Draghi: competition continues to be necessary

On 9 September, an eagerly anticipated report by Mario Draghi was published, containing recommendations for putting Europe (which is lagging behind in the digital revolution) more firmly on the global map in economic and geopolitical terms. Mr. Draghi recommends three areas for action: (i) closing the innovation gap with the US and China, especially in advanced technologies; (ii) making the energy supply more sustainable without eroding competitiveness and economic growth; and (iii) security and reducing dependencies.

The report devotes an entire chapter to competition. Should competition enforcement be dialed down a notch for the sake of European champions or some higher purpose? Mr. Draghi does not advocate that, although, in the run-up to the report's presentation, that did seem to be in the air. The chapter, titled "Revamping competition", starts off with the importance of competition and competition enforcement. Without presenting an exhaustive list: which of the ten recommendations for competition policy stand out?

Innovation and future competition

The most prominent recommendation is recommendation no. 1, which says that European competition policy should place more emphasis on innovation, especially in merger assessments. In addition to lower prices, consumers also benefit from new and improved products in the future, also from new competitors.

As the existing competition rules already offer scope for that, this recommendation, Mr. Draghi argues, must take shape in its implementation, so that competition authorities devote more attention to possible innovation benefits of concentrations. Even though, in practice, this aspect is already taken into account, sometimes it remains underexposed. Additional explanation in the 'Guidelines on the assessment of horizontal mergers' may offer national regulators extra guidance (the Mission Letter to the incoming European commissioner already mentions this). This is not new, as economists make this substantive point all the time.

Mr. Draghi proposes that market participants substantiate how a merger or acquisition promotes innovation ('innovation defense'). A competition authority may then impose conditions, such as a requirement to realize an agreed upon investment level or otherwise risk a sanction (such as a fine) if that level is not realized. That is a behavioral remedy, the implementation of which can be tricky while businesses sometimes factor in fines. In addition, the (existing) efficiency defense already provides for the submission of benefits through innovation. All the same, it is an advanced idea, which may give businesses more confidence regarding the feasibility of innovation-driven mergers.

This recommendation could be seen as a call for more "strategic" assessments of mergers: more relaxed merger control in favor of increased scale in the global competitive battle. Yet, apart from the fact that bottlenecks do exist, scaling-up does not automatically lead to more innovation. A different pathway lies in ecosystems that allow start-ups to flourish and benefit from cross-pollination. Even without designating European champions, a considerable degree of innovation and dynamism is possible, with a more equal distribution of power within the supply chain, and with fair opportunities for new entrants to win the game.

Recommendation 2 underscores that collaboration between businesses and coordination regarding investments in R&D is sometimes necessary. The report omits to discuss that research joint ventures (RJVs), particularly in case of a convincing innovation defense, can be more targeted, faster, and less far-reaching than merging the entire business: depending on the form, an RJV may be less anticompetitive. Also, RJVs may fall under the block exemption for R&D agreements. For exceptions to that exemption, an additional recommendation could have been to provide more individual guidance.

Security and resilience

Recommendation 3 argues taking into consideration security and resilience criteria in DG Comp's decisions. At the moment, competition authorities are able to take into account disruptions to society or the economy if a restriction of competition (such as a merger) creates risks in that area. This has gained in importance, as competition issues overlap with geopolitics more often than in the past. In addition to dual-use technologies, this also affects sectors that are vulnerable to cybercrime and manipulation, such as social media (political influencing) and cars connected to the internet (remote sabotage). Mr. Draghi recommends that a separate unit analyze such risks in competition decisions, if necessary. This recommendation should have been implemented much earlier.

The attention for security and resilience does not exist in isolation. Competition authorities (in Europe) consider possible harmful effects of restrictions of competition in all kinds of areas, such as sustainability or media pluralism. The restriction of competition is the starting point: without a causal relationship with a restriction of competition, it is up to other bodies to protect such public interests.

Open access and interoperability

Recommendation 6 talks about the promotion of open access, interoperability, and adherence to European standards (including technological standards). Under a similar rationale, the recently introduced Digital Markets Act (DMA) imposes obligations on digital market participants designated as 'gatekeepers'. As the entire economy is digitalizing, the rationale behind the DMA is gaining relevance with regard to the safeguarding of fair and dynamic competition. That calls for lower barriers to entry for new entrants and for reduced switching costs for buyers, so that new entrants are able to shake up the status quo. In that context, Mr. Draghi sees a role for state aid (see also recommendations 4 and 5). This recommendation thus brings existing pathways towards innovation more prominently into the limelight, which is helpful.

The European laws on data and governance (the Data Act and the Data Governance Act) will help in that respect, for example through the requirements regarding seamless switching, standards, and operability. And let's not forget that the ECJ upheld (on 10 September) a fine on Google for abuse of its dominant position in online searches. That ruling underscores the importance of fair access (in that case, for comparison shopping websites).

Toolbox in competition enforcement

Recommendation 9 calls for a 'New Competition Tool' (NCT) for DG Competition, for situations where existing enforcement tools fall short in getting lagging competition off the ground. The existing tools are ill-equipped to address challenges such as impediments for consumers to effectively exert choices, or practices that undermine competition without violations of competition rules (such as tacit collusion). Various European countries are working on or have already introduced a national NCT, something is also in favor of.

Telecom and fast broadband

In a separate chapter on high-speed networks for broadband and telecom, Mr. Draghi argues that regulation and competition policy have led to fragmentation, and that consolidation is desirable. That is a dubious argument, since competition among competitors with networks of their own tends to fuel investments and innovation. On that note, Mr. Draghi argues for less ex ante regulation (less access regulation) in favor of ex post competition enforcement. Under favorable market circumstances, which differ per country, that is a positive direction.

In that area, the Netherlands, with its competitive, world-class networks, is actually doing relatively well. We have three national competitors on the mobile market, two national competitors in the fixed market, as well as several regional fiber-optic providers. For this outcome, it is unnecessary to link countries with one another.

Yet, Mr. Draghi argues to define relevant markets in the telecom sector at the European level rather than the national level, in favor of scaling-up through more cross-border market participants. That makes market definitions a policy choice rather than the result of an empirically (fact-based) based process. What does that mean for competition? Competitors that are not active on each other's territories can merge without harming competition. However, if international competitors also compete with one another at national or regional levels, then mergers can drive up prices and discourage network investments. The consumer benefits of having EU-wide competitors are therefore not evident, at least not without harmonization of spectrum auctions. Consumers already benefit from seamless roaming for voice and data traffic within the EU.

In conclusion

While awaiting the report, some had been expecting a call for more-lenient assessments of mergers and acquisitions, yet Mr. Draghi appeared to be more nuanced. Increased attention for innovation and future competition may require companies to band together, either through concentration or collaboration. That does not require an overhaul of competition law. It turns out it is all the more important to protect competition through innovation, and enable new entrants to constantly challenge the incumbents. Hopefully, the report does not prompt mergers that are appealing (to incumbents or individual member states) for wrong reasons. In that light, the call for consolidation in the telecom market (which experts have already called misguided and dangerous) is cause for concern.

The recommendation for open access and interoperability is a fundamental one. After all, more and more businesses create platform-like business models, often characterized by a 'winner-takes-most' principle. That is innovative, but it also introduces risks for the dynamism and innovation from which buyers benefit, hence the importance of openness (open standards and access to data, for example), interoperability (the ability to link and combine devices, services, and data), non-discrimination (no improper preferential treatment of one's own services), and the freedom of buyers to switch (while keeping data and user experiences). Fair opportunities and openness for all.

I will conclude with some more general observations. First of all, scaling-up does not necessarily lead to more innovation. That requires a more integrated European market, which attracts larger investors. In addition, pathways other than scaling-up can also promote innovation and competitiveness, such as ecosystems around a strategic value chain, with more-balanced power relations than with a 'champion'. Second, competition policy increasingly must relate more to policy areas that have overlap with competition. That does not mean that competition authorities must bring in other policy goals, but, at the same time, they cannot be blind to other public interests. Competition is not a goal in and of itself. Third, Mr. Draghi gives little attention to risks of dependency on Big Tech. Yes, innovation must offer a counterweight to the power of international competitors, but, in Europe too, governments cannot be at the mercy of Big Tech companies, which have more information and knowledge. Market power is more than just profits, it is also about influence and power vis-à-vis governments. Having a realistic perspective on the interplay with our democracy and the rule of law is therefore essential.

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