On 20 January 2022, the European Commission published its Final Report on the consumer Internet of Things (the “IoT”) Sector Inquiry, which it launched in 2020 (see press release here and Q&As and here). In the report the Commission confirms a number of potential competition issues in the consumer IoT sector with products and services such as smart home devices, voice assistants, information and search services and wearable devices, the features of competition in these markets and identifies competition issues. The findings will provide guidance for the Commission's competition law enforcement but also input for regulatory work. The Report, which was announced for the first of half 2022, was published earlier than expected, apparently to allow law makers considering the results of the sector inquiry in the final discussions on the proposed Digital Markets Act (DMA), which are currently taking place.
2. Background, main steps of inquiry
The Commission first launched its IoT Sector Inquiry on 16 July 2020, issuing various requests for information (“questionnaires”) to stakeholders, standard-setting and industry organisations, and companies active in four consumer IoT segments: (i) the manufacturing of smart home devices; (ii) the provision of voice assistants; (iii) the provision of consumer IoT services; and (iv) the manufacturing of wearable devices. The Commission received questionnaire responses from over 200 companies and 14 standard-setting and industry organisations which formed the basis of its findings in the Preliminary Report, published on 9 June 2021. This was shortly followed by a public consultation open to all stakeholders which closed on 1 September 2021 and gained 26 submissions. The Final Report published together with the Staff Working Document summarises the Commission’s main findings (discussed below) which incorporates comments received from the public consultation. Whilst no infringements have been found yet, the Commission may decide to open case-specific investigations under Articles 101 and 102 TFEU.
3. Characteristics of consumer IoT and features of competition
As we explained in our previous Law Now on the Commission’s IoT Sector Preliminary Report, 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), providers 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) – but specifically excluding connected cars. The Commission’s Final Report confirmed as highlighted in its Preliminary Report that the European consumer IoT sector is growing rapidly and becoming more and more a part of our everyday lives. It further highlighted the trend towards increasing the availability of voice assistants as user interfaces, enabling interaction between both smart devices and consumer IoT services. It also points out that the general expectation from respondents is one of continued or increasing growth in the consumer IoT services, the smart home device and the wearable device segments.
The Commission’s Final Report confirmed indications that certain company practices could distort competition, and that most stakeholders had indicated that there are a number of main barriers to entry or expansion in the sector:
The first is the cost of technology investment, which is particularly high for voice assistants;
The second is the competitive situation and competing with vertically integrated players who have built their own ecosystems within and beyond the consumer IoT sector; and
Others include various interoperability issues, lack of access to data, and regulatory barriers.
According to the Commission, such vertically integrated players have determined the processes for integrating devices and services in the consumer IoT system since they themselves provide the most common smart and mobile device OS, as well as the leading voice assistants. They were found to have achieved this by combining their own and integrating third-party products and services into an offering with a large number of users – benefitting from so-called network effects.
4. Concerns identified
Earlier, the IoT Preliminary Report identified a range of emerging competition concerns which could lead to new competition cases being opened. The four main areas of potential competition concerns that were raised in the Preliminary Report are largely confirmed in the final report. Summarised, these concerns boil down to the following:
Exclusivity and tying practices and restrictions on the possibility 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;
Huge amounts of (personal) data that voice assistants and smart device operating systems have privileged access to, which are not shared with other market players under the pretext of privacy protection claims and that provide the ability to increase the market position and to leverage into adjacent markets more easily; and
Limited amounts or even 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, resulting inter alia in the lock-in of consumers and limitation of functionalities of third-party smart devices and consumer IoT services.
5. What are the conclusions and what’s next?
The Commission’s aim when initiating the consumer IoT Sector Inquiry was to gain a better understanding of the rapidly evolving consumer IoT sector at a (relatively) early stage of the development of the market. This aim seems to be achieved: The Final Report and the extensive Staff Working Document will provide the Commission with a solid basis for its future regulatory work. This concerns two areas: competition law enforcement and regulation. Where the competition concerns identified by the Commission appear to be result of behaviour in breach of the competition law rules, Art. 101 TFEU (prohibition of anti-competitive agreements) and Art 102 TFEU (prohibition of the abuse of a dominant position), the Commission may initiate proceedings. However, the disadvantage of such procedures from the Commission’s perspective are the time and efforts required and the resulting delay. Important in this context is the statement of the Executive Vice-President Vestager that she is hopeful that the Final Report will stimulate companies to pro-actively address the concerns set out in it. Lack of willingness to adopt problematic business practices mentioned in the report and complaints from other market participants could lead the Commission to take a closer look at individual cases and initiate proceedings.
It seems likely, however, that the Commission will strongly rely on regulation under its digital agenda to address the issues in the consumer IoT sector it detected. The policy conclusions in the Final Report expressly mention the Commission’s standardisation strategy and upcoming “legislative and non-legislative initiatives” aimed regarding the standard essential patent (SEP) framework. Maybe most importantly, the findings of the Sector Inquiry will also feed into the debate on the Digital Markets Act (DMA). The legislative process for the Commission's flagship project in the digital sector, which, if passed, will lead a shift from ex post competition law intervention to ex ante regulation for large digital platforms, has just entered its final stage with the so-called trilogue between Member States, European Parliament and Commission. It is surely no coincidence that the Final Report was published earlier than expected and just in time to still find its way into the process. Based on the results of the Sector Inquiry, for example, voice assistants could be included in the scope of the DMA by adding them to the list of core platform services. Further, the obligations in the DMA could be adjusted to address the specific concerns identified in the report.