European Commission’s IoT Sector Inquiry: Preliminary Report published, identifies a range of potential competition concerns

EU, UK

On 9 June 2021, the European Commission published its Preliminary Report on the consumer Internet of Things (the “IoT”) Sector Inquiry which it launched last summer (see press release here and Q&As and here). With the Sector Inquiry, the Commission aims to better understand the consumer IoT sector with products and services such as smart home devices, voice assistants, information and search services, wearable devices, and potential competition issues. The IoT Preliminary Report identifies a range of emerging competition concerns in the market which – if confirmed - “could lead to new competition cases being opened” as Executive Vice-President Margrethe Vestager noted. Results of the sector inquiry could also feed into the work on the proposed Digital Markets Act (DMA). 

Background

The relatively new but booming consumer IoT sector comprises consumer-related products and services that are connected to a network and can be controlled at a distance, for example, via a voice assistant or mobile device. Players in the market include manufacturers of wearable devices (e.g. smart watches, fitness trackers), provider of voice assistant services, manufacturers of smart appliances (e.g. smart TVs, smart fridges, lighting systems) and providers of services that can be accessed via smart devices (e.g. music and video streaming).

The Commission launched the IoT Sector Inquiry last year as part of its Digital Strategy. One of its main goals is a "a fair and competitive digital economy" in which "consumers can be confident that their rights are respected".

Despite being a relatively nascent market, the Commission saw indications that certain company practices could distort competition. According to the Commission there were in particular indications relating to restrictions of data access and interoperability, as well as certain forms of self-preferencing and practices linked to the use of proprietary standards. It was noted that IoT ecosystems are often characterised by strong network effects and economies of scale, which can lead to the emergence of dominant digital ecosystems and gatekeepers and face tipping risks.

Sector inquiries represent an important tool in the Commission’s regulatory tool-box, and help identify competition concerns in markets where early intervention may be needed. Executive VP Vestager explained that it is “precisely because” the IoT sector is developing so fast that the regulator needs to “ensure it does so in a competitive way” – in other words, the Commission wants to act before serious competition problems manifest.

Findings

For its investigation, the Commission has sent questionnaires to 400 companies, liaised with over 200 companies active in the sector, and reviewed around 1000 agreements. The Preliminary Report, amounting to 122 pages, first notes that the consumer IoT sector is becoming increasingly entrenched in everyday life. It also points to several potential competition risks the Commission detected.

The four main areas of potential competition concerns include:

  • multi-homing, and restrictions on the ability to access/install more than one voice assistant on a smart device;

  • voice assistants taking over/controlling/self-promoting in the direct relationship with their users, due to the voice assistant’s position as intermediary, and role in data generation and collation;

  • the huge amounts of personal data that voice assistants and smart device operating systems have privileged access to, including information on third-party smart devices being used by the end-user, and provide the ability to leverage into adjacent markets more easily; and

  • the lack of interoperability (i.e. the ability to speak to/work with each other) between products, services and technology in the IoT sector due to a combination of the prevalence of proprietary technology and lack of common standards,

    • in particular, it was highlighted that the limited interoperability can lock-in consumers to only one or a limited number of providers, and potentially restrict the functionality of other third-party smart devices and services.

The majority of respondents to the Commission’s market investigation flagged high technology investment costs and the competitive environment as being the main barriers to entry or expansion in the IoT sector.

A particular problem identified was the market position of a small group of vertically integrated companies which have built their ecosystem within and beyond the IoT sector, and which were described by certain stakeholders as holding effective control over interoperability and the integration of smart devices in the IoT market.

What’s Next?

The Commission has now launched a 12-week fact-based exchange of views with stakeholders to gather feedback on its initial findings. The consultation is set to close on 1 September 2021. The Commission’s IoT Final Report is tabled to be published in the first half of 2022. The public consultation document can be accessed here.

If the existence of any of the various anti-competitive practices is indeed confirmed during the further proceedings, the Commission will no-doubt be focused on acting quickly and effectively. It should be pointed out the Commission must not necessarily wish to wait for the finalisation of the IoT sector inquiry before it commences any such action if it considers that a problem needs to be addressed immediately.

In addition, all (preliminary) findings of the sector inquiry will be “considered carefully” in the ongoing legislative work for the proposed Digital Markets Act (DMA) as the European Parliament’s rapporteur for the bill, Dr Andreas Schwab, immediately after the publication of the interim report explained in a Tweet