EU aims to regulate big tech with Digital Markets Act

EU aims to regulate big tech with Digital Markets Act

The legislation aims to protect users online by providing transparency into how content algorithms work

The European Commission is rapidly moving on legislation that would create a level-playing field among small and large entities in the European Union (EU) digital economy. The proposed Digital Markets Act (DMA), introduced in 2020, specifically targets the practices of "gatekeeper online platforms"

The proposal cleared a year-long hurdle in the European Parliament Plenary Session held in December last. The Parliament had allowed commencement of the negotiations with the Member States the various provisions of the Act.

Not only does this piece of intended legislation mark an important update to the Internet regulations in the EU, but it is also a breakthrough in competition laws.

The European Parliament Committee on the Internal Market and Consumer Protection agreed on a compromise text based on the suggestions by the Members of the European Parliament and the Digital SME Alliance.

The subsequent changes introduced in the original draft blacklist certain practices of large platforms, increase the threshold for qualifying as a "gatekeeper" and propose centralized enforcement of the Act by the EU Commission, in cooperation with national authorities.

DMA acknowledges the noted improvement in efficiency and effectiveness that has taken place in the EU since the digital economy boomed. However, this spurt in online interaction among consumers and service providers is dominated by a small number of very large platform companies, among the thousands of other companies operating in the economy.

Some of these giant establishments control the ecosystem of the EU digital economy and prevent new companies from contesting themselves, irrespective of how innovative they might be. This disparity has forced policymakers to reconsider the digital environment and applicable laws by strengthening and updating the regulatory model.

It is widely agreed by experts that the existing competition policy procedures in the EU are unable to keep pace with the rapid changes in the digital economy. The remedies may be insufficient to deal with the complex challenges produced by the wave of digitization over businesses.

In light of this, an expert panel constituted by the Directorate-General for Connected Networks, Content and Technology and other institutions, found it necessary to regulate the activities between platforms and regulators and users.

Why do existing rules need to change?

The competition in the EU is governed by Title VII of The Treaty on Functioning of the European Union (TFEU). The wordings of Article 101 and Article 102 of TFEU imply that competition authorities can only intervene ex-post, after a case-by-case assessment of the situation has been made. An evaluation of the market conditions, environment and the platform at hand would be followed by a determination of whether the platform is a dominant one or not.

Therefore, even if a supplier of online platform services has a big turnover and a large number of business or end-users, the competition authority cannot simply conclude that it has a dominant position. It should instead identify the relevant market first and then examine its characteristics to determine whether such a platform is dominant or not.

The four main factors are to be considered on a case-to-case basis, namely, defining the relevant market, assessing market power, keeping a check on anti-competitive behavior of the players and tracking mergers that are not notifiable under the EU Laws.

Meaning of Gatekeepers

The most striking feature of DMA is the categorization of dominant forces as "gatekeepers". It is a new legal category of platforms that connect the buyer and the seller and provide essential and core services such as search engines, front-end display, messaging services and even social networking platforms.

The DMA adds certain additional criteria to identify an online service platform as a gatekeeper, which should exceed the number of size thresholds. As per the newly-approved draft, it should have a turnover of more than 8 billion pounds in the last three financial years, 45 billion monthly active end users, 10,000 business users and a market capitalization of 50 billion pounds.

These thresholds are designed to identify platforms that capture the largest portions of the digital economy and have the potential to manipulate the same with the large quantities of data and sensitive information it possesses.

It almost always comes down to the tech giants Google, Amazon, Facebook, Apple and Microsoft (GAFAM). Furthermore, the compromise text foresees restrictions on killer acquisitions, in which incumbents seek to eliminate future innovation and competition by acquiring nascent competitors. In situations of systemic non-compliance, the Commission may prohibit gatekeepers from undertaking acquisitions in sectors relevant to the DMA in order to repair or avoid additional harm to the internal market.

Competition policy

TFEU has the objective of undistorted competition in any market. On the other hand, the DMA aims at ensuring that markets, especially digital ones, where gatekeepers operate, remain free and fair and contestable. They should not suffer from the actual, likely or presumed effects of the conduct of the dominant players like gatekeepers on the market that are covered by the proposed legislation.

The EU market is a single market, defined at its core by the four freedoms - free movement of goods, services, capital and person.

Considering that services provided by the gatekeepers have a cross-border nature, it is especially important for them to uphold the sovereignty among all Member States. Therefore, Article 1(5) of the Act prohibits the Member States from imposing any further obligations on gatekeepers for the purpose of the contestable and fair markets.

Further, Article 1(6) states that the DMA is unaffected by the implementation of Articles 101 and 102 TFEU and their corresponding national laws. It may be assumed that this provision is not prejudicial to the application of national competition laws to companies that do not meet the objective criteria to be designated as gatekeepers under the DMA, but also to those undertakings that do meet objective requirements.

The provisions under DMA, in addition to the prohibitions on the use of data for targeted or micro-targeted advertising, will become essential to keep in check the exploitative practices of social media giants, like Facebook, as apparent from the 2019 Bundeskartellamt case.

In this case, the German Federal Court had confirmed the charges of abuse of dominant position against Facebook, on account of the platform's activities forcing its users to share data with other Facebook-owned services like WhatsApp and Instagram. The court acknowledged the dominant position of Facebook in the German market, the volume of sensitive data it possesses and the lack of choice available to its users.

Digital Markets Act

It is a novel and innovative approach to curb the anti-competitive behavior of the gatekeepers in the digital market. The ambit of digital markets under the Act has now been expanded to include connected TVs, virtual assistants, and web browsers.

Although the DMA is intended to be an ex-ante regulatory tool to address issues that cannot be (effectively) addressed by EU and national competition policies and should not prejudice the application of these policies, the concurrent existence of this regulation and competition law may result in over-enforcement – or double-enforcement against the same undertaking for the same behavior.

Temporal and conceptual separation of ex-ante DMA regulation and ex-post competition enforcement in digital marketplaces has been proposed to avoid double enforcement.

The ex-ante and ex-post rules may at present be the best solution to the complex challenges posed in the digital framework. Traditional competition laws are too slow and narrow to be able to address these issues and in many cases, the harm cannot be undone.

Thus, the confluence of elements seen in large platform ecosystems, such as direct or indirect network effects, economies of scale, and data-driven economies of scope, can result in market tipping behavior that is difficult to address by ex-post regulation.

The Centre on Regulation in Europe has suggested that the DMA should promote competition, market contestability and innovation by complementing competition laws when it is ineffective or unable to intervene. Further, the DMA should be allowed to grow as a single piece of legislation. It ought not to be fragmented by the laws of the Member States governing the activities of gatekeepers.