Should the EU’s forthcoming ex ante regulation of digital gatekeepers be based on the EU regulatory framework for electronic communications?

As discussed in a prior post, the European Commission is currently working on an ex ante regulation to control the market power of so-called “digital gatekeepers” or “systemic platforms”. An idea floated by some would be to base this ex ante regulation on the EU regulatory framework for electronic communications.

The main features of this framework are the following:

• The Commission adopts a Recommendation identifying those product and service markets within the electronic communications sector, the characteristics of which may be such to justify the imposition of regulatory obligations.

• National regulatory authorities (“NRAs”) may consider that a relevant national market (which they have defined taking utmost account of the Recommendation) may justify the imposition of regulatory obligations if all of the following criteria are met:

(a) high and non-transitory structural, legal or regulatory barriers to entry are present;

(b) there is a market structure which does not tend towards effective competition within the relevant time horizon, having regard to the state of infrastructure-based competition and other sources of competition behind the barriers to entry;

(c) competition law alone is insufficient to adequately address the identified market failure(s).

NRAs conducting this analysis shall adopt a forward-looking perspective, taking into account market developments, all relevant competitive constraints, other types of regulation, etc.

• Where an NRA determines that, in a relevant market, the imposition of regulatory obligations is justified, it shall identify any undertakings which individually or jointly have a significant market power (SMP) on that relevant market.

• Finally, once the NRA has identified undertakings with SMP, it shall impose on such undertakings appropriate specific regulatory obligations (e.g. access obligations, equal treatment, transparency, unbundling requirements, etc.).

The reasons why some consider that the EU regulatory framework for electronic communications (hereafter, the SMP framework) should be used as a model for the ex ante regulation of digital gatekeepers (or should even be extended to these gatekeepers) are generally the following:

• First, some of the challenges created by the conduct of digital gatekeepers are similar to those created by SMP operators in the electronic communications field.

• Second, the SMP regime has been in place for many years, and could be adapted to the needs of regulating digital gatekeepers. Thus there is no need to reinvent the wheel.

• Third, the SMP regime is “asymmetrical”, as regulatory obligations will only be applied on companies that have SMP. That should also be the case with respect to online platforms. There is no need to burden all existing platforms with regulatory requirements, while only some of them are “problematic”.

• Finally, the SMP framework relies on experienced NRAs that are able to deal with the complexities of dynamic markets.

I can certainly see the logic of this approach and it has some merit. Yet, I remain unconvinced that this is the path that the European Commission should follow when it comes to regulating digital gatekeepers for the following reasons:

• First, the structure of the digital markets (search engine, social networks, app stores) is different from the structure of telecommunications markets. While the latter are dominated by a fairly large number of companies with a strong position in their domestic markets, the former tend to be dominated by a relatively small number of global actors.

• Second, the SMP framework is essentially implemented and enforced at the national level. I wonder whether this is suitable in the context of the regulation of digital gatekeepers. For instance, it would not make any sense, in my view, to have digital gatekeepers subject to regulatory obligations identified by NRAs on a national basis. This would generate inconsistencies across the internal market. As to the enforcement of regulatory requirements, an approach where both the Commission and NRAs would be in charge (with the Commission focusing on cases of EU interest as in the competition law field because, e.g. they raise transnational issues or important questions of principles) seems more promising than having all the enforcement done at national level;

• Third, if the digital gatekeepers subject to regulatory obligations were to be defined on the basis that they have SMP on some nationally-defined markets, this regulation would probably catch a large number of local actors, which although they may have SMP on a few local digital markets, are far from creating systemic challenges.

• Fourth, having 27 NRAs engaged in market analysis and defining obligations of SMP platforms would likely take a lot of time, while there is a growing consensus that we need intervention now.

• Finally, the SMP framework has often led to the imposition of extremely granular regulatory requirements on SMP operators. It is questionable whether such a “heavy-handed” approach is desirable in digital markets.

Thus, my initial assessment is that, while some aspects of the EU electronic communications regulatory framework may be a source of inspiration for the forthcoming EU ex ante regulation of digital gatekeepers, I would certainly not transpose that framework to digital markets. Having NRAs identifying SMP operators on nationally-defined markets with regulatory obligations applying on national basis does not sound like a good plan.

To be sure, I am strongly in favour of ex ante regulation, but I would much prefer an approach where digital gatekeepers are identified on the basis of a set objective criteria (such as the presence of network effects, economies of scale and scope, the ability to engage in vertical leveraging, etc.), with the determination of whether a firm is a digital gatekeeper and the list of obligations applying to it (and other digital gatekeepers) made at EU level, and where enforcement is jointly pursued at EU and Member State level. More on this soon.