The European Commission's preliminary report on its e-commerce inquiry has confirmed fast growth of the sector within the EU, and identified trends and business practices which may hinder competition between Member States, and limit consumer choice for EU citizens.
While in some Member States, as many as 80% of adults have participated in buying either goods or services online, the proportion is significantly less for those who have experienced e-commerce with a provider based in another Member State. The findings identify certain business practices which may hinder online competition including:
- Manufacturers using price restrictions or recommendations
- Contractual restrictions including pricing, marketplace and cross-border sales restrictions
- Restrictions on the use of price comparison tools
- Complex copyright licenses for digital content, with potentially anti-competitive clauses concerning exclusivity and duration
- Digital content providers contractually agreeing to geo-block
The preliminary report identifies behaviour amongst undertakings which may restrict choice and affect e-commerce prices, which could be harmful for the consumer and breach EU competition rules. This initial report is an opportunity for companies to review their e-commerce practices and make sure they are in compliance with EU competition rules.
Where the Commission has reason to believe that competition within the internal market may be distorted, it has the power under Council Regulation 1/2003 to carry out an inquiry into a particular sector of the economy. If, as part of the sector inquiry, the Commission finds that certain practices could amount to an agreement which restricts competition or an abuse of a dominant position, it has further powers to open case specific investigations to ensure compliance with Articles 101 and 102 of the Treaty of the Functioning of the European Union (TFEU).
In 2014, it was estimated that 50% of the EU population had experienced online shopping. However, only 15% of the population had experience of shopping for goods or services from an online provider based in another Member State. While the Commission acknowledges that there are a number of factors which contribute to the low level of cross-border e-commerce participation, such as language barriers and consumer preferences, the e-commerce sector inquiry aims to gain an understanding of the market, in particular the extent of any barriers which may hinder competition between Member States.
The e-commerce inquiry is part of the Commission's wider Digital Market Strategy which aims to ensure better access to goods and services for all EU citizens. The Digital Market Strategy has already identified a number of regulatory barriers that hinder cross-border e-commerce. The purpose of the e-commerce sector inquiry is to identify the extent to which contractual restrictions set up by companies, may act as a barrier to trade. In particular, the inquiry covers e-commerce in consumer goods and digital content.
The sector inquiry aims to:
- Obtain an overview of the prevailing markets trends
- Gather evidence on potential barriers to competition linked to the growth of e-commerce
- Understand the prevalence of certain, potentially restrictive, business practices and the underlying rationale for their use.
As part of the inquiry, the Commission gathered information from nearly 1800 stakeholders from across all 28 EU Member States, including reviewing 8000 distribution agreements. The Preliminary Report published on 15 September 2016 details the Commission's initial findings.
E-commerce of consumer goods
- High degree of price transparency leading to an increase in price competition
Increased online price transparency affects the behaviour of both retailers and consumers.53% of respondent retailers track prices of their competitors, with 70% of retailers using automatic software programmes to do so.
- Increased direct retail activities by manufacturers
64% of manufacturers reported that they had opened their own online shop in the last ten years, a trend most prevalent amongst cosmetic and healthcare providers.Many retailers now find themselves competing against their own suppliers.
- Expansion of selective distribution
In selective distribution systems, distributers are selected by manufacturers based on specific criteria, with the aim of achieving high quality distribution, consistency in terms of brand image and/or a high quality sales experience for the consumer.The preliminary data identified that one in five manufacturers introduced selective distribution systems in the last ten years, and 67% of those using such criteria introduced new selection criteria for online sales.This trend is particularly established in the clothing and shoe sectors.Nearly 50% of the manufacturers using selective distribution do not allow pure online players to join their selective distribution network.
- More contractual sales restrictions
Manufacturers increasingly report using contractual sales restrictions such as pricing or advertising restrictions, when distributing their products.
In response to increased price competition and the ability for both retailers and consumers to track and compare prices, manufacturers are now using price restrictions/recommendations when contracting with distributors.Around 42% of retailers reported experience of some type of price restriction, and four out of five respondent manufacturers recommend prices to their distributors.
The preliminary findings also indicate that 18% of retailers report that marketplace restrictions (i.e. online markets versus instore) are now a feature of contracts with suppliers.However this trend varies between Member States, with Germany reporting the highest proportion of marketplace restrictions (32%), the United Kingdom at 15% and Denmark just 6%.
Over one in ten retailers reported experience of contractual cross-border sales restrictions, limiting retailers from serving customers in other Member States, and leading to geo-blocking measures.Examples of geo-blocking measures include websites redirecting customers to websites in other Member States, or retailers refusing to provide cross-border delivery services.However, most geo-blocking is based on unilateral business decisions (almost 40%), rather than contractual limitations (11%).
While price comparison tools are increasingly used within the e-commerce sector, one in ten retailers have experienced contractual restrictions on the use of such tools.
Many manufacturers are concerned by the increasing trend of customers initially using one sales channel (typically the physical in-person shopping experience) to sample, view or gain advice about a particular product, and then switching sales channel (typically online) to purchase the product in question.This trend makes the costs of pre-sales services difficult to recover for the manufacturer who effectively loses the sale to an alternative sales channel.
E-commerce in digital content
The availability of licences from the holders of digital content copyright is essential for maintaining healthy competition in the e-commerce sector. Licences determine the territories, technologies and release windows available to digital content providers.
The preliminary results show 70% of digital content providers have implemented geo-blocking measures, such as restricting access to their online digital content for users outside their Member State.
The findings also identified that the duration of licensing agreements may provide difficulties in terms of access, as rights that are under long term exclusivity agreements will be inaccessible for other providers, in some cases for over ten years. The data showed 80% of the agreements submitted were for a duration of at least two years, with 10% lasting for over ten years. Furthermore, some of the agreements contained clauses providing for the contractual right to first renewal of the license, and in some cases automatic renewal. Such clauses further limit access to digital content.
The preliminary report is now open to public consultation for two months. Stakeholders are able to comment on the initial findings, submit additional information and raise any further issues. The final report is expected in the first quarter of 2017.