Competition authority - or digital product regulator?

In Europe, the proposed Digital Markets Act (DMA) sets out that gatekeepers are not allowed to tie any other services to operating systems, virtual assistants and web browsers (paragraph 5(3)).

“The gatekeeper shall allow and technically enable end users to easily change default settings on its operating system, virtual assistant and web browser that direct or steer end users to products or services provided by the gatekeeper.” (paragraph 5 (3)).

So in principle, any service that is currently integrated with an operating system, virtual assistant or web browser will need to be opened up to competition from alternative providers.

In Germany, Section 19a of the GWB makes a similar statement in 19 9a) 3 (a), which outlines that:

19 (a) 3. directly or indirectly hinder competitors on a market on which the undertaking can rapidly expand its position, even without being dominant, in particular

a) to combine the use of an offer of the company with an automatic use of another offer of the company, which is not necessary for this purpose, without granting the user of the offer sufficient possibilities of choice with regard to the circumstance and the manner of use of the other offer…

This is an (even) broader proposition. In principle, this provision suggests that the BKartA might argue that (for instance) Amazon ties its retailing service with Amazon Prime under the same account, and Amazon does not allow users of its account the choice to access competing services. Amazon should therefore be prevented from offering Amazon Prime to existing providers. (It is not in any event clear that there is a single competitive service to Amazon Prime given that it covers both TV content and grocery delivery – perhaps Amazon needs to offer access to Netflix and Ocado?)

The BKartA has already opened an investigation into Google Maps under this power: “We have information to suggest that Google may be restricting the combination of its own map services with third-party map services, for example when it comes to embedding Google Maps location data, the search function or Google Street View into maps not provided by Google. Among other aspects, we will now examine whether this practice could allow Google to further expand its position of power regarding certain map services.” At least in respect of the search function this approach overlaps with the DMA paragraph 5(3).

The underlying theory behind these provisions appears to be that large digital firms should not be allowed to extend their products from one market into a second market, in order to ensure that competition in that second market is not distorted, and hence supports the contestability of those markets.

From a competition law perspective, these powers are controversial. The High Court in the UK has already heard a competition law case brought by Streetmap against Google, in which Streetmap argued that Google was abusing a dominant position by giving preferential treatment to its own mapping service (in the sense that it started to provide maps alongside general search results), to the detriment of standalone mapping services. This was rejected by the High Court on the basis either that this would not eliminate competition in standalone maps (since there were other routes to market for companies such as Streetmap) or because there was an objective justification for Google’s actions (adding Maps improved the search product for consumers, and trying to include the option for users to choose their preferred Maps provider would have been disproportionate).

The DMA (and the GWB 19a) case launched by the BKartA) essentially challenges this thinking, replacing the competition law assessment with a presumption that gatekeepers should not widen the scope of their products to the extent that these incorporate products previously offered by a standalone rival.

In my view, this approach is likely to damage an important type of innovation competition, namely competition in product scope. There are many examples of the characteristics of products changing over time which have damaged some firms but which have enhanced competition and consumer benefits overall. For instance, smartphones now include integrated digital cameras, which were previously offered on a standalone basis. This additional functionality, integrated with other services on the phone, has led to substantial innovation. (For instance, one can now make a passport application online using the integrated camera; it is easy to lead up photos to social media accounts; etc.) However, it clearly had a dramatic effect on sales of standalone digital cameras.

Under the DMA and 19a proposals, one could argue that this integration damaged competition in standalone digital cameras. But how could Apple or Samsung offer a choice of digital camera providers to be chosen by consumers as part of an iPhone or Android phone? If the DMA (or 19(a) GWB) had been in place, digital camera providers would seem likely to have complained that this was contrary to these regulations, and hence smartphone/camera integration may never have happened.

There is also an incentive issue for gatekeepers. It is not clear that Google would have been interested in taking the cost burden of redesigning its products to include maps were it to have to offer the maps slot to rivals (on unclear terms and perhaps for free).

The danger of these provisions is that they fossilise the characteristics of products and make it impossible or unattractive for gatekeeper firms to develop those characteristics. And yet this is a critical source of innovation in the economy – not just in digital firms but more broadly (in the offline world, one could similarly argue that supermarkets should not be allowed to sell clothes or electrical goods).

The DMA and GWB 19(a) 3 (a) therefore place the European Commission and Bundeskartellamt in the troubling position of being product regulators in digital markets. Their qualifications for this are not obvious. This seems unlikely to lead to improvements in consumer welfare. ?