• Booking stresses lost ‘discipline’ of foreclosure standard
• Claims no proof of ‘significant’ effect on competition
• EC says ‘evolution’ of rules necessary to address entrenchment

In its Etraveli/Booking merger review, the European Commission (EC) wrongly prohibited a “pro-competitive conglomerate transaction, a transaction that was cleared by every other competition authority that reviewed it, and that was not even opposed by Bookings’ main rivals,” Booking’s lawyer Robbert Snelders told the EU’s General Court in Luxembourg today.

The Commission prohibited the deal on the basis of what was essentially an “efficiency offense” — offering an attractive one-stop-shop service that would win customer loyalty through competition on the merits, he said.

To come to that outcome, Snelders argued that the commission wrongly departed from the “discipline” of the non-horizontal merger guidelines and the need to prove that competitors would be foreclosed by the merger.

“By dropping the discipline, the decision ignores the ‘s’ in the SIEC test” — the need to prove that the merger threatens a “significant” impediment to effective competition, Snelders said.

He said that led to a Commission position that “any increase at all in Bookings’ hotel market position” would be unacceptable, with no need to “quantify the increment or to ascertain the magnitude” of the effects.

“This is at odds with the foreclosure standard in the guidelines and the need for a significant impediment”, he said.

Further, he rejected the commission’s reliance on the alleged “inertia” of customers, the concept that once customers land on Booking’s site, they tend to stay there.

It is not as if customers are “suddenly and magically locked into its service without actually valuing it,” Snelders said.

The Commission uses the “inertia label” to avoid acknowledging that customers like the pro-competitive benefit of one-stop shopping. “Their theory is in reality, an efficiency offense,” Snelders said.

‘Buzz words’ are no substitute

Daniel Beard, KC, also representing Booking, dedicated his pleading to analyzing the commission’s treatment of the “counterfactual” — which he described as the difference between “the way the world works without the transaction and the way the world works with the transaction.”

He rejected the Commission’s contention that absent the transaction, Booking would not have any flight online travel agency (OTA) business, a “zero flights counterfactual.”

Beard called this “speculation without foundation,” and said rather the Commission should have taken the competitive conditions existing at the time of the merger as the “baseline.”

There was no logic to assuming the existing agreement between Booking and Etraveli, which had been “extended and deepened repeatedly” would be terminated, he said.

“You can’t use buzz words as a substitute for analysis, ‘ecosystems’, ‘digital platforms’, ‘network effects’. You still need to identify the counterfactual correctly, and the Commission did not,” Beard said.

Customers are not zombies

Enrique Gonzalez Diaz, also pleading for Booking, focused on how marginal the impact of the transaction would have been, even taking the Commission at its word.

“Even on the Commission’s significant overstatement of the numbers,” he said the deal would result in perhaps one additional reservation on Booking.com per month.

“Selling one extra room per month is too immaterial and cannot possibly cause hotels to change their behavior.” The numbers are too small to trigger the type of network effects the Commission claims, he said.

In addition, he stressed the “incoherence” and “evident tension” between this “tiny” increment and asserting that flight OTAs are a “significant customer acquisition channel” for hotel OTAs.

He pointed out that 83% of flights are purchased directly from airlines, not through OTAs, and “around half” of that number do not require a hotel. Further, he noted that in the Commission’s investigation, only one hotel OTA identified flights as an important acquisition channel.

“Last but not least,” he said Bookings’ competitors in the OTA hotel market did not object to the transaction “because it was too immaterial for them to object.”

Finally, Gonzalez Diaz focused on the need to distinguish between competitive effects resulting from the competition on the merits and not on the merits.

“That is a fundamental distinction that should drive the assessment of any non horizontal merger, and in particular, a conglomerate merger like this one,” he said.

“Are those very small numbers of new hotel customers coming to Booking and somehow getting stuck there? Or are they coming to Booking because they find the experience convenient, attractive, and choose to stay?” he asked.

The Commission needed to establish that their decision to keep using the platform was not the result of competition on the merits, but he said they did not do that analysis.

In fact, rather than being inert and “zombie-like”, he said customers are proactive, “multihoming” and checking alternatives.

“The truth, your honors, is that customers come and stay with Booking because they get a cheaper product that is at least as good or better than competing offerings, not because they are inert or somehow lobotomized by Booking,” Gonzalez Diaz said.

Sven Voelcker, pleading for Etraveli, added his support to these arguments, saying that the requirements of the non-horizontal guidelines exist because conglomerate deals are usually procompetitive.

“Merely inconveniencing competitors is not enough,” Voelcker said. The regulator needs to prove strategies such as tying and bundling.

Further, he said the Commission ignored the “commercial and legal reality” in using a “no agreement, zero flights” counterfactual.

He said the commission does not have license to “imagine a totally different past, as far as the parties contractual relations are concerned.”

Finally, Voelcker contested the allegation that Etraveli is a “unique asset” helping to “drive flight traffic to Booking.”

“For all its expertise and excellence, [Etraveli] is not a rare asset,” Voelcker said, noting that the Commission recognized it is not even the number one player in flight OTAs.

Mateo Domecq, pleading for the Commission, said the watchdog prohibited the transaction because it would have allowed Booking to “entrench its dominant position by seizing control of one of the few customer acquisition channels it does not already dominate.”

He stressed that Booking is “by far” the leading hotel OTA provider, and is growing “significantly.” He said Booking elaborated its “connected trip” strategy precisely to develop a “travel ecosystem” that would be difficult for competitors to replicate.

“There is no evidence of likely entry or expansion that would effectively constrain Booking,” Domecq said, and Booking’s advertising spend “exceeds that of its main competitors by several orders of magnitude.”

He also said that the hotel OTA market is characterised by the existence of “strong network effects and strong customer inertia”. Further, he said the deal would have given Booking access to additional consumer data, enabling it to “retarget” consumers more efficiently and attract more traffic.

Domecq said that the entrenchment of Booking’s dominant position would come from the fact that the transaction would make it more difficult for competitors to acquire customers and hotels.

“This will happen regardless of whether Booking increases its sales on the hotel OTA market,” he said. “While an increase in market share serves to confirm the reduced contestability of Bookings’ dominant position, it is not a necessary prerequisite.”

He also said that foreclosure is not the standard that the Commission must meet to be able to prohibit a concentration under the merger regulation.

The non-horizontal merger guidelines do not exclude that conglomerate mergers may give rise to concerns other than foreclosure, “they simply state that foreclosure is the main concern,” he said.

Secondly, he said that the guidelines leave room for “an evolution in decisional practice.” He said there is an “emerging consensus” that mergers that could create digital ecosystems could give rise to concerns that traditional theories of harm may not “adequately capture.”

He said in such circumstances, there is no need to find an increase in market share. Instead, competition concerns can arise when the transaction allows an incumbent to extend its ecosystem and thereby reinforce or defend its position in its core market, for instance through an increase in barriers to entry and expansion.

“This case is about the transaction facilitating Bookings’ entrenchment, and about its position in the hotel OTA market becoming less contestable if the transaction were to be authorized” Domecq said.

He concluded that the Commission must protect not only the limited competition that exists on a “dominated” market, but also the prospect of that competition increasing in the future, even if that increase in competition may be limited.

Next, Thomas Franchoo, also pleading for the EC, addressed the parties’ arguments about the counterfactual.

First, he said that the Commission’s position was not that absent the transaction, Booking would have zero flight capability. He called Booking’s entire pleading on this point a “hoax”.

The counterfactual, he said, is not the situation as it existed at the time of the merger. It is “a prospective analysis of what the conditions of competition will likely be in the near future, absent the transaction.”

He said the Commission must consider future changes that are “reasonably predictable” and he said here, the “future change” was that the existing cooperation between the parties would not last.

He said the terms of the agreement between Booking and Etraveli were ”heavily influenced by the prospect of the transaction.”

“That is highly relevant,” Franchoo said, “because since the terms of agreement are motivated by transaction, these terms would have been different absent the prospect of a transaction.”

It is only “logical” to infer that those terms would not be maintained in the event that transaction were to be abandoned, he said, adding that the parties’ internal documents support the Commission’s position.

“In that respect, it’s essential to recall the purpose of the counterfactual, that purpose is to be sure that the anti-competitive effect identified by the Commission results from the merger and not from anything else”.

But he said this allowed, in this case, the Commission to establish that the transaction would bolster Booking’s position, increasing barriers to entry on the hotel OTA market, and strengthening Booking’s dominant position in that market.

In that light, he said Booking’s arguments about the “zero flight scenario is therefore no more than a storm in a tea cup.”

The hearing will continue tomorrow.