At the end of 2020, both the EU and UK published ground-breaking proposals which threaten to revolutionise the governance of digital platforms. The EU published the proposed Digital Markets Act (DMA) which will seek to establish an ex ante framework to govern “Gatekeeper” digital platforms. The UK Government confirmed that it will establish a new Digital Markets Unit (DMU) and introduce a new enforceable code of conduct governing digital platforms designated as having “Strategic Market Status”. To inform this, the Digital Markets Taskforce has made its recommendations on the design and implementation of the new UK digital regime. These measures, once adopted, promise to create a new supervisory regime governing “Big Tech” complementing and building on existing competition law enforcement tools.
Who will be caught – the Gatekeepers?
The primary focus of both the EU’s and UK’s digital regimes is “Big Tech”. The EU is targeting the digital platforms that act as “Gatekeepers” and the UK regime those firms that are designated as having “strategic market status”. Designation will be based on objective criteria, although the proposed EU rules include a set of “rebuttable” presumptive criteria whereas the UK regime is less prescriptive.
The Gatekeeper Regime (EU)
In the EU, firms will be “deemed” to be gatekeepers if the following criteria are met:
I.Significant impact on the EU internal market - EU turnover equal or > €6.5bn in the last 3 years or where the average market capitalisation or equivalent fair market value amounted to equal or > €65bn in the last financial year and it provides services in at least 3 Member States; II. Important “Gateway” for business users to reach consumers - >45m monthly users in the EU and more than 10 000 yearly active business users in the EU; III. Entrenched and durable position – satisfied if (i) and (ii) are met for the last the 3 years.
Any digital platforms that satisfy this “gatekeeper” test will be required to notify the European Commission (EC) within 3 months and/or seek to make arguments that it does not satisfy the “Gatekeeper” test . The EC can then confirm the designation within 60 days and/or initiate a 5 month market investigation process. Pursuant to this process the EC can also seek to designate other providers as “Gatekeepers” and this could include entities that are close to the so-called “tipping point” (i.e. they may enjoy an entrenched and durable position in the near future - this is a subject to a lengthier 12 month designation process). The EC will publish the list of gatekeepers and keep this up to date and will be reviewed every 2 years.
The Strategic Market Status Regime (UK)
Unlike the EU, the UK regime will not include presumptive quantitative thresholds but instead involves an evidence based economic assessment which will consider a number of factors to determine whether a company has “strategic market status” (SMS) – a position of substantial, entrenched market power (non-transitory), including:
• Significant size and scale of the activity;
• Important access/input to customers (gateway);
• Leverage/extend market power to new activities or “ecosystem of products”;
• Ability of the platform to determine the rules of the game; and
• Wider social and cultural importance.
The UK is expected to publish further guidance on the assessment criteria and will also set out potential prioritisation criteria:
I. The firm’s revenue – UK annual revenue > £1bn (and global revenue >£25bn); and
II. Activity undertaken: online marketplaces, app stores, social networks, web browsers; online search engines, operating systems and cloud computing services.
Companies will then need to be designated as having SMS pursuant to a 12 month process. It is also envisaged that the designation would apply for a period of up 5 years.
What “Digital” activities/services are caught?
Both the EU and UK regimes are designed to capture a wide range of digital services.
Core platform services (EU)
- Online intermediation services (marketplaces, app stores and other services like mobility, energy and transport)
- Online search engines;
- Social networking;
- Video sharing platforms;
- Number-independent interpersonal communications services ((NI-ICS) e.g., online messaging/communication services/apps);
- Operating systems;
- Cloud services; and
- Advertising services.
The EC can also extend the regime to other digital services and practices pursuant to a 24 month market investigation procedure.
Range of activities (UK)
The UK regime will apply to a range of “digital” activities (a collection of products and services) and a firm can have multiple designated activities. As listed above, the UK has identified a set of potential activities (similar to the EU’s CPS) that will likely be captured by the new regime but the list is non-exhaustive.
Of importance is that the EU regime also proposes to capture online messaging/communication services which is not expressly covered by the UK regime. This is perhaps not surprising as the UK telecoms regime does not regulate these services unlike the EU telecoms regime governed by the European Electronic Communications Code which was due to be implemented across the EU by the end of 2020 (although a number of Member States are late in transposing the EECC). However. the inclusion of NI-ICS under the EU’s digital regime is significant and signals that the EC will likely keep a close eye on the continued use of these services (especially given the Covid pandemic which has heralded a dramatic increase in the use of video/online communications services). The EC’s ability to regulate these services under the DMA as well as the EECC and potentially require interoperability between services could be a powerful tool (it should be noted that the UK regime may have the ability to mandate interoperability pursuant to the pro-competitive intervention regime (discussed below)).
What are the rules of the game?
Both regimes aim to provide increased certainty to businesses and set out a clear ex ante regulatory framework with specified rules of engagement. The EU regime sets out a series of do’s and don’ts and the UK regime seeks to establish a tailored enforceable code of conduct based on a set of objectives and principles.
Do’s and Don’ts (EU)
The EU regime has set out a series of blanket do’s and don’ts that will apply to all “gatekeepers” to ensure “fair and open digital markets”. Some of the obligations can also be further specified by the EC to provide further clarity on the nature of the obligations. The range of measures, include:
- Allowing interoperability with the gatekeeper’s own services;
- To provide companies advertising on their platform with the tools and information necessary for advertisers and publishers to carry out their own independent verification of advertisements hosted by the gatekeeper;
- Allow business users to promote their offer and conclude contracts with the customers outside the gatekeeper’s platforms;
- Providing business users with access to the data generated by their activities on the gatekeeper’s platform; and Provide data portability.
- Prohibits gatekeepers from preventing users from un-installing any pre-installed software or apps;
- Not use data obtained from business users to compete with these business users (to address dual role risks);
- Measures to address self-preferencing, parity and ranking requirements to ensure no favourable treatment to the services offered by the gatekeeper itself against those of third parties.
Gatekeepers will need to comply with the obligation within 6 months. The EC will also have residual powers to set other obligations following a market investigation as well as investigate new services and practices.
“Big Tech is under pressure and these ground-breaking proposals certainly promise to change the game”
- Anthony Rosen, Legal Director
Enforceable Code of Conduct (UK)
The UK SMS regime is based on three core pillars: (i) enforceable code of conduct (Digital Code); (ii) pro-competitive interventions (PCIs); and (iii) a new SMS merger regime.
The Digital Code will be designed to establish the rules of the game and set out how firms will be expected to behave. It will be enshrined in legislation and be based on three core objectives – fair trading (users treated fairly and are able to trade on reasonable commercial terms with the SMS firm), open choices (users face no barriers to choosing freely and easily between services provided by SMS firms and other firms) and transparency (users have clear and relevant information to understand the nature of the services and can make informed decisions). The objectives will then be supported by a series of principles which well set out the standards as to how SMS designated firms will be expected to operate which will be set by the DMU. The principles will be targeted at the particular activity, conduct or behaviour of concern and be flexible and forward-looking. The DMU will also issue guidance to assist with interpretation of the rules and set out examples of the type of conduct that would be in line with or breach the principles. The Digital Code will be established as part of the SMS designation process and consultation to allow a tailored approach. Unlike the EU’s DMA, the regime envisages firm-specific and tailored remedies.
In addition to the Digital Code, the DMU will also likely have the power to intervene to address the root causes of the market power (adverse effects on competition or consumers) and make PCIs following a 12 month investigation process. This could include a range of measures covering data access and portability, interoperability, consumer choice and default interventions and transparency measures, obligation to provide access on fair and reasonable terms and organisational/functional separation remedies (e.g., separate divisions/units within the company) stopping short of full break up powers (which the UK already has via the existing market investigation regime (MIR) under the Enterprise Act 2002).
Impact on merger control and “killer acquisitions”
Both the EU and UK have also proposed measures to strengthen merger control and ensure that regulators are at least made aware of all “Tech” transactions to address, in part, the concerns around perceived historic under enforcement of “Tech” deals.
Mandatory reporting (EU)
The DMA will introduce a requirement for Gatekeepers to inform the EC (rather than a formal merger control notification) of any proposed merger or acquisition involving another provider of CPS or other digital services (irrespective of whether it triggers the EUMR/National thresholds). However, the proposal stops short of revising the merger control thresholds for substantive review.
Mandatory reporting and notification process (UK)
Unlike the EU, the UK proposals for the SMS Merger Control regime go further. SMS firms will be required to report all transactions to the CMA (to ensure the regulator is made of aware of all transactions) and there will also likely be a new mandatory merger review process for all transactions that trigger revised merger control thresholds which may include a new size of transaction test (similar to the US regime as well as Germany and Austria in the EU) as well as introducing a “safety net” to allow the CMA to review transactions that do not trigger the mandatory thresholds. There are also proposals to introduce a lower standard of proof and a new “realistic prospect” standard which will mean that the regulator will not need to prove it is more likely than not that the transaction will result in a substantial lessening of competition.
Tough enforcement regimes – fines and break-up powers?
Clearly, with all these new powers and rules, a strong deterrent is also required. Combined with strengthened monitoring, investigatory powers and interim measures (many of which are similar to existing competition enforcement powers), both the EU and UK have proposed stringent fining regimes. The EC will have the ability to impose fines of up to 10% of worldwide revenues and periodic penalty payments of up to 5% of the average daily turnover. The UK will have similar fining powers. In terms of break up powers, the EU will have residual powers to order divestments as a last resort in cases of systematic non-compliance. The UK already has break up powers under its MIR regime.
A quick overview of the regimes
How quickly will the new rules come into play?
The DMA is a draft proposal and we can expect a lengthy process before the act is finally adopted. Members States, the European Parliament, European Council and Commission will have differing views and there will no doubt be lobbying to influence the final outcome as it passes through the legislative process and it could well be 2-3 years before the final measure is adopted.
The UK is more advanced and we can expect a consultation in early 2021 with legislation to follow thereafter (either late 2021/early 2022) with the DMU operational by April 2021.
Irrespective of the changing regulatory landscape, it should not be forgotten that the sector is competitive, dynamic and innovative. Regulators will need to be mindful – big is not necessarily bad - and just as firms with market power have a special responsibility not to abuse that position, regulators will have a similar responsibility to use any new tools wisely or risk harming competition, innovation and investment.