Searching for a New Theory of Harm for Startup Acquisitions by Digital Ecosystems: A Review of the EU Merger Control Regime

Abstract

Digital markets are known with their dynamic nature where actors mostly compete for the market rather than in the market. Strong network effects with extreme economies of scale cause the markets to tip in in favor of one company leading to a monopoly who takes it all as the winner. Promising startups might be the key to ensure that disruptive innovation can happen against established dominant big tech companies. Startup acquisitions are already proven to be a systematic pattern followed by digital ecosystems rather than one-off incidents. That is why it is very crucial to make sure that competition law effectively oversees these acquisitions in terms of their anti-competitive effects.

In order to better address any kind of competitive concern in relation to the big tech companies; it is essential to have a clear perception of their business model. That is why there was a need for a new description for these big tech companies. ‘Digital ecosystem’ is a popular one recently used by many commentators to portray the vertically integrated business model of big tech companies with a portfolio of diversified products and services. Google, Amazon, Facebook, Apple and Microsoft (hereinafter all together as GAFAM companies) have their core businesses; whereas they are also active in many related or unrelated sectors. In other words, digital ecosystems have one or several core products/services, where they build an ecosystem around it. Although each digital ecosystem is particular on its own, there are certain common features which help us to identify and distinguish them from other forms of businesses. These include (1) offering most convenient option to users, (2) competing with other digital ecosystems with their vertically integrated business model for access points to users and (3) use of data as an essential element.

Digital ecosystems have the tendency to enlarge the boundaries of their ecosystem and startup acquisitions are very useful for this purpose. The acquisitions could have two different purposes: it can be a tool for the digital ecosystem to enter into new markets or it can be some sort of a defensive strategy to eliminate a potential rival that could compete against the digital ecosystem in one of its markets. The availability of only limited number of merger decisions on startup acquisitions done by these digital ecosystems is the first indication that there might be an essential enforcement gap. Furthermore, even if these acquisitions are somehow get caught into the nets of the European Commission or national laws of the member states; unfortunately, these decisions fall far behind from understanding the competitive business model of these digital ecosystems.

This thesis analyzes the possibility of identifying a theory of harm on the basis of significantly impeding the competition as result of the acquisition of the user base of the startup. The traditional relevant market-centric approach of competition law seems to fall short of addressing real power of digital ecosystems and how it might lead to anti-competitive results. User base could be helpful to overcome the challenges associated with too much relevant market-centric approach; as it allows to see connections between different markets even if these connections seem to be non-existent according to traditional competition law assessments. In other words, it is an objective parameter that could concretize the potential anti-competitive effects of the acquisition by taking into account the specific features of the ecosystem power. User base has become one of the competitive parameters in the market for which digital ecosystems compete with each other and/or other non-ecosystem companies. This is a new perspective for competition law; and it is certainly disruptive for the old-school relevant market-centric approach since it requires to have a three dimensional approach.

When there is a startup acquisition conducted by digital ecosystems, the correct perspective should be to assess whether there is restraint of competition; without the need for finding a dominance. It would be wrong to reduce the user base approach to a rigid analysis merely focusing on the total sum of the numbers. The purpose is not to come up with a new market definition or new type of market dominance based on the acquisition of the user base. Instead, the aim is to set forth how it could be restrictive of competition that digital ecosystems insert startups to their ecosystems and user base is just one of the ways of illustrating the potential restrains of competition that happens in the bigger picture. User base could allow substantiating potential theory of harms in relation to consumer dependency and market foreclosure. In any event, it should be a flexible analysis subject case-by-case review.

User base could be complementary in terms of identifying the potential competitors of the ecosystems more accurately, as it recognizes the fact that ecosystems compete for access points to consumers/users. In terms of vertical/conglomerate theory of harm in startup acquisitions of digital ecosystems, potential foreclosure scenarios could be related to (i) increasing consumer dependency and creating high switching costs for the consumers, (ii) forcing competitors to create an ecosystem to compete and (iii) leveraging the ecosystem power to other markets. User base perspective could be useful to build these foreclosure scenarios as it could address the ecosystem power more accurately.

Keywords: merger control, killer acquisitions, theory of harm, startup acquisitions, digital ecosystems, consumer dependency, user base