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From Regulating Platforms to Platform Regulation in the EU – A 2018 Preview

· November 27, 2017

At the time the new Commission took office, ‘platform regulation’ was one of those concepts most controversially discussed in the Brussels policy community – and far beyond it. While a lot has been written about that concept the Commission ultimately announced that there will be no specific platform regulation. Online platforms are, of course, subject to regulation through various policy-specific, vertical initiatives but a promise has been made to not regulate platforms horizontally.

It seems times have changed and promises could be broken when the Commission will unveil its legislative proposal on ‘fairness in platform-to-business relations’ either at the end of this year or at the beginning of next year. As part of this ongoing initiative the Commission has recently published an Inception Impact Assessment (IIA), a document that describes the various policy options the Commission is considering to address ‘unfair’ platform-to-business (P2B) trading practises by online platforms. The Commission identified these unfair trading practices to include sudden changes to platforms’ terms and conditions, lack of transparency with regard to ranking, lack of access to certain type of data, lack of meaningful redress mechanisms, removal or delisting of products or services and potential situations of discrimination. The IIA provides a more detailed description of these issues.

Maybe the most notable aspect of the IIA is that it discusses potential regulatory intervention towards platforms while lacking any discussion on how the term ‘platform’ should be defined. That is not a minor detail as the definition of ‘platform’ will determine the legal scope of this initiative. In light of today’s ever-increasing digitalization and diversity of online platforms, an open debate on this matter would have been quite useful. Online platforms are not just those companies that were born digitally but also more traditional companies that decided to move into the digital space. Think of newspapers, banks, supermarkets and even cars.

Another interesting aspect is the IIA’s bold claim that this initiative aims to resolve “proven market failures”. The extensive economic activity that platforms enable, particularly for small business users of all kinds, is only very difficult to marry with proven market failures. No one claims that problems don’t exist – just like in offline business relations problems do come up and when a platform needs to maintain relationships with thousands, if not millions, of business users there will always be those who would prefer to be subject to different terms and conditions. But these disputes should not be equated with market failures, i.e., problems of a systemic nature. Even a study commissioned by the Commission did not reveal widespread business user dissatisfaction. Problems of a technical nature was the most common issue complained about by both heavy and non-heavy platform users. Technical problems have hardly anything to do with unfair treatment or unequal bargaining positions. In fact, dissatisfaction levels with most of the major online platforms were rather low – in some cases even extremely low. This indicates that legislative intervention in this field would very likely be over the top.

The non-existence of a systemic problem should not come as a surprise. Multi-sided platforms’ business models rest on a mutually beneficial relationship with business users. Platforms have a strong incentive to maintain good relations since any harm on the business user side will quickly translate into harm on the consumer side undermining the rationale of a multi-sided business model. P2B relations are not a one-way street of business user ‘dependency’, as formulated in the IIA. It is for this reason that online platforms often work in cooperation with business users to make sure there is enough transparency, clear rules and effective redress mechanisms. These mechanisms are constantly evolving as platforms’ businesses evolve and as problems are tackled through more efficient means. In light of the great variety of platforms serving a great variety of business users it does not make sense for EU-level legislation to mandate, e.g., what effective redress systems should look like. Hence the need for any hard law approach to be put through a rigorous necessity and proportionality test in tune with the Commission’s better regulation principles. That is particularly important for smaller platform players since regulatory intervention that goes beyond addressing proven market failures will only end up as a barrier to entry for aspiring platforms. For an initiative that seeks to ensure a thriving platform economy in Europe that would be a pretty big miss.

On a more granular level the IIA goes through various policy options ranging from industry-led, soft-touch approaches to detailed legislative interventions. It is quite remarkable that on the softer side the IIA talks about regulatory incentives for industry to structurally or legally separate platforms’ intermediation activities from their auxiliary services (e.g., payment). It is inconceivable why the Commission would question vertically integrated business models in this initiative. Under established competition rules vertical integration generally benefits from a presumption for greater efficiency, innovation and better customer experience. For example, in most cases DG Competition routinely clears vertical mergers, i.e., mergers between companies that don’t compete against each other directly. It is unclear why a regulatory measure that exclusively targets online platforms would all of a sudden reverse established presumptions on vertical integration.

Policy option 3 in the IIA, the most interventionist, brings into play the potential establishment of a EU regulator for platforms. In the absence of a systemic problem in the market, a dedicated EU regulator seems a grossly disproportionate measure. Such a egulator would require public resources and would create more bureaucracy which will always have a more detrimental effect on smaller players.

As online platforms have been engaged in regulatory dialogue for quite some time, no one has ever denied that there is room for improvement in P2B relations. Ultimately, any Commission proposal needs to be a proportionate and necessary measure to a clearly identified and proven problem in the marketplace. With a horizontal, legislative approach the Commission will always run the risk of regulating highly diverse business models rather than particular business practices. One size simply doesn’t fit all. That is precisely the reason why the idea of ‘platform regulation’ was ultimately abandoned and why it should not resurface.  

European Union

DisCo is dedicated to examining technology and policy at a global scale.  Developments in the European Union play a considerable role in shaping both European and global technology markets.  EU regulations related to copyright, competition, privacy, innovation, and trade all affect the international development of technology and tech markets.