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European Commission Alarmed at Possible Uneven Playing Field in E-commerce Sector for Wide Variety of Consumer Goods

On 15 September 2016, the European Commission published a preliminary report of its e-commerce sector inquiry which was launched in May 2015. The Commission’s antitrust officials began to investigate whether unfair restrictions may be halting the emergence of an EU-wide online market. The inquiry has – at least preliminarily – found that European consumers are struggling to buy goods and to access content over foreign websites because of “geoblocking” –the practice of blocking purchasers based in other countries – among other possibly illegal practices.

The study covered over 1,800 companies active in e-commerce that sell a variety of products online, ranging from consumer electronics to garden furniture, asking for details about any potential obstacles to buying and selling across borders, and looking into nearly 8,000 distribution contracts for reference. The Commission had sent out thousands of questionnaires to companies to obtain such information.

Positively for Hong Kong traders seeking to exploit online opportunities, the Commission remarked on the growing significance of e-commerce in European trade. It has verified that more than half of EU adults have ordered consumer goods or services online in 2015, and that figure is expected to further grow in the coming years.

The aim of the inquiry was to determine whether and when the competition authorities should intervene with regard to e-commerce practices. The Commission acknowledged the importance for businesses to freely establish their sales strategies as well as the need for consumers and businesses to generally have better access to goods and services, particularly in line with the EU’s “Digital Market Strategy”.

The Commission found that e-commerce plays a relevant role in price transparency and price competition. The conclusion that has been reached for now, arising from the inquiry thus far, relates to two main fields: goods (such as consumer electronics and other consumer items) and digital content.

As concerns “physical” goods, the Commission sought to identify the key features that impact distribution strategies and that may give rise to potential barriers to competition. It set the focus on, among others, price transparency, increased direct retail activities, and the expansion of selective distribution, as key factors.

Price transparency leads to an increase in price competition at the retail level. Over the last 10 years, many manufacturers have set up their own online shops. This has apparently resulted in many retailers having to compete against their own manufacturer-suppliers. There has also been a remarkable expansion of selective distribution with the risk of introducing certain contractual clauses that may, according to the Commission, go beyond what is necessary to achieve the goals of selective distribution. Selective Distribution is one kind of distribution which falls between intensive and exclusive distribution. It essentially involves using more than one, but less than all the intermediaries who carry an undertaking’s goods. It is common to find electronics and other household appliances to be distributed in this way.

The Commission has found, according to the responses provided, that retailers are oftentimes subject to the following restrictions: (i) different forms of price recommendation, (ii) contractual restrictions regarding sales in online marketplaces, (iii) contractual restrictions on providing offers or any relevant data to price comparison websites, and (iv) restrictions on sales across borders. Such restrictions, when inserted into contracts, may, according to the Commission, render online and cross-border sales difficult for consumers who may be more constrained in the choices they are able to find online.

Moving to the second element of the study on e-commerce, namely digital content, the Commission came up with useful insights. The Commission concluded that contractual restrictions are the norm in such markets.

Relevant to Hong Kong’s online sellers, the Commission considered that it may be difficult for new entrants or smaller operators wishing to grow their digital content businesses to secure licences to provide digital content online, because of the relatively long-term agreements usually in force. Moreover, the Commission noted the importance of payment structures such as advance payments or minimum guarantees and fixed/flat fees, as well as the spread of geo-blocking conditions imposed by right holders, as this may negatively impact new entrants and smaller operators.

In the future, the Commission’s antitrust department may start probes into individual cases, or it may use the data to justify new legislation to boost online shopping and cross-border services. Notwithstanding the above, staff members are said to be already investigating suspicious practices in the sale of consumer electronics and computer games.

A final report is expected to be released in early 2017 after a public consultation. Please click on the following to see the European Commission’s preliminary report of its e-commerce sector inquiry.

Content provided by Picture: HKTDC Research
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