Q&A: Competition and antitrust in the TMT sector
September 2023 | SPECIAL REPORT: TECHNOLOGY, MEDIA & TELECOMMUNICATIONS SECTOR
Financier Worldwide Magazine
September 2023 Issue
FW discusses competition and antitrust in the TMT sector with Maureen K. Ohlhausen at Baker Botts LLP, Nikolaos Peristerakis at K&L Gates LLP and Josh Buckland at Simpson Thacher & Bartlett LLP.
FW: What do you consider to be the key competition and antitrust trends impacting the technology, media & telecommunications (TMT) sector in recent years?
Ohlhausen: New laws to directly regulate the actions of large online platforms as gatekeepers in Europe and elsewhere will clearly impact the technology, media & telecommunications (TMT) sector. In my view, one overlooked trend impacting the TMT sector globally is competition arising from strong players in one TMT market entering another TMT market and bringing new offerings and de-concentrating the market. We have seen this happen with cloud, streaming video, payments, online retail and more. This trend demonstrates that agencies should not discourage mergers that allow successful companies to reposition and enter other markets at scale.
Buckland: All three strands of TMT have been buffeted by the winds of change that have swept across the antitrust and competition landscape in recent years. Notably, international merger control authorities are increasingly aggressive and will meticulously review every major transaction that has the potential to raise concerns. For the first time in at least five years, for instance, US regulators in 2022 did not settle any TMT cases but instead chose to launch multiple antitrust challenges. Another trend – linked to the first – is the high level of coordination between national and supranational regulators. This is particularly relevant for tech sector deals, which often combine businesses operating on a global basis. No one planning such a deal can afford to look at things from a solely or even predominantly domestic perspective – you need a concerted international strategy for obtaining regulatory approvals that considers the quirks of each relevant jurisdiction.
Peristerakis: There are two basic categories in the TMT sector. First, the tech sector, which is characterised by dramatic technological innovation and the existence of multisided ecosystems, and the emergence of Big Tech players – Google (Alphabet), Apple, Facebook (Meta), Amazon and Microsoft, collectively known as GAFAMs. Second, the telecoms and media sectors, where the players have been largely the same. The only exception is in the media sector where we saw the emergence of Netflix, which prompted the other large media players to launch their own streaming services. The European Commission (EC), the Department of Justice (DOJ), the Federal Trade Commission (FTC) and other enforcers around the world have taken the view that the reason why GAFAMs are the largest companies in the world, is because they enjoy high barriers to entry and entrenched market positions in the digital ecosystems they created. Antitrust enforcers are often concerned that many of the markets in which the GAFAMs operate have already tipped in their favour. The telecoms and media sectors are faced with more traditional antitrust and merger control cases.
“Regulators have a duty to focus on the deal that is in front of them, and that should remain the priority, but they would ideally also take account of how they are influencing commercial incentives down the track.”
FW: What kinds of TMT companies and practices are typically being targeted by competition regulation and enforcement?
Buckland: Across the wider TMT landscape, large incumbent firms remain squarely in the crosshairs of international competition authorities. Big Tech companies are perhaps the most widely publicised targets, coming under scrutiny not only for their M&A activity, as demonstrated by Microsoft’s travails in its purchase of Activision Blizzard, but also for suspected abuses of dominance. For instance, Amazon recently offered commitments to the UK’s Competition and Markets Authority (CMA) in an attempt to resolve concerns that it has abused its position as the UK’s leading online retail platform by, among other things, unfairly favouring its own retail business over external sellers operating through Amazon Marketplace.
Peristerakis: In the tech sector, the key competition and antitrust trends are an unprecedented hostility toward conducting what would be viewed as legitimate competition in other industries and toward acquisitions that would go under the radar in other industry sectors. This has translated into aggressive abuse of dominance and antitrust enforcement against vertical integration or the realisation of efficiencies that arise from vertical integration and aggressive merger enforcement focused in particular on killer acquisitions, strengthening or extension of dominance, and any other transaction that could raise innovation competition concerns. Telecoms companies typically face strict antitrust scrutiny in relation to less controversial antitrust infringements, such as margin squeeze or network-sharing arrangements that may lead to market allocation or coordination concerns.
Ohlhausen: Competition regulation and enforcement is focused primarily on large, successful US tech companies that operate as platforms. People may disagree about whether these actions, many of which have been unsuccessful in the courts, are justified under consumer-welfare focused antitrust law or reflect the pursuit of other goals, but the similarities among the targets are clear.
FW: To what extent is more vigorous enforcement leading to blocked acquisitions as well as increasing the pressure on TMT companies to divest core businesses?
Ohlhausen: Although there is much fanfare about ‘more vigorous’ merger enforcement in TMT, the agencies in the US have not brought strong factual or legal cases in this area and have thus far failed to persuade courts to block acquisitions. They have suggested that their goal is deterrence of mergers overall, so perhaps some deals have not been pursued due to either heightened regulatory burdens or enforcement risks, though it is hard to measure such an effect separate from things like high interest rates that may also be slowing M&A activity. Without any indication that antitrust law itself, rather than US agency interpretation of it, has changed, I see no reason why TMT companies would voluntarily divest core businesses, something that courts have been extremely reluctant to impose. Even when there has been a successful antitrust enforcement, such as the DOJ case against Microsoft decades ago, it did not result in a breakup remedy.
Peristerakis: GAFAMs are conducting much more extensive antitrust due diligence before they acquire any company, given the heightened level of regulatory scrutiny. Blocked acquisitions like Meta’s proposed purchase of Giphy show that no matter how small the target is, the acquisition might be prohibited if it raises potential competition concerns. This aggressive enforcement will have an adverse effect on the incentives to innovate for start-ups. It effectively takes away one of the key avenues for founders of start-up companies to exit the market through a sale to one of the GAFAMs. This leaves start-ups with only private equity or much smaller companies, which are typically much less willing and able to pay an equally significant price or continue to invest in the growth of the start-up company. In the telecoms sector, there have been prohibition decisions for ‘4-to-3’ mergers. Some argue that this has led telco operators to start divesting towers as a way to get financing for 5G investments, but that has not always been the case. In the media sector, there have been prohibition decisions in Europe at the national level, based on traditional antitrust concerns.
Buckland: While the position varies across jurisdictions, there is a general trend toward more deals being blocked or approved only with remedies, at least in the European Union (EU) and the UK. For instance, the proportion of total transactions involving remedies at Phase 1 in the UK increased significantly in 2022 and the first half of 2023, and now stands at around one-third, or 33 percent. For deals that go to an in-depth Phase 2 investigation in the UK, the prognosis is worse still: 60 percent of such deals were blocked or abandoned in the first half of 2023, compared to 43 percent in 2022 and 50 percent in 2021. This trend is not limited to the UK; 75 percent of Phase 2 investigations by the European Commission (EC) in 2022 led to either a block or an abandonment, compared to 43 percent in 2021. A key factor in this trend is the unwillingness of regulators to accept behavioural remedies in lieu of structural divestments. The UK’s CMA is particularly stringent in this regard – while it always considers the viability of other remedies, there is a strong institutional view that the divestment of an intact, standalone business is typically required to solve significant competition concerns.
“The most significant regulatory action by far is the adoption by the EU of the DMA, an EU regulation whose stated purpose is to ensure “fair and contestable” digital markets.”
FW: In your opinion, what can regulators do to promote TMT sector innovation on one hand, while protecting consumers on the other? What challenges exist in achieving this balance?
Peristerakis: There is a concern that the overly aggressive enforcement against Big Tech might actually reduce the incentives to innovate, both for the GAFAMs and start-up companies. GAFAMs might be discouraged from bringing new products or acquiring companies in markets that expose them to aggressive antitrust intervention. Start-ups and smaller companies might no longer have the option to be acquired by a large company. What regulators can do to promote competition is to be less interventionist on the merger control and antitrust fronts, set out clear rules for antitrust enforcement, and only focus on mergers or practices that clearly raise significant exclusionary effects that are likely to have a clear impact on consumers. The need for clarity in antitrust enforcement cannot be understated as we have seen the emergence of new theories of harm, such as self-preferencing, which have traditionally been seen as innocuous from an antitrust standpoint, even for dominant companies.
Buckland: Most regulators will say that they are already promoting innovation, or at least preserving it, by blocking or imposing remedies on what are known as ‘killer acquisitions’. These are deals where a well-established player acquires an emerging rival only to shut down their projects and thereby eliminate the future competitive threat. When the evidence supports such a theory of harm, regulatory intervention is clearly helpful. On the other hand, innovation in the TMT sector is particularly resource-intensive, and often a start-up simply will not have the means to ensure high levels of R&D spending or keep taking risks with its business. So, there are scenarios where allowing an acquisition can bolster innovation and have a pro-competitive effect. I also think that regulators face a difficult choice when balancing the impact of a particular M&A transaction, which may potentially reduce innovation in the short term by removing a player from the market, against the wider long-term consequences of fostering an environment that is overly hostile to trade buyouts. Typically, regulators have a duty to focus on the deal that is in front of them, and that should remain the priority, but they would ideally also take account of how they are influencing commercial incentives down the track.
Ohlhausen: Competition regulators should continue to focus on consumer welfare effects and the importance of protecting dynamic competition to allow innovation to flourish in the TMT sector. Harms to consumers unrelated to competition, such as privacy infringements and discrimination or fraud, should be addressed by other regulations.
FW: Could you highlight any recent, significant regulatory actions that may affect the playing field for TMT companies going forward?
Buckland: An obvious highlight is the recent European Court of Justice (ECJ) judgment in the Three/O2 mobile telecoms case, which delivered clarity on the legal framework for assessing mergers in the EU telecoms sector and beyond. The case was about the EC’s prohibition in May 2016 of the attempted merger between mobile network operators Hutchison 3G UK (Three UK) and Telefónica UK(O2). After the General Court upheld the merger parties’ challenge in 2020, the EC has now prevailed on all six grounds of its appeal. Notably, the ECJ refused to endorse a higher standard of proof for determining whether a transaction would significantly impede effective competition and similarly rejected a more stringent approach to assessing closeness of competition. The judgment is a comprehensive victory for the EC and allows it to maintain a robust approach to merger control enforcement for the foreseeable future. Another important TMT regulatory milestone was the publication in July of the initial seven companies that have declared they meet the thresholds to qualify as gatekeepers under the EU Digital Markets Act (DMA). The list included many of the biggest tech players such as Alphabet, Amazon, Apple and Meta. The EC is aiming to officially designate these companies as gatekeepers by September, after which they will have six months to comply with the DMA obligations. Many other players in the TMT sector will be watching those compliance efforts closely, as they are intended to unlock a host of pro-competitive benefits, including improved interoperability and the elimination of self-preferencing.
Peristerakis: The most significant regulatory action by far is the adoption by the EU of the DMA, an EU regulation whose stated purpose is to ensure “fair and contestable” digital markets. The DMA is asymmetric regulation that imposes extensive obligations on Big Tech companies in relation to their core platform services (CPS), such as social networking websites, online intermediation services, video-sharing services, number-independent communications services, operating systems, web browsers, virtual assistants, cloud computing services and online advertising intermediation services. The DMA came into force in May 2023 and is based on the premise that Big Tech companies that offer CPS benefit from extreme scale economies, often resulting from zero marginal costs to add business and end users, significant dependence and lock-in effect of both business users and end users, vertical integration, and data-driven advantages. Against this background, the DMA concluded that antitrust enforcement and market forces were not sufficient to preserve a level playing field that will be ‘fair’ for both new entrants as well as business users that rely on CPS.
“The advent of widely available AI will have large and unforeseen impacts on markets and may reshape the competitive landscape in the TMT sector.”
FW: What advice would you offer to TMT companies on navigating an increasingly complex competition and antitrust landscape? What steps can companies in this space take to understand, evaluate and mitigate these risks?
Peristerakis: The common parameter for all TMT companies is that regulators around the world now consider that ‘big is bad’ and the bigger the company is, the larger the scrutiny it will face. There is very limited tolerance for any practice that could be viewed as exploitative or exclusionary, or any acquisition in an oligopolistic or concentrated market. Accordingly, companies should have very comprehensive compliance systems in place for any commercial arrangement or initiative that they undertake. As for M&A, TMT companies should be aware of the fact that the EU, UK and US agencies are much less tolerant of mergers in oligopolistic markets, and will not hesitate to prohibit deals. The US agencies, namely the DOJ and FTC, are more constrained compared to their EU and UK counterparts, as the US agencies must still convince a federal judge to prevent a deal from happening. That being said, there is seamless cooperation between US, EU and UK enforcers, so it is possible that the US agencies could rely on cooperation with their EU and UK counterparts to prohibit or make more difficult a deal that they could not prohibit before a federal judge in the US.
Buckland: My advice is: “you cannot be complacent”. TMT companies must not assume things remain as they were last time around. This applies most forcefully to deal making, where antitrust and competition authorities are increasingly willing to intervene. But it is also relevant to regulatory housekeeping matters, such as updating internal compliance programmes, rolling out training sessions, and so on. The rapidly evolving and ever more complex regulatory landscape means that companies cannot keep relying on old, and likely outdated, materials. It takes more effort to maintain a best-practice standard. On the bright side, this complexity presents an opportunity for sophisticated and well-advised companies that can stay ahead of the curve. Quality TMT assets remain attractive and account for a significant proportion of recent M&A activity, showing that the right deals can still happen, notwithstanding the regulatory hurdles.
FW: How do you expect competition and antitrust enforcement activity in the TMT sector to evolve in the months and years ahead? What developments are likely to unfold?
Ohlhausen: The advent of widely available AI will have large and unforeseen impacts on markets and may reshape the competitive landscape in the TMT sector. Regulators are likely to focus on developments affecting the availability of inputs for rivals, such as data, cloud computing and chips, whether arising in mergers or through industry wide or individual actions.
Buckland: We are at a critical juncture for TMT consolidation in Europe, particularly in the telecoms sector. Two of the UK’s leading mobile network operators, Vodafone and CK Hutchison, the latter of which owns Three UK, announced in June that they would merge their UK operations to create the nation’s largest player. If successful, the consolidated business would hold slightly less than half of the UK’s mobile spectrum and be well-positioned to invest in the continued 5G rollout. However, the CMA will closely scrutinise the transaction given it would leave the UK with only three mobile networks and may potentially lead to higher consumer prices. That formal review process has not yet commenced, as the parties are no doubt still mired in pre-notification with the CMA, but I expect the deal will eventually be referred to an in-depth Phase 2 investigation. A similar dynamic is playing out in Spain – at a more advanced stage – with the proposed creation of a joint venture between Orange and MasMovil, the country’s second and fourth largest operators, respectively, for fixed broadband and mobile services. That deal was announced in 2022, with the EC opening an in-depth investigation in April this year, and issuing what is known as a ‘statement of objections’ in June. This suggests the parties may need to offer serious remedies to secure approval.
Peristerakis: Each of the GAFAMs will continue to face intense antitrust scrutiny in the months and years ahead. There are several cases against Alphabet, Apple, Meta and Microsoft before the EC and elsewhere. These cases could result in the imposition of significant fines, combined with orders that would constrain the conduct of the Big Tech platform under investigation. The one case that stands out from others is the EC’s current AdTech investigation, which is considering the breakup of Google’s AdTech business. This case is largely inspired by the DOJ investigation, which itself was inspired by a Texas attorney general case that was dismissed by the federal courts. But while the DOJ case gives the EC political legitimacy to ask for the same remedy, the reality is that the DOJ must still convince a US federal judge. In contrast, the EC can simply adopt the decision and be subject to a much more superficial review by the EU courts in Luxembourg, which is limited to an administrative control of legality of the EC’s decision.
Maureen K. Ohlhausen, partner and chair of Baker Botts LLP global competition group, is recognised as a leading antitrust lawyer. She represents clients in the tech, life sciences, energy and retail industries. She served as acting FTC chairman from January 2017 to May 2018 and as a commissioner starting in 2012. She can be contacted on +1 (202) 639 7726 or by email: maureen.ohlhausen@bakerbotts.com.
Nikolaos Peristerakis is a partner in K&L Gates’ Brussels office. He is a member of the antitrust, competition and trade regulation practice group. He has more than 20 years of experience advising and representing clients in merger control and antitrust investigations. He has handled the EU and global merger clearance process for hundreds of public M&A, joint venture and private equity transactions. He has also led or co-led numerous high-profile Phase I remedy and Phase II cases before the European Commission and globally. He can be contacted on +32 23 361 934 or by email: nikolaos.peristerakis@klgates.com.
Josh Buckland is a counsel in Simpson Thacher’s European antitrust and foreign investment group. He has deep experience in developing strategies for obtaining regulatory clearances on high-profile deals around the world. Mr Buckland also helps clients navigate a wide range of complex behavioural matters and investigations, particularly those brought by the UK’s Competition and Markets Authority (CMA) and the European Commission. He regularly acts for leading private equity clients and other multinationals across numerous sectors, including tech, media and telecoms, financial services, healthcare, industrials and retail. He can be contacted on +44 (0)20 7275 6260 or by email: josh.buckland@stblaw.com.
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