Helicopter overview of the proposals for digital markets regulation (competition law perspective)

16.10.2020

A major focus of the European Commission (‘Commission’) in recent years has been on ensuring effective competition in digital markets. For example, the Commission has fined Google more than €8 billion since 2017 for breaches of competition law[1]. Google’s appeals of all three decisions are still pending. The Google cases were surrounded by significant political and media scrutiny. It took the Commission a long time to bring them to a conclusion, partly because of the difficulties in establishing a credible theory of harm and in dealing with remedies in cases where markets have already ‘tipped’. Against the background of the Google cases and a number of other concerns about effective competition in markets where a strong digital presence ins key, the UK Competition & Markets Authority (‘CMA’) and the Commission, as well as other competition authorities and government bodies in Europe and elsewhere, began to look beyond conventional competition law, which appeared to some to be inadequate to solve the issues arising in digital markets. This led to the commissioning of various reports on competition law and policy in digital markets. Most notably, the Furman Report on ‘Unlocking Digital Competition’ was published by the UK Government in March 2019, and the Commission published a report on ‘Competition Policy in the Digital Era’ in April 2019. (These have been discussed in ‘Chancellor’s Spring Statement: Digital Advertising Market Study’ and ‘CLIP of the month: Is a new framework needed to assess antitrust work?’.) The subsequent proposals for new regulatory regimes and tools are largely based on these two reports. This article is an attempt to summarise in an accessible format some of proposals to date.

A new competition tool

In a press release announcing a consultation on a potential new competition tool (‘NCT’), the Commission stated that a ‘holistic and comprehensive’ approach is required to ensure the contestability and fair functioning of markets across the economy. The Commission suggests that this could be based on three pillars:

  1. the continued enforcement of existing competition rules;
  2. possible ex-ante regulation of digital platforms (see below); and
  3. a possible NCT.

The Commission’s consultation lasted from 2 June 2020 until 8 September 2020 and covered both the need for a NCT and the potential characteristics of any NCT. According to the Commission a NCT could enable the Commission to address perceived gaps in the current competition rules. Such gaps are said to consist of structural competition problems that the Commission believes the current rules cannot tackle or cannot address in the most effective manner. It is suggested that once the Commission has identified such a structural risk the NCT would allow it to impose behavioural and structural remedies. However, it is clear that crafting an appropriate regime and determining its scope will be far from straightforward.

For example, during a hearing with the European Parliament on 23 June 2020, Commissioner Margrethe Vestager was asked: “how do we define which platforms need to meet a higher demand than others because they have a specific role – not only in the market but in our society as the online platforms for our democratic debate?” Ms Vestager acknowledged that the term ‘gatekeeper’ was tricky to define, but said that the Commission’s working definition of gatekeeper was rooted in concepts familiar to competition enforcement. She referred to the essential infrastructure doctrine and the concepts of dominance and market power, adding that the NCT would allow the Commission to address smaller market participants where these risk attaining dominance. In her view as expressed at that time, there must be fundamental values that small platforms live up to, while there would be special responsibilities for those that have developed into gatekeepers.

Subsequently, four expert studies by external academics have been commission by the EU: (1) a comparative study of similar tools in Greece, Israel, Mexico, Romania, South Africa and the UK; (2) a study on intervention triggers and underlying theories of harm; (3) a study on the appropriate procedural and institutional set-up; and (4) a study on interplay with sector-specific regulation.

Ex-ante regulation of digital platforms

On the same day as the consultation on the NCT was launched, the Commission also announced it was launching a consultation on the Digital Services Act (‘DSA’), a broader initiative designed to modernise the e-Commerce Directive of 2000 in the light of the digital transformation that has taken place in the past 20 years. Concentrating on Module 3 of the consultation, it becomes apparent that there is significant scope for overlap with other initiatives. Module 3 concerns ‘gatekeeper digital platforms’. The Commission is currently considering three options for ex-ante regulation of digital platforms:

  1. revising the Platform-to-Business Regulation (EU) 2019/1150 to cover certain practices by platforms, such as self-preferencing, data access policies, unfair contractual provisions and transparency;
  2. empowering regulators to collect information from large online platforms; or
  3. adopting a new regulatory framework for online platforms, which could involve ‘blacklisting’ certain unfair trading practices or adopting tailor-made remedies on a case-by-case basis.

On 28 September 2020, a European Parliament Committee approved a report supporting the initiative to impose ex ante regulation on gatekeepers, stating that the aim should be to prevent, instead of merely remedy market failures caused by large operators and to open markets to new entrants. A vote on the report is expected to take place during the 19 – 22 October plenary session. If approved, the European Parliament will table the DSA in December 2020.

An early draft of the DSA was leaked on 30 September 2020. That document divided practices into those belonging a ‘blacklist’ of unfair practices that are self-executing and those belonging on a ‘grey list’ of unfair practices where intervention by the regulator may be needed. The practices relate to data, self-preferencing and bundling and tying.

A further leaked document suggests that the Commission is considering a focus on four categories of technology for its proposed regulation: (1) online intermediation services, including markets places, app stores and social networks; (2) online search engines; (3) operating systems; and (4) cloud services.

The position and possible outcomes for both the NCT and the potentially overlapping aspects of the DSA continue to evolve, but there should be greater clarity about the more likely outcomes towards the end of 2020.

CMA call for digital platform regulation

Finally, the CMA has also called for the introduction of greater scrutiny and regulation of digital platforms in the UK. Following the Furman Report, the CMA published a market study into the nature of ‘Online platforms and digital advertising’ and concluded that the existing laws are not suitable for effective regulation of this market. The CMA recommended the creation of a new independent regulatory body, the Digital Markets Unit. This unit would have powers to enforce a code of conduct, which would be tailor made for platforms with ‘strategic markets status’ (‘SMS’). It could also introduce a number of far reaching pro-competitive interventions. A newly created Digital Markets Taskforce, which is led by the CMA but supported by the expertise of Ofcom and the ICO, is due to advise the UK government by the end of this year. For further detail on the CMA’s proposal, please see ‘Spotlight on online platforms and digital advertising as CMA calls for a new pro-competition regulation regime’.

The Digital Markets Taskforce provided more detail on the work of the taskforce and the scope of the recommendations they are likely to make to the government in a CLA webinar in late September. In particular, the taskforce is expected to focus on the methodology and procedure for designating platforms with SMS, the form and content of a Code of Conduct, and the case for other remedies such as data access and interoperability. The taskforce will also consider how this new regulation will interact with existing regimes and how international cooperation could be achieved.

Helicopter overview

As will be apparent from the brief descriptions above, the Commission and the CMA are seeking to address similar issues in relation to digital markets, which they believe cannot be addressed by the current competition law framework. Even within the EU context, there seems to be scope for considerable overlap between the NCT and some aspects of the DSA. The table below gives a high level snap shot of the similarities and differences between the three proposals discussed above.

 NCT Ex-ante regulation of digital platforms under the DSA Digital platform regulation
Proposed byCommissionCommissionCMA
Issues addressed ‘Structural competition problems’, including market characteristics and market structures that do not deliver competitive outcomes. This includes in particular markets at risk of ‘tipping’.Systematic problems of contestability, fairness and market entry. Leverage concerns relating to access to data and the ability to improve or develop services in adjacent markets. Particular issues include self-preferencing, data access policies and unfair contractual provisions.Digital advertising. Additionally, large digital platforms are said to have unmatchable access to data and to use default settings to influence users as well as the capability to  take advantage of economies of scale.
SectorNot necessarily limited to digital markets. Options range from all sectors to digital or digitally enabled sectors.Digital platforms only.Digital platforms only.
Applies toA wide range of options are being considered: could apply to all companies or dominant companies only. It could therefore be the broadest of the three proposals.‘Gatekeepers’, a term that is yet to be defined.Online platforms with SMS.
Enforcement CommissionWide range of options, including the possibility of an EU digital regulatory body.Independent regulator called the Digital Markets Unit.
PowersTo identify competition problems in certain sectors and intervene before a dominant company forecloses competitors or raises costs or a market is prevented from functioning properly due to structural risks. Potentially significant interventions are foreseen.Wide range of options, including extending  the Platform-to-Business Regulation framework to cover certain practices by platforms, empowering a dedicated regulatory body to collect information or adopting a new and flexible regulatory framework for large online platforms. Sub-options include blacklisting certain unfair trading practices or adopting tailor-made remedies.The introduction of a code of conduct based on high level principles of ‘fair trading’, ‘open choices’ and ‘trust and transparency’.

Pro-competitive interventions relating to data, consumer choice, default settings and separation of operations or ownership.

Competition infringement No specific competition law infringement would be required.No specific competition law infringement would be required.No specific competition law infringement would be required.
RemediesStructural and behavioural remedies, such as mandated de-mergers and ordering businesses to change their policies.Wide range of options, including structural and behavioural remedies, such as data portability and interoperability.Powers to suspend, block and reverse decisions and impose financial penalties for breach of the code of conduct.

Impose pro-competitive interventions.

 

The various tools referred to above are merely proposals. Further steps are required if they are to be implemented at all. In particular, the NCT would be based on Articles 103 and 114 TFEU and therefore requires approval of the Council and European Parliament. The CMA’s proposal for a new regulatory regime requires action from the UK government. Additionally, the proposals remain vague, leaving many specific questions about their application open for debate.

The competition authorities seem to be persuaded of the need for action. Dr Mike Walker, the CMA’s chief economic advisor, commented on the need for European regulation of Big Tech during a Concurrences webinar on 2 October 2020: “We need to really worry about the firms’ ability to create barriers to entry in their markets, possibly by extending into neighbouring markets… or by other ways, such as increasing barriers to entry by not allowing inter-operability, that sort of thing. These development strategies are a real concern.” Dr Walker specifically referred to the need to limit the ability of such firms to self-preference in ways that are not based on merit and their ability to use proprietary data from their core markets to enter neighbouring markets.

It is clear that a number of the issues which all of the proposals are seeking to address are specific to digital markets and focus on the use of data, self-preferencing, unfair contract terms and the expansion into adjacent markets.

The remedies and powers proposed are also very similar across all three proposals. None of them requires (or necessarily involves) a competition law infringement under existing competition law provisions and the imposition of fines is not currently foreseen (unless the code of conduct proposed by the CMA is breached).

The current focus appears to be on how to create a rule book for digital markets with a view to levelling the playing field for new entrants through structural and behavioural remedies. The focus is stated to be on how the market functions as a whole, rather than on the individual conduct of particular undertakings. Nevertheless, the remedies proposed by the Commission and the CMA mean that the impact of any (or all) of these new regimes could be wide-ranging, with the potential to significantly affect the ways in which digital companies are able to conduct business.

[1] See Google Search (Shopping) case AT.39740, Google Android case AT.40099 and Google Search (AdSense) case AT.40411.

Pat Treacy

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Elisa Lindemann - Trainee Solicitor

Elisa Lindemann

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