Re-evaluating ‘market definition’ in the Qihoo v Tencent Antitrust Case
Introduction
The decision of the Supreme People’s Court of China (SPC) in the landmark anti-monopoly case Qihoo v Tencent contains an impressive analysis of competition issues in the internet industry and is likely to be highly influential in China. This article, however, suggests that a different definition of the relevant market may have been appropriate and that, had it been adopted, Tencent may well have been found to be in a dominant market position.
Summary of the case
The dispute between Tencent and Qihoo, two of China’s largest internet companies, has been simmering for years in one form or another.
Tencent is a provider of social networking services, including its popular QQ instant messaging (IM) service. Qihoo provides internet security software, including its 360 Guard anti-virus software. When 360 Guard blocked Tencent’s QQ IM pop-up ads and was promoted by Qihoo as preventing Tencent from accessing its customers’ personal data, Tencent responded by making its QQ software incompatible with 360. Customers had to choose between QQ and 360; they could not use both. This prompted many QQ users to uninstall 360, and Qihoo to sue Tencent for abusing its dominant market position in breach of China’s anti-monopoly law.
Both the court of first instance and the Supreme People’s Court on appeal held that Tencent was not in a dominant market position and had not abused its market power.
The Courts’ Definition of the Relevant Market
Both the first and second instance courts inclined towards a definition of the relevant market as the Instant Messaging App market. In considering Tencent’s market power, they applied the hypothetical monopolized test (HMT), rather than the Small but Significant Non-transitory Increase in Price (SSNIP) on the ground that, in the internet market, IM Apps are usually provided free of charge. Internet providers do not and will not charge for them. They see IM Apps as tools for gathering customers, not as profit generators in themselves. Profits are generated by means of advertisements and other additional services attached to the IM App. There was, therefore, no likelihood of a rise in price of either the QQ product or the IM Apps of other suppliers.
The SSNIP formula is referred to in paragraph 17 of the EU Commission Notice:“The question to be asked is whether the parties’ customers would switch to readily available substitutes or to suppliers located elsewhere in response to a hypothetical small (in the range of five to ten percent) but permanent relative increase in the price of the product and area being considered. If substitution were enough to make the price increase unprofitable because of the resulting loss of sale, additional substitutes and areas are included in the relevant market”[1].
This article looks at the products in detail and queries whether Tencent’s QQ product is provided free of charge and whether the SSNIP test should have been applied.
Market definition on the basis of products
1. Tencent’s products
Tencent’s QQ is not a pure IM App, but is more properly seen as a member of a family of products on the Internet platform developed and run by Tencent. It is never presented to customers by itself, but always bundled with value-added services, such as QQ Show, QQ Games, QQ Software, QQ Video, etc., giving Tencent the opportunity to derive income from these add-ons. QQ Games provides a good example of how Tencent operates.
QQ Games have grabbed a high proportion of the Internet games’ market[2]. Compared to the products of competitors, they create more intensive links to consumers by enabling them to play games with acquaintances or friends, not only for the enjoyment of the game itself, but also for the purpose of maintaining or developing relationships. In antitrust law, such practices might be considered to be taking advantage of consumers’ preferences or bundling sales, both of which are often seen as contravening the law. Various add-on products and systems, including the QQ membership system, gives customers reason to stick to QQ and its affiliated games. It is reasonable to conclude that, in this scenario, Tencent is in a position to raise the price of its various add-on products and services.
2. Competitors’ products
On the basis of the market definition proposed above, we can then study the products and activities of Tencent’s competitors to determine whether or not Tencent has achieved a dominant market position.
The courts referred to competitors such as Ali Wangwang, MSN, RenRen, Skype, etc. An analysis of the activities of these companies, however, suggests that while they are operating in the IM Apps’ market, they are not substitutable for Tencent’s integrated QQ products/services.
Market Definition based on Anti-trust Formulas
1. SSNIP test
The second instance court expressly refused to apply the most pervasively used hypothetical SSNIP test (Small but Significant Non-transitory Increase in Price) when defining the market. It considered the test irrelevant because the products at issue were free and not likely to become otherwise in the near future. Only where a price is being charged will the test give a clear picture of the interchangeability of products, or of customers’ reactions in the event of a price rise. The above market definition and analysis, however, suggests that although Tencent does not charge for its QQ product as such, it does charge for the additional products/services. Contrary to the courts’ finding, the SSNIP test may, therefore, be appropriate. It is also relevant to consider the interchangeability of products. The ECJ has held that the definition of a market is, essentially, determined on the basis of the interchangeability of the products or services concerned. Where goods or services can be regarded as interchangeable, they are within the same product market[3].
2. Market barrier
Entry levels to the market that we are discussing now can be extraordinarily high, as customers are probably not able readily to move or transfer their entire social networking resources from QQ to any available IM App. Because many QQ IM App users are committed to the bundled value-added services, we may conclude that Tencent has created a customer preference via QQ, which is likely to prevent its users from switching to a competitor’s product quickly or at a low cost. The market is not, therefore, as competitive as the second instance court’s decision suggests. On the contrary, any potential competitor will have to spend a long time, or incur huge costs, in order to share the market with Tencent. It seems likely, therefore, that Tencent is creating or maintaining a high entry level for the relevant market.
3. Market share
The ECJ’s judgment in Hoffmann-La v Roche v. Commisssion contains the following relevant observation on market share: “Furthermore although the importance of the market shares may vary from one market to another, the view may legitimately be taken that very large shares are in themselves, and save in exceptional circumstances, evidence of the existence of a dominant position. An undertaking which has a very large market share and holds it for some time......is by virtue of that share in a position of strength”[4]. Tencent has had absolute market share in the Internet platform market centred on an IM App, and has dominated the market for more than twenty years[5]. It has maintained, and will probably continue to maintain, its dominant position if the current trend continues.
Conclusion
The above analysis and observations suggest that, had the courts taken a different approach to market definition and product analysis, they may well have found that Tencent was in a dominant market position. To determine whether or not it had manipulated the market, or abused its dominant position, would, however, have required additional market research and economic analysis. Most players in the Internet industry in China do, however, appear to be fearful of Tencent’s dominance, which might be an indication that Tencent’s activities are reducing or distorting competition in the relevant market.
