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QIHOO V. TENCENT (2013) MSZZ No. 4, SPC

Cause of action: Dispute alleging abuse of dominant market position

Collegial panel members: Wang Chuang | Wang Yanfang | Zhu Li

Keywords: abuse of dominant market position, market share, monopoly, relevant market

Relevant legal provisions: Anti-Monopoly Law of the People’s Republic of China, articles 17–19

Basic facts: This case was filed by Beijing Qihoo Technology Co., Ltd. (hereinafter “Qihoo”) with the Higher People’s Court of Guangdong Province, alleging that Tencent Technology (Shenzhen) Company Limited (hereinafter “Tencent”) misused its dominant market position with respect to relevant IM software and services. On November 3, 2010, Tencent released a letter to users of its IM platform QQ requesting them to stop running QQ on computers that had Qihoo’s 360 (anti-virus) software installed. On November 4, 360 Security Center announced that, after strong intervention by relevant state departments, the current version of Tencent’s QQ and its own 360 software were fully compatible. In September 2010, Tencent QQ IM software and QQ Software Management were provided to users for installation as a package. However, users were not prompted to install QQ Software Management when installing QQ IM software. On September 21, 2010, Tencent issued a notice that the current version of QQ Software Management and its own security software QQ Doctor would be automatically upgraded to QQ Computer Housekeeper. Qihoo claimed that Tencent refused to provide related software services to users who had installed Qihoo’s 360 software and forced users to choose between Tencent’s QQ and Qihoo’s 360, thus constituting a restrictive trade practice, which is prohibited under the Anti-Monopoly Law of the People’s Republic of China. Tencent’s act of tying QQ Computer Housekeeper to its IM software and installing QQ Doctor under the guise of upgrading QQ Housekeeper constituted a bundled sale, which is prohibited under the Anti-Monopoly Law.

The case was filed, at first instance, in the Higher People’s Court of Guangdong Province, which held as follows.

(a) On the definition of the relevant market, Qihoo’s claim that an integrated IM service constitutes an independent relevant commodity market and relevant geographical market, which in this case was mainland China, could not be established. The relevant commodity market in this case went far beyond the integrated IM service market and the relevant geographical market should be the global market. However, the court did not clearly define the scope of the relevant commodity market in this case.

(b) On the dominant market position, because Qihoo misjudged the relevant commodity market in this case, the evidence it provided did not prove that Tencent had a monopolistic position in the relevant commodity market.

The court found that Qihoo’s litigation claims had no basis in fact or law and thus could not be established. It delivered its judgment dismissing Qihoo’s entire claim.

Not accepting the decision, Qihoo filed an appeal. The main points that it contended were as follows.

(a) The first-instance judgment did not determine the relevant commodity market in this case, so the basic facts of the case were not clearly established.

(b) The basic method used in the firstinstance judgment to analyze the relevant commodity market was incorrect. Hypothetical monopolist testing (that is, an SSNIP test) should not have been directly applied in this case to free-of-charge products to define the relevant market. The relevant commodity market in this case should be defined as PC-related IM software and services that integrate text, voice and video.

(c) The determination of the relevant geographical market at first instance was obviously incorrect. The relevant geographical market in this case should be mainland China.

(d) The finding at first instance that Tencent did not possess a dominant position in the relevant market was incorrect. Tencent’s share in the relevant market was more than half and thus it should be presumed to possess a dominant market position.

(e) Tencent had abused its dominant position in the market and should bear legal liability according to law.

Held: On October 8, 2014, the Supreme People’s Court delivered its judgment, in which it dismissed the appeal and affirmed the decision at first instance.

Reasoning: Based on the grounds of appeal, the Supreme People’s Court summarized 22 specific controversial issues in terms of five aspects and analyzed each of the issues individually. In particular, with respect to the role, purpose and method of defining the relevant market, the Court approached the analysis of the traditional Anti- Monopoly Law creatively in its judgment, given the unique features of the Internet sector, and gave an innovative answer on the method of defining a relevant market in the global arena. For example, on the issue of whether it is necessary to define a relevant market in resolving a monopoly dispute related to abuse of dominant market position, the industry widely recognizes that accurate definition of such is a prerequisite to determining dominant market position, as expressed in the traditional analytical model “Relevant market – Market power – Competition effects”, or “R–M–C”. The Supreme People’s Court reviewed the purpose and role of the relevant market based on the characteristics of Internet trading, and it eloquently illustrated the tools that can be used to define the relevant market, proposing the models “Market power – Competition effect” (or “MC”) and “Conduct – Competition effect” (or “CC”) for analysis that can be conducted independently of the determination of relevant market.

The Supreme People’s Court held that the focus of dispute involved in this case mainly centered on:

I. how to define the relevant market in this case;

II. whether or not the respondent possessed a dominant market position; and III. whether or not the respondent’s act constituted abuse of dominant market position and other aspects that are prohibited under the Anti- Monopoly Law.

I. How to define the relevant market in this case

The focal point of the dispute can be further divided into numerous specific issues, which can be summarized as follows.

First of all, it is not necessary to define the relevant market clearly in each and every case involving abuse of dominant market position. In general, competition occurs and is pursued within the scope of a certain market. Defining the relevant market can define the market scope and the competition constraints that business operators face. In a case alleging abuse of dominant market position, a reasonably defined relevant market is of great importance in correctly identifying the business operator’s market position, analyzing the influence of the business operator’s behavior on market competition, judging whether the business operator’s acts are illegal or not, and determining the legal liabilities and other key issues in the event that violations are established. Therefore, in handling antitrust cases, defining the relevant market is usually an important analytical step. Nevertheless, a clear definition of the relevant market depends on the specific circumstances of the case – particularly, the evidence, the availability of relevant data and the complexity of competition in the relevant field. In handling cases alleging abuse of dominant market position, defining the relevant market is nothing more than a tool for assessing the business operator’s dominant market position and the influence of the allegedly monopolistic act on the competition; it is not the purpose in itself. In the absence of a clearly defined relevant market, the possible market impact of the business operator’s market position and allegedly monopolistic act may be assessed with reference to direct evidence of elimination of or barriers to competition. In this case, however, the court of first instance actually defined the relevant market. Because its boundary in this case is ambiguous, the court merely analyzed the possibility of there being a boundary without arriving at any definite conclusion on where it might lie. In view of this, Qihoo’s grounds for appeal that the failure of the first-instance court to clearly define a relevant commodity market in this case was a failure to establish the basic facts of the case could not be supported.

Secondly, on the issue of whether the HMT method of analysis can be applied to commodities offered free of charge, the effective judgment held as follows.

(a) As an analytical way of defining the relevant market, it is assumed that HMT is universally applicable. In practice, there are several such tests that can be conducted, using either the SSNIP or the SSNDQ methods. At the same time, it is assumed that HMT can be conducted using both qualitative and quantitative methods when conditions permit, in practice.

(b) In practice, choosing the HMT method depends on the specific field of market competition involved in the case and the relevant data available. If the homogeneity of commodities in a particular WIPO Collection of Leading Judgments on Intellectual Property Rights: China 116 market field is pronounced and if price competition is a relatively important form of competition, it is more feasible to adopt the SSNIP method. However, in a field in which product differentiation is obvious and in which competition based on non-price factors such as quality, service, innovation, consumer experience and so on become important, it will be difficult to adopt the SSNIP method. Using the SSNIP method is particularly difficult when the market equilibrium price of commodities in a particular field is zero. When using the SSNIP method, it is usually necessary to determine the appropriate benchmark price and to increase the price by between 5 and 10 percent to determine the consumer’s reaction. Where the benchmark price is zero, price increases of 5 and 10 percent will still be zero. If the price is increased from zero to a smaller positive price, it will be equivalent to an indefinite price increase, which will mean that the characteristics of commodities or business models have undergone major changes, making it difficult to conduct the SSNIP test.

(c) In terms of the applicability of HMT in this case, Internet service providers are placing greater emphasis on competing on the basis of quality, service and innovation rather than price. In circumstances in which a free-of-charge Internet based IM service has existed for a long time and has become a pervasive business model, users are highly sensitive to price. Changing from toll-free tactics to charging even a small amount can result in a massive reduction in the number of users. Likewise, such a change also means a major shift in the characteristics of the commodity and the business model – that is, changing from free goods to paid goods and from an indirect profitability model to a direct profitability model. Under such circumstances, if HMT based on relative increase in price were to be adopted, it would be likely to include non-substitutable commodities within the relevant market, resulting in an overly broad definition of the relevant market. Thus HMT based on relative increase in price is not entirely suitable for this case. Although it is difficult to fully apply HMT based on relative increase in price in this case, alternatives to this method remain available, such as HMT based on decrease in quality. Because it is difficult to assess quality degradation and to obtain relevant data, HMT based on decrease in quality can be used for qualitative analysis rather than quantitative analysis.

Thirdly, in relation to whether the relevant market in this case should be identified as Internet application platforms, Qihoo asserted that Internet application platforms have nothing to do with defining the relevant market in this case. Tencent argued that Internet competition is actually competition among platforms and that the scope of the relevant market in this case goes far beyond the IM services market. In light of the special features of competition among Internet platforms, the effective judgment examined the ways of considering these in defining the relevant market and held as follows.

(a) To some extent, general competition on the Internet does have the same features as competition specifically among platforms. When the allegedly monopolistic act occurred, the specific features of Internet platform competition became obvious. Operators enter the Internet arena at a particular point of access for the purpose of playing an intermediary role for different types of consumer with different demands, aiming to create value.

(b) In terms of whether the relevant commodity market in this case should be identified as Internet application platforms, the key issue lies in whether the competition between network platforms for users and advertisers completely crosses the boundary determined by the characteristics of products or services and imposes enough competitive constraints on the business operators. The answer to this question ultimately depends on empirical testing. In the absence of definitive empirical data, attention shall be paid to at least the following aspects.

(i) Competition between Internet application platforms for user and advertiser attention is based on the critical core products or services they provide.

(ii) The critical core products or services offered on an Internet application platform may differ in terms of attributes, features, functions and usages. Although advertisers may care not about differences in these products or services, but about prices and the effectiveness of advertisements, and although, from their perspectives, different Internet application platforms may be considered to be alternatives to each other, the majority of users are very unlikely to consider the products or services of different platforms that have completely different functions and uses to be effective alternatives to each other. A user trying to find out about the life of a historical figure, for example, typically uses a search engine, not IM, and would hardly ever imagine that the two might be equally effective.

(iii) Differences in the characteristics, functions and uses of the critical core products or services of Internet application platforms suggest that there may be differences between the major groups of users and advertisers for whom they compete. There are therefore likely to be obvious differences in the mode of obtaining economic benefits, targeting user groups and cross-selling other products.

(iv) In this case, the focus should be on whether Tencent has taken advantage of its potential dominant market position in the field of IM to eliminate or block competition in Internet security software, and hence has extended its dominant market position in the field of IM into the field of security software, and whether this competitive process occurs more often for non-paying users. For these reasons, the nature of competition among Internet platforms is not considered a major factor in defining the relevant market in this case.

(c) In terms of how to consider the competitive features among Internet enterprise platforms in this case, the purpose of defining the relevant market is to clarify the constraints to competition that business operators face, to reasonably determine their market position and to judge accurately the impact of their actions on market competition. Even if the features of competition among Internet platforms are not considered at the stage of defining the relevant market, due consideration can still be given to such a feature in recognizing the business operator’s (dominant) market position. Therefore, in this case, failure to consider features of competition among Internet platforms while defining the relevant market does not imply that the court ignored these features, but rather that it took the features into consideration in a more appropriate way.

Finally, in terms of the issues that need to be clarified when defining the relevant geographical market for IM services, the effective judgment held that defining the relevant geographical market in this case should begin with the target market for the IM services in mainland China. Because Internet-based IM services can be delivered at low cost and can be made available to or cover the entire world without additional or noteworthy shipping costs, price costs or technical hurdles, the actual area in which the majority of users select the goods, the legal and regulatory jurisdiction, the status of overseas competitors and the time when the competitors entered the relevant market will be considered in defining the relevant geographical market. Because none of these factors is decisive, the court is required to assess them comprehensively.

(a) The vast majority of users in mainland China choose to use IM services provided by business operators based in mainland China. Users in mainland China do not pay much attention to international IM products.

(b) China’s Internet-related administrative rules and regulations clearly set out the requirements and conditions for operating IM services. China implements a system of administrative license for value-added telecommunications services such as IM. Foreign business operators usually cannot directly enter the mainland China market; to do so, such an operator must establish a joint venture with a Chinese partner and obtain a corresponding administrative license.

(c) In terms of the actual situation of IM services operators located overseas, prior to the filing of this antitrust case most international IM operators, such as MSN, Yahoo, Skype, Google and so on, entered the market in mainland China by means of joint ventures. Therefore, when the allegedly monopolistic act took place, there were very few major international IM services operators that had not yet entered mainland China. If the quality of IM services in mainland China had decreased, there would have been a few overseas IM service operators available from among which domestic users could choose.

(d) It is quite difficult for overseas IM service operators to enter mainland China in a relatively short period of time (such as a year) and to develop enough market share to restrict the scale of domestic operators. Overseas IM services operators need first to establish a joint venture, and then to satisfy a series of licensing conditions and to obtain appropriate administrative licenses, which, to a certain extent, delays the foreign business operator’s entry.

In summary, the court found that the relevant geographical market in this case should be mainland China.

Based on other evidence and the facts of the case, the relevant market was to be defined as the IM market in mainland China, including both PC-based and mobile-based IM services, as well as both integrated IM services and nonintegrated IM services, such as text, audio and video.

II. Whether or not the respondent possesses a dominant market position

With respect to the position and role played by a business operator’s share in the relevant market in determining its market power, the effective judgment held that this must be determined according to the specific circumstances of the case. In general, the greater the market share and the longer its duration, the more likely it is to indicate the existence of dominant market position. However, market share is only a relatively crude and potentially misleading indicator of dominant market position. Under circumstances in which the market is relatively easy to enter, or high market share stems from a business operator’s higher market efficiency or provision of better products, or products originating outside the market impose a strong competitive constraint on business operators, then high market share does not directly imply the existence of a dominant market position. In particular, competition in the Internet environment is highly dynamic. The boundaries of the relevant market are far less clear than those of markets in traditional fields. In this case, the role of market share as an indicator of dominant market position ought not to be overestimated; instead, more attention should be paid to the operator’s entry into the market, its market behavior and the impact of competition, as well as other specific facts and evidence that might help to reveal a dominant market position.

Combining all of these ideas, the effective judgment considered and analyzed whether Tencent possessed a dominant position in the market based on aspects such as market share, competitive conditions in the relevant market, its capacity to control price, the volume or other trading conditions of goods or the business operator’s financial and technical conditions, the degree of dependency of other business operators on Tencent with respect to transactions and the degree of difficulty with which other business operators enter the relevant market – especially the fact that when Tencent forced its users to choose between its own QQ and Qihoo’s 360 on November 3, 2010, the number of users that month of MSN, one of Tencent’s competitors, increased by 23 million and many IM services competitors entered the field. The Court eventually found that the evidence submitted in this case was not sufficient to support a conclusion that Tencent had dominant market position.

III. Whether or not the respondent’s act constitutes abuse of dominant market position and other aspects that are prohibited under the Anti- Monopoly Law

The effective judgment broke from the traditional “three-step” approach of analyzing the abuse of dominant market position and adopted a more flexible analytical procedure. It considered that, in principle, if the accused business operator does not have a dominant market position, it is not necessary to analyze whether it has abused its dominant market position and it can be straightforwardly determined that its act does not constitute abuse of dominant market position as prohibited by the Anti-Monopoly Law. However, when the relevant market boundary is vague and it is not clear whether or not the accused business operator possesses a dominant market position, the effect of the allegedly monopolistic act on competition may be further analyzed to test whether the conclusion regarding dominant market position is correct or not. In addition, even if the accused business operator possesses a dominant market position, to assess whether the act constitutes abuse of dominant market position, it is necessary to comprehensively evaluate the negative and potential positive effects that such an act has on consumers and competition to further judge its legitimacy. In this case, such consideration has two main aspects, as follows.

(a) Whether Tencent’s imposition of “product incompatibility” (whereby the user had to choose one of two products) constituted a restrictive trade practice, as prohibited under the Anti-Monopoly Law According to the provisions of article 17 of the Anti-Monopoly Law, any act of a business operator with market dominance that requires a party to trade exclusively with itself or to trade exclusively with a designated business operator(s) without any justifiable cause shall constitute abuse of dominant market position. Qihoo claimed that Tencent’s act forcing users to stop using or to uninstall Qihoo’s software constituted an abuse of its market dominant position aiming to restrict trade, as prohibited under the Anti-Monopoly Law. In this respect, the effective judgment held that although Tencent’s act of “product incompatibility” caused inconvenience to the user, it did not result in the obvious effect of eliminating or restricting competition. Such a result not only demonstrates that Tencent’s act of “product incompatibility” did not constitute abuse of market dominant position, as prohibited by the Anti-Monopoly Law, but also supports the conclusion that Tencent did not possess the dominant market position.

(b) Whether Tencent’s act constituted a bundling, as prohibited under the Anti-Monopoly Law According to the provisions of article 17 of the Anti- Monopoly Law, an act of a business operator with market dominance that bundles products or imposes unreasonable conditions at the time of trading without any justifiable cause shall constitute abuse of dominant market position. Qihoo claimed that Tencent tied its QQ Software Housekeeper to its IM software and installed QQ Doctor under cover of upgrading QQ Software Housekeeper. Such acts were contrary to conventional trading, consumption habits or commodity functions and restricted the consumer’s right to choose, without any justifiable cause. However, the Supreme People’s Court found that the first-instance court erred in its allocation of the burden of proof with regard to the effect caused by the alleged bundling of products of blocking or restricting competition. In this respect, the Court held that Qihoo’s appeal against Tencent’s abuse of dominant market position was not well grounded.