DST18600 - Marketplace Examples

Example A

ABC group operates a large department store. In recent years, it has been expanding its online operation in the face of competition from online retailers. It sells its good online to customers. It has title to all the goods sold through its website and recognises the income and expenses as a principal. ABC group is not an online marketplace as there are no sales by users.

Example B

BCD group provides an online platform which allows users to outsource everyday tasks like doing the weekly shop to other users in return for payment. The user lists the task it would like to be completed and then other users bid the lowest price that they would be prepared to accept for completing the task.

The online platform is likely to meet the online marketplace definition. The performance of the task is a service and services are included within the definition of a thing. The task is performed by a third party user and is listed on the online service. It therefore meets the first condition. It facilitates the sale by users of particular things so the remaining question is whether this is a main purpose of the service. Based on these facts, connecting users with other users is a central part of the business model. The main purpose test would be satisfied.

It is worth noting it does not matter that the user listing the tasks purchases the service or that the user on the demand side provides it.

Example C

Business CDE operates an airline. Its website allows customers to book flights to various destinations. It offers related services like car hire on the website. These are provided by a third party preferred ‘partner’ with whom CDE has a long-standing business relationship.

The first question to answer is whether the car hire is part of a single online service or is a separate service. In this case, customers can and often do hire a car without booking flights or a holiday through the website. The business is also separately organised. It’s likely the car hire is a separate online service, particularly given the difference in nature of the business activities.

If the car hire service is regarded as a separate online service it will need to be tested against the online marketplace definition. While the car hire is provided by a third party, and the facilitation of car hire is the main purpose of the service, it will not meet the second condition. This is because the services are only provided by one third party user.

Example D

Group DEF is a hotel group which owns a portfolio of leading hotel brands. The group has two main business divisions, the hotel management business which directly operates hotels and the franchise business division. The franchise division involves entering into franchise agreements with third party businesses. The agreements allow the third party to trade under the name of DEF’s brands in return for a franchise fee. The agreement requires the franchisee to operate the business in accordance with DEF’s strict brand standards.

As part of the agreement, DEF provides certain centralised services on behalf of the franchisees. These include an online reservation system and a loyalty reward scheme. These services enable customers to book rooms in the franchised hotels and to accumulate loyalty points for staying in DEF branded hotels. The points can then be redeemed in any DEF branded hotel. The cost of the loyalty scheme is funded by a pooling system where the costs are shared between participants in the scheme.

The first question is whether the centralised services are separate online services or should be considered as a part of a single online service, for instance the bundle of services provided for in the franchise agreement. This will depend on the facts; there is potentially an argument the services are an ancillary element of a broader package provided to the franchisees and consequently would not be viewed as independent services in their own right.

However, if it is established that the centralised services are separate online services then it is likely they will satisfy the marketplace definition. The reservation system, for instance, clearly allows third party users (the franchisees) to list services (the hotel rooms) for sale to customers. The facilitation of hotel stays is clearly the main purpose of that system. Equally the loyalty scheme is part of the competitive offer of the hotel and enables franchisees to sell the hotel rooms to other users. It is designed to facilitate such sales.

In such cases, there are likely to be multiple services present; the centralised online services and the other services like IP licensing provided for as part of the franchise agreement. There will consequently be a need to identify which revenues relate to each service. To the extent they relate to both services, like the franchise fee, the group will need to attribute the revenues between the two services on a just and reasonable basis. This attribution is highly fact sensitive but should reflect the values each service contributes to the wider business.

Example E

Group EFG is a leading consumer technology conglomerate. The group’s game division manufactures games consoles and works closely with third party games publishers and software houses to ensure the content available through the console is market leading. To maximise sales, EFG provides an online service enabling users to buy the latest games from the games publishers. This App Store is a marketplace within the meaning of the DST legislation. It exists to facilitate the sale of games by third parties.

In recent years, “massively multiplayer online” (MMO) games have become very popular. Unlike traditional games, many of these games have been free to purchase for the consumer, reflecting the intention to build as large a network of players as possible. Instead, the games are typically monetised through a combination of in-game purchases and advertising. Recognising the growing popularity of these games, EFG has negotiated an agreement with the producer of the most popular game of the moment, Shukan, where the game is made available through EFG’s online service in return for a share of in-app purchase revenues.

The first thing to consider here is whether the Shukan arrangement is a separate online service to EFG’s main app store. This will depend on the detailed facts but on the information given it is likely to be part of a single online service. This is because the Shukan arrangement involves providing games to gamers through an online portal in the same way as the app store. The fact the game is monetised through a different model (i.e. by a share of ongoing in app purchases rather than a commission on the initial sale) is not a particularly strong indicator one way or the other. Many services within scope of DST are monetised in multiple ways.

If it is part of one online service, EFG’s revenues from Shukan will be part of the App Store’s revenues. Even if it is a separate service, the revenues from Shukan may well arise in connection with the App Store too. Assuming that isn’t the case, and it is a separate service, the Shukan arrangement would not satisfy the online marketplace definition. This is because there is only one selling user.

If EFG entered into a similar arrangement with another games publisher, it’s likely the service would then meet the marketplace definition. It does not matter that the initial transaction is free, the definition is capable of being met when there are a series of subsequent transactions are in-app purchases are made.

Example F

Group FGH is a large business operating in Baskerville. The healthcare system is highly regulated and there are strict licensing requirements for pharmaceutical businesses in the country. These requirements mean there are currently only four authorised suppliers in the country, and most of these operate in only one or two regions. Both healthcare providers and consumers have complained that the system lacks transparency and it is difficult to compare drug prices and availability very easily and complained the fragmented nature of the system leads to inefficiencies.

Group FGH has spotted a commercial opportunity to build a user friendly platform which searches across each pharmaceutical company’s product range and identifies the best pricing for local healthcare providers. The National Drug Licensing Authority requires FGH to partner with each licensed provider in Baskerville.

FGH is likely to meet the marketplace definition. The service lists drugs for sale to users and the drugs are sold by third party pharma companies. The main purpose of the service is to facilitate the exchange of such drugs.

It does not matter that there are only 4 third party suppliers operating on the platform. The legislation does not test the number of suppliers. While a large network of users is a strong indicator the online service is a marketplace, this is because marketplaces will usually try to maximise the number of suppliers in order to exploit strong network effects. This is still true for FGH even if the number of sellers is small. This is because the sellers operating on the online service account for the entire pharmaceutical market in Baskerville.

It also does not matter who is listing the item on the platform, i.e. whether it is the provider of the online service or the third-party user.

Example G

Business GHI provides a website that is designed for users to list items of jewellery for sale. The website charges a fee for listing each item and also receives advertising income from third parties who wish to be associated with the website.

The website allows the listed items to be searched by different criteria allowing a potential buyer to quickly determine if the item they want is listed. The items listed are of a high value, so typically a physical inspection takes place before the sale is concluded. The website enables the buyers and sellers to contact each other to arrange the inspection. The website is not involved in arranging payments or the terms of the sales between the parties.

The service meets the first marketplace condition because the service enables users to advertise particular things to other users. The second condition will also be met because a main purpose of the service is to facilitate transactions between third parties. It does not matter that the service only facilitates part of the transaction and does not provide payment facilities.

The revenue from the listing fees and associated advertising income will both be within scope of the DST legislation.

Example H

Group HIJ is a highly trusted regional broadcaster in Aomori. Group IJK is a major international travel business which is looking to crack into the competitive Japanese market. In recent years, IJK’s business has been dominated by its online marketplace which allows users to choose from an extensive range of flights, accommodation and tours. While the online marketplace is very successful and a highly recognisable brand, it is relatively unknown in Japan.

IJK arranges with HIJ to operate its marketplace under the HIJ brand name. IJK operates the marketplace in the same way it does in other markets. It simply pays a royalty fee to license the HIJ brand name on the website.

The online service IJK operates in Japan is an online marketplace. It is essentially the same service as the online marketplace the group offers in other jurisdictions, just under a different brand name.

HIJ will not meet the online marketplace definition. The service it is providing is the licensing of the group’s brand name and user traffic to IJK. The licensing agreement does not enable users to sell or list items to third parties, even if the brand is then used in an online service which does do this. Equally, the use of the brand may indirectly facilitate transactions between users but this facilitation is too far removed to be a main purpose of the licensing service, which is simply to license the use of the IP. Any facilitation is merely an incidental outcome.