Big data: high financials rewards, high regulatory risks?

In a 2013 survey of 400 companies, management consultancy Bain & Company, found that companies using data analytics were:

• Twice as likely to be in the top quartile of financial performance within their industries
• Three times more likely to execute decisions as intended
• Five times more likely to make decisions faster

Fast forward to 2018 and data analytics is firmly entrenched within many companies to the extent that it has attracted the attention of the regulatory authorities. The European Commission, the Competition and Markets Authority and the French Authorite de la Concurrence have all stated that big data and the competitive advantage it can give is a top investigative priority for 2017 and beyond.

How can big data give unfair competitive advantage?

Big data as an asset

Margrethe Vestager, the European Commissioner for Competition is currently considering revising merger control thresholds to include a threshold pertaining to non-turnover related big data holdings. Although the Commission previously incorporated the value of data into previous merger control investigations, this has largely involved companies where big data generates significant revenue. However, a company could acquire a business with a small turnover and large amount of user data, the new owner could exploit this data and reduce competitiveness that market place.

Big data pooling

Although sharing data is not forbidden per se, the way companies share data can breach competition rules. Companies can use big data to place themselves in dominant position over competitors. For example, if a company wants to diversify its offering and move into new areas, it can use data held on current customers to promote the new business.  For instance, Uber’s access to users of its lift-sharing service can be used to promote other ventures such as UberEats. This gives Uber an unfair advantage over other providers offering a similar takeaway food business but lacking the data from such a large customer base.

The regulatory authorities take these violations seriously and are imposing significant fines. Most recently, the Belgian Lottery was fined €1 million  for using a data base of customer contacts to promote a new sports lottery game.

A new form of white collar crime?

The formation of so-called digital cartels is predicted to be one of the biggest challenges regulators will face in the future. Digital cartels arise from companies using automated pricing systems. These digital tools automatically calculate prices according to a set of criteria such as supply versus demand, profit targets and so forth. Increasingly, these systems use machine learning technology. This can lead to the situation where two rival companies use the same pricing technology and react identically to changing market conditions. This results in prices being unintentionally fixed and the law being violated.

Getting value from big data without incurring fines

When it comes to the formation of digital cartels, prevention is complicated. Automated pricing systems are widespread and manual pricing models are unlikely to make a comeback. For regulatory authorities, who are reliant on laws written in the pre-digital age, enforcement is a greater challenge.  However, Vestager has suggested a new directive might follow later in 2017 which may bring clearer rules and stricter enforcement.

Other streams of revenue enabled by the collection and analysis of big data are more easily policed.  For companies who rely on sharing information for product development, Vestager recommends referring to the Commission’s guidelines on horizontal cooperation which shows companies how to share data in a way that doesn’t reduce competition.

She also discussed ways for companies to share information with competitors anonymously in a way that doesn’t harm their own business interests such as sending information to a platform anonymously. In return, they would receive aggregate data with no indication of which company it comes from.

In conclusion, competition enforcement is changing, and fast. Companies who use big data and smaller companies who hold big data should but don’t actively use it should closely monitor the Commissions announcements over the next few months in order to prepare for any changes.  Watch this space!

[1] http://www.theregister.co.uk/2015/08/21/forget_big_data_hype_says_gartner_as_it_cans_its_hype_cycle/

[2] https://ec.europa.eu/commission/commissioners/2014-2019/vestager/announcements/big-data-and-competition_en