Critiquing the Prohibition on Tying and Bundling in the Digital Competition Bill: Economic Theory, Microsoft, and Past Decisions

-Srinjoy Debnath*

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Introduction

Technological innovation has transformed the way the world works today. This transformation has led to the proliferation and expansion of digital markets that pose unique challenges, including competitive concerns. Keeping pace with the unique nature of the digital markets, the Committee on Digital Competition Law (“CDCL”) proposed the draft Digital Competition Bill (“DCB”) that imposed certain obligations on enterprises that are designated as Systematically Significant Digital Enterprises (“SSDEs”).

There is a lot of scholarship on whether ex-ante regulations for competition, as proposed under the DCB, are suitable for India. However, not much literature exists on the specific obligations that the DCB has suggested. One of the obligations imposed by the DCB on SSDEs is a prohibition on tying and bundling unless such product or service is integral to the use of their Core Digital Service (“CDS”). Although tying and bundling are very similar, they have been dealt with differently by the CCI. This is largely influenced by the structure of section 3(4) that explicitly penalizes tying arrangements but not bundling. The CCI explained the difference in the case of Sonam Sharma v. Apple. The CCI held that tying arrangements cover agreements where the proportion of the two products is not fixed at the time of purchase. On the other hand, bundling covers sales where the two products are sold only in fixed proportions. The former is prohibited under section 3(4)(a) while the latter is not. However, when it comes to abuse of dominance, the distinction is largely academic as both tying and bundling have been investigated u/s4(2)(d). In the same vein, DCB also does not distinguish between tying and bundling, and both arrangements are governed by the same prohibition. Therefore, for the purposes of this paper, I shall use tying to mean both tying and bundling arrangements.

This paper seeks to fill the void in the literature on the obligations under DCB, specifically with respect to the prohibition on tying and bundling. I shall argue that the prohibition on tying and bundling in the DCB is too wide and can lead to a loss of efficiency and consumer welfare. I shall use the recent case of tying against Microsoft to build my argument.

This paper is divided into three sections. Section I shall discuss the economic theories and past decisional practices of Competition regulators while dealing with tying and bundling cases. In section II, I shall analyze the Microsoft case through the lens of DCB and the Digital Markets Act (“DMA”) to argue that the prohibition on tying and bundling under the DCB is too strict. Section III draws these strings together and concludes.

I. Pro and Anti-Competitive Effects of Tying and Bundling: Economic Theories and Decisional Practices

Initially, in the early 20th century, tying cases were mostly dominated by the leveraging theory in the United States. As per this theory, a monopoly in one market can leverage its market power to enter and monopolize a second or new market. Tying agreements were thought not to have any purpose other than the distortion of competition and monopolistic exploitation. The application of the leveraging theory led to a strict per se prohibition on tying and bundling in the United States.

After dominating the first half of the 20th Century, the leveraging theory slowly started facing resistance from the Chicago School of Economics. The Chicagoans argued that a monopoly is better off in gaining monopoly profits from its own monopolized market than entering another market where it will not be able to impose monopoly prices. Further, they showcased how tying arrangements can lead to efficiencies such as quality assurances, product improvements, economies of scale, etc. For example, a manufacturer of a Washing Machine may want to tie a warranty package of 5 years to ensure that their product runs smoothly for at least a period of 5 years. Leaving it in the hands of third-party servicing may lead to the breakdown of the machine earlier than expected, which will impact its reputation. Similarly, tying two complementary products together as a package may reduce variable costs like transportation. Hence, a per se illegality approach would be inefficient.

The Chicago School, however, is not without flaws. The post Chicago Scholars argue that the Chicago School is built on multiple assumptions, such as perfect competition in the tied market and rational and perfectly informed customers. In digital markets where network effects play an important role, tying practices may also have a foreclosing effect on competition in the tying market. Some scholars have also argued that the assumptions of the Chicago School do not hold true at all in the digital markets and that the digital markets are more prone to tying and bundling due to network effects. However, the insights of the Chicago school cannot be thrown away fully, as tying and bundling may have technical and efficiency benefits in certain situations, even in the digital markets. Therefore, from an economic theory’s perspective, tying and bundling may have both pro-competitive as well as anti-competitive effects. Therefore, a per se approach may not be ideal, and a rule of reason assessment needs to be undertaken.

The CCI has also rejected a per se illegality approach and has taken a rule of reason approach while deciding tying and bundling cases. In the case of Harshita v. WhatsApp, the CCI laid down a four-fold test to assess whether a tying arrangement is illegal. The four-fold test hinges on the following factors: (i) the tying and tied products are separate, (ii) the Dominance of the enterprise in the tying product market, (iii) the customers are coerced to accept the tied product, and (iv) the arrangement can foreclose competition.

Recently, the CCI used this test to dismiss an abuse of dominance complaint against Microsoft. In this case, Microsoft had tied its antivirus, Microsoft Defender, along with its Operating System (OS), Windows 10. The CCI observed that the two products are different and there are different players present in the respective markets. Consequently, The CCI delineated two relevant markets for the two products in question. One is the market for Licensable OSs for desktops/laptops in India (Tying product market), and the second is the market for desktop/laptop security (antivirus) software for Windows OS in India (tied product market). Therefore, the first prong of the four-fold test discussed above, got fulfilled as the tying and the tied product are separate. After delineating the two markets, the CCI prima facie found Microsoft to be dominant in the market for Licensable OSs for desktops/laptops in India. The CCI reached this conclusion by looking at the high market share of 70% in the tying market and the additional advantages due to its presence in various productivity software like Word, Excel, PowerPoint, etc. Therefore, the second prong of the four-fold test also got fulfilled. On the third prong, the CCI observed that the consumers had the option of uninstalling Microsoft Defender or installing any other antivirus from third parties. Further, various third-party antivirus software was also found to be pre-installed on many devices due to agreements between Laptop/Desktop manufacturers and the Antivirus companies. Thus, the third prong that relates to coercion to use the tied product was not fulfilled. The CCI further observed that it has been almost 10 years since the practice of tying followed by Microsoft. However, it has not led to any foreclosure of the market. Existing players like Norton, McAfee, etc have not been driven out ot weakened due to the tying practice followed by Microsoft. Thus, the fourth prong was also not fulfilled. Consequently, the CCI dismissed the case as only the first two prongs were fulfilled. Further, the CCI observed that the tying practice led to consumer benefit as it ensured a minimum cybersecurity protection for all users. This is in line with the Chicago School as the tying arrangement has actually led to consumer benefit. Therefore, tying arrangements are not always anti-competitive and can sometimes further consumer benefits as well. In the next section, I shall contrast the prohibition on tying under DCB with the four-fold test, then analyze the fact situation of the Microsoft case through the lens of DCB.

II. Blanket ban on Tying and Bundling: DCB going back to per se Illegality

The DCB contains a blanket prohibition on tying and bundling of any product with a core digital service (CDS). The only exception is if the tied product is integral to the functioning of the core digital service. This exception only addresses the first prong of the four-fold test, which is to understand if the two products are separate. This effectively means that the antitrust regime in India moves back to the per se illegality standard, which leaves no space for efficiencies and consumer benefits that may flow from such arrangements.

It would be beneficial to understand the problem using the example of the Microsoft case discussed above. Microsoft has already been designated as a Gatekeeper in the market for operating systems in the EU. Similar to being designated as an SSDE under the DCB, being designated as a gatekeeper under the DMA attracts a host of prohibitions and obligations. To name a few, a gatekeeper is prohibited from self-preferencing; that is, a platform run by a gatekeeper cannot rank or index its own products over those of others. There are other prohibitions that are only applicable to entities that are designated as a gatekeeper under the DMA. Similarly, there are obligations like interoperability and data portability that the gatekeepers are mandated to provide.  In the same way, if Microsoft is designated as an SSDE under section 3 of DCB, the same practice of tying Windows with Microsoft Defender, which did not cause an anti-competitive effect, would be prohibited. This is because, as per section 15, tying and bundling is one of the prohibitions under the DCB. The only exception to the prohibition on tying and bundling is if the tied product is integral to the functioning of the CDS. This exception is similar to the first prong of the four-fold test laid down in Harshita v. Whatsapp. The first prong was held to be fulfilled in the Microsoft case. The absence of the other three prongs of the four-fold test means that the tying arrangement in the Microsoft case would be prohibited in a post the operationalization of the DCB.

The CDCL report also acknowledges that tying and bundling may have pro-competitive circumstances, like enhanced product quality and reduced cost. However, it does not provide a solution to eliminate false positives. In fact, the prohibition on tying and bundling is wider under the DCB than that under the Digital Markets Act (DMA). The DMA also prohibits  tying and bundling. However, the prohibition is restricted to only two kinds of tying:

1. Tying of a Core Platform Service (CPS) with another CPS,

2. Tying of a CPS with identification services, web browsers, payment services, or any technical service supporting the payment service.

   
   

Thus, the prohibition on tying and bundling is very limited. The tying of Windows with Microsoft Defender will escape this prohibition as the market for Antivirus is not a CPS under the DMA. Article 2(2) of DMA provides an exhaustive list of services that are considered as a CPS. Only Operating Systens are included in that definition and not Antivirus. Therefore, tying of an operating system and an antivirus will not fall under the first kind of tying as discussed above. Further, antivirus does not fall under any of the services mentioned in (ii) above.

It is important to note that the obligations under DMA are generally much stricter and numerically greater than the DCB. No reason has been provided by the CDCL as to how a blanket ban is necessary or why the restriction on tying in the DMA is insufficient in the Indian context. The Chicago School, as well as decisional practice clearly shows that not all kinds of tying arrangements are harmful and some of them also bring with it efficiencies and consumer benefits. Therefore, any prohibition on tying and bundling has to be backed by a detailed legal and economic assessment to ensure that false positives are avoided. In the absence of such an assessment, a blanket ban has the potential to do more harm than good.

III. Conclusion

Digital Markets are vastly different from the traditional markets. Unique features like Network effects and high switching costs do increase entry barriers and pose challenges for Competition regulators. However, a one-size-fits-all prohibition that stifles innovation can have a chilling effect on the digital markets in India. While the DCB does a good job in identifying the anti-competitive practices in the digital markets, a blanket ban on tying and bundling may swing the pendulum too far. An ignorance of the beneficial effects may reduce efficiencies, stifle innovation, and ultimately harm the consumers. The DCB adopts a strict per se illegality approach, unlike its EU counterpart, which has a narrowly tailored obligation. The obligation in its current form is a breeding ground for false positives. It is hoped that the DCB will undergo changes that allow for a more flexible framework before it is finally passed and enforced.

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*Srinjoy Debnath is a third-year B.A. LLB. (Hons.) student at the National Law School of India University (NLSIU), Bangalore.