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The EU Digital Markets Act: Five Questions of Principle

· February 9, 2021

On 15 December 2020 the European Commission unveiled its rapidly advanced Digital Markets Act (“DMA”), designed to address an alleged risk of national fragmentation of regulatory approaches to fairness and contestability in the digital economy of the European Union. The DMA attempts to do this by imposing 18 specific and immediately enforceable behavioural obligations on companies designated as “gatekeepers”. However, while industry has commended the Commission’s stated objectives, the DMA leaves open several questions as to implementation, and implications for the future of the European digital economy.

1. Gatekeepers or Gateways? 

Most of the expert reports advocating for reforms to competition law have explained that a new ex-ante regime should only apply to “gateway” business models with a potential for “gatekeeper” effects. Or, as the UK’s Furman report put it, those that are holding “a position of enduring market power over a strategic bottleneck or gateway market, where a firm controls others’ market access and where there are many dependent users on either side”. The DMA precludes any such context specific assessment, instead using mechanically applied size-based thresholds.

Under the DMA, companies that operate a “core platform service” must notify the European Commission upon meeting pre-defined thresholds for European turnover, market capitalisation, and their number of European consumer users and business users. There is some debate over the precision of the size-based thresholds. Meanwhile, competition investigations have shown that size does not always correlate to power in the digital economy, nor to actual “gatekeeping”. After receiving a notification, the Commission must decide within 60 days whether, having been met, the “gatekeeper” presumption is justified. A positive decision will make the company strictly liable for breach of any of the 18 obligations after six months. The Commission can conduct a market investigation to determine that a smaller company is an “emerging gatekeeper”, bringing it under the DMA’s scope regardless of thresholds. It can also change the thresholds by delegated act (Article 37).

Legislators will have to decide, should the DMA focus on actual gatekeepers exercising control over a digital bottleneck, or should the Commission have broad discretion to choose to whom the DMA obligations apply, regardless of their market impact?

2. Pro-consumer or Pro-supplier?

The DMA’s 18 behavioural obligations are modeled on remedies sought by past competition complainants (some of which led to competition law infringement decisions that are under review by Courts, and others which are still being investigated). These are regulations passed by competition law enforcement agencies to address allegedly anti-competitive behaviour (e.g. tying of “core platform services”), but also restorative orders that appear designed to reset or restructure markets (e.g. providing business users access to the platform operator’s infrastructure and resources). Altogether, the obligations are proscriptive and far-reaching, applied to a wide range of different industries and business models, rewriting commercial relations with business users, and governing how digital products and services are technologically designed and commercially monetised. For example, platform operators can no longer monetise aggregated data generated through the platform, nor prevent free-riding. The platform model itself is under threat, along with the consumer benefits that it generates.

One of the modern triumphs of competition law enforcement is that it is largely focused on, and tailored to, well defined, internationally agreed, competition policy objectives (traditionally understood as “the consumer welfare standard”, or promoting the “efficient use of resources while protecting the freedom of economic action of various market participants”). Through decades of trials and fact-finding, enforcers and Courts have developed a flexible and evolving set of rules, applicable to all industries and products, and capable of factoring in all relevant trade-offs so that pro-competitive conduct, to the benefit of consumers, is preserved.

Industry has called on the Commission to preserve this pro-competitive safe-harbour. But under the DMA, the Commission must “ensure a fair balance” in the commercial relationship between the platform operator and its business users regardless of the effect on consumers (see Article 10). As proposed, the DMA will set in stone a policy preference for suppliers at the expense of consumers.

Legislators will have to decide, should the DMA put the consumer interest first, allowing companies to justify their product design decisions as pro-competitive or pro-consumer, or should the Commission’s primary prerogative be protecting competitors interests, regardless of how that may harm consumers?

3. Pro-competitive or Protectionist?

Following a market investigation, the Commission can also introduce additional obligations regulating practices that are “unfair” or “limit contestability” “in the same way” as the practices addressed by the original 18. Unfortunately, “contestability” and “fairness” are largely left undefined, and absent a normative framework, leave significant room for Commission discretion. As mentioned above, this is particularly troubling since what is “fair” for suppliers or would increase “contestability” for rivals may not necessarily be in the consumer interest (or even in the interest of differently situated business users). The only limitation is where such rebalancing would “endanger the economic viability” of the platform operator (Article 8). Complainants will no doubt take advantage of this broad rule-making power, increasing pressure on the Commission to tilt “gatekeeper” behaviours in their own favour. 

The ongoing saga around the effectiveness of remedies in the Google Shopping and Google Android cases suggests this pressure will be intense. Dissatisfied with the process, many complainants insist that because Google is still successful, the remedies haven’t worked

If the size of the largest technology companies doesn’t shrink after the DMA is enacted, expect more complainants demanding regulation for “fair” outcomes instead of fair processes.

Internationally, the Commission would be opening a pandora’s box. It is the international consensus of the consumer welfare standard that means that enforcement designed to promote and protect local rivals is easily criticised as redistributive rather than pro-competitive, leading to trade disputes. This efficiency based approach helps keep trade barriers down, and markets open. But if the DMA approach is copied, trade barriers would begin to creep in under the guise of “fairness” and “contestability”. Are patent protection policies “fair” to producers of generic drugs? Are trademark policies “fair” to copycats? Are the demands of the auto-industry “fair” to their suppliers? Do emerging economies think there is enough “contestability” in industries dominated by European players, or do they need some state intervention as well? 

Legislators will have to decide, should the DMA focus on well understood and internationally accepted objectives, or should it open the door to lobbying campaigns demanding the Commission (and other international regulators) adjudicate what is “fair” in commercial disputes, re-write agreements with suppliers, and protect favoured industries?

4. Pro-innovation or Anti-evolution? 

Breach of the DMA obligations can lead to fines equivalent to that of competition infringements (10% of global turnover), and repeated infringements can even lead to break-up and other structural and behavioural remedies. A company that is unsure of its compliance with the DMA may request that the Commission “specify the measures that the gatekeeper concerned shall implement” in order to reach compliance. However, the Commission is not obliged to offer such specification, nor is it clear that such specification would be tailored to the particular business model of the firm, the core platform service which it operates, or even its industry context. Instead, the Commission is free to assume that such conduct is always bad, in every business model, in every industry context, regardless of proof of actual effects or consumer interest.

Engineers and inventors at the targeted companies will have a hard time convincing their internal compliance departments to move ahead with pro-consumer innovations under such threat of strict liability and heavy penalties. DMA advocates will say that this loss in innovation will be recompensed through increased innovation from business users. Perhaps, but perhaps not.

The DMA could encourage numerous business users to choose a “remedy taker” business model, foregoing independent innovation in favour of Commission enforced access to platform interfaces and resources. But this would effectively make them mere resellers, not rivals. The results of telecom regulation suggest that potential rivals would focus less on disrupting digital incumbents and growing the digital pie, instead of the zero-sum “regulated access” game of lobbying for a bigger piece of value created elsewhere.

The DMA also ignores that platform operators already have an incentive to facilitate innovation from business users in their ecosystem, because it attracts more users. But they also have to optimise across a range of different ecosystem players to maximize total system value. The right balance has evolved separately for different business models and in different industry contexts. The DMA would impose a one-size-fits-all straightjacket to this dynamic evolution across the entire digital economy. 

Legislators will have to decide, should the DMA obligations be flexibly tailored to specific business models and industry contexts in order to maximise innovation, or should platforms be prohibited from dynamically responding to evolving market developments?

5. Harmonization or Centralization?

The DMA’s legal basis is to address national fragmentation of approaches to “fairness and contestability” in the digital economy, whether by enforcer or legislator. But the DMA distinguishes, and leaves untouched, the national pursuit of “competition” objectives. The DMA’s use of competition enforcement means (e.g. the behavioural remedies) can hardly be rescued by its appeal to “fairness and contestability” ends, which are as explained above largely undefined. Adding to the confusion is that many competition enforcers have referred to “fairness” and “contestability” as ancillary competition policy objectives. If both the means and the ends overlap, how exactly will the DMA prevent fragmentation

In practice, harmonisation is more likely to be achieved through the centralisation of enforcement. Recital 10 states that contestability and fairness are assessed “independently from the actual, likely or presumed effects of the conduct of a given gatekeeper covered by this Regulation on competition on a given market.” In other words, the Commission can impose the same behavioural obligations as national competition enforcers, without having to prove likely anticompetitive effects, and without regard for negative spillover effects. Investigations to impose additional obligations are only two years long, so the incentive of complainants would be to bring all commercial disputes with a “fairness” or “contestability” element under the DMA. This enforcement power will bypass the legal requirements of Article 102 developed over decades through the wisdom of Courts. It will apply broadly to successful digital platforms, exclude consideration of consumer interests, and ignore evolving market dynamics. Not only will this necessarily make the Commission the arbiter of all commercial disputes between platform operators and business users, it will make it impossible for national authorities or courts to allow pro-competitive conduct based on an assessment of effects.

Legislators will have to decide, should the DMA widen and strengthen the digital single market, or should the Commission be empowered to pick and choose which digital innovations are “unfair” and prohibited, regardless of their competitive effects?

6. Concluding thoughts

There will be many other questions for legislators in the months ahead, but the most important is, will this legislation preserve competition and innovation in the consumer interest, or will it inadvertently widen the digital innovation gap between Europe, the USA and China?

Commissioner Thierry Breton has said that “the European Union must organise the digital world for the next 20 years”. The DMA experiment would do this by establishing the European Commission as the central decision maker on digital innovations, product integrations and product designs. Even before a product is built, if it has anything touching upon a “core platform service”, engineers and inventors will need to ask the regulators whether it can be built. They will need to ask whether that investment can be recouped, or whether such monetisation might be at some point deemed “unfair” to suppliers.

Investors will ask whether European start-ups’ business models will survive if they become successful and fall under the DMA. They may be reluctant to take that risk given reduced exit opportunities due to the DMA’s obligation to notify all mergers and acquisitions, and the Commission’s intention to begin investigating “whether or not [national] authorities had the power to review the case themselves.” They may prefer investing in jurisdictions with a more nuanced approach to digital economy regulation.

European competitors and suppliers will ask whether the threat of Commission intervention will help them extract better terms from the successful platform operators, greater access to platform resources, more data, and less responsibility. Instead of building something independent and internationally competitive, they will weave DMA provisions into their business models, dependent on everlasting Commission patronage.

With the DMA, the Commission has promised the taming of gatekeepers, and increased innovation and competition to the benefit of consumers. But the proposed DMA risks inadvertently installing the European Commission as a gatekeeper to innovation and investment in the European digital economy. Any disappointment as to the outcome will result in only more intense lobbying and calls for greater intervention. Perhaps, in reflecting on these five questions, legislators can consider ways to improve the proposal and better shape Europe’s digital future.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.