Booking/eTraveli: the Commission’s ecosystem theory and further divergence with the CMA

On 25 September 2023, the European Commission prohibited Booking’s proposed acquisition of eTraveli. Following an in-depth investigation, the Commission concluded that the transaction would have allowed Booking to strengthen its already dominant position in the market for hotel online travel agency (OTA) services, even though eTraveli was not active in that area.

The Commission's decision comes after the UK's Competition and Markets Authority (CMA) had previously cleared the deal at Phase I in September 2022.

Same transaction, different conclusion

The Commission and CMA both found that Booking holds a dominant position and that the hotel OTA market is protected by high barriers to entry, yet came to different conclusions in their respective assessments of the transaction.

The Commission's findings

The Commission found that the acquisition would have reinforced Booking's travel services ecosystem and strengthened its dominant position in the hotel OTA market:

• booking is the dominant hotel OTA in the EEA and only faces one notable competitor which has a much smaller presence and is focused on the US. As a result, Booking has been able to charge higher commissions to hotels and benefits from important and growing network effects (since the significant scale in its hotel offering attracts large numbers of consumers, which creates a positive feedback loop by incentivising more hotels to join the platform);
• the acquisition would have allowed Booking to acquire an additional way of winning customers. Flight OTA services are the second largest OTA market and the closest complement to Booking's hotel OTA services, so Booking would have been able to leverage the capabilities of eTraveli, the number two flight OTA platform in the EEA, to reinforce its presence in the hotel OTA sector;
• the transaction would have made it more difficult for competitors to contest Booking's position since flight reservation is a crucial growth avenue in this ecosystem and would have generated significant additional traffic to Booking's platform. This is because flights present the highest cross-selling potential for accommodation among the various OTA services and Booking would have benefitted from consumer inertia. The Commission feared that many customers would simply have stayed on Booking's platform to make hotel reservations after having purchased their flights; and
• by increasing traffic to and sales by Booking's platform, the transaction would have reinforced and accelerated existing network effects. This would have resulted in increased barriers to entry and expansion and made it harder for competing OTAs to develop a customer base of sufficient scale.

In response to the Commission's concerns, Booking offered various behavioural remedies. These included displaying a choice screen on the flight website check-out page, which would have shown customers various hotel offers on which they could click, including offers from competing OTAs. The Commission dismissed these remedies because they would have been difficult to monitor and left Booking in control of the selection and ranking of hotel offers available from competing OTAs, which would also only have appeared on the flight check-out page and not anywhere else on the website.

The CMA's findings

The CMA had also focussed on the importance for an hotel OTA to be able to offer flight reservation services to acquire and retain customers in the UK, but it ultimately ruled out any substantive concerns on the basis that:

• eTraveli has a modest position in the supply of flight OTA services.
• consumers frequently "shop around" rather than purchase multiple travel services from the same platform; and
• adding flight capabilities to Booking's pre-existing services would only minimally increase its OTA accommodation offering.

Accordingly, the CMA concluded, in contrast to the Commission, that there was insufficient evidence to suggest that consumer behaviour in the UK would change and result in a material reduction in competition from alternative platforms which provide accommodation and flight OTA services.

A novel approach?

The prohibition decision has not yet been published but Didier Reyners (acting Commissioner for Competition since Margrethe Vestager stepped down earlier in the year) has already emphasised the fact that this was the first prohibition decision "based purely on ecosystem concerns". This is true, though as Reyners also went on to note, such theories of harm are not entirely novel, particularly in digital markets where similar concerns revolving around network effects and the strengthening of online ecosystems have previously been investigated in several transactions, including Google/Fitbit, Meta/Kustomer, Microsoft/Linkedin, Amazon/MGM. Similar issues are also currently being considered by the Commission in the ongoing Amazon/iRobot phase 2 investigation.

Nonetheless, this case represents a step change in the Commission's enforcement in non-horizontal deals, in particular through its focus on the strengthening of Booking's existing dominant position, which shows a willingness to depart from its own merger guidelines (which rather focus on the extension of an existing market position into other areas). While we await publication of the Commission's full decision, this leaves dealmakers in unpredictable waters, in particular in the digital sector where companies with high market shares should increasingly be prepared to deal with ecosystem theories of harm in future deals. As Booking's CEO, Glenn Fogel, expressed following the Commission's decision:

If Booking cannot buy a tiny flights business that doesn't have any kind of dominant position, what does it mean for other types of acquisitions?

Divergent approaches - uncertainty for merging parties?

The CMA and the Commission's decisions in Booking/eTraveli follow several other parallel merger investigations post-Brexit where the agencies reached different conclusions.

It was already clear that the CMA was willing to take a more robust position than the Commission, even in high-profile deals. This case is notable, however, in that the Commission has taken a stricter line than the CMA. The risk of sterner scrutiny from both agencies gives rise to even greater uncertainty for parties facing dual clearance who will need to factor these risks into their decision making and deal structure, in particular with respect to dynamic digital markets.

• In Booking, the Commission's theory of harm was built on the network effects associated with digital markets. The Commission considered that Booking's pre-existing dominant position and the structure of the OTA market meant Booking would be able to benefit from network effects i.e., the more customers Booking gets, the more hotels will be attracted to its website and vice versa. This suggests that even the risk of a marginal increase to one party's dominant position within the digital markets sector could be enough by sufficient to generate concerns.
• In Microsoft/Activision, the CMA and the Commission initially reached opposite conclusions. The Commission cleared the merger subject to behavioural remedies after an in-depth investigation whereas the CMA originally blocked the merger before carrying out a U-turn in the face of widespread criticism, eventually accepting a restructured transaction in October 2023. The CMA's initial prohibition of the Microsoft/Activision merger was again tied to a forward-looking assessment and focussed on concerns about the future development of the nascent and dynamic cloud gaming market.

Meanwhile, Booking has announced it will appeal the decision to the General Court, contending that the Commission has not shown that the transaction would have created anti-competitive foreclosure and that the decision was wrong on both the facts and application of the non-horizontal merger guidelines. This judgment (and any subsequent appeal to the Court of Justice of the European Union) will be crucial in determining the scope of the Commission's ability to intervene in future deals in this way (as was the case for the European Court of Justice's recent CK Telecoms judgment)