Published on Aug 02, 2023
Amazon’s (AMZN) proposed $1.7 billion iRobot (IRBT) acquisition is providing European enforcers an opportunity to further develop a 21st century economic theory of harm created with tech platforms in mind.
In announcing its phase 2 in-depth investigation of Amazon/iRobot last month, the European Commission said the deal could potentially “strengthen [Amazon’s] position in the market for online marketplace services to third-party sellers (and related advertising services) and/or other data-related markets.”
This concern about “other data-related markets” is likely a reference to the nascent “ecosystem” theory, economists and lawyers said.
With the theory, some competition economists seek a better way to reveal the harmful effects of giant tech platforms’ acquisitions. These “digital conglomerates” can use acquisitions to leverage anticompetitively their existing advantages in network effects, economies of scale and presence across multiple markets, these economists said.
“Market power may need to be understood not just in terms of a product position in a given market, but as a function of controlling multiple ‘levers’ (assets) at the same time,” wrote prominent economist Cristina Caffarra and UK-based economists Matthew Elliott and Andrea Galeotti in one of two June online columns on the ecosystem theory.
The FTC, which also is investigating the iRobot deal, has given no indication that it’s viewing the transaction through the lens of the ecosystem theory. But that doesn’t mean the agency isn’t focused on the longstanding concerns the theory touches upon.
In discussing last month the decision to sue to block Microsoft’s (MSFT) proposed $68.7 billion acquisition of Activision Blizzard (ATVI), FTC Chair Lina Khan stressed the importance of preventing “walled gardens.” The term refers to companies establishing an ecosystem of services and products that’s protected from competition.
Although they don’t explicitly mention it, the U.S. draft merger guidelines list several principles that contain aspects of the ecosystem theory.
Still, some attorneys said they were skeptical that enforcers will rely heavily on the theory until it’s more fully developed. They said that’s particularly true in the U.S., where judges for decades have rejected at trial any government antitrust merger suits based on such non-horizontal theories of harm.
The FTC, which has been considering a suit against the deal, will probably base a challenge on a traditional vertical foreclosure theory. Although the EC may ultimately also raise objections, including some related to the ecosystem the deal may promote, the regulator has been more willing than its American counterparts to accept behavioral remedies to address antitrust concerns.
An FTC spokesperson declined to comment. Spokespeople for the EC, Amazon and iRobot didn’t respond to requests for comment.
All in the data. For now, the EC is taking the lead in applying the ecosystem theory to deals.
The regulator’s vague reference to “other data-related markets” in its iRobot phase 2 statement suggests the EC is considering the deal’s impact on a range of digital services that Amazon offers. Those could include digital advertising, cloud computing and artificial intelligence.
Max von Thun, Europe director of the anitimonopolist Open Markets Institute, noted that the concern “doesn’t really fit into a vertical or horizontal theory.”
“It’s about how this data can strengthen Amazon’s market position more generally,” he said. “The commission didn’t say in its statement that this is an ecosystem theory of harm. But, to me, that is the case.”
The regulator said it will examine whether Amazon would have incentive to attract more consumers to its products and services by foreclosing access to iRobot’s vacuum cleaners or restricting the application programming interfaces (APIs) rival devices need to connect with its Alexa voice assistant.
The UK’s Competition and Markets Authority explored both issues before clearing the deal unconditionally in phase 1; it found the UK robot vacuum cleaner market too small for the former strategy to be worthwhile and that Amazon couldn’t disadvantage rival smart home platforms by limiting their access to iRobot.
The EC, though, said that European markets for robotic vacuum markets are significant and that Amazon’s website was a “particularly important channel” for selling the devices.
The phase 2 probe is also looking at whether access to iRobot’s data improves Amazon’s advertising and e-commerce systems, which is similar to the commission’s concerns about Google’s (GOOGL) 2021 acquisition of Fitbit. In that case, the regulator concluded that without behavioral remedies, Google could leverage data from the fitness tracking devices for use in advertising and foreclose access to rivals’ information.
Meta/Kustomer, Booking.com/eTraveli. The regulator also used the ecosystem theory in its analysis of two other transactions.
In Meta/Kustomer, the EC said the acquisition would allow Meta to steer more consumers into its ecosystem, but then used this as evidence of a foreclosure incentive in the customer relationship management software market.
The EC acknowledged it was pursuing the theory in its recent announcement that it had sent Booking.com a Statement of Objections over its proposed acquisition of flight booking platform eTraveli.
The regulator said the deal could allow Booking to “expand its ecosystem of travel services” and make its dominant position in the hotel online travel agent market “more difficult to contest.” The transaction also would have the effect of “increasing [Booking.com’s] bargaining position towards hotels and diverting demand from cheaper alternative sales channels.”
The authority has leaned on its existing guidelines to justify an ecosystem-based analysis in merger control. In a December policy brief, it proposed two frameworks to assess “the competitive effect of the acquisition and integration of an asset via a merger, to complement, extend or reinforce an existing ecosystem.”
The first framework is a more traditional conglomerate theory of harm found in the EC’s vertical merger guidelines, in which the acquiring platform leverages power in its core market to provide an advantage to a newly acquired product or service.
The second framework is a dominance-based theory like that laid out in the EC’s horizontal merger guidelines, through which enlarging the ecosystem by an acquisition could “further lock customers in or incentivise them to remain within its so-called ‘walled garden’ of services.”
The EC’s draft of its revised market definition notice also explicitly refers to ecosystems.
In this way, the EC can articulate a new theory of harm while relying on more traditional economic ideas.
Looking across an ecosystem, the commission can use established parameters such as network effects, switching costs, interoperability and “multi-homing” considerations in specific markets to express wider concerns about large platforms accumulating vast amounts of data to reinforce their walled gardens.
“Multi-homing” refers to when consumers use more than one product or service in a specific market. For example, voice assistants are generally a “single-homing” market because most people don’t have both Alexa and Google Assistant, but many consumers exhibit “multi-home” conduct when using social media networks.
U.S. iRobot review. Although U.S. antitrust enforcers for years have delved into issues the ecosystem theory raises, they haven’t yet relied on it in a lawsuit to block a merger. In the iRobot review, the FTC instead is focused on a customer foreclosure concern—that Amazon would hamstring iRobot rivals’ products on its website.
But that doesn’t mean that American enforcers aren’t focused on some of the issues at the core of the theory. One of the “principles” in the U.S. draft merger guidelines that might trigger increased scrutiny of a deal highlights transactions involving “multi-sided” platforms, which serve several groups of customers and users.
This idea is similar to the ecosystem theory’s emphasis on a tech platform’s presence in multiple markets. The multi-sided platform principle in the draft guidelines also refers to network effects, in which a platform’s value increases as more people use it, adding to its market power.
FTC Chair Khan discussed this phenomenon in a March 2022 speech in Brussels.
“The ever-expanding reach of these same few firms reveals how digital markets scramble traditional dynamics, enabling incumbents to benefit from mutually reinforcing positions across distinct markets,” she said.
The market power derived from these “reinforcing relationships” harms competition, DOJ antitrust chief Jonathan Kanter said in a September 2022 speech at Fordham University in New York.
“The constant threat of [this market power’s] abuse threatens the competitive process and would-be rivals,” he said.
U.S. agencies have pursued several conduct cases based on concerns echoed in the ecosystem theory.
In January, the DOJ and a coalition of state attorneys general sued Google for allegedly monopolizing crucial digital advertising technologies through serial acquisitions and anticompetitive conduct locking website publishers into using its tools. This follows a separate case filed by DOJ over Google’s monopolization of search and search-advertising markets. The search case is expected to go to trial in September 2023.
Meanwhile, the FTC is pushing to unwind Meta’s acquisitions of social networking platform Instagram and messenger service WhatsApp. In the case, the FTC alleged that Meta engaged in a systemic strategy to maintain its monopoly on personal social networking illegally.
The agency could have used the ecosystem theory in analyzing Meta’s proposed purchase of Within, a virtual reality fitness app developer, Caffarra and her co-authors said.
In their view, Meta would gain with the acquisition a “ready-made capability,” allowing the tech giant to “abandon its own stunted efforts” to create a VR fitness app.
The deal would be a “building block” for establishing itself in the metaverse, they said. The company could use its app store and headset products to ensure that Within would thrive post merger, the economists said.
Eleanor Fox, an emerita law professor at New York University, agreed the ecosystem framework would have aided the agency’s analysis of the deal.
“Meta wants everyone to be immersed in its metaverse,” she said. “Each link strengthens each other link, taking oxygen out of rivals’ attempts to compete in standalone functions.”
The FTC, however, decided to sue on a narrower potential competition theory, with a judge ultimately finding for the merging parties.
Further development needed. Caffarra, Elliott and Galeotti acknowledged that the ecosystem theory needs to be more fully developed so enforcers can use it effectively.
The economists said competition enforcers must identify and measure a platform’s capabilities. They also must determine how these capabilities and a platform’s assets, some of which it would acquire in a merger, complement or serve as substitutes for each other, the economists said.
Some lawyers and other competition experts said they weren’t sure if the Amazon/iRobot case would be the best for developing the theory.
Tom Smith, the former CMA legal director who’s now a partner at Geradin Partners, said the EC’s focus on data might be “too speculative.” Andreas Reindl, a partner at Van Bael & Bellis, said the regulator first needs a clearer framework to identify relevant evidence and quantify harm before acting on “nebulous concerns.”
It won’t be easy to convince U.S. judges, who haven’t been swayed by the administration’s other non-horizontal cases, to accept an ecosystem theory in any case, said Tad Lipsky, a former senior enforcer in Republican administrations.
But NYU’s Fox was blunt about why she thought the theory should be taken seriously.
“Ecosystems can be engines to monopolize,” she said.
