOD platforms (e.g., Disney+) and SVODs internalizing content production.

The growing competition between these actors has already been acknowledged on several occasions by US Courts. For instance, in the decision clearing the merger between AT&T and Time Warner, the Court noted that, although the market definition excluded “distributors of only on-demand content, such as Netflix and Hulu, the district court considered the impact of the increasing presence of these distributors on the multichannel video programming and distribution industry”. Similarly, the order terminating the Paramount Decrees acknowledged that “None of the internet streaming companies—Netflix, Amazon, Apple and others—that produce and distribute movies are subject to the Decrees. Thus, the remaining Defendants are subject to legal constraints that do not apply to their competitors”. The conflict between the two realities clearly emerged in 2019, when Steven Spielberg tried to prevent SVODs from participating to the Oscars. In that occasion, the Department of Justice (“DOJ”) warned that “In the event that the Academy — an association that includes multiple competitors in its membership — establishes certain eligibility requirements for the Oscars that eliminate competition without procompetitive justification, such conduct may raise antitrust concerns” (see Variety). In particular, the DOJ was worried about a coordination among traditional movie producers, aimed at avoiding the entrance of new innovative players on the market. As illustrated below, Spielberg’s idea of facing an unfair competition from SVODs was probably not so far from the truth, especially considering the provisions of the Draft DMA. In this framework, the FTC’s decision on the announced acquisition of MGM by Amazon (Reuters) will be of utmost interest.

  1. The definition of Gatekeeper

While Competition Law usually requires the assessment of a dominant position and/or of the anticompetitive object or effect of the conduct of an undertaking, the Draft DMA replaces such pre-conditions with the one of the Gatekeeper status (see Ibáñez Colomo). To this end, under Art. 3 of the Draft DMA, “A provider of core platform services [as listed at Art. 2, including “video-sharing platform services”] shall be designated as gatekeeper if: (a) it has a significant impact on the internal market; (b) it operates a core platform service which serves as an important gateway for business users to reach end users; and (c) it enjoys an entrenched and durable position in its operations or it is foreseeable that it will enjoy such a position in the near future”. For each of these requirements, Art. 3 sets out a rebuttable presumption if the undertaking satisfies certain quantitative thresholds. Moreover, the EC can designate Gatekeepers regardless of such thresholds under Art. 3 (6) and 15 of the Draft DMA. The flexibility of the concept of Gatekeeper, while justified by the fast-changing nature of digital markets, could risk causing legal uncertainty. Indeed, while there is almost no doubt on the fact that Amazon and Google would fall under the definition of Gatekeeper (indeed, the Draft DMA seems to be tailored on them), the same cannot be said about other platforms.

Let us take, for example, the case of Netflix, which holds a leading position (55% share in 2020) in the EU SVOD market (European Audiovisual Observatory) but would reportedly not meet the quantitative thresholds provided by Art. 3 to qualify as Gatekeeper (ProMarket). Given the fast expansion of its subscribers’ base, Netflix will likely overcome such thresholds soon. It is also possible that the EC designates the company as a Gatekeeper even before that. On the other hand, Amazon Prime Video, Netflix’s main competitor, could indeed qualify as a Gatekeeper.

  1. Data generated by business users

Under Art. 6.1 (a) of the Draft DMA, any Gatekeeper should “refrain from using, in competition with business users, any data not publicly available, which is generated through activities by those business users”. This obligation seems to draw upon the investigation recently initiated by the EC towards Amazon, which allegedly exploited its dual role by using non-public business data of independent resellers to favour its own products (Press Release). Recital 43 of the Draft DMA affirms that said obligation “should apply to the gatekeeper as a whole, including but not limited to its business unit that competes with the business users of a core platform service”. Consequently, a Gatekeeper should abide by it not only in its “core” market (e.g., e-commerce for Amazon) but in all the markets where it operates. Such extension is probably due to the assumption that Amazon’s success in each market is related to its position as a leading e-commerce operator and to the wide database gathered through its various channels (to this end, see the DMA Impact Assessment support study, according to which Amazon Prime Video seems to be cross-subsidized). However, imposing extra obligations on a Gatekeeper in all the markets in which it operates would constitute a condemnation of vertical integration as such and could risk causing a serious impediment to competition.

The SVOD market could witness at least two scenarios in the hypothetical framework of the Draft DMA. On the one hand, if Netflix were not appointed as a Gatekeeper, Amazon Prime Video would be banned from using its business users’ data for its internalized production while Netflix – notwithstanding its superior market share – would not. In this scenario, Amazon would be subject to a more severe treatment because of its superior level of vertical integration. On the other hand, in case Netflix were considered a Gatekeeper, there would be two operators (covering around 74% of the EU market in 2019, according to the European Audiovisual Observatory) subject to extra obligations, which could possibly lead to an over-regulation and distort the proper functioning of competition on the merits, favoring otherwise less-efficient actors.

Moreover, Art. 6.1 (i) of the Draft DMA provides for the obligation for Gatekeepers to share data generated by their platform with business users. SVODs are currently in the position to use the viewing data generated by their business users, achieve a better profiling of their viewers and tailor their internalized production accordingly. The DOJ has already been confronted with the allegedly anticompetitive practices carried out by Netflix, which was accused of exploiting its market power to “prevent rivals from obtaining the data necessary to compete” by encrypting its viewing data and not sharing them with third parties, including the studios whose content was shown on Netflix as well as streaming device makers (see Candeub). The alleged hiding of data – which appears even more economically logical considering that some streaming devices (e.g., Amazon Fire TV and Apple TV) are owned by competitors – would be in contrast with Art. 6.1 (i) of the Draft DMA. Again, depending on the application of the Gatekeeper definition, this could risk creating distorting effects on the market.

  1. Self-preferencing

The Draft DMA contains a self-preferencing ban (Art. 6.1 (d)), which codifies the principles emerged in recent case law, such as the Google Shopping case. The test for self-preferencing conducts to result in violations of Art. 102 TFEU is by-passed by the Draft DMA, which generally imposes the self-preferencing ban on Gatekeepers. In addition, it is noteworthy that SVOD operators (regardless of their status of Gatekeepers) will soon have to comply with the so called “made in Europe” quota, introduced by Art. 13 of Directive 2018/1808, prescribing that “Member States shall ensure that media service providers of on-demand audiovisual media services under their jurisdiction secure at least a 30% share of European works in their catalogues and ensure prominence of those works”.

Looking at Netflix’s homepage, it is arguable that, by showing its self-produced movies and tv shows in a prominent position, (i.e., in a stripe significantly wider than the ones of the other categories of content) Netflix would be self-preferencing and exploiting its position in the SVOD market to enlarge its market share in the movie production industry. The same could be said about Amazon Prime Video, which gives evident prominence to its original content in the first stripe of its homepage.

It is not clear whether the self-preferencing ban should apply to the Gatekeeper as a whole or only to the business unit that competes with the business users of a core platform service. However, in case SVOD operators were appointed as Gatekeepers and, therefore, subject to the self-preferencing ban, the EC would have to face a new dilemma. Indeed, SVOD operators would probably end up encouraging internalized European production as a legitimate way to pursue self-preferencing.

  1. Suspending the obligations depending on the characteristics of the market

In light of the above, the Draft DMA could have a serious impact on vertically integrated business, which would be de-incentivized from investing in markets different from their “core” market. This would be in line with the theory considering the very existence of vertically integrated business as anticompetitive (see Khan, according to which the existence of undertakings showing a high level of integration could represent a serious structural risk for digital markets). However, vertical integration is not deemed to be anticompetitive as such and, as argued by Ibáñez Colomo: “The point of the EU competition law system is to allow firms to exploit their competitive advantages, not to neutralize them in the name of a ‘level playing field”.

Art. 8 of the Draft DMA could probably be relied on to soften and calibrate its provisions. Indeed, Art. 8 contemplates the possibility of suspending the obligations of the Draft DMA in case the Gatekeeper proves that “compliance with that specific obligation would endanger, due to exceptional circumstances beyond the control of the gatekeeper, the economic viability of the operation of the gatekeeper in the Union”. The expression “economic viability of the operation of the gatekeeper” is indeed quite obscure and, according to recital 59, the suspension of obligations only applies in exceptional circumstances (e.g., unforeseen external shocks that temporarily eliminate a significant part of demand), thus excluding the possibility of suspension due to structural characteristics of the market. On the contrary, Art. 8 could serve as a means to grant more flexibility and adapt the Draft DMA to cases, such as the one of the SVOD market, where its full enforcement would risk leading to either an over-regulation or a disproportionate imposition of obligations.

 

Image from Apple.

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Alice Rinaldi

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