Clifford Chance

On 9 June 2021, the European Commission (the "Commission") published a preliminary report setting out provisional findings of its ongoing competition sector inquiry into the Internet of Things ("IoT") for consumer-related products and services. The sector inquiry forms part of the Commission's strategy to shape Europe's digital future by 2030 and the European market, being the third largest adopter of IoT (after North America and Asia-pacific region) is forecasted to grow annually by double digits between 2021 - 2024 (according to a report by CBI, an agency of the Ministry of Foreign Affairs, Netherlands and IDC, a market intelligence data provider).

Background to IoT sector inquiry

On 16 July 2020, the consumer IoT sector inquiry was launched primarily for the Commission to understand the fast paced IoT market (ensuring it remains open and competitive in order for consumers to realise the full benefits of IoT) and to address concerns around 'misuse' of data to secure or cement market dominance or power.

The Commission's information gathering process involved sending requests for information/questionnaires to stakeholders active in four consumer IoT segments in the EU, namely:

• Manufacturers of smart home devices (such as smart appliances, smart home entertainment devices, smart comfort and lightening systems and smart security devices);
• Providers of voice assistants;
• Providers of consumer IoT services (such as information and search services, creative content services, health and fitness services, intermediation services); and
• Manufacturers of wearable devices (such as smart watches and fitness trackers),

c.200 companies responded and shared with the Commission over 1000 agreements in relation to their consumer IoT activities.

Questionnaires were also sent to industry standard setting organisations, such as private not-for-profit organisations and alliances between undertakings operating in the consumer IoT sector.

What is IoT and why is it important?

IoT refers to the network of physical objects - “things” - that are embedded with electronics, sensors, software, actuators and other technologies for the purpose of connecting and exchanging data with other devices and systems over the internet. IoT can typically be divided into two main categories: consumer IoT (devices for personal use, e.g. smartphones, smartwatches, smart-TV etc.) and industrial IoT (non-consumer devices used by organisations to enhance operations, e.g. manufacturing equipment, robots and 3D printers).

IoT is particularly important because of its interconnection with AI and machine learning, big data and 5G. With 5G becoming mainstream more devices globally will connect to the internet leading to an 'uptick' in data generation and processing allowing companies to benefit from big data and further increasing the demand for machine learning and AI. Moreover, according to the Commission, worldwide consumer IoT revenue is predicted to increase from c.EUR107.2 billion in 2019 to c.EUR 408.7 billion by 2030.

Key findings of the preliminary report

The preliminary report provides an overview of the main competition-relevant market trends identified in the consumer IoT sector inquiry and points to possible competition concerns. The key findings cover:

• Characteristics of consumer IoT products and services: Consumer IoT is growing rapidly and becoming a necessity for everyday life, trending towards increasing availability and proliferation of voice assistants as user interfaces enabling interaction with different smart devices and consumer IoT services. The number of voice assistants in use worldwide is expected to double between 2020 and 2024, from 4.2 billion units to 8.4 billion units. The leading providers of voice assistants in the EU are Amazon (Alexa), Google (Google Assistant) and Apple (Siri).
• Features of competition in the markets for consumer IoT products and services: New business entrants and several non-market dominant businesses are finding it difficult to compete with vertically integrated companies that have built their own ecosystems within and beyond the consumer IoT sector (e.g. Google, Amazon or Apple). As these players provide the most common smart and mobile device operating systems as well as the leading voice assistants, they determine the processes for integrating smart devices and services in a consumer IoT system.

Key concerns raised by respondents include:

• barriers to entry or expansion in the consumer IoT sector, particularly in the market for voice assistants due to cost of technology investment and competition;
• lack of interoperability due to technology fragmentation, lack of common standards and the prevalence of proprietary technology. These will allow certain companies to monopolise certain markets; and
• consumer usage data being used to obtain market dominance by certain companies using historical data to develop and market new products, thereby gaining an unfair advantage over others.

Next steps

Following on from the publication of the preliminary report, the Commission will launch a public consultation requesting interested parties to comment on the preliminary findings of the sector inquiry, submit additional information or raise further questions. Findings of the sector inquiry and information received from interested parties will serve as a guide for the Commission's future enforcement activity in respect of EU competition law and may also feed into the regulatory work of the Commission.

The public consultation will run for a period of 12 weeks (until 1 September 2021). The final report on the sector inquiry is expected in the first half of 2022.