Digital Market Act: Impact on antitrust in European Union

The newly agreed upon Digital Market Act (DMA) has the potential to become a landmark legislation in regulating big tech. We shall see the context, main provisions and analyze the impact of DMA on antitrust in the European Union. I believe the overall impact will be on the negative side as far as the antitrust aspect is concerned especially when innovation is considered.

Context

In March 2022, the European Union (EU) agreed upon the Digital Market Act (DMA) aimed to make the digital sector fairer and more competitive in Europe. The proposed law aims to improve competition by preventing large companies from abusing their market dominance and thereby encouraging new players to enter the European common market. Along with Digital Services Act, DMA is part of a digital strategy entitled ‘Shaping Europe’s Digital Future”. The proposal is not expected to be implemented till 2023 as the legislation is yet to be approved by the European Parliament and European Council.

Highlights of key provisions

DMA targets the big tech by introducing the concept of ‘gatekeepers’ as companies who meet certain criteria in terms of revenue (>7.5 billion EUR), users (>45 million monthly end-users or >10,000 business users established in the EU) and/or market capitalization (>75 billion EUR). At the same time, there are exemptions for a small or medium entity being classified as a gatekeeper. Further, there is an ‘emerging gatekeeper’ category for “companies whose competitive position is proven but not yet sustainable”[1].

DMA will have an impact on 8 categories of ‘Core Platform Services (CPS)’. They include social media networks, search engines, video platforms, communication services, intermediation services, cloud computing services, operating systems, and advertising networks that operate alongside any of them. The act:

 (i) Prohibits combining data from different services of the same company to derive insights. For example; Gmail and YouTube, Facebook and Whatsapp, etc.

(ii) Protects platform business owners.

(iii) Legal measures against self-preference for own products. Example: Microsoft products in Bing search.

(iv) Ensures interoperability, portability and access to data for users.

(v) Regulations on pre-installation of apps/services.

(vi) Regulations on product bundling practices.

Penalties for violations can go up to 10% of the gatekeeper’s global turnover for an initial breach and up to 20% for subsequent infringements.

Impact on Antitrust

Antitrust law (Competition law) refer to those practices which promote market competition by regulating anti-competitive practices by companies. In this section, we will analyze the DMA’s impact on antitrust.

Relationship with existing competition laws

The competition law in the EU is guided by Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU)[2]. Article 101 prohibits anti-competitive agreements between two or more independent entities. Article 102 prohibits abusive behaviour by companies holding a dominant position in any given market. The DMA will be an ex-ante regulation to reign in big techs to promote competition in Europe. It is premised on the belief that current policies have not been effective in reigning in the size, scale and perceived dominant behaviour of large US online firms[3]. Having said that, I believe the DMA will not replace the extant competition law and regulations but supplement them in addressing specific enforcement gaps by focusing on digital space.

Impact on innovation

One of the objectives of DMA is to address the competition arising from large companies in the US and China. DMA will force these companies to change the manner of conducting business within Europe. The legislation aims to promote competition by enabling the growth of startups and medium enterprises within Europe. I feel the regulations will promote innovation by startups to a certain extent because of the protection provided by DMA. However, I have concerns about DMA’s effectiveness in promoting innovation as few pro-innovation EU member states have expressed concerns about suppressing the effects of stringent regulations on innovation in the EU. Established companies might prevent best investments in the EU region because of the compliance burden. For instance, Estonia warned against overregulating the online service providers.[4]

Impact on customers

 When large companies combine data from different products and services provided by them there are beneficial integration and efficiencies. For example, Google drive’s integration with Gmail enables large files to be sent via email, Amazon Prime can provide cheaper services to its customers while shopping, etc. When DMA is implemented, I feel competitors may be able to provide isolated products and services but the cost from the customer's point of view increases. Further, there would be liability issues with blurred lines between several players under the EU level ‘Directive 85/374/EEC’ on liability.

Impact on mergers and acquisitions

Under the proposed DMA, gatekeepers will be required to inform the commission about proposed concentrations under Article 12 involving other platform providers in the digital sector[5]. This helps the commission monitor mergers and killer acquisitions which have the potential to disrupt the market. Additionally, mergers are regulated by Council Regulation (EC) No 139/2004 along with domestic laws of member states. My inference on this proposal is that startups will have lesser investors as the potential for their acquisition is reduced and accordingly, their valuation will be seeing a downtick. This will in turn deter aspirational entrepreneurs from venturing and thereby countering the very purpose of promoting innovation and competition under DMA. Further, medium enterprises will try to remain at the same level because of the benefits enjoyed under DMA. These will impede the creation of big businesses in the EU.

Relationship between digital and non-digital markets

DMA classifies markets as digital and non-digital. However, the emerging pattern of the businesses shows a hybrid trend where traditional non-digital markets are increasingly adopting digital aspects and becoming hybrid. It is unclear to what extent a company needs to adopt digital sales to be considered a digital company[6]. For example, consider the case of a smartwatch seller who sells a physical product but at the heart of it are digital services running on it. According to me, this strict bifurcation between digital and non-digital will lead to several grey areas leading to potential litigation and jurisdictional issues.

Way Forward

As seen above, there are some potential issues on the antitrust front which need to be addressed if DMA has to achieve its objective. This includes harmonizing existing laws and regulations to promote innovation yet at the same time assuaging concerns expressed by big techs. This inter alia includes intellectually property concerns where US companies would be forced to disclose sensitive trade secrets, proprietary data and prized source code of algorithms.

As DMA’s successful implementation has the potential to become a gold standard for regulations across the world, the EU needs to work on enforcement challenges that would arise in implementing DMA. Relevant laws within member states need to be harmonized across the EU to avoid conflicts. There must be sufficient resources provided to enforcement authorities to balance the asymmetry in resources between regulators and large companies.

DMA must provide the best possible products and services to the end-users and customers. To do this, DMA must encourage partnerships that promote innovation between entrepreneurs, startups and big techs. The regulations in their current form carry more negative dictums and border protectionism tendencies. These may violate the spirit of the EU’s obligations under international trade agreements such as World Trade Organization’s Trade-Related Intellectual Property Rights (TRIPS) agreement and renewed Transatlantic Partnership proposed.

Further, there must be an impact assessment of the DMA by anchoring it to measurable outcomes by identifying key metrics. This can broadly include the number of new startups created, investments from gatekeepers into the European Union, alternatives for the EU in case big tech decide to rationalize their expenditure on R&D and innovation in the EU, and how much the similar services cost in the EU vis-à-vis other markets post the implementation of DMA among others.

[1] https://www.europarl.europa.eu/news/en/press-room/20220315IPR25504/deal-on-digital-markets-act-ensuring-fair-competition-and-more-choice-for-users

[2] https://ec.europa.eu/competition-policy/antitrust_en

[3] https://www.csis.org/analysis/implications-digital-markets-act-transatlantic-cooperation

[4] https://www.euractiv.com/section/digital/news/digital-brief-powered-by-google-dsa-and-dma-member-states-respond/

[5] https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020PC0842&from=en

[6] https://www.csis.org/analysis/implications-digital-markets-act-transatlantic-cooperation