Background

Digital marketplaces, their users and sectoral regulators are moving towards a new market paradigm of the cyber-economy. Information technology (“IT”) is constantly evolving in magnitude and regulators frequently have to react and catch up with market practices.

Data driven business models have propelled digital platforms to an unprecedented scale. Platforms like Meta, Google and Amazon are reducing transaction costs and are increasing their influence by facilitating multi-sided interactions and providing businesses with instant access to global markets. However, low marginal costs, network effects and strong economies of scope becomes a deterrent for new entrants in all markets where they may face a competitive threat.

Exclusionary and unilateral conduct has prompted market intervention by competition regulators to prevent dominant platforms from stifling competitors in similar services. The European Commission (“EC”) was one of the first to take a note of this. Discontent with letting market failure persist, the EC passed the Digital Markets Act. Through it, the EC hopes to steer the gatekeepers of digital services towards interoperable standards and prohibit practices like pre-installations that affect user-choice and competition.

Worldwide, regulators are also quickly catching up to a changing market reality to address patterns of unilateral conduct and calls to action to address these online platform’s economic dominance.

Competition regulators in Netherlands, EC and Australia have taken note of the evidence that major technology platforms cannot self-correct; and found that competition law is uniquely placed to address issues before them.

In India, the Competition Commission of India (“CCI”) on October 25, 2022 passed an antitrust enforcement decision against inter alia Google, fining them INR 936.44 Crores (“Order”) for contravening various provisions of the Competition Act, 2002 (“Competition Act”) by way of their policies governing use of their platform (“Play Store”), and specifically, its proprietary payment service, Google Play Billing System (“GPBS”) which operates on the Android Operating System (“OS”).

The observations and remedies recorded in the CCI’s order raise important questions into the role of competition law in the new millennium as the CCI attempts to maintain platform neutrality whilst upholding “fair competition for the greater good.”

Director-General’s (“DG”) Investigation into GPBS and Google Pay and Observations of the CCI

The CCI considered various factors like switching costs, barriers to entry in the market for licensable OS, indirect costs, lack of countervailing buyer power and access to data in coming to its conclusions.

Android Operating System

App stores are a two-sided marketplace, with app developers on one hand and users on the other. Clocking 17 billion app downloads in India from January 1 to August 31, 2022 and a 95% market share, the Play Store serves as a digital storefront and is a “critical gateway between app developers and users”. App stores have become a necessary medium for app developers to distribute their creations and its availability is inextricably linked to the OS installed on the smart device.

Google holds undisputed influence and control over the development of OS and its updates, even though it is an open-source project. The DG found Google to be dominant in the markets for licensable OS for smart mobile devices and app store for OS in India and concluded that Google leveraged its dominance when it made the use of GPBS mandatory and exclusive for payment processing and in-app payments in the Play Store for all apps except Youtube.

This practice is considered as an unfair and discriminatory condition under Section 4(2)(a)(ii) (Abuse of dominant position) of the Competition Act. The CCI took exception to the original equipment manufacturers (“OEMs”) having to sign a mobile application distribution agreement to install the google mobile services (“GMS”) suite of apps which restricts what applications can be pre-installed on their devices, achieving “total exclusion” of downstream competitors through revenue sharing agreements (“RSA”). Thus, the CCI concluded that Google had discriminated between similarly situated apps and transactions in Google Pay and rival unified payment interface (“UPI”) apps.

This means that Google’s release of OS is a misnomer of open source. Such conduct by Google from a position of dominance, backed by its reputation as a hyperscaler helps it create a de-facto industry standard while exclusively retaining some parts that add value on top to create an attractive commercial proposition for itself.

Denial of Access to Payment Markets

Selling in-app digital goods is an important way for app developers to monetize their creations. To distribute through the Play Store, app developers had to agree to a developer distributor agreement (“DDA”) and developer program policies (“DPP”). Use of GMS requires a certificate from an authorized testing facility and written approval from Google. Play Payments is included in this suite of agreements, so Google can tie the use of GMS to GPBS. The imposed tying of apps with GPBS amounts to a vertical integration in digital market that exists for ancillary purchases after the main transaction.

Google owns the intellectual property rights (“IPR”) to the OS and “as the sponsor of the Android platform enforces rules through a combination of compatibility provisions, contracts, and trademark licenses” and to safeguard its dominant position and preserve value of the IPR, imposed anti-steering provisions. These prevent developers from redirecting customers to other payment processors or informing them of their choice to pay through third party websites.

The DG reported that Google has entered into non-exclusive agreements with OEMs to pre-install Google Pay by offering financial incentives through RSA and placement bonus agreements but the DG found no evidence to conclude abuse of dominant position and did not investigate the aspect of default payment status of Google Pay.

Nevertheless, Google excluded other UPI apps as ‘effective’ payment options on the Play Store, discouraging users from using other UPI apps. This has a wide ranging market implications in the highly competitive online payments industry in India. Google becomes a gateway to android smartphones due to dominance in markets for licensable OS and app stores for OS, uniquely placing it in a position to leverage its dominance in favor of the Google Pay UPI app.

The CCI ruled that this amounted to denial of market access and unfair conduct for two reasons:

• Google charged developers a considerable premium of 12-14% over other payment aggregators coupled with a longer settlement period, which was deemed to be an unfair benefit to the detriment of app developers.
• Google had seamlessly integrated its own UPI payment system using the ‘intent flow’ methodology to facilitate payments under the GPBS, whereas other competing payment systems could only be used by adopting the ‘collect flow’ methodology, involving a broken chain of steps which requires a customer to actively engage with various applications to manually complete a purchase. This resulted in users preferring the GPBS and prevented other UPI apps and app developers from collecting necessary consumer preference data to keep their apps updated. Such conduct was deemed to have indirectly affected competition in the wider UPI segment.

Another important point that the CCI noted is that the number of people affected by such policies is immaterial if conduct is deemed to be anticompetitive and Google, being a dominant entity, had an obligation under Section 4 of the Competition Act to not engage in conduct that affects competition on its merits.

The Form and Function of Data Collection

The policy was interpreted by the CCI to give Google access to “critical and competitively relevant consumer/ transaction data of all its rival apps.” Since data can be used and reused, without incurring significant extra costs for each subsequent use, it can be used by one person without preventing others from using it. This means that data is non-rivalrous, it can be viewed as a shareable input for firms to achieve economies of scope in product development.

The CCI concluded that providing truncated access to data while mandating use of GPBS discourages app developers from developing captive in-app payment processors. Such conduct falls afoul of Section 4(2)(b)(ii) of CA because it distorts competition by stifling innovation incentives and limiting technical development in the market for in-app payment processing services.

The volume of data harvested from users and a firm’s marginal costs of innovation are inversely related, giving impetus for data-driven network effects to incentivize incumbent’s diversification into connected markets. Two markets may be connected because they share the same data although they may be weakly related by product market definition. Once the CCI establishes the proposed digital markets and data unit, this market delineation may become increasingly important for companies as data analysis by regulators becomes more sophisticated.

Directions of CCI

In addition to an unequivocal direction to cease and desist from anticompetitive practices, the CCI also ordered Google to modify its conduct by stipulating certain behavioral remedies:

• It should allow, and not restrict app developers from using any third-party payment processing services for in-app purchases and for app sales. It should also not, in any manner, discriminate or otherwise take any adverse measures against such practice.
• It should not impose anti-steering provisions on app developers and restrict them from communicating with their users to promote their apps and offerings. It should not restrict end users to access and use the features and services offered by app developers within apps.
• It should set out a clear and transparent policy on data collection, usage and the potential and actual sharing of such data with app developers or other entities, including related entities. The competitively relevant transaction/ consumer data of apps generated and acquired through GPBS, should not be leveraged by Google to further its competitive advantage. It should also provide access to the app developer of the data that has been generated through the concerned app, subject to data protection safeguards.
• It should not impose any condition (including price related condition) on app developers, which is unfair, unreasonable, discriminatory or disproportionate to the services provided to the app developers.
• It should ensure complete transparency in communicating to app developers, services provided, and corresponding fee charged by publishing, in an unambiguous manner, the payment policy and criteria for fees applicability.
• It should not discriminate against other apps facilitating payment through UPI in India vis-à-vis its own UPI app, in any manner.

CCI’s direction to provide data access to app developers over user and transaction details, which in this case, will allow greater transparency and data driven decision-making at all levels of the value chain.

However, it is important to keep in mind that mandating data access and calling it interoperability is not a blanket remedy because Google’s rivals may lack the technological and operational abilities to effectively analyze and process the data. Remedies, to be effective to the letter and spirit of competition law, warrant ongoing surveillance and fine-tuning to be value-accretive for society and stakeholders in the long run.

VA View:

Competition law, in its endeavor to increase consumer welfare, is concerned with preserving the competitive process rather than competition itself, as the latter approach may have the unintended effect of supporting inefficient market players. This reasoning is why a dominant entity per se is not anticompetitive unless it abuses its market power, substantially lessening competition through exclusionary conduct. This Order has implications on competition in digital marketplace, amongst app developers in the technology sector; between payment aggregators and UPI apps in the finance sector; and for the ways in which users’ data may be utilized.

A dominant entity has a special obligation to preserve competition and cannot impose tying requirements that may raise competitors’ costs. Non-exclusive revenue sharing or placement bonus agreements may be permissible.

In markets for search services, operating systems, app stores, online retail and other digital markets, low marginal costs, network effects and strong economies of scope enabled dominance are construed by regulators as triggers for the market tipping in favor of a single entity. Aggressive conduct by dominant platforms is likely to prompt regulatory scrutiny.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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