Internet of Things: The risks to fair competition are hidden

Internet or Things (hereinafter ‘IoT‘ose’smart devices‘) is revolutionizing in many sectors around the world. IoT devices are characterized by the fact that they are connected to a network and can be controlled remotely, for example through voice assist and / or mobile devices, and can exchange data. Examples of intelligent devices are almost endless: self-driving cars; an intelligent watch that provides an overview of your athletic performance and offers tips to improve it; a patient who can leave the hospital faster because it is monitored remotely and can communicate directly with the hospital; intelligent meters for electricity, water and gas; autonomous agricultural machines that work the land and inform the farmer about the harvest. It is clear that it is almost impossible to imagine our daily lives without IoT.

As the IoT becomes more and more part of our daily lives, the topic is also high on the European Commission’s agenda (“commission“). One of the Commission’s focus points in the field of IoT is the creation of a single market for IoT. To achieve this, in 2020 the Commission launched a sectoral inquiry into competition in the IoT consumer sector.

On 9 June, the Commission published a preliminary report (“Report“). The report discusses preliminary findings on competition parameters, key developments and identified competition risks in the IoT sector. The Commission findings are relevant to the smaller market players who (want to) offer IoT products and will be discussed on this blog.

The reason for initiating a sectoral investigation and its scope

Global consumer IoT revenues are expected to increase from € 107 billion in 2019 to around € 408 billion in 2030. The market is still evolving, however there are already indications of barriers to entry and some companies may restrict competition. Sectoral investigation identifies these problems. Moreover, the choice of sector investigation fits well within the Commission’s 2019-2024 strategy entitled “A Europe suited to the Digital Age”.

Preliminary findings of the sector investigation are based on information provided by more than 200 different stakeholders from Europe, China and the United States, who are active in the IoT consumer sector, including manufacturers of smart devices, voice assistant providers and IoT customer services and industry associations. Moreover, these companies have shared more than 1,000 agreements with the Commission.

IoT for industrial products and related machines are outside the scope of market investigation. One of the specifics of consumer IoT is that the data collected by smart devices usually includes personal data.

Barriers to entry

According to respondents, the main barriers to market entry are:

  • Investing in technology. According to respondents, the cost of investing in technology is high, especially in the voice assistant market.
  • Current competition situation. Regarding the competitive situation, respondents note that it is difficult to compete with vertically integrated companies that have built their ecosystems inside and outside the IoT consumer sector (e.g. Google, Amazon or Apple). It is also considered impossible for new applicants to enter the field of voice assistants in the short term, as the costs of developing voice assistants are high.
  • Interaction. Different IoT devices are often useful only if the data collected can be combined with other data. This requires data interaction. The main providers of voice assistants and mobile devices are usually the parties with their technology enabling interaction between different IoT products. IoT product providers are often dependent on these parties for interaction. Respondents point out that the different integration requirements of technology platforms lead to an additional complexity for IoT providers when integrating their products.
  • Access to data. IoT product and service providers collect a lot of data. For example, a smart watch gathers information about consumers’ health, location, and movement patterns. With the data collected, IoT device providers can respond to the needs of their customers and further develop the product. Respondents note that they encounter barriers to accessing data. This is caused, among other things, by changes in the formats in which data is collected and by limitations in data portability.

It is also evident that product pricing was identified as a less important parameter of competition, although it is still considered important.

Identified competition risks

Remote control is essential for intelligent devices. To reach the remote control, intelligent device manufacturers often use voice assistants and / or a mobile device. Leading voice assistants in the EU are Amazon Alexa, Google Assistant and Apple Siri. For mobile devices, Google’s Android and Apple’s iOS are the main operating systems. The sector investigation has shown that IoT providers generally depend on voice assistant providers and (operating systems) mobile devices and that supply is limited. This leads to the following competition risks:

  • Exclusivity and connection to voice assistants. The sector investigation shows that leading voice assistant providers are trying to achieve voice assistant exclusivity on certain IoT devices. Practices that limit the ability to use different voice assistants on the same smart device have also been reported. Smartphone manufacturers are also concerned that voice assistant providers are bringing together different types of software and technology, including voice assistants.
  • Pre-installation, default and importance. Respondents indicate that leading providers of voice assistants and / or mobile devices pre-install, set by default or otherwise attach importance to their services or the services of key international players in the smart device. This can create a competitive advantage for the service provider that is pre-installed to the detriment of often smaller players and / or locals.
  • Data. Voice assistants are at the heart of IoT customer sector data collection. This enables leading voice assistant providers to collect large amounts of data, allowing them to not only manage data streams and user relationships, but also exploit adjacent markets. With access to large amounts of data, voice assistant vendors can improve their technology through algorithmic training and machine learningWith This leads to improvements in the quality of voice assistance. Lack of this large-scale access to data can create barriers for new entrants to the voice assistant market.
  • Standardization and interactionWith leading Providers of voice assistants and mobile devices they have technology that enables interaction. These providers can unilaterally control the interaction and integration processes. They are thus able to limit the functionalities of IoT devices and services to the advantage of their services.

What can we expect from the Commission in the field of IoT?

The results of the Commission’s sectoral investigations often lead to formal investigations into individual companies. For example, the e-commerce sector investigation resulted in many formal investigations and substantial fines for companies such as Asus, Philips, Pioneer, Guess, Sanrio, Nike, NBC Universal Studio and some video game publishers. Similarly, the investigation of the pharmaceutical sector resulted in significant fines at European level for, inter alia, Lundbeck, Jansen-Cilag and Servier and at national level fines, inter alia, for GlaxoSmithKline and Pfizer / Flynn ( MB), Aspen (Italy) and CDPharma (Denmark).

The Commission is expected to launch a formal investigation as a result of its findings in the IoT sector. In describing the competition risks identified in the report, the Commission does not explicitly identify the parties that may restrict competition. The Commission mentions, inter alia, ‘key players in the field of voice assistants and / or mobile devices’ and ‘IoT technology platforms’. However, it is not difficult to understand that the Commission is referring to key players like Google, Amazon and Apple as they are the largest service providers and the Commission also refers to these parties more often in the report. The clearest course of action is for the Commission to open a formal investigation into the abuse of a dominant position against one or more of these parties on the basis of, for example, exclusivity, affiliation and / or personal preferencewith

It is also entirely conceivable that the final report of the sector investigation – which is expected in the first half of 2022 – will affect the ongoing debate on the Digital Markets Act (“DMA“) Proposal and regulation ex ante. The proposed DMA obligations mainly address the identified competition risks in the IoT sector. If Google, Amazon and Apple are defined as gatekeepers under the DMA, the obligations imposed on the DMA such as prohibition of mergers, access to non-public data and preferring himself can partially eliminate identified competition risks. For a discussion on ex-post enforcement and ex ante regulation in the proposed Digital Markets Act, check out our June 24 blog. “Digital Markets Act (DMA): an effective tool for regulating Big Tech?

Although IoT for industrial products and related machines fall outside the scope of sector research, it cannot be ruled out that similar competition problems will emerge in these sectors as in consumer IoT. Technology, data access and interaction also play an important role in these sectors. The existence of dominant players should be assessed on the basis of the market. With regard to related cars, there are indications that Nokia, among others, is a major player. As of 2018, five formal complaints of abuse of a dominant position have already been filed with the Commission by various parties against Nokia, but no formal investigation has been launched to date. For example, carmaker Daimler, among other things, approached the Commission complaining that Nokia was abusing its dominant position by licensing essential patents for technology standards for related cars. Daimler also initiated civil proceedings in Germany and the German court referred the questions to the Court of Justice for a preliminary ruling. The preliminary question was eventually withdrawn because the parties resolved the issue in June.

We advise smaller market participants who (want to) offer IoT products to be vigilant against the competition risks described in the report. Market parties can comment on the report by 1 September 2021. If market participants encounter competition problems in the IoT consumer sector or beyond, they can also file a complaint with the Commission or a national competition authority. It is also advisable to seek legal advice from a competition lawyer.

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