knowledge 21 October 2020 |

European Commission Launches Sector Inquiry into Internet of Things

What is the Internet of Things?

The Internet of Things is described by the Commission as “consumer-related products and services that are connected to a network and can be controlled at a distance”.  Key examples include smart home appliances (such as fridges, TVs, and speakers), wearable devices (such as smart watches or fitness trackers), and voice assistants. These devices collect large amounts of data regarding their users’ habits, which can be used by manufacturers to improve their products, as well as to offer other products and services through targeted advertising and pricing. Moreover, data gathered by one device can be used by another “connected” device – for example, sensors in home alarm systems may be used to adjust lighting and heating when a user arrives home, while smart fridges can send grocery lists to a smart device which then orders a delivery.  As noted by Commission competition chief Magrethe Vestager, “the possibilities seem endless”.

What is the Purpose of the Inquiry?

The Commission is empowered to conduct sectoral inquiries where circumstances suggest competition may be distorted¹. While recognising that the Internet of Things is in the “early stage of development”, the Commission says that it is already seeing indications of behaviour “conducive to structurally distorting competition in and for this sector”, such as restrictions on data access and interoperability, the emergence of digital ecosystems and gatekeepers, and forms of ‘self-preferencing’.

According to the Commission, the sector inquiry will allow it to “better understand the nature and likely effects of the possible competition problems in this sector” and will “contribute to the Commission's enforcement of competition law.”  The key concern for the Commission is that the Internet of Things is driven by data: smart devices collect large troves of consumer data, which is linked to market power and the competitive structure of markets.

The Commission wants to keep access to data open and competitive, and to avoid “tipping-points”, beyond which the competitive power of market players becomes difficult to reverse. The Commission is aware that Internet of Things ecosystems are often characterised by strong network effects and economies of scale, which might lead to the fast emergence of dominant digital ecosystems and market players with “gatekeeper” status.  Another concern is the use of proprietary standards: common standards will allow integration and interoperability between devices connected to the Internet of Things, while diverging standards will frustrate this process.

Where Does the Inquiry Fit in the Commission’s Digital Strategy?

The inquiry forms just one part of the Commission’s broader Digital Strategy, announced earlier this year, which proposes major policy initiatives targeting artificial intelligence, data, and digital platforms. The Commission has recently launched consultations on a “New Competition Tool”, which would allow the Commission to address structural competition problems in digital markets (read our briefing here), and a “Digital Services Act”, a proposal for ex ante rules governing online platforms that act as gatekeepers.  

Possible Future Developments – Information Requests; Dawn Raids; Enforcement; Legislative Change

The Commission has begun to send questionnaires to a range of players active in the Internet of Things throughout the EU, including smart device manufacturers, software developers and related service providers.  The Commission’s power to conduct sectoral inquiries – set out in Article 17 of Regulation 1/2003 – allows it to request information from undertakings.  Recipients of such requests should be aware that failure to reply, or the supply of misleading information, may result in fines of up to 1% of total turnover.  Market players should also be aware that the Commission has the power to undertake inspections of premises – including so-called “dawn raids” – as part of the inquiry.

It is likely that the inquiry will result in enforcement by the Commission under Articles 101 and 102 of the TFEU – which prohibit anti-competitive agreements and the abuse of a dominant position in the EU respectively.  The Commission’s most recent sectoral inquiries - into the e-commerce and pharmaceutical sectors – resulted in high profile enforcement action.  It is also possible that the inquiry may inform the Commission’s approach to ex ante regulatory initiatives, such as the Digital Services Act, as well as the structure of the New Competition Tool.

The Commission expects to publish a preliminary report of its findings in spring 2021 and a final report in summer 2022.

If you have any queries relating to the Internet of Things or competition law in the digital sector, please contact a member of our Competition team.

Also contributed by Ciarán Donohue.