05 January 2021

Vox: The European Commission Digital Markets Act: A translation

The European Commission has finally issued the proposed Digital Markets Act, its bid to complement antitrust intervention in digital markets with ex-ante regulation in the form of a set of obligations that platforms identified as “gatekeepers” should abide by.

This column argues that the current proposal makes good progress, but lacks the translation tools to map the rules from the settings that inspired them to other businesses that are deemed gatekeepers, that the rules may not do enough to recognise the direct consumer harm that flows from the exploitation of data and the extraction and appropriation of consumer value, and that merger control remains a significant lacuna in the Commission’s digital regime that will need to be addressed separately. In contrast, the UK CMA proposals condition the rules on business models and fold merger control into the digital regime.

The European Commission has finally issued the proposed Digital Markets Act (DMA), its bid to complement antitrust intervention in digital markets with ex-ante regulation in the form of a set of obligations that platforms identified as “gatekeepers” should abide by.  The UK – having severed its links with Europe – simultaneously laid out its own distinct approach to regulating digital markets, now taking real shape after the statement of intentions in the 2019 Furman report.  All of this is happening, extraordinarily, in the very same weeks that have seen five major complaints filed in the US against Google and Facebook by the federal agencies and the state attorney generals. And China has opened a major investigation of e-commerce giant Alibaba.

While the final form of the EU DMA rules will change possibly substantially in its journey through the European Parliament and European capitals before final approval, there is a lot to consider already. First, let’s say what this isn’t. Americans in particular, looking at it from afar, may expect it to be something akin to common carrier or public utility-style regulation. Not so – the regime is not designed to regulate infrastructure monopolies, but rather to create competition as well as to redistribute some rents.  Second, the current definition of “gatekeeper” is not nuanced, and so we expect it will be updated and improved in the review process.  Third, in our reading, the list of Obligations seems to be a catalogue derived from past and current antitrust cases involving the usual set of big tech platforms, but lacks the translation tools to map a rule from the setting that inspired it to other businesses that are deemed gatekeepers. Translating these dicta into actionable rules that people and companies can understand likely will require clearer organising principles around business models. The UK is doing just this – the CMA proposed regulation identifies the equivalent of a gatekeeper platform while at the same time creating a set of rules designed for that specific business model. Fourth, while “data” is mentioned multiple times in the Obligations, it is unclear that the rules do enough to recognise the direct consumer harm that flows from the exploitation of data and the extraction and appropriation of consumer value,  amplified by privacy concerns. Lastly, while we understand there are legal reasons why the DMA could not include merger reform, the effective regulation of digital platforms requires powering up this essential tool.  As the UK is folding its merger control into its digital markets regime, and the US is making undoing bad mergers a cornerstone of its antitrust cases against Facebook and Google, there appears to be a significant lacuna in the EC digital regime that needs to be addressed. 

For Americans: What this isn't 

The US’ “big awakening” on the use of antitrust to deal with digital markets (Google and Facebook in particular) is much welcome and overdue. To Europeans, the recent federal and state complaints have looked like an extraordinary giant iceberg breaking free and finally on the move – with a much broader scope and bolder agenda than anything Europe had set out to do. While Europe has done good cases, zooming in on a particular market and conduct (Google Shopping, Android), nothing has been quite as far-reaching in ambition.  “You cannot buy your way out of competition” is the big underlying theme of the US complaints – a theme that has broad reach, encompassing exclusivity agreements, special deals with rivals to keep them out of a market, and multiple acquisitions to buy out threats. It will take some time for the US policy community to evaluate what they can expect to achieve with these cases and on what timeline. In the future we expect to see digital regulatory initiatives advance also in the US.  

And because experimentation with different approaches will matter, industry participants and policymakers in the US will benefit from watching the European regulatory experiment unfold. It is important for Americans to appreciate that the European DMA (European Commission 2020) is not is a step to breakups (in classic European fashion, these are briefly mentioned only as a last resort for repeat offenders) or a common carrier/public utility style regulation. Its animating principle is not so much to control the power of a monopoly infrastructure (e.g. setting access terms), but much more to prohibit or discourage conduct that has either the intent or effect of preventing entry of a rival (or raising its cost) where entry would otherwise be possible. A second purpose is to enforce fairness, a strong pillar of the European ordoliberal tradition, by prohibiting conduct that exploits and weakens counterparties that depend on the platform. Removing obstacles to entry, and fairness in the relationship with dependants, are the two goals of the law. Its method is “pro-competitive regulations” that seek to tame market power by enabling new competitors, rather than choosing price or quality levels.¹

Note that this is quite different from a sector-specific regulator who might approve particular prices or approve certain product characteristics. US observers tend to associate the word “regulation” with this type of market intervention. The EC law is designed to operate much more strongly on the dimension of barriers to entry and to competition in the expectation that, if entry barriers are lowered, more competition can create a competitive price or quality (though consumer protection is also needed, which the parallel Digital Services Act – issued simultaneously to the DMA – is intended to take up).

The European Commission approach: Needs a translation key, and some organising principles

The DMA envisages a two-step process in which the “provider of a core platform service”² first self-designates as a “gatekeeper”, and then adheres to list of obligations that apply to all gatekeepers. 

The criteria for the designation of a gatekeeper are quantitative (annual EEA turnover above €6.5 billion in the last three years, average market capitalisation or equivalent fair market value above €65 billion in the last year, active in at least three Member States, over 45 million monthly active end users in the Union and over 10,000 yearly active business users in the last year). Back-of-the-envelope calculations suggest that these criteria will capture not only (obviously) the core businesses of the largest players (GAFAM), but perhaps also a few others. Oracle and SAP, for instance, would appear to meet the thresholds, as would AWS and Microsoft Azure. Conversely Twitter, AirBnB, Bing, Linkedin, Xbox Netflix, Zoom and Expedia do not appear to meet the thresholds at present, and Bookings.com, Spotify, Uber, Bytedance/TikTok, Salesforce, Google Cloud and IBM Cloud appear to meet some but not others at this point.³

For those that do not meet the quantitative criteria, there is a long-winded alternative method of designation via a “market investigation” – a new tool which, however, will require time to get going and to run, and may not survive the review process in its current form.⁴ The designation of gatekeepers mainly through quantitative rules is clearly intended to leave no room for the imagination – it will curb shenanigans and flannelling by companies trying to argue against all common sense, and speed up the process of designation.  On the other hand, a more principled approach will be needed for platforms that fall below the hard thresholds but may still be capable of conduct the law wishes to proscribe.  

There are then two sets of “obligations” laid out for gatekeepers: a shorter list of obligations that apply without qualification, and a longer list of obligations “susceptible of being further specified” – the latter more tentative and “for discussion”, the former a definitive list of proscribed conducts (i.e. “thou shall not”).   

Identifying conducts that are not acceptable in general is important and right, but these lists are a curious game of charades.  With experience and familiarity with past, current and pipeline EC antitrust cases, one can just about assign each entry to a particular company and its issue. We attempt to do this in the table below. But this mapping is not obvious, because the writers have generalised each case away from its specific setting in order to apply a rule across the board.  And then, when the mapping is finished, it is clear that some rules really are specific to one – or perhaps two – platforms, but unclear how they might or should apply to others, both within and outside the traditional GAFA list. So how can these lists be made operational?  Some organising principles around business models would have been more useful, even if one does not want to get too “close and personal” and name individual companies. A fixed set of rules – covering all kinds of business models – applying to any platform that is designated a gatekeeper is the contrary of “flexible”. What is more, the separation between the designation of a gatekeeper first, and the application of the obligation second, is artificial because it is through the evaluation of conduct and its impact that an agency would identify a gatekeeper and understand what particular rules would ameliorate the problems that have been identified. As discussed further below, the UK seems to be taking this combined approach. 

The gatekeeper role cannot be independent of business models

Intuitively, we think of a gatekeeper as an intermediary who essentially controls access to critical constituencies on either side of a platform that cannot be reached otherwise, and as a result can engage in conduct and impose rules that counterparties cannot avoid.  Susan Athey proposes a similar definition: “A platform acts as a gatekeeper when it aggregates a meaningfully large group of participants that are not reachable elsewhere” (Athey 2020).   The key is that the way in which gatekeeping power can materialise is distinct across business models (and platforms are often conglomerates operating several related businesses models; for example, Amazon Marketplace is distinct from AWS, Google’s various individual businesses – operating systems, search, placing of display ads – are all different, and so on). The designation of gatekeeper applies not to the whole firm, but to one business within the conglomerate.

The need to recognise business models explicitly in designing rules for tech is now well established (Caffarra 2019, Athey 2020, Caffarra et al. 2020).  The DMA makes only a fleeting reference to business models (four times in the whole document, and to no particular purpose), but in practice there are big differences in economic properties and incentives across these business models. Compare three rough groups: ad-funded digital platforms (Google, Facebook, Bing, Pinterest, Twitter, Snapchat), transaction or matchmaking platforms that are marketplaces and exchanges (Uber, Airbnb, Amazon, DoubleClick), and OS ecosystem platforms (i.e. operating systems and app stores such as iOS, Appstore, Android, Google Play Store, Microsoft Windows, AWS, Microsoft Azure etc.). These business models differ in systematic ways in terms of (a) the type of economies of scale they rely on (data scale, R&D costs); (b) the type and direction of network effects (direct/indirect, one/both directions); (c) the potential for multihoming (on one or both sides), and (as emphasised again by Athey); and (d) the potential for disintermediation, either by someone else “introducing a different layer” intermediating two sides of the platform (e.g. end users and business users) or finding a way for two sides to connect to each other directly.     

These distinctions matter because they mean the entry strategies of competitors will differ, and therefore defensive strategies will also differ. They also matter for the definition of a gatekeeper. Because a gatekeeper must be a business that controls access to a large enough group of users to affect entry and competition, key to the designation of a gatekeeper is whether there are obstacles to multihoming, and whether users cannot directly bypass the platform. Obstacles to multihoming and disintermediation could be in part inherent to the service (transaction costs, technical barriers), but could also be induced by the conduct of the platform. At the stage of designating a gatekeeper, this distinction does not matter. If there is a large enough user base that entry depends on, including upstream and downstream, and there is limited ability to multihome and no real possibility for bypassing the platform, then the platform business will be deemed to have “gatekeeper power”. However, the analysis of disintermediation and multihoming possibilities differs between three main categories of business models: ad-funded businesses, transaction/match-making businesses, and operating systems/app stores. ...

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