Big Tech critics are calling for a more rigorous enforcement of competition rules when reviewing platform mergers. In response, European Commission officials seem to be keen to define new legal tests, analytical methods and possibilities for reinterpreting existing rules to review platform mergers.
The European Commission’s Chief Competition Economist in a recent presentation specifically referred to the notion of “platform envelopment” and the possibilities of leverage. Usually, it is difficult to displace an existing platform due to network effects and customer switching costs. It may be possible, however, for a new entrant to succeed if it is able to offer an innovative product. As an alternative to this strategy of creative destruction, leadership in a platform market can be established without a revolutionary innovative functionality through a “platform envelopment” strategy. Platform envelopment entails one platform provider adding another platform’s functionality to its own, and then offering a multi-platform bundle. The practices of tying, bunding and leveraging that can be part of a platform envelopment strategy have in the past been examined by the European Commission in the context of conglomerate mergers. The European Commission could extrapolate the concept of platform envelopment to a merger scenario, thus suggesting a possible harm to competition as a result of the implementation of a platform envelopment strategy.
The European Commission is cognizant that platforms may help cut costs and improve services, but it is also concerned that platform markets are showing signs of becoming more concentrated. It is clear that platform companies that want to merge and use data will have to work harder to explain what they want to do and why to secure a merger-clearance decision. What does this mean for strategic transaction advisors and companies that plan to undertake platform mergers?
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EY Law contacts:
Manu Mohan – EY Law
Kiran Desai – EY Global EU Competition Law Leader
Richard Goold – EY Global TMT Law Leader