European Commission issues terms of reference for study on “platforms with significant network effects acting as gatekeepers”

Last week, the terms of reference (“ToR”) of the above-mentioned study started circulating in Brussels. While Christian Borggreen of the big tech’s lobby CCIA criticized this planned study as a “political hitjob”, I have a more positive view of it. As the Commission has to assess the impact of all its legislative proposal, there is certainly nothing wrong to tender “to assist the Commission’s Impact Assessment process in providing it with robust evidence as regards issues linked with gatekeeping power of digital platforms with strong data-driven network effects, and a structured analysis of problems raised by those platforms.”

What the Commission is concerned about is summarized in these two extracts of the ToR:

• “The digital platform economy is characterised by strong ‘winner takes most’ effects, whereby an accumulation of a critical amount of users or device data generates an essentially incontestable competitive advantage that may lead to the situation where once an incumbent is established, the ability to scale up or enter the market may be extremely difficult for any competitor. This is due to the specificities of the platform economy that allow the winner a large competitive advantage due to the economies of scale and of scope, reinforced by data-driven network effects. A potential new entrant or market operator that would like to expand may find it extremely difficult to overcome this competitive edge without operating a sufficiently large user base. This position allows those platforms (Platforms with Significant Network Effects acting as Gatekeepers) to act as private regulators setting the rules of the game on the markets they control, which are critical markets for a very large number of users and SMEs and are central to the digital economy.”
• “This initial analysis focuses on the role of some large online platforms driven by strong economies of scale, and direct and indirect network effects who increasingly act as private gatekeepers to critical online activities for an exceptionally large population of private and business users. This gatekeeper role is enabled inter alia by their hold over vast amounts of data and in some cases very large customer bases. Their systemic ability to cement and even expand their critical gatekeeping roles, including in other ecosystems, to raise barriers to entry and expansion for rivals and to increase their hold and leverage over their users have not been effectively tackled by existing regulation. A particular challenge for market regulation arises from the opacity and complexity of these large platform ecosystems resulting from both platforms’ cross-market (vertical and horizontal) integration and automation of their core services and the significant information advantage such platforms have over regulators.”

The ToR list several tasks and sub-tasks to be performed by the authors of the study.

Task 1: “Identify and provide for structured analysis of issues raised by platforms with strong network effects acting as gatekeepers.”

Subs-task 1: “Identify issues stemming from gatekeeper power within online platforms ecosystems”‘

The ToR position the issues to be analysed as follows:

“Due to the economics of online platforms and them benefiting from strong network effects these platforms can leverage the same core abilities (data; customer base; technological assets, skills and know-how; and/or financial capital) to enter and potentially ‘conquer’ new (and even completely unrelated, in terms of economic sector) markets with relative ease. Such expansion further strengthens their core abilities and limits the contestability of these markets. This may lead to unusually large commercial imbalances and bargaining power between platforms on the one hand and their users and rivals on the other. This power of certain online platforms and their role as gatekeepers between business users and consumers also allows them to control almost entire ecosystems and unilaterally set rules within the platform ecosystems they control.

It may also give scope for unintended harms as well as for misuse, such as: (1) risk of unfair commercial ‘platform-to-business’ practices (e.g. self-preferencing, data leveraging) and/or (2) risk of distortion of fair competition and fair trading conditions within platform ecosystems (e.g. discounting ‘organic’ results in favour of advertisements).”

With these concerns in mind, the ToR provide that the study should: “1) gather evidence reflecting these trends in the online platform economy; 2) identify concrete issues posed by platforms with significant network effects acting as gatekeepers and; 3) identify and analyse business practices that potentially harm innovation, consumer welfare, business users and competitors.”

Moreover, the study should perform six case studies, covering self-preferencing, data access, digital identity services, interoperability, leveraging conglomerate data holdings into other markets, and information asymmetries in data gathering. The choice of these market studies makes sense as they cover issues that were already discussed in the expert report commissioned by Commissioner Vestager, and that have been hotly debated in industry, policy-making, and academic circles.

Sub-task 2 : Specify the regulatory gaps in terms of gatekeeping power of platforms

The ToR position the issue to be analysed as follows:

“As demonstrated by a number of recent studies (see context above), the existing service-, market- or sector-specific regulation does not effectively address systemic and structural issues deriving from the economic power of online ecosystem (vertical integration allows circumvention when only parts of the value chain are regulated) while existing competition rules are not designed to address (i) issues deriving from the structural and systemic control over whole platform ecosystems that are essentially impossible to contest as well as (ii) wider competition related systemic problems in the online platform economy. Due to the particular dynamics of digital economy the cases of market distorting practices are due to (i) effects of the structural and systemic control exercised by large digital platforms over online ecosystems as well as (ii) wider structural market issues and market failures rather than abusive practices by a dominant company. The antitrust interventions, such as a restoration of status quo may thus be insufficient to address the underlying problems and set in too late.”

Thus, the Commission is concerned that — as already observed in the Furman report — EU competition rules may not be sufficient to address some of the issues created by digital gatekeepers. The study should therefore assess “whether the existing regulatory approach is adequate to address the challenges stemming from complexities of online platform ecosystems, the fast pace of change and, in some cases, the platforms’ market power.”

Task 2: Analyse the identification criteria defining “gatekeeper”/“structural” platforms

Assuming that ex ante regulation is needed, the next task is to identify which online platforms would be subject to it. The ToR provide that:

“For the purpose of this identification, the contractor is expected to propose a set of mainly quantitative indicators (and underlying methodology for setting those) on the basis of platforms’ characteristics such as number of unique users, number of visits, the amount of gathered data, time spent on the platform, network effects and drivers of growth, main source of income, multi-platform integration, third parties’ turn-over realised on a platform or geographic coverage, number of transactions, etc.”

I am doubtful that the platforms that should be subject to ex ante regulation should be solely identified on the basis of quantitative criteria, instead of a combination of such criteria with qualitative factors that are identified elsewhere in the ToR, such as those referred to in the extracts of the ToR mentioned at the beginning of this post, including:

• the fact that the “accumulation of a critical amount of users or device data generates an essentially incontestable competitive advantage” for some platforms;
• the presence of “economies of scale and of scope, reinforced by data-driven network effects”;
• the ability for some platforms to act “as private regulators setting the rules of the game on the markets they control”;
• their “systemic ability to cement and even expand their critical gatekeeping roles, including in other ecosystems, to raise barriers to entry and expansion for rivals and to increase their hold and leverage over their users have not been effectively tackled by existing regulation”; and
• “the opacity and complexity of these large platform ecosystems resulting from both platforms’ cross-market (vertical and horizontal) integration and automation of their core services and the significant information advantage such platforms have over regulators.”

The duration of the contract will be 5 months (following the signature of the contract by both parties), of which 4 months are for the execution of the contract and one month for the final approval of the deliverables and closure of the contract.

The budget allocated for the study is €600,000, which is reasonable considering the wide scope of the study and the complexity of the issues to be studied.