Does the Free|Gratis|NoFee Aspect of Free|Libre|Open Constitute "Predatory Pricing"?

Last modified by Joseph Potvin on 2023/02/17 01:53

Case: European Commissioner for Competition: Probe of allegations of antitrust violations http://europa.eu/rapid/press-release_IP-10-1624_en.htm?locale=en

Alleging there are Violations

Defending that there are no Violations


Extract from an OIN letter drafted by Origin LLB re the Fairsearch allegations against Google, and against the OHA, and against the Free/Libre/Opem business model generally:


Fair Search and its members have both announced and heavily publicised their complaint asserting that Google’s distribution practices infringe EU competition law (Article 102 TFEU) by ‘tying’ the supply of its Google Android operating system to other products or services, such as Google Maps, YouTube and Play and by distributing the Google Android mobile operating system (“OS”) ‘free’ or below cost. From what Fair Search has made public about its complaint, the claim against Google is one of bundling (i.e., tying) and predatory pricing in either or both of the mobile operating systems and search engine market places.

FOSS as the basis for economic activity

Many users and developers of FOSS participate on a non-profit making, community basis. They participate as an intellectual and social activity and to achieve the technological advancement and peer recognition that elegant software solutions will bring. However, business entities, such as the members of OIN, are major financial as well as code contributors to FOSS. They contribute at least in part due to associated commercial benefits that flow to them from the widespread adoption of FOSS. Their participation and investment in the development of FOSS has been and remains crucial to its development and adoption by mainstream users.

FOSS is now the basis for a considerable amount of important economic activity in every area of computing, from the cloud and servers to smartphones, laptops, robots and small devices. In all Linux distributions, such as Google Android, the operating system is based on the Linux kernel, which is available only on the royalty free (copyleft) licence, GPLv2. Any licensee can nevertheless commercialise their operating system in a number of ways, for example:

  • by supplying the program, embedded in software, used with a fixed or mobile device which is sold to end-users for a fee. It has become common (in fixed network environments) for a device manufacturer to commission specific enhancements to Linux operating systems to optimise its performance when installed on their own devices and with the suite of programs they have chosen to provide their end-user customers;
  • by providing support or consultancy services in association with the software – also providing this to end customers - for a fee;
  • through revenue sharing arrangements with third parties (e.g., advertisers, App and service providers on a subscription basis) linked to particular programs or applications (including search engines); and
  • by developing their own enhancements or add-ons to the code. Clearly in the case of code under a royalty free copyleft licence, this will mean that both the code describing the original program and the enhancement will be licensed on the same copyleft terms, but that does not preclude charging for development work. Moreover, since the licenses are non-exclusive, the licensee retains the right to write additional licenses.
    The Linux kernel and the Linux operating systems themselves, once released on FOSS licences, are perpetually available on those licence terms to anyone who wants to use them.

People can and do re-use FOSS code to develop their own new versions of the operating systems, to give their own colours to the FOSS ecosystem. Examples of this in desk and laptop computers are Ubuntu, Fedora, OpenSUSE, Chrome OS, Pure OS, Slackel, Mandriva, Rosa, Mint (and many more) and in mobile-devices Ubuntu Phone, Bada, Firefox OS, = Replicant, Sailfish (previously Meego, Maemo and Moblin), Tizen, Google Android (and many more). This is a dynamic, broad, transparent and highly innovative and competitive environment that is open to all comers with a very low cost of entry.
The commercial approaches to FOSS outlined, introduce a more ‘metered’ revenue model – in which customers can control the price/quality mix of the products they buy far more easily than under historic proprietary models. Proprietary software is based on charging a single large fixed, up-front price to all users of the software, regardless of the degree to which they use the software, its value to the user and their economic circumstances. By contrast, the FOSS model, through downstream cost recovery for ancillary products and services, meters the revenue that the commercial participants recover (directly and indirectly) by tying their revenues to their success in selling ancillary products competing in an open manner. 

In principle FOSS allows a user to avoid making any payment or value return at all for use of the basic software – it is perhaps inherently fairer and more democratic.

1. Royalty free licensing of FOSS code cannot infringe EU competition law

Where FOSS code has been written in the context of community, academic or intellectual research and development (without expectation of monetary reward), the subsequent permission by the writer for third parties to freely use that code (whether by express or implied licence of his rights), either alone or in combination with other similar research, is not an ‘economic activity’ within the scope of the competition provisions of the Treaties (the code writers are not ‘undertakings’ for competition law purposes). The licence granted by each contributor ‘donates’ the use of the code that contributor has written to a common code base as a matter of ideological choice since the combined result of the code base will be freely available to all .

Consequently – and even if the terms on which takers of FOSS codes can subsequently use or modify the code might be said to be restrictive – the express or implied non-exclusive licences from the writers (or groups of writers) cannot be agreements between undertakings, nor can the terms amount to the abuse by an undertaking of any position of market dominance.
The Commission’s consideration of the Fair Search complaint should therefore be limited to investigating the business practices of commercial downstream users and takers of FOSS code who further enhance it or add additional products or services, which are paid-for, in the expectation of profit. The Commission should not extend its investigation into the upstream FOSS ecosystem; it does not constitute an economic market on which undertakings operate and on which there is competition that may be distorted.
OIN has seen a copy of the recent non-confidential questionnaire the Commission distributed to a number of interested parties in this case. We note with some concern that you asked: 

 "If an OS is made available to the market under an open source licence, do you consider that the market share corresponding to that OS should be attributed to the owner of the underlying intellectual property rights? Please explain the reasons for your reply."

For the reasons outlined above, OIN believes this question incorporates a basic misunderstanding of the way in which FOSS is developed. In FOSS the owners of the ‘underlying intellectual property right’ may be a diverse group of individuals or an organisation co-ordinated for a particular project through a not-for-profit foundation, the concept of attributing a ‘market share’ to an “owner of the underlying intellectual property rights” is fundamentally misplaced.

Even where code being used by a FOSS project is initially written by an ‘undertaking’ (whether an individual or a corporation), the licensing under FOSS conditions, especially when they are non-copyleft, makes the product something that can be considered a “commons,” therefore available for use and exploitation by everybody. Depending on a number of conditions, a FOSS project can be the springboard to offer competing products with only a few incremental additions, thereby reducing or eliminating barriers to entry, yet allowing product diversification and innovation. Absent copyright-based prohibitions to develop modifications, even radical ones, starting from the FOSS licensed code, only two other IP rights can theoretically be used by the original developer. They are trademarks and patents. But trademarks are not essential to the development or marketing of competing solutions, and fair use rights allow marks indicating that the code flows from the upstream project. As for patents, they are indeed a considerably higher source of concern.

OIN was born precisely to remove that threat and to make sure that any OIN members or licensees would not aggressively use patents against the Linux ecosystem. Furthermore, most of the FOSS licenses (including the Apache, the Mozilla and the GPL v3 licenses) have explicit, transmissible patent grants that further reinforce this safeguard. Therefore, a member of OIN is not in a position to retract the permissions embedded in FOSS public licenses, by means of patents. The two alternatives are either ‘closed’ proprietary OS development or no new OS development.
Both of the alternatives would lead to:

  • reduced competition in technology markets (there will be fewer competing OSs and new entrants to the technology market);
  • increased concentration in downstream markets for devices (phones, tablets, etc,) as OEMs are forced to bid for the right to use the few remaining OS ecosystems; and
  • less (slower) technical innovation and therefore less consumer choice of devices and software products (both Apps and OSs).
    FOSS projects, even if ‘agreements between undertakings,’ are the least restrictive method of collaborating for a legitimate technological end, the development of innovative software products. They allow for the combination of complementary rights and do not fall within the prohibition in Article 101 TFEU since they don’t restrict or distort competition to any greater extent than would have been the case had the arrangement not been made. Indeed, under a ‘rule of reason’ type analysis, FOSS has acted as a significant spur to competition, forcing incumbent OS proprietors to innovate rather than continue to extract excessive profits derived from their prior market power and dominance.
    All other current approaches to software collaboration are more restrictive of competition. Without this form of collaboration, many innovative programs, from which a wide variety of end-users have benefitted, would simply not have been made.

2. ‘Anti-fragmentation’ agreements are not a vehicle for restricting competition

There is an inherent tension between the need for software to be interoperable on the one hand and unfettered competition on the other, an issue addressed by the Commission in particular in the Microsoft cases. Thus the ability to compete in offering (for example) applications to run on an operating system is important. FOSS addresses this issue in part by being “open source.” The source code of all FOSS software is available to all writers of operating systems, eliminating the ability of the OS writer to conceal or delay publication of key APIs (i.e., Application Processing Interfaces) needed for their apps to work with each OS, at issue in earlier Commission investigations.

However, there is a second competitive feature peculiar to FOSS; the ability of anyone to write new versions of released FOSS software and make such versions available. This might be described as a ‘feature’ with an associated ‘bug’ or inherent flaw. That bug is ‘fragmentation,’ the multiple versions of FOSS programs and OSs extant.

Although these multiple versions compete in the market and allow developers to test new technological ideas in a variety of systems, they create a problem for writers of applications (‘apps’) and other programs intended to run on or interoperate with FOSS based OSs. To take smartphones as an example – the architecture of the microprocessors and of the OSs in such phones can be highly variable. A writer of an app must be able to target that app at a stable version of the OS, adopted for a large number of widely used devices, to be certain that:

  • the app will run and be maintained properly; and
  • there will be sufficient consumer demand for it to make its development economic.
    This is difficult to do if there are too many versions (forks) of the approved release of the OS. The absence of such fragmentation was a key aspect of the early success of the Apple App store and in the past hindered the development of FOSS OSs such as Google Android.

3. Bundled offers of FOSS and non-FOSS products are not necessarily restrictive of competition

We note from the questionnaire distributed by the Commission that the current concerns appear to centre on the possible leveraging of Google’s market position in certain applications and the Google Android mobile OS to foreclose market entry to competitors. We hope that the Commission’s findings will be limited to the very particular circumstances of Google’s market position (on which, again, we take no view) rather than attempting to set rules for the generality of FOSS based software development.

In particular:

  • in the absence of dominance in either the tied or the tying product or service, we suggest it is uncontroversial that tying or bundling of products (in response to customer or consumer demand) does not infringe EU competition rules ;
  • given freely available source code for all FOSS developed products, it is implausible that an OS substantially derived from FOSS code can be the basis for sufficient sustainable market power to ground a finding of dominance in any OS market (and we note from the questionnaire the Commission’s preliminary views on product market definition);
  • where FOSS derived OSs are bundled with other products in a way which could plausibly be characterised as anti-competitive, it will be necessary for the Commission to find that Google (in this case) has a dominant position in the tying product. It will not be enough simply to rely on Google’s current market position in OS (derived from FOSS codes) to make a finding of dominance;
  • where the upstream originator of code has chosen to make the distribution of it available to all, royalty free, there is no reason why Google should be forced to charge a royalty on the downstream market for the use of that code alone – thereby potentially giving Google a windfall profit in which the other earlier contributors to the software will not share. Indeed such an intervention would, of itself, be likely to strengthen Google’s economic position;
  • if the Commission were to take such an extreme step, it would not be practical for any royalty charged by Google (or anyone else) to be distributed to the inventors on a collective basis. Unlike music distribution, where collecting societies play a significant role, the inventors of a particular line of code do not have to identify themselves and the precise contribution each makes to the program or product in question may well be unknowable. There is no practical alternative in a software context to the FOSS community system except a fully proprietary one;
  • charging for products or services ancillary to a FOSS based OS is un-objectionable. Similarly, charging for a bundle of OS and ancillary services supplied in response to a customer’s demand must also be un-objectionable. Where a bundle is offered ‘ready-made’ (i.e., a software ‘bouquet’), it is the price for the bouquet as a whole, and not the price of each of its individual components which is relevant to the question of whether the pricing practices of the seller are anti-competitive or abusive. As the Commission recognises, it is only where the products that are bundled are considered by users to be ‘distinct’ that competition issues may arise (even under Article 102);
  • the Commission recognises that pricing for a bundle which implies the ‘free’ use of one of the components can only be anti-competitive if an efficient competitor offering only some of the products in question cannot compete against the bundle. However, in the FOSS eco-system, it remains the case that any developer can use the same basic code as even the largest commercial business in order to develop a different bouquet (and charge for it) if they wish and many do;
  • since even a royalty free copyleft licence allows users to package the software derived from the licensed code with other products for which they can charge, it is wrong to describe the large majority of commercial uses of FOSS code as entirely ‘free’ (in the monetary sense). So, any finding of ‘below cost pricing’ will need to compare the price of the bouquet with the sum of the costs of its ‘stems,’ and not the cost of each ‘stem’ individually; and
  • even if the Commission were to consider it appropriate to separate out the elements of a bouquet, the cost of software codes developed by the FOSS community is, as a deliberate and idealistic choice, set at or near zero. It is wrong both in principle and in law, for the Commission to impute a cost to the development of FOSS based programs where none exists in fact, in order to found a finding of unlawful pricing behaviour. 
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