New rules to enhance competition in digital markets

In the last few years many competition authorities have been debating how to address the concerns raised by the market power of large online players and whether competition rules are sufficient to address those concerns.

Although most competition authorities have acknowledged that existing competition rules are fit for purpose and flexible enough, they recognise that there are limitations in fast moving digital markets because:

• an investigation takes several years and by the time an authority intervenes the harm could already have taken place, and
• intervention can only take place if certain conditions are met such as dominance in a relevant market.

In 2019, many countries issued reports on tackling the market power of large online players. In Europe the digital economy has been part of the agenda of the new president Ursula von der Leyen who tasked Commissioner Vestager with making sure that competition policy and rules are fit for the modern economy

After the publication of those reports, we expected to see some concrete actions and both the UK and the EU have now come out with far reaching regulatory initiatives.

The EU – The Digital Markets Act

In December 2020, the European Commission published its proposals for a Digital Markets Acts (DMA). You can read a summary of the key provisions here.

The proposal creates a completely new regulatory regime for core platform service providers designated as gatekeepers. The DMA sets up the criteria for the designation of a gatekeeper: the targets are large online platforms with a substantial number of users in the EU. It does not matter where the gatekeeper is established and therefore the Regulation will capture many of the obvious American players.

The DMA also sets out what will be considered core platform services (including online search engines, social networking services, and operating systems among others).

The designation of gatekeeper status triggers a series of obligations and substantial penalties for non-compliance. Some of those obligations are clearly linked to the concerns that competition authorities have had in recent competition cases against large online players and include obligations:

• not to treat services and products offered by the gatekeeper itself more favourably in ranking than similar services offered by third parties on the gatekeeper platform (EU Google shopping case)
• not to combine end users’ data from several of the gatekeeper's services (Bundeskartellamt Facebook decision)
• not to apply MFN clauses for business users (Amazon MFN), and
• not to prevent business users from acquiring customers through the platform for conclusion of a contract outside the platform (EU Apple Store case).

The DMA makes clear that competition law will continue to apply in parallel and the current pending competition cases in front of the Commission will continue.

The DMA will also introduce new access and interoperability obligations as well as the obligation on gatekeepers to inform the Commission of any concentration irrespective of merger control thresholds if the acquired entity provides services in the digital sector.

Powers

In this ex-ante regulatory regime, the Commission will have most of the powers we would expect in competition law investigations, including to impose fines, request information, carry out interviews and take statements, carry out dawn raids, issue interim measures and accept commitments.

Market investigations

On top of the already familiar powers, the Commission has introduced a new power to allow it to carry out market investigations. Earlier this year the Commission consulted on a new market tool which looked similar to the market investigation regime in the UK. Serious concerns about its introduction at EU level were raised by some stakeholders.

While a new power is included in the DMA, it is much more limited than the one originally envisaged: rather than being applicable to all sectors of the economy or all digital players, it is restricted to playing a specific role as part of this new ex-ante regime.

Its purpose is to make sure that the rules keep up in these fast-moving markets, and will be used by the Commission to:

• Designate as gatekeepers certain companies that do not meet the defined criteria in the Regulation but which the Commission thinks should still be categorised as such.
• Examine whether a gatekeeper has systematically infringed its obligations and further strengthened its gatekeeper position. In particular, if an infringement is identified, the Commission may impose any behavioural or structural remedy which is proportionate to the infringement. A structural remedy can only be imposed if there is no equally effective behavioural remedy or where an equally effective behavioural remedy would be more burdensome for the gatekeeper concerned than the structural remedy.
• Identify other services that should be added to the list of core platform services within the scope of the Regulation or types of practices not addressed effectively.

As mentioned, the market investigation power and the power to order structural remedies are much less intrusive that what the Commission proposed in its consultation. In Brussels, lawyers have been left wondering whether, separately from the DMA, the Commission is planning to introduce a new and wider market investigation power.

The DMA has now started its legislative process and it will take at least two years to be finalised. Provisions may well be subject to change during this process.

The UK – the Digital Markets Unit (DMU)

The UK has already got a market investigation power and, in light of Brexit, will not be bound by the DMA but is busy creating its own regime intended to focus on similar issues. 

Digital Advertising Market study

On 1 July 2020, the CMA concluded its market study into online platforms and digital advertising and made several recommendations to the UK government:

• The establishment of an individual and enforceable code of conduct to govern platforms designated as having strategic market status (SMS) over an important online gateway. The code should address concerns around the potential for exploitative behaviour on the part of the SMS platform, the potential for exclusionary behaviour and ensuring SMS platforms provide sufficient information to users.
• The establishment of a Digital Markets Unit (DMU) to undertake the SMS designation and maintain the code with the power to enforce the principles of the code, impose fines, and amend its principles in line with evolving market conditions.
• Give the DMU the necessary powers to introduce a range of pro-competitive interventions to tackle the sources of market power and promote competition such as mandating consumer control over data, interoperability, data access and data separation powers.

All but one of the recommendations have been accepted by the government, including the establishment of the DMU within the CMA from April 2021.  The exception is the power to introduce a range of pro-competitive interventions to tackle the source of market power and promote competition.  The government believes more work needs to be done on this and it will consult on the form and functions of the DMU in early 2021.

Digital Markets Taskforce

The CMA also carried out its digital advertising market study. In the Spring 2020 budget, the government announced the creation of a Digital Markets Taskforce based in the CMA and incorporating expertise from Ofcom and the Information Commissioner’s Office (ICO) to work on online platform more generally. Its task was to report to the government within six months on the design of a pro-competitive regime for digital platform markets.

On 8 December 2020, the Digital Markets Taskforce published its recommendations, similar to those suggested for players in the online advertising sector, but with more detail. Those recommendations include:

• The establishment of the DMU with power to designate a firm with SMS (with criteria including on the basis of revenues and the activity undertaken).
• An enforceable code of conduct.
• The imposition of pro-competitive intervention (data remedies as suggested before and in addition the possibility to order operational and functional separation); full ownership separation can, however, only be done by the CMA following a market investigation (which can be requested by the DMU).
• Formal investigations for breach of the code and substantial penalties as well as interim measures.
• Like the EU DMA, SMS firms should report all merger transactions to the CMA; in addition, while the UK merger regime is a voluntary system, it recommends a mandatory notification with a prohibition on completion before clearance for transactions that meet clear-cut thresholds.

We are waiting for the government's response.

What's next?

After many years of discussion and debate, we can now see the beginning of a new regulatory regime in the EU and the UK for large digital players (whether defined as gatekeepers or as having SMS). It will be interesting to see how the rules are applied and the impact they will have on the innovative efforts of large online players as well as on new entrants.

These are clearly very intrusive systems but will they achieve what they are designed to do? How will companies cope with different rules imposed by different authorities? Only time will tell. Of course, these are just legislative proposals at the moment and subject to change but it is obvious that they will have significant impact going forward.

Find out more

To discuss the issues raised in this article in more detail, please reach out to a member of our Technology, Media & Communications team.