DMCC Deep Dive : Digital Markets

Since the inception of the digital age, law-making bodies and regulators alike have grappled with the regulation of digital markets, struggling to keep pace with the ever-evolving nature of the technology giants who now tower over the industry. In November 2022 the European Union took the first step in revolutionising the regulation of big tech with the introduction of the Digital Markets Act (DMA), establishing, for the first time, an ex-ante regime for the regulation of big tech.

The UK recently responded with its own digital markets regulatory framework in the form of the Digital Markets, Competition and Consumers Act (DMCC). This received royal assent on 24 May.

What Changes are made by the Act?

The Digital Markets chapters of the DMCC introduce an ex-ante regime for the regulation of digital markets, most notably through the regulation of organisations designated by the CMA as having “Strategic Market Status” (SMS). Once an organisation is designated as having SMS, a door is opened to a world of increased regulation that touches almost every activity of the designated entity, from acquisition strategy to data protection, to strategic alliances.

How Does the Act Define a Digital Activity?

The Act defines takes a broad-brush approach to defining digital activities, and includes within the definition the following, irrespective of whether provided for a fee, or free of charge:

1. The provision of services by way of the internet (including via application);
2. The provision of digital content; and
3. Any other activity pursuant to the provision of services or digital content.

What does Strategic Market Status mean?

The Act sets out a number of conditions which must be satisfied in order for an organisation to be designated as SMS:

• Turnover: The firm must satisfy the relevant turnover thresholds (either ￡25 billion annual group worldwide turnover, or an annual UK turnover of ￡1 billion).
• Substantial and Entrenched Market Power: In order to assess this criterion the CMA indicates that it will engage in a future gazing exercise; examining how the market may look in five years absent the designation. Whilst the CMA will consider market shares in its assessment, there is no indication that (unlike with the current Chapter II enforcement regime) a threshold of 40% or higher must be met to establish substantial and entrenched market power. The CMA sets out that it will consider, non-exhaustively: profitability levels; the number of competitors in the market; levels of customer switching; data advantages; integration into wider ecosystems, and ownership of intellectual property rights.
• Position of Strategic Significance: The CMA will examine the size and scale of the undertakings' position in relation to digital activities. Again, the scope of what may be considered under this criterion is particularly broad and may include the number of users of the digital activity, the volume of data processed by the SMS firm in relation to the activity, whether the firms power in one area of the market may allow it to expand its dominance into other areas of the market – leveraging its existing influence, and even the ability of the firm to influence or control the behaviour of other undertakings.
• Link to the United Kingdom: Finally, the SMS firm must have a link to the United Kingdom. The link to the UK is defined in the broadest sense and even those which do not directly supply to the UK but provide a key input or component for a good or service that is ultimately supplied in the UK, may be subject to the Act.

Where the CMA has reasonable grounds for believing that an undertaking may meet the requirements to be designated an SMS, it may launch an investigation. On conclusion of the investigation, the CMA will issue a notice setting out its reasons for designating (or not designating, as the case may be) the undertaking as SMS. Each designation will last for an initial period of 5 years, with the possibility to extend or revoke.

The CMA has indicated that it anticipates it will carry out between 3 and 4 SMS investigations per year. Whilst, rather predictably, it is suggested that the undertakings that will first be subject to investigation will include those that have already been designated as gatekeepers under the DMA (including Alphabet, Meta, Apple, ByteDance, Amazon, Microsoft and Booking.com), the CMA has indicated that it is willing to go further than the European Commission, and will welcome the views from third parties as to which undertakings should be considered for investigation.

How could it impact your business?

Obligations on SMS Firms

Once a firm has received the SMS designation, it is welcomed into the world of digital markets regulation, and the heightened regulatory scrutiny this brings. The DMCC confers onto the CMA a plethora of powers relating to SMS firms:

1. Conduct requirements: Where a firm is designated as SMS, the CMA has broad jurisdiction to impose conduct requirements (CRs) on the firm, designed to protect consumers and/or the wider competitive process. In its draft guidance the CMA sets out the permitted type of CRs; a list of 13 liberally-drafted permitted purposes, including in relation to fair data use, self-preferencing, fair trading practices and interoperability. The sweeping nature of the permitted CRs in practice gives the CMA broad remit to implement CRs on virtually any aspect of a digital activity. The CMA has extended its enthusiasm for third party submissions to welcome opinions from third parties on the contents of CRs. Once the CRs have been decided, the CMA will publish the CRs online, available for any interested party to view. Where a breach is suspected or identified, the DMCC confers powers on the CMA to conduct investigations. The CMA has the power to impose enforcement orders on the undertaking and can pursue various remedies, including fines of up to 10% group worldwide turnover. Interestingly, the Act also makes provision for the CMA to intervene in contracts by way of final offer mechanism where it feels that the undertaking has breached an enforcement order in failing to agree fair and reasonable terms with a third party and grants the CMA investigation powers in relation to the agreement. The CMA then has the power to facilitate renegotiation between the parties, which presents a novel opportunity for parties entering into contracts with SMS firms.
2. Pro-Competition Interventions: In addition to CRs, the DMCC bestows upon the CMA the ability to make pro-competition interventions (PCIs) in relation to the digital activities of SMS firms. Under the PCI regime, the CMA can intervene and impose requirements on SMS firms where it feels that factors exist in the market which are causing an adverse effect on competition. The requirements that the CMA has the power to impose are wide-ranging and include both behavioural remedies (such as requiring the firm to give access to data or intellectual property) and structural remedies (including divestment).
3. Mergers and Acquisitions: For mergers and joint ventures involving designated firms and exceeding a value of ￡25 million, the DMCC introduces specific notification requirements, which may trigger a CMA investigation into the merger or joint venture.

What does this mean for firms who are at risk of being designated?

For risk and compliance teams at SMS firms, the Act introduces a new era, bringing with it an increased cost and a need for specialist advisors to assist with the complexities of the new digital regulation regime. As those firms which have previously entered into behavioural undertakings with the CMA will warn, reporting on the requirements alone can be a significant compliance task. Firms should fully and wholeheartedly engage with the CMA to feed into the designation process and engage in an ongoing collaborative strategy with the CMA, establishing open lines of communication. Designated firms will find themselves having to make far more frequent contact with the CMA, so it will pay to develop a constructive, collaborative dialogue.

From a financial perspective, the Act makes provision for a levy to be imposed on SMS designated firms to cover the CMAs operating costs in the field of digital regulation, introducing another cost of doing business for designated firms. The CMA indicated in its draft guidance that it will soon produce draft levy rules for consultation which will provide some indication of the necessary contribution.

What does this mean for firms who have a business relationship with SMS firms?

For those firms who are not at risk of being designated as SMS, the DMCC presents a sea of opportunities. The law will necessitate more egalitarian practices from SMS firms, allowing customers and competitors alike a fairer marketplace. Moreover, the DMCC presents firms with the opportunity to engage with the regulator, and feedback on the behaviour of SMS firms, or even make submissions as to which firms should be designated, and how they should be regulated. Where firms believe that SMS firms are not abiding by the requirements placed on them by the CMA, firms are presented with another option for enforcement of competition, one which is faster and more economically viable than the current court enforcement options.