Contributed by Natasha Mittal and Raima Singh

Introduction 

The panacea concerning digital regulation was addressed in the Digital Competition Bill 2024 (“the Bill”). The fundamental premise of the Bill is to address the needs of the evolving digital market of India and the shortcomings of the Competition Act, 2002 (“the Act”). The contours of the Bill tackle the ten anti-competitive practices identified by the Standing Committee and focus on modulating the identified Systematically Significant Digital Enterprises (“SSDE”). Furthermore, the ex-ante regime is expected to complement the present ex-post scenario to regulate the digital ecosystem.

The article seeks to examine The Anti-Circumvention Clause (“ACC”), which  binds the Bill together and ensures due enforcement of the obligations placed on the SSDEs. Further examination reveals that the Bill fails to acknowledge the potential pro-competitive outcomes of tying and bundling practices. While such provisions aim to improve the market, such blanket regulations, as enumerated below, may lead to negative results.

The Possibility of Regulatory Spillover 

As per the ‘Spillover Theory’, regulation can create ripple effects, with its burden extending beyond target entities or industries. Such an effect has been observed in various instances, including the Sarbanes-Oxley Act, passed by the US Congress in 2002. While it targeted reforms concerning financial reporting, the regulations ‘spilled over’ to have broader impacts, with its effects apparent even in the non-financial sector.

Regulatory effects either enhance or constrict the performance of the market players. The digital market is an interconnected web of industries, where there is constant exchange of innovation. Since the possibility of such regulatory spillover cannot be ruled out, it is asserted that the errors resulting from the implementation of the Bill in this regard will be far more than its possible benefits. 

Digital disruption, followed by digital innovation does not only cater to growth but also offers new opportunities for consumers. For an evolving market, this ensures that businesses, no matter how big or small, constantly strive for innovation to remain relevant. For example, the development brought froward by agile players like Netflix and Uber. The provisions of the Bill will affect the disruptive nature of the digital market of India, which acts as a self-regulating mechanism. Considering the developmental trail of digital markets, it is to consider how monopolistic competition remains a feature rather than an anomaly, which can be regulated to foster intensive growth. Hence, while regulation remains essential, it must result in positive outcomes for all the stakeholders involved. 

Navigating the ACC 

Being at the heart of the Bill, the ACC ensures that the prescribed measures are carried out by the SSDEs. The clause states “The Commission may, at any time, direct an enterprise to furnish any information that the Commission deems necessary…” and hence, aims at promotion of a competitive market and regulation of the SSDEs. However, there exists no threshold or exhaustible criteria to limit the collection of information by the commission.  Furthermore, the privacy of an enterprise is protected under section 57 of the Act and vesting such a power might be contrary to the act, as it may lead to possible corruption as it can furnish any information which it merely deems “necessary”. 

An enterprise, within due course of business, may subsequently violate two or more of these overbearing obligations, leading to increased costs in addressing them. Since the possibility of such concomitant violations is not ruled out, absence of reasonable restrictions makes this clause an unruly horse. This will lead to imposition of unnecessary burden and diversion of resources from technological breakthroughs to fulfilling such compliance costs. Therefore, the terms of such a contradictory clause may lead to achievement of one goal at the loss of another. 

Evaluating Tying and Bundling Practices

Price bundling is a strategic marketing approach that involves combining two or more products or services into a single package offered at a discounted price, compared to purchasing each item separately. On the other hand, tying occurs when a company conditions the purchase of one product on the simultaneous purchase of another related product. It is important to differentiate between these practices. Tying can raise legal and anti-competitive concerns, whereas recently, price bundling has gained traction in digital platforms for fostering customer value, loyalty and reducing marginal costs. A study by Bakos and Brynjolfsson elucidates that when marginal cost savings are low, bundling products increases the demand without incurring any increased costs. Instead of adopting a blanket “Per-se Illegality Approach,” which would outright prohibit tying and bundling practices regardless of their specific effects, it is more prudent to consider a “Rule of Reason” approach. In United States V. Microsoft Corporation, the district court found that Microsoft violated U.S. antitrust law by contractually and technologically bundling Internet Explorer with its Windows operating system. However, the Court of Appeals rejected this decision, dismissing the Jefferson Parish test—a per se illegality approach—and concluded that software platforms should be evaluated under a rule of reason approach, balancing anti-competitive practices with their efficiencies. 

This approach would assess each case based on its individual merits, and assess whether the practice in question has any appreciable adverse effect on competition (“AAEC”) . In Shri Sonam Sharma v Apple Inc, and Ors., it was observed that Apple, along with Airtel and Vodafone, had engaged in a tie-in arrangement by selling ‘locked’ iPhones. However, due to Apple’s minimal market share in the Indian smartphone market, it was concluded that this tie-in arrangement did not result in an AAEC. Hence, the Bill lacks a comprehensive regulatory framework to acknowledge these ambiguities.

Recommendations

In the digital market, the combination of both technology and contractual features is unlike traditional markets. Thus, laws with a cross intersection of innovation, fairness, and regulation are required. 

An interim-based regulatory mechanism (IBRM), inspired by the suggestions of UK Secretary of State, can prove to be more functional. A proficient Digital Markets Unit can be established on the foundations of a broad digital agenda, to ensure the functioning of this mechanism. After the quantitative and qualitative threshold for identifying SSDEs is adjusted, the Unit can assess their business model and upcoming growth strategies. It can propose temporary or partial injunctions specifically targeted at activities related to any anti-competitive concerns, without disrupting the overall operations and innovation of the SSDEs. These injunctions can be lifted or enforced based on subsequent hearings conducted in the ex-post mechanism. 

A Rule of Reason for Tying and Bundling

The Bill may have veered away from adequately promoting market innovation, therefore, it is foreseeable that an AAEC test could be employed, prioritizing consumer harm over potential competition stifling. 

In the USA, Section 1 of the Sherman Act aims to prohibit any agreement assessed for its unreasonable restraint, while Section 3 of the Clayton Act prohibits tying agreements if they may substantially diminish competition or tend to create a monopoly. The European Commission’s Guidance on Article 102 provides a sound approach to tying by requiring proof of an anti-competitive foreclosure, which specifically leads to consumer harm. A SSDE might incentivise upon contractual tie-up arrangements as a strategy to strengthen its market position. These arrangements typically involve compulsion of the sale of one product or service (the tying product) with the purchase of another (the tied product). However absent such compulsion, mixed bundling, where products or services are offered both individually and as part of a bundle, can be perceived as pro-competitive as this approach would provide consumers with more options and potentially lower prices.

The Need for Digital and Technological Sovereignty 

Predominantly, the bias against tying was majorly against “contractual tying”, and its “technological integration” utility wasn’t per se prohibited owing to its cost efficiencies and marketing strategy. Hence, an approach rooted in digital and technical sovereignty could be adopted. For instance, firms equipped with diverse technology access, whether indigenous or external, could leverage this to develop unique bundles and tied products, thereby establishing a distinctive competitive advantage. Subject to regulatory oversight, this unique selling proposition could differentiate firms in the market based on product value and features rather than solely focused on price. For example, the European Chips Act, aims to bolster the EU’s economic digital sovereignty within the semiconductor sector. 

Conclusion 

India’s expanding digital landscape offers immense opportunities but also unforeseen risks. Any legislation should aim to establish legal frameworks along with promoting the relevant area to reach its potential. Hence, the question is: does this law fulfill this cherished promise or objective? 

Unfortunately, with the introduction of major acts like Digital India Act 2023, the Personal Data Protection Bill, 2022 alongside the Bill, it might give rise to excessive overregulation and discourage innovation. It is pertinent to recognize that a blanket approach and lack of an exhaustible criteria, such as that found in the anti-circumvention clause and prohibition on tying and bundling practices, could hinder market growth.

The proposed ex-ante regulatory approach may counter-fire and not align seamlessly with the dynamic nature of India’s digital market. A dual strategy, involving a balanced integration with the proposed robust ex-post amendments would accommodate the evolving needs of the market and ensure its stability, thus avoiding the pitfalls of excessive regulation.