Online bargains: The disruptors disrupted
By
Manufacturers are responding to the growth of e-commerce with new distribution agreements that could be regarded as unlawful, suggests Jonathan Silverman
Secret shoppers are something one might be more likely to associate with TV documentaries or supermarket price wars
than European Commission inquiries, but the EU has admitted taking part in such activities in recent months,
as part of the research for its report on the e-commerce sector.
The EU has indicated it wants to have an overview of prevailing market trends, gathering evidence on potential barriers
to e-commerce, and a better understanding of potentially restrictive business practices
and whether or not there is any underlying rationale for their use.The concern is that despite
the mantra of having achieved a single market with no borders for goods or services, in reality there are still major challenges ahead.
While the commission recognises that businesses should have the freedom to determine their sales strategies online, at the same time, in its
role as an anti-trust authority,
it is determined to ensure that businesses do not engage in anti-competitive practices, thereby preventing European consumers from gaining the
full benefit of e-commerce in terms of greater choice and
lower prices.The commission's investigation focused on several consumer sectors, including cosmetics, electronics, clothes, and shoes. It accepts that e-commerce is an important driver of price cuts, transparency, and price competition, increasing consumer choice and the ability to find the best deals. The report reveals that from the supply
side over half of retailers track competitors' prices and the vast majority respond to changes.
However, the commission has made some interesting findings. Manufacturers generally have responded to the growth of e-commerce by adopting a number of practices to give them greater control of the distribution networks for their products and the positioning of their brands.
Authorised resellersBy operating selective distribution channels so that their products can only be sold by pre-selected authorised sellers, they have more control than previously, and increasingly manufacturers are selling
their products online directly
to consumers, thereby competing with their own
trade customer base.
The report has found that manufacturers regularly stipulate within distribution agreements that retailers cannot sell beyond a certain designated geographical area, online, or at anything other than the 'suggested' retail prices
if they wish to be able to secure supplies from manufacturers in the future.
The commission suggests
that such restrictions may, in certain circumstances, make cross-border shopping or
online shopping in general more difficult and ultimately harm consumers by preventing them from benefiting from greater choice and lower prices in e-commerce.
This is not just simply in
relation to physical products:
the commission is similarly concerned by the availability of licences from copyright holders, which it believes is restricting competition in the marketplace.The commission perhaps surprisingly comments that it has found that 'copyright licensing agreements tend to be complex and exclusive, foreseeing what territories, technologies, and release windows digital content providers can use'. Clearly, we must be aware that it may step
in to change the ground rules
and free up competition at
some point.The preliminary report equally indicates concerns that some retailers are restricted from having either foreign language versions of their websites or providing ready currency conversions, simply with the aim of ensuring
a degree of market control.Even though the commission recognises that its principal focus will be on 'dominant market players', it seems likely that a considerable number
of provisions in distribution agreements will be called
into question in its inquiry.The commission has already indicated that the preliminary report identifies business practices which may raise competition concerns.
As a result, it is likely to open specific investigations to ensure compliance with EU rules on restrictive business practices
and abuse of dominant market positions.
Making representations
At this stage, practitioners would be wise to warn clients engaged in the consumer sector, whether as manufacturers, distributors,
or retailers, that the commission is on the prowl.
Making representations
to the commission before the consultation ends in November may be worthwhile. Practitioners should also review distribution agreements which contain restrictive practices with
clients to highlight provisions which could be called into question once the commission publishes its final report in
May 2017.Ironically for a disruptive technology, e-commerce can now look forward to being similarly disrupted by the commission, to a degree
which may not have previously been expected.
Jonathan T R Silverman is senior partner at Silverman Sherliker