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European antitrust inquiry into the Internet of Things: A new digital battleground?

On July 16, 2020, the European Commission (the “Commission”) launched a sector inquiry into the market for consumer products and services linked to the Internet of Things (“IoT”) (see the Press release announcing the launch of the sector inquiry). The sector inquiry will cover products such as smart home appliances (TVs, fridges, lighting systems, etc.), and wearable devices, such as smartwatches and fitness trackers. The regulator will also collect information on the services which can be accessed from these devices or via voice assistants, including Amazon’s Alexa or Apple’s Siri.

According to Commission vice-president Vestager, the consumer IoT is expected to grow significantly in the coming years and become part of the daily lives of European consumers. In Europe alone, the Commission expects the value of the smart home market to almost double in the next four years to reach a forecasted €27 billion.

In itself, the sector inquiry will be a vast information-gathering exercise and will take around two years to complete. Customarily, sector inquiries serve as springboard for subsequent enforcement actions against individual companies suspected of engaging in anticompetitive conduct.

This time around, given the Commission’s close interest in digital markets, it comes at no surprise that this newly launched sector inquiry digs into connected devices. Specifically, this can be seen as an additional layer of inquiry, consisting in collecting a vast array of facts and information, which will inform and support the Commission’s other digital initiatives, including:

  • The revision of the e-commerce rules and the newly launched consultation on the introduction an ex-ante regulation, which could be applied to the largest digital platforms (the “gatekeepers”), and should translate into the Digital Services Act Package at the end of year;
  • The parallel consultation on a “New Competition Tool”, which could empower the Commission to impose behavioral or structural remedies even in the absence of any violation if a market (especially a digital market) suffers or is at risk of suffering from structural competition problems; and
  • The Commission’s White Paper published in February on AI, which increasingly plays a central role in data related markets.

The consumer IoT sector inquiry also finds some echo in the current probe on the Google’s Fitbit takeover.

What is the Commission’s focus and which questions are asked to selected companies?

From the Commission’s perspective, a pre-requisite for consumers to fully enjoy the IoT benefits is that IoT markets remain open and competitive. Like other digital markets, the consumer IoT sector is data-driven and characterized by strong network effects and economies of scale. Given its recent crosshairs experiences with the GAFAM, the Commission suspects that the operators of the most popular voice assistants and the largest suppliers of connected devices will collect vast amount of consumer data, a key to success in the digital industry, and misuse such data to entrench their market power.

According to Commission vice-president Vestager, some company behaviors might very quickly push the IoT markets beyond the ‘tipping’ point, where competition turns to uncontestable monopolies. These behaviors comprise ‘usual-suspect’ practices, including self-preferencing (i.e. where a voice assistant directs a user to a service that is part of its own ecosystem), exclusive dealing (sending customers to a “preferred” partner, for instance the same flower store, where ordering a bouquet) and interoperability restrictions (i.e. limiting the choice for consumers to few selected partners and technologically excluding others).

Commission officials are currently sending questionnaires to hundreds of companies active in the IoT sector. The inquiry focuses on how their markets work, how data is collected from connected devices, used and monetized, and how their products allow consumers to access specific services. So far, it has been reported that the Commission has sent three sets of questionnaires:

  • The first focuses on smart home appliances manufacturers: In the questionnaire, the Commission appears to be particularly interested in the standards and protocols that govern connected devices. They investigate whether smart home appliances manufacturers may have been excluded from standard-setting bodies or struggled to get access to proprietary standards. A large part of the questionnaire is also devoted to agreements, which determine the relations between the manufacturers and the voice assistants and other hub owners. Further, the Commission’s questions appear to probe the type of personal data that is collected through the connected devices, from basic consumer details, such as a user’s name or address, to more valuable information resulting from the consumer’s interaction with the device.
  • The second set is dedicated to online service-providers (e.g., podcasts companies, security services providers, car sharing applications…): The Commission seems to explore how a service provider can make its offer available on a connected device (pre-installation, downloading an app or through an application programming interface). Another large section of the questionnaire examines the exclusivity arrangements between voice assistants and service providers.
  • The third set is specifically devoted to wearable connected devices (e.g., smartwatches, fitness trackers, head-mounted displays, smart clothes…): Among others, the Commission appears to investigate whether wearable devices work independently or need to connect to an app on a smartphone to work. A latter section seems to focus on how apps and voice assistants function on wearable devices.

What to expect from the sector inquiry, what companies should do, and why this initiative matters?

Companies have a mid-October deadline to answer the three above-mentioned questionnaires. This is certainly a tight deadline given the complexity of the questions asked by the Commission. This means that companies active in the IoT sector should be on the lookout for an official email from the Commission inviting them to respond to the EC questionnaire(s). This way, they will have the fullest amount of time possible to prepare their response.

Based on all the companies’ replies, the Commission ambitions to issue a preliminary report by spring 2021. The final report would only be expected in the summer of 2022. Just as the last sector inquiry into e-commerce markets contributed to the adoption of the geo-blocking regulation and prompted the Commission to initiate competition law investigations into various vertical restraints, with a focus on resale price-fixing, this report should feed into the Commission’s ongoing regulatory initiatives and future enforcement agenda. Specifically, it could serve to assemble evidence to support adoption of the “gatekeeper regulation” or to bolster its (weak) case in favor of new competition enforcement tools.

More importantly, given that sector-wide probes constitute the fuel for the Commission to launch antitrust investigations, which can happen during the sector inquiry itself, how you respond to and interact with the European Commission will matter a great deal and can impact your business. It will thus be critical for any company active in the IoT sector to (a) carefully assess and reflect on the way they shall take part in the sector inquiry and (b) review their business practices to ensure compliance and be prepared in the event of an individual investigation.

The outcome of this sector inquiry may also be highly relevant to telecommunication companies and internet service providers. To some degree, any company having some digital activity, including e-commerce, should feel concerned by the sector inquiry, as the IoT is rightfully portrayed as Internet’s next frontier.-JDSUPRA

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