In which Google Android Judgment of September 14, 2022, the General Court deals with the treatment of competition in and between digital “ecosystems” under EU competition law.
The €4.6 billion fine under appeal focused on the European Commission’s finding that Google held a dominant position in the market for licensed operating systems (OS) for smart mobile devices. Google argued that this narrow market definition failed to take into account the competition between, on the one hand, the Android ecosystem, which includes mobile devices and apps based on Google’s Android operating system, and, on the other hand, the Apple ecosystem, which is based on Apple’s proprietary iOS operation System.
The Court recognized both the potential difficulties in applying the usual competition law principles of market definition in the digital economy and the need to take due account of extra-market restraints. Nevertheless, it ultimately confirmed the Commission’s approach.
The starting point for the Commission’s position on market definition and market dominance was the observation that smartphone manufacturers (OEMs) who wanted to license an operating system had practically only one choice: Android. Apple had its own proprietary operating system for iPhones (iOS), but Apple chose not to license iOS to other OEMs. Google argued that its narrow focus on OEM choices ignored the keen downstream competition between devices running the Android operating system and Apple’s iOS.
The court agreed that, from the OEMs’ perspective, iOS and Android were not interchangeable since Apple had not licensed iOS. The competitive relevance of Apple’s iOS therefore had to be assessed at the level of the downstream markets for phone users and app developers.
Regarding users, the court found that users’ choice between ecosystems was based on multiple factors and could not be reduced to the operating system alone. The operating system was an important factor when choosing a smartphone, but not the only factor. Switching between ecosystems was mainly prompted by the introduction of new devices, not operating system changes.
Android users showed significant loyalty to the Android ecosystem: 82% refused to switch to Apple when buying a new device in 2015. However, this loyalty did not seem to be driven by the quality of the operating system. Figures for May 2017 showed that only 7.1% of Android users were running the latest version of the Android operating system on their devices six months after it became available. Likewise, only a very small portion of users who switched to an Apple device said they did so because of the quality of the operating system.
Instead, user loyalty could be due to the difficulties encountered in switching ecosystems, such as porting personal data, buying apps again, or relearning how their device works. The fact that Apple had launched an app to make it easier to switch from Android to iOS tended to show that switching costs were an issue. For users of lower-end devices, Apple’s pricing policy also appeared to be a barrier to switching, with at least 50% of Android devices being sold at prices below Apple’s devices.
Regarding a possible restriction by app developers, the court found that to the extent that users are unlikely to switch to a different mobile operating system, the same would apply to app developers, which the majority of their customers reasonably do not could let you down.
Overall, the Court concluded that the Commission was justified in treating the Apple ecosystem as an “indirect constraint” on Google and found that this constraint was insufficient to challenge Google’s dominant position. In assessing the significance of the restriction, the commission examined the likelihood that users (and app developers) would switch in response to a small but significant non-transitory quality degradation (SSNDQ). This differs from the traditional SSNIP test (small but significant non-transitory price increase). However, the court upheld the approach. Competition can take place both in terms of quality and innovation, and in terms of price. And this was a case of a product that probably doesn’t lend itself to a traditional, price-based SSNIP test. In fact, Google seems to have argued that for an operating system, quality is the deciding factor in consumer choice.
Conclusions and Comments
As in all cases, the result of the market definition and market dominance was strongly dependent on the facts. For those pondering how to treat competition between digital ecosystems — or even more traditional pre- and post-market systems like razors and razor blades, or copiers and toner cartridges — the court’s approach seems instructive. The court was quick to define separate markets at the OEM and user levels. It was then asked whether competition at the user level is only (or at least very strongly) determined by the quality of the operating system. After the Court found that several factors, including but not limited to the quality of the operating system, were relevant to users’ choices, Google faced an uphill battle to prove that Apple’s indirect constraint was sufficient to warrant the finding to avoid a dominant position.
in the digital economy… traditional parameters such as the price of products or services or the market share of the company in question may be less important