Just before the holiday season, on December 15, EC Vice President Margrethe Vestager announced the first drafts of the Digital Services Act and the Digital Markets Act. These are 2 new European regulations that together form the Digital Service Package and that should ensure more and better regulation of online platforms in the foreseeable future.
The European Commission itself speaks of ‘an ambitious reform of the digital space, a comprehensive set of new rules for all digital services, including social media, online marketplaces and other online platforms operating in the EU’.
Although these are two draft texts that have yet to be addressed by the European Parliament and the European Council, at Sirius Legal we are taking the time to outline the main points. After all, the potential impact on the online world and in particular on e-commerce and online marketing is considerable.
Digital Service Package?
The Digital Services Act (DSA) and Digital Markets Act (DMA) include a series of new rules that, as part of the European digital strategy, Shaping Europe’s Digital Future, should ensure a safer digital environment for European citizens and more competitive equality for businesses, which should increase innovation, growth and competitiveness, both in the European internal market and worldwide.
The DSA imposes new obligations on online intermediaries such as online marketplaces, social media platforms, app stores and booking websites, while the DMA is introducing new rules for major online platforms, which the European Commission calls “gatekeepers”. These are the large internet players who channel a lot of traffic through their platforms. In concrete terms, both (future) regulations want to ensure more transparency in online advertising, less counterfeiting, better privacy protection and, above all, more control for the EU over the economic power of some internet giants.
The European Commission is the first to recognize that online platforms have significantly changed the lives of consumers in the EU in a positive sense over the past 10 or 15 years. Online platforms have also become very important in the online world and even in our economy in general in recent years. Unfortunately, however, there are also some negative side effects associated with the success that platform websites have in today’s online landscape. For example, the trade in counterfeit goods and illegal goods and services is a recurring problem. The past few years have also shown that online services are also increasingly being misused to spread disinformation based on smart algorithms and to manipulate election results, for example. The fact that a handful of (American) companies de facto control a very large part of the internet is also a concern for the EU, for some time now. It is those companies that the EU refers to as “gatekeepers”, who direct and control access to online services on the Internet. The press releases of the European Commission do not mention names, but of course they refer to Amazon, Google, Facebook, Apple, Microsoft and other tech giants.
Digital Services Act
The first part of the Digital Service Package, the Digital Services Act, focuses mainly on online intermediaries and builds on the existing Electronic Commerce Directive. The draft regulation provides for a whole series of new obligations for operators of all types of online platforms, such as booking websites, marketplaces, app stores, cloud services, internet providers, messaging services and social media platforms.
Among other things, the regulation provides for:
- New obligations for very large platforms to take risk-based measures to prevent misuse of their systems
- Rules for removing illegal content, illegal services and counterfeit goods
- New rules to ensure that sellers of counterfeit or illegal content can be detected more quickly;
- Extensive transparency obligations for targeted (“targeted”) online marketing based on user profiles and algorithms
Online platforms must know who the actual seller is on their platform (“know your customer“) and must also clearly inform users of this, something that today is unfortunately often all too unclear until the moment an order is delivered. The EU hopes this will help track down rogue traders and protect online shoppers from illegal products, such as counterfeit and dangerous products. At the same time, citizens will easily report illegal content and products on a platform. Platforms will be obliged to remove illegal content or goods. Very large online platforms will be subject to even stricter rules and must undergo a risk analysis and if necessary take additional measures against counterfeiting and illegal content.
Platforms that reach more than 10% of the EU population or about 45 million users will have to take into account additional obligations because of their size. They will be subject to the supervision of a newly created Council of National Coordinators for Digital Services (“Digital Services Coordinators”).
The draft also provides rules to combat the spread of political disinformation, hoaxes and manipulation of public opinion (for example during pandemics). The rules apply mainly to very large platforms, which will have to conduct a risk analysis and take measures for additional protection of fundamental rights, public interests, public health and security. Online content will have to be better moderated and in certain cases will have to be removed. It is also important that the text pays a lot of attention to the protection of the freedom of expression against government interference in order to prevent content from being removed too quickly, too often or too extensively.
The Digital Services Act further contains a set of rules that threaten to fundamentally disrupt the online marketing world as we know it today and which, in addition to the recent GDPR and the ePrivacy Regulation announced for several years, will have a considerable impact for this sector. These new rules oblige online advertisers to inform visitors to websites transparently about why they see certain advertisements (and on the basis of which criteria this happens) and who the advertiser is. Website visitors should also clearly see that certain content is sponsored. Very large online platforms must also maintain “ad repositories”, which show which advertisements they have shown in certain periods and which groups were targeted (without, however, keeping personal data of individuals). Incidentally, the Digital Markets Act also contains provisions on online advertising, which we will discuss below when we go into more detail on this second draft.
Each Member State will have to appoint a Digital Services Coordinator, an independent authority responsible for supervising service providers established in their Member State. These new authorities will be able to impose sanctions, including, of course, financial fines that the Member States themselves can determine in national legislation. Here too there is a stricter regime for the very large platforms. These fall under the direct supervision of the European Commission, which can impose fines of up to 6% of a service provider’s worldwide turnover. This makes the sanction system even stricter than the monster fines introduced by GDPR at the time (up to 4% of global turnover).
The Digital Markets Act
While the Digital Services Act regulates all online intermediaries and provides for additional strict obligations for the very large players, the Digital Markets Act mainly focusses on limiting the economical power of the internet giants, who are referred to in the design as “gatekeepers”. A number of companies now have such a great grip on the internet, on e-commerce and on online marketing that they de facto control (a significant part of) access to digital services.
The usual suspects for the European Commission are Amazon, Google, Apple, Facebook and Microsoft or any other company that meets the criteria in the draft or that is unilaterally (!) designated as gatekeeper by the European Commission itself “following a market research”. These gatekeepers are platforms that have a significant impact on the internal market, act as an important gateway for professional providers to reach their customers and are firmly anchored in the digital economy. In a number of cases, this gives them a lot (too much one might say?) of economic power with regard to both the companies that want to use their services and towards consumers. This leads to, for example, the unfair use of data from companies operating on these platforms, or situations where users are tied to one service and have limited options to switch to another.
The Digital Markets Act wants to remedy exactly this. The Digital Markets Act aims to prevent gatekeepers from imposing unfair conditions on businesses and consumers and to ensure the openness of important digital services. Examples of these unfair conditions include it impossible to pre-installed software or remove apps (something that happens very often in smartphones and tablets today) or fail to make it to operate third-party software and cooperate with their own services
The Digital Markets Act only applies to large companies identified as “gatekeepers” according to the objective criteria set out in the proposal. These are companies that play a particularly important role in the internal market because of their size and importance as a gateway for professional providers to reach their customers.
These companies operate at least one so-called “core platform service” (such as search engines, social network services, certain messaging services, operating systems and online intermediation services), and have a persistently large user base in several countries in the EU.
In concrete terms, there are three main cumulative criteria that place a company under the scope of the Digital Markets Act:
- An annual turnover in the European Economic Area (the EU + Norway and Liechtenstein) of at least 6.5 billion euros in the past three financial years or average market capitalization or equivalent fair market value in the last financial year of at least EUR 65 billion and a core platform service available in at least three Member States
- Control of a major gateway for professional providers to end users: this is assumed to be the case if the company operates a core platform service with more than 45 million monthly active end-users in the EU and more than 10,000 professional providers in the EU annually
- An (expected) anchored and sustainable position: this is assumed to be the case if the company meets the other in each of the last three financial years met two criteria.
If not all of these thresholds are met, the Commission may evaluate the specific situation of a given company in the context of a market survey for the appointment of gatekeepers and decide to designate it as a gatekeeper based on a qualitative assessment.
What are the consequences for those considered to be gatekeepers?
The Digital Markets Act establishes a set of obligations that gatekeepers must implement in their day-to-day operations to ensure fair and open digital markets.
Some examples of the “do’s” include the following:
- Opening up proprietary services to third parties who want to work with them Providing
- companies that advertise on their platform access to gatekeeper performance metrics and the information advertisers and publishers need to build their own independent perform verification of their advertisements hosted by the gatekeeper
- Allow professional providers to also offer or promote their products or services outside the gatekeeper platform (think of hotels that also need to be able to offer their rooms outside booking platforms)
Some examples of the “don’ts” are:
- Preventing users from removing pre-installed software or apps;
- Do not use data obtained from their professional providers to compete with these professional providers
What happens if a gatekeeper ignores the rules?
Anyone who does not follow the rules can incur fines of up to 10% of the worldwide turnover in this case. Inflation in fines in recent EU regulations now seems to no longer keep up … For repeat offenders, these sanctions may also include an obligation to take structural measures, which could potentially extend to the divestment of certain businesses, where no other equally effective alternative measure is available to ensure compliance.
Who Enforces the Digital Markets Act?
Given the cross-border nature of gatekeepers and the complementarity of the Digital Markets Act with the Digital Service Act and other internal market rules and competition law in particular, enforcement of the instrument remains in the hands of the Commission. Member States can always request the Commission to open a market investigation in order to designate a new gatekeeper.
Both the Digital Services Act and the Digital Markets Act are preliminary draft texts of the European Commission. The texts have already been the subject of extensive public consultation rounds and the texts are largely fixed. Nevertheless, this still needs to be approved by the European Parliament and the European Council, and both institutions can still make extensive changes. So it remains to be seen what the final texts will deliver, but it seems to be certain that both regulations will eventually come into effect.
As far as timing is concerned, a discussion in both Parliament and the Council does not seem to be expected before 2023. In the meantime, we will of course be monitoring the most recent developments closely.