‘Competition is as essential to labour as division... It is necessary... for the advent of equality.’
- Karl Marx, Chapter 3, The Poverty of Philosophy[1]
A core prerequisite for the modern capitalist economy is the existence of a thriving free market, supplemented by both incumbent industry heavyweights as well as nascent entrepreneurship. Often, it is the latter that drives innovation, curbs stagnation and makes revolutionary breakthroughs, which underline the importance of adhering to principles of competitive market practice.[2] However, pre-emptive poaching of nascent competitive threats, flying below the radar of merger control regulations like the EUMR, often plagues the tech industry. The two ways killer acquisitions take place in tech companies is either when a dominant firm ‘acquire[s] an innovative target and terminate[s] the development of the target’s innovations to preempt future competition’ or acquires a target company and then ‘kills-off its own internal efforts to develop a competing product.’ Acquisitions of nascent competitive threats, on the other hand, take place when a dominant firm acquires 'young firms with products or services whose competitive significance remains highly uncertain.’ The latter method characterises much of the digital industry in the last decade, and glaringly so in the music streaming industry.
Origins of Music-Streaming: The Apple Effect
The music industry is a complex network, often marked by players at various levels and characterised by a broad division of labour spanning across multiple vertical levels of operation, supplemented by recorded music and concert sales as much as by the publishing market, though their market share varies as per time and place. Though pre-internet technology increased record sales, Apple’s foray into the music industry through iTunes, changed the market forever; users could now own a song for a dollar or two, without ever having to buy a physical CD. An algorithm which recommended songs based on previous activity and portable iPods rendered piracy websites like Napster obsolete in the new age of digital music distribution.[3] The gradual adoption of digital streaming services, often running on a subscription or freemium basis,[4] with the shift to Apple Music in the 2010s, tailored for Apple’s network of 1.3 billion active iPhones.
This reflected a general policy to shift towards subscription-based software services such as Apple One and Apple Pay, a sentiment shared by other tech giants, seen through acquisitions such as that of Audible, IMDB, and Goodreads by Amazon etc. In 2019, Apple’s CEO Tim Cook stated that Apple buys a new company every two to three weeks and that Apple’s ‘approach on acquisitions has been to buy companies where [they] have challenges, and IP, and then make them a feature of the phone.’
Breaking Down the Walled Garden
Apple’s isolationist software-hardware architecture has indeed led to the rise of the App Store and an entire industry. Yet, increasing protectionism from Apple has led to conflicts with various stakeholders, with a $539 million investigation over antitrust practices regarding the App Store algorithm, by obscuring cheaper alternatives to Apple Music and complaints to the EU Commission alleging imposition of Apple’s in-app payments system. This forced Apple to revoke its policy alternative subscription modes policy, which was seen as a breach of Article 102 of the Treaty on the Functioning of the European Union (TFEU).
This is, however, not the only instance of a platform developer abusing its influence among developers and participants. Examples lie in Amazon’s disproportionate profits as an e-commerce player and Microsoft’s acquisition of prominent game development companies Activision Blizzard for $69 billion[5] and Bethesda for $7.5 billion. However, that is not to say that anarchy prevails; Nvidia’s $40 billion acquisition of chipset supplier Arm was sued against by the US FTC, prompting further scrutiny on such acquisitions.
Abuse finds a definition in Hoffman-La Roche v Commission,[6] wherein pre-existing dominance is employed to tilt the market status quo of healthy competition in your favour. In the audio streaming industry, though Big Tech firms are scrutinised diligently, authorities often tend to overlook an emerging giant, lurking in the shadows of non-disclosure, Spotify.
Analysing Spotify’s Rise to the Top
Spotify’s business model has undergone a seminal transformation from its origins in 2006, from a transaction-based model like iTunes, to the access-based model that would come to characterise much of modern music streaming.[7] The business is driven by two segments, ad-based access and premium access, which hugely benefited from the ‘Discover Weekly’ feature (2015), which curates new music suggestions based on previous activity.[8] Currently in 178 countries, Spotify leads the wallet share as well as the stream share in music streaming. But this sudden rise comes at a price.
In a recent SEC filing, Spotify disclosed investments in acquisitions, totaling €291 million for four recent purchases: Findaway, analytics tools Podsights and Chartable, and an AI voice tool Sonantic, signifying Spotify's commitment to diversifying beyond music into podcasts and audiobooks. Previous acquisitions like Gimlet Media, Kinzen and The Ringer, also demonstrated Spotify's ambition to control the podcast supply chain.
Moreover, Spotify’s business model calls for increased exploitation of artists. Duetti’s 2023 Music Economic Report for Independent Artists, puts Spotify’s payout rate at the lowest in the industry (8% drop), despite having 55% of the stream and market share. Competitors like Apple Music and Amazon Music, despite having lesser shares, pay up to 4 times the same, as Spotify’s revised thresholds, designed to demonetize tracks which used to receive 0.5% of the royalty pool, target small artists, and promote stream farming by big labels. Spotify’s royalty system, based on market share (the ratio of streams to total streams in the service), drew strong criticism of ‘unsustainable competition’ from artists like Taylor Swift and Thom Yorke, prompting the removal of entire catalogues from the platform. Additionally, Spotify’s acquisition of data analytics tools raises concerns regarding data privacy, as the usage of AI in the suggestion algorithm requires neural networks to collate substantial amounts of heterogeneous user data.[9] The glamorization of the same in public discourse, through features like Spotify Wrapped, is appalling at best.
Regulating the Big Players: Challenges & Alternatives
Regulating players in the tech industry is often an uphill task for enforcement agencies; it is one thing to scrutinise a potentially anti-competitive acquisition, and another to bring them to their knees in a legal proceeding. Big players with deep pockets, such as Apple, Amazon or even Spotify, have the power to tip the competition to their side, due to their scale and size.[10] In Brunswick Corp vs Pueblo Bowl-O-Mat, the court held that anti competitiveness should be evaluated from the end consumer’s point of view. Moreover, as per EU law, the Small but Significant Non-transitory Increase in Price (SSNIP) test would often define that despite the increase in prices, customers would often prefer to continue using the service due to exclusive artist deals.[11]
Therefore, regulators are faced with 3 main challenges. First, many such acquisitions often tend to take place below the merger review thresholds. In the USA, even with the Platform Act shifting the burden of proof in the Clayton and Sherman Acts to the acquiring firm, it would be difficult to review how a nascent acquisition might not provide an unfair market advantage.[12] This, combined with big tech’s data-driven scouting, often bypasses such regulation. If this is the case with the USA's $50 million threshold, one can only assume what would happen in Germany (400 million dollars) or India ($252 million). The second aspect is that legislations like the Platform Act are tailored to deal with the GAFA-sized companies of today. Inherently susceptible to uneven and radical market shifts in technology, such a regulation also runs the risk of being excessively intrusive. The current definition of covered platforms lets the 2010 Facebooks of today fly under the radar.[13] Third, there is growing consensus that ICT firms tend to gain competitive edge by acquiring same or adjacent market technologies from smaller firms to refine their own products, like what Google did to enhance its office workspace ecosystem.[14] This goes against traditional norms of anti-competitive acquisitions. In Europe, before the EU Merger Regulations (EUMR), Articles 101 and 102 of TFEU were used to deal with antitrust mergers and acquisitions, based on minority shareholdings which prompted tacit collusions. The EU MR was enacted to regulate mergers among independent market players to gain market dominance, which provided ex ante provisions for merger review.[15] Article 22, however, contradicts its one-stop shop nature and causes uncertainty as to merger controls due to a controversial ex-post review provision.
An alternative would be a reworked Digital Markets Act (DMA), which classifies online platforms as gatekeepers based on economic, intermediary and market share, in order to control anti-competitive activity better. Currently, online marketplaces, search engines, social networks, video-sharing platforms, communication services, operating systems, web browsers, virtual assistants, cloud computing, and online advertising are all included in this category of ‘core platform services.’[16] However, music streaming has not been included anywhere. Spotify’s market share, royalty system and acquisitions point to a position of market dominance as well as intermediary between artists and consumers, and hence gatekeeper status. Thus, amending the DMA to include music streaming sites is the right way ahead.
From the vendor to consumer perspective, one way to overcome Spotify’s abuse of dominance is to ensure better regulatory practices, safeguarding the interests of artists. A case in point is the recent legislation by Uruguay, ensuring fair and equitable remuneration to artists by music-streaming players like Spotify. However, governments would do well to not capsize to lobbying or public pressure, instead of keeping long term interests in mind.
Conclusion
Spotify’s exploits often get overlooked under current European and American laws on merger control regulations. Rather than extending outdated statutory licensing provisions like in countries like India[17] a forward-looking legislative overhaul is warranted, considering the interests of music rights holders and market players, while also acknowledging the revenue dynamics and the need for healthy competition in the music streaming industry. Broadening the scope of nascent acts like the DMA and incorporating alternative legislations ensuring protection of artists would go a long way in regulating antitrust practices. A future in which you will own nothing and be happy[18] must not come at the cost of commodification of mankind
[1] Karl Marx, The Poverty of Philosophy (1847) ch 2
[2] J. W. Harris, ‘The Rule of Law and the Measure of Property’ (1994) 14 Oxford Journal of Legal Studies 203.
[3] Jean Simon, ‘New players in the music industry: lifeboats or killer whales? the role of streaming platforms’ (2019) 21 Digital Policy, Regulation and Governance 525.
[4] P-J Benghozi, E Salvador, and J-P Simon, ‘The Race for Innovation in the Media and Content Industries: Legacy Players and Newcomers: Lessons From the Videogames, the Music and the Newspaper Industries’ in P Bouquillion and F Moreau (eds), Digital Platforms and Cultural Industries (ICCA, Peter Lang, Brussels 2018) pp 21-40.
[5] Mainak Mukherjee and Tanisha Mishra, ‘Microsoft’s Acquisition of Activision Blizzard King: Too Big to Pass the Antitrust Test’ (Centre for Business and Financial Law, 3 May 2022) <https://www.cbflnludelhi.in/post/microsoft-s-acquisition-of-activision-blizzard-king-too-big-to-pass-the-antitrust-test> accessed 7 April 2024.
[6] Hoff mann- La Roche v Commission 85/76 [1979] ECR 461, [1979] 3 CMLR 211.
[7] Simon (n 3).
[8] A Pessanha, ‘Spotify´s Equity Research: Spotify’s Dominance in the Market’ (A Work Project, presented as part of the requirements for the Award of a Master Degree in Economics/Finance/Management, 3 January 2020) <https://run.unl.pt/handle/10362/106055> accessed 7 April 2024.
[9] TJ Sejnowski, The Deep Learning Revolution (MIT Press 2018).
[10] Mikah Roberts, ‘Killer Acquisitions and the Death of Competition in the Digital Economy’ (2022) 24
Tennessee Journal of Business Law 61.
[11] Hatice Kocaefe, Killer Acquisitions Under EU Merger Control: Recent European Commission Decisions (EU Law Working Papers No. 84, Stanford-Vienna Transatlantic Technology Law Forum, 2024) <https://law.stanford.edu/publications/no-84-killer-acquisitions-under-eu-merger-control-recent-european-commission-decisions/> accessed 7 April 2024.
[12] Roberts (n 9).
[13] Roberts (n 9).
[14] Jonathan Barnett, ‘Illusions of Dominance?: Revisiting the Market Power Assumption in Platform Ecosystems’ (2023) USC CLASS Research Paper No. CLASS22-29, USC Law Legal Studies Paper No. 22-29, available at SSRN: https://ssrn.com/abstract=4259260.
[15] Mark Porkka, ‘Capturing killer acquisitions in the digital sector: Article 102, EU Merger Control and Commission’s approach’ (2022) JAEM03 20221, Faculty of Law, Lund University <https://lup.lub.lu.se/student-papers/search/publication/9093182> accessed 7 April 2024.
[16] Kocaefe (n 11).
[17] N Uppin, ‘Statutory Licensing of Music and Competition Law: The Indian Music Industry Perspective 2020’ (2020) 7 Journey on Contemporary Issues of Law 32.
[18] L Watt, ‘What Is the Great Reset? Hint-You’ll Own Nothing and Be Happy’ (Liz Watt, 18 November 2022) <https://lizwatt.com/articles/what-is-the-great-reset/> accessed 27 May 2024.
This article has been authored by Akhil Joseph Mathew and Raghav Arora, final year students in the BA LLB (Hons) course at the Rajiv Gandhi National University of Law, Punjab. It is a part of RSRR’s Rolling Blog Series.
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