On 6 May 2022 the Government confirmed its approach to strengthen digital competition regulation in the UK.1 The UK is now on the verge of publishing the Digital Markets, Competition and Consumer Bill (the "Bill") which will be broadly aligned with the EU's Digital Markets Act ("DMA"). However, will the Bill be fit for purpose?
The state of play in the EU
On 1 November 2022, the DMA2 [2] entered into force introducing an ex-ante regulatory framework to eliminate unfair practice from undertakings with significant market power.
Despite over 10,000 online platforms operating and competing in the EU, 90% of which are small and medium-sized enterprises (SME's), only a small number of very large online platforms are dominating the market and influencing the boundaries of consumer choice and competition. These substantial platforms are thus described as 'gatekeepers'.
The DMA sets out criteria to create a rebuttable presumption of gatekeeper status (Article 3(2)) where a company is found to:
- have a significant impact on the internal market;
- have a Core Platform Service ("CPS") that acts as an important gateway for business users to reach their customers;
- have an entrenched and durable position.
The onus lies with the respective undertaking, which must notify its gatekeeper status to the European Commission within two months of satisfying the criteria, under Article 3(3). The gatekeeper must then comply with the obligations laid out in the DMA within 6 months of its designation (Article 3(10)).
Gatekeeper Obligations
The obligations, which are set out in Article 5, ensure that established gatekeepers do not engage in unfair practices such as: signing end-users into their other services, requiring users to subscribe to further services to use the initial service, and restricting the ability of users to switch between another platform's service that can be accessed through their own core services.
The DMA also sets out proactive obligations, demanding that gatekeepers adhere to data portability (Article 6(3)) for any CPS that they provide and additional interoperability requirements (Article 7(1)) for when that CPS constitutes a number-independent interpersonal communication service.
Enforcement and Penalties
The gatekeeper is obliged under Article 11(1), within 6 months of its designation, to provide the Commission with an annual report detailing the measures it has implemented.
Above this, Chapter 5 of the DMA affords the Commission with investigative powers to request information, carry out inspections and conduct interviews. In attempt to rectify circumstances of non-compliance, the Commission is also granted enforcement powers to impose interim measures, binding commitments or, where necessary, impose fines of up to 10% of total worldwide turnover (although this can be increased to 20% of worldwide turnover for repeated infringements).
Digital Markets, Competition and Consumer Bill: due to be published before Easter 2023.
The Government will introduce the Digital Markets, Competition and Consumer Bill in this parliamentary session. In principle, it is intended to speed up enforcement and operate on an ex-ante basis, like the DMA.
The policy position behind the Bill recognises that at present, the digital market is dominated by a minority of substantial tech platforms which often exert their market power at the expense of smaller players. The Bill aims to designate those players with 'strategic market status' ("SMS"). Enforcement will be through the Digital Markets Unit ("DMU") in the Competition and Markets Authority ("CMA").
The Government is expected to set out requirements for companies with SMS that meet similar pre-defined quantitative and qualitative thresholds to the DMA:
- substantial and entrenched market power (non-transitory);
- in at least one digital activity; and
- which provides the firm with a strategic position.
There will be a statutory deadline of 9 months to complete a designation assessment, extendable by 3 months in exceptional circumstances.
Requirements
The Bill will require mandatory compliance with a tailored Code of Conduct ("Code") for SMS firms, which will be developed concurrently with the designation assessment process and is based on three high-level core objectives:
- fair trading;
- open choices; and
- trust and transparency.
Enforcement, Speed and Penalties
The Code will have binding effect. Failure to comply with the Code will result in enforcement action. Code orders or interim Code orders can address breaches. A 6-month statutory deadline is expected for breach investigations.
In cases where there is evidence of an adverse effect on competition, the DMU is afforded similar powers which shall allow them to implement a pro-competition intervention ("PCI") if the competition concern relates to a designated activity. PCI investigations will have a 9-month statutory deadline, with an optional 3-month extension for exceptional circumstances.
Failure to comply with the Code or PCI orders can result in fines up to a maximum of 10% of a firm's global turnover. Daily penalties of up to 5% of daily worldwide turnover are also available for continued breaches.
The DMU's decisions will be subject to Competition Appeal Tribunal review by way of judicial review. Prohibitions and obligations will be enforceable through fines, as well as potential structural and behavioural remedies akin to the DMA will be available.
Comment: will the Bill be of any use?
At the outset it need to be remembered that platforms, like the telecoms networks on which they are based and the technology stack of which they form part, are businesses. However, these businesses have unusual economics. They benefit from increasing returns to scale, very high fixed costs including technology that may be protected by patents (that act as barriers to entry for rivals) and economies of scope that means the production of new products from the same platform benefit from the use of existing capital investments and sunk costs. Low incremental costs are involved in production. They also benefit from network externalities; existing users benefit from being part of the biggest network/platform in various ways.
Running more products and services over the same platforms increases efficiency, lowers cost and provides increasing benefits to end users. At the same time, it excludes rivals, limits innovation, and leads to highly concentrated markets that are dominated by the platform players.
Recent discussions with Government indicates it has lost sight of this. One example of this is the proposal that "exemptions" are made for efficiency enhancing innovations by the platforms under the "net consumer benefit test".
Activities and Markets
The Government is understood to be considering how the application of enforcement obligations will be tailored to actions (or activities) by SMS players that relate to pre-defined markets. The first issue this raises is how exactly the DMU will know about the activities of the SMS players that could produce anti-competitive impacts.
Officials have suggested that SMS firms' activity that would "materially increase market power" or "significantly lessen competition" could be prevented via PCI's. This begs the question, familiar to competition lawyers, of how authority will know, and further, how it will assess the effects of such activity in advance of its impact.
We have proposed that the DMU could adopt the process used worldwide in merger control to require prenotification. For example, prenotification of product developments could be required. This would enable the DMU to oversee product pipelines. This method is currently already being used by the CMA to oversee Google's product changes under Google's Privacy Sandbox Commitments.
However, Government officials have indicated that the Bill will contain no process for advance notification. This casts doubt on claims that the regime will truly be an ex-ante regime. It also raises questions about how the DMU will be informed of what is happening in the SMS firms in advance of their activities impacting the market.
Another conceptual conundrum is that markets are typically defined with relation to the action that is under investigation. The Bill defines "designation" in relation to activities in "markets" defined in the law. This potentially sets the law in stone. If, for example Google were to be designated in a market for "Online Search" rather than its Android Operating system or Chrome Browser, how will its actions that foreclose rivals in denial of access to data needed for advertising or publishing and which affect the plurality of news, be addressed?
Where, for example Amazon was recently accused by the European Commission of self-promoting products into its "Buy Box", the relevant market was defined by reference to the actions taken by Amazon in promoting products via the Buy Box. When Google self-promoted maps in search engine results, the relevant market was defined as online search.
Using markets as a test for jurisdiction is unlikely to endure. The scope of application of any law needs to be simple and clear and apply based on objective factors. It is unclear how markets as we know them today can be defined in the abstract and how activities will relate to them in the Bill. It is also unclear how remedies can be said to relate to them, or how the Bill will apply over time.
Officials have stressed that remedies by way of interventions need to be "tailored and proportionate". They are clearly signalling that the UK regime will be lighter touch and less intrusive than the DMA and that this is in some ways a Brexit dividend. Ensuring compliance with the law should be the aim of all law, emphasis on "light touch" and "proportionate remedies" indicates a concern about intervention in the market. Concerns about overregulation are fair and reasonable where regulation threatens to stifle market dynamics, however, it does not arise in dominated markets.
Customer Information
One question is the dominance that Google and Apple have over general customer information. Given that they control the passage of information about everything bought and sold over mobile handsets, and exert control over payments, billing and data while restricting access to all data needed by those making and selling products, they effectively control the information that suppliers need to innovate. In its music and streaming market study, the CMA found that the lack of information available to songwriters about their songs affects their ability to promote and market their products. Spotify and Epic Games complain that they are locked into billing systems and overcharged and don't know who their customers are. Google and Apple control the billing and payments and information about customers and who is buying what. Vertical integration means that the platforms now have the information and others don't, and innovation suffers.
The scale of the problem becomes clearer if you multiply the lack of information about customers' changing demands over time by the number of products sold online. How can a designer, manufacturer, or service provider know what to improve if they don't know what is liked and disliked?
Access and Interoperability
When asked about data access and interoperability (areas for which the CMA has already proposed PCI in its 2020 Online Platforms and Digital Advertising Markets Final Report [3]), officials have indicated that the analysis will start with a designated market and an assessment (hopefully consistent with previous investigations) presumably, the market affected by the SMS' actions. Any PCI tool can be used to provide remedies and those remedies can address leveraging issues beyond the immediate market in question. The example has been given of an SMS firm's default settings over search, or choice architecture that affects consumer decisions, being addressed through PCIs.
As many who have been involved in the issues relating to Google's manipulation of search engine results and self-promotion and display of its own products will know, these indications suggest that SMS firms have been busy lobbying and have managed to add hurdles into the Bill that those affected by their actions will now need to jump through before enforcement can occur.
Intervention Thresholds and Exemptions: what has happened to "promoting competition?"
The Government appears to be contemplating "exemptions" being available from SMS firms that can show "net consumer benefit" from their actions. The direction of UK Government's policy position was set out in its consultation as aiming towards: 4
"...promoting competition to drive enterprise, innovation, growth, and productivity: a more active pro-competition strategy, rebalanced merger controls, stronger enforcement against anticompetitive conduct, and cross- cutting reforms to the CMA's powers."
The reason that platform regulation has been introduced is that efficiency improvements lead to monopoly in certain businesses. A "net consumer benefit" would be an exception that would allow an "efficiency defence" to be run. This is a problem where the platform will always be more efficient than its rivals.
One person's "net consumer benefit" can easily mean a rival has suffered a substantial lessening of competition, but the consumer of the platform's services has received a marginal short-term benefit. For example, Google promoted its own map to the top of is search engine results pages, and rather than providing a choice of maps, pushed rivals' results down its rankings. Consumers received a short-term benefit, but rivals offering online maps were wiped out.5 This can be described as a "net consumer benefit", as consumers get a map, where previously they didn't have this service. However, where innovation from rivals in all online mapping is lost, can this really be described as a consumer benefit? Consumers generally suffer from increased dependency. The Bill should remedy this defect in the current law.
How this is to be judged by the DMU is a major concern, particularly since existing competition law is running in parallel and either law could apply.
Telecoms and tech are part of the same stack of technology and the same economics arise. In both tech and telecoms high levels of investment are required which makes entry difficult for rivals. Also, there are very low distribution costs - so the incremental cost of making a call or performing a search or downloading software is very low. They have increasing returns to scale, scope, and network externalities. This means that there are additional benefits for each user to belong to the biggest network, whether telecoms, social media or messaging service. They are prone to vertical integration and such integration reduces costs but at the same time it denies rivals the inputs needed for innovation.
Does the Bill really mean to be introducing an "efficiency defence" where increased efficiency leads to increased monopoly?
Loss of open competitive markets operating at each level in the supply chain controlled by each platform means a loss of information needed by rivals for innovation at each level in the supply chain. Product and process innovation by competitors are affected by such losses of input information. Vertical integration may thus increase the efficiency in the supply of existing products but internalise information and prevent rivals knowing what to do next.
If this is the direction the Bill is proposing, dynamic competition in the UK will suffer.
It is seriously concerning that exemptions being available to SMS platforms are judged against a "net consumer benefit" test. It implies that products SMS firms introduce and actions that they take which affect rivals will not be judged against whether they lessen or promote competition but whether they provide more benefit to consumers than disbenefit from the loss of competition.
This is going to be a difficult trade-off to make and the DMU may also be setting itself up for legal challenges on each decision. It also looks to provide considerable scope for platforms to justify their actions and delay intervention. Litigation beckons about, for example:
- What does the test mean?
- How are benefits to consumers measured?
- How are detriments (to competition and innovation over time) balanced against benefits in the short, medium and long term?
- How has the test been applied, and for judicial review have relevant considerations been taken into the account and properly assessed? Since SMS firms know all relevant information how will the DMU know it has all relevant facts on which to decide?
Payment for Content/Final Offer arbitration6
The Department for Business and Trade ("DBT") has confirmed that Payment for Content and Final Offer Arbitration will be included in the Bill. Officials from DBT have stressed the DMU will have all the tools needed to take effective action against platforms including an "Amended Schedule 8 set of powers". The current Schedule 8 of the Enterprise Act 2002 allows CMA to break up companies and force divestitures but has been little used in recent times.
Speed of Enforcement
There is little in the current discussion of the Bill which is likely to see faster enforcement in practice.
Conclusions
Both the DMA and the impending Bill attempt to promote fairer competition and better market practice to ensure that both companies and consumers can all benefit. By imposing a refined designation process and more stringent obligations on gatekeepers/SMSs, both pieces of legislation aim to help prevent the tech-giants ability to leverage their access to consumer data to manipulate digital markets. This is hoped in turn to generate more innovation and boost consumer protection and choice.
However, there is still an opportunity for the Bill to succeed in increasing competition. It is vital for the functioning of an open market for enforcement action to be fast, not just marginally quicker than the current pace. It is still unclear whether the DMU will be designated to exercise Attorney General powers so that it can get information and keep up with its peers in Australia and the USA. If Attorney General powers were available, the DMU could make applications in the courts, use the existing court jurisdiction for interlocutory relief, and have greater ability to move faster than current powers allow.
Footnotes
2 EUR-Lex - 32022R1925 - EN - EUR-Lex (europa.eu).
3 See Final report (publishing.service.gov.uk) between pp. 349 to 357.
5 See Streetmap vs Google in UK High Court. Where Google claimed this type of benefit and was allowed to promote its own map and denigrate rivals.
6 See previous post on Access to Content and Final Offer Arbitration, UK legislative redress for news publishers should not be modelled on the Australian News Media Bargaining Codes - Movement For An Open Web.
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