There is much to like in the CMA Digital Markets Taskforce’s advice to the UK government on a pro-competition regime for digital markets

CMA publishes annual report for 2016/17 - GOV.UK

Yesterday, the Digital Markets Taskforce led by the CMA issued its advice (the “Advice”) regarding the setting of a pro-competition regime in digital markets in the UK, referred to as a Strategic Market Status (“SMS regime”). This Advice is a very rich document of 89 pages, accompanied by several Appendices. This post does not intend to provide a detailed discussion of the Advice, but instead make a number of general comments and draw some parallels with the Commission’s proposal for a Digital Markets Act (“DMA”), which will be published on 15 December. For the reasons that will be discussed below, my overall impression is that the Advice is a serious piece of work, which makes sound recommendations. I would not make many changes in the document if I were allowed to edit it as it proposes a balanced approach to address the harm that may be created by large digital platforms. One key aspect is that the Advice recommends that the SMS regime only applies to the largest platforms (e.g., suggesting very high turnover thresholds). That approach makes a lot of sense.

The Advice is very much in line with the Furman Review, which recommended the adoption of an ex ante regulatory regime that would apply to a limited subset of digital market players having “Strategic Market Status” (“SMS”).  This ex ante regime would essentially take the form of codes of conduct, which would be adopted by a Digital Markets Unit (“DMU”) as well as pro-competitive interventions. Last week, the Government indicated that it would support the adoption of such an ex ante regime and that the DMU would be set up within the CMA in April 2021. The Government would also propose legislation that would give the DMU the powers it needs to implement and enforce such a regime based on the advice of the Digital Markets Taskforce, which came out yesterday.

A first observation is that this Advice is the culmination of a lot of work where stakeholders have been given ample opportunities to comment. It builds on the Furman Review, as well as the CMA Market Study on online platforms and digital advertising, whose Final Report came out last July. While the European Commission triggered a public consultation on the planned EU ex ante regulatory framework last summer, a much greater amount of analytical work has been performed by the CMA. This does not mean that the Commission’s proposal will necessarily be weaker than the proposed UK regime, but the process has certainly been less transparent than in the UK.

Now, considering that the Government will have to propose legislation, which will then have to be adopted by the Parliament to empower the DMU to identify companies with SMS status and then design codes of conduct with their participation, we are at least 2-3 years away from having this ex ante regime in place.  The same timeframe, in fact possibly longer, will likely apply to the DMA, since, once the Commission’s proposal is out on 15 December, it will have to go through the EU legislative pipeline (with the Council and the European Parliament involved if Article 114 TFEU is the legal basis) before becoming law, and then the regulatory body in charge of implementing the DMA will have to go through the motions of identifying digital gatekeepers, deciding which exact obligations and prohibitions will apply to each of them (assuming possible variations linked to the nature of the activity, the business model, etc.), and so on. This will clearly take time.

Let me now focus on some of the key aspects of the Taskforce’s Advice to the UK government.

WHY AN EX ANTE REGIME IS NEEDED

The Advice recognizes that

[t]he accumulation and strengthening of market power by a small number of digital firms has the potential to cause significant harm to consumers and businesses that rely on them, to innovative competitors and to the economy and society more widely.”

As to harm to business users the Advice notes that

digital firms with market power may be able to exploit the business users reliant upon them, such as marketplace sellers, app developers and advertisers (the vast majority of which are likely to be SMEs), through charging high prices. This can include through charging higher fees, higher commissions or higher prices for advertising than would be expected in a more competitive market.”

Similar concerns underpin the Commission’s intention to propose a DMA as one of the main rationales for this legislation is to ensure greater fairness in the relationship between digital gatekeepers and the millions of businesses depending on them.

The Advice also emphasizes the market power held by large digital firms may also lead to

reduced innovation and choice – as barriers to entry and expansion weaken the incentives of new entrants and challenger businesses to come forward with disruptive innovation – these dynamics also limit the incentives of the large digital firms to innovate themselves.”

Against this background, an ex ante regime is needed because, as recognized in the Furman Review, “existing competition laws are not, by themselves, sufficient to address these challenges” considering the entrenched market power of the most powerful digital platforms in the context of fast-moving markets.

SMS DESIGNATION

The ex ante regime will apply to companies that are designated as having SMS.

Only a very small subset of digital platforms will likely be designated as having SMS, as the following suggests:

  • First, the Advice recommends that “SMS should require a finding that the firm has substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position.” Thus, even if a firm has market power in a digital activity, this is not sufficient, as this market power should be both “substantial” and “entrenched”, and should give the firm a “strategic position”. The Advice considers that a firm will have a strategic position “when the effects of its market power are particularly widespread or significant.” This could be determined on the basis of a series of factors, such as its size and scale, the fact that it is an important access point to customers, the fact that it can extend its market power from one activity to a range of others, etc. These factors are not unlike some of the qualitative criteria the Commission suggested it might use to identify “digital gatekeepers” in its public consultation.
  • Second, the Advice recommends that the DMU should set out in formal guidance its prioritization rules for designation assessments, including key factors, such as:
    • The firm’s revenue – it recommends the DMU prioritize firms of a certain size (it suggests focusing on firms with annual UK revenue in excess of £1 billion, and particularly those which also have annual global revenue in excess of £25 billion).
    • The activity undertaken by the firm – it recommends the DMU initially prioritize firms active in particular activities (relevant sectors could include online marketplaces, app stores, social networks, web browsers, online search engines, operating systems and cloud computing services).

Although this is only a suggestion, the suggested turnover is quite high, i.e. annual UK revenue in excess of £1 billion and annual global revenue in excess of £25 billion. Clearly, only a handful of digital platforms would exceed such thresholds. Such an approach is quite different from the Commission’s rumoured approach of laying down criteria that would capture a wider group of 15 to 20 platforms within the notion of digital gatekeepers. For the reasons I have expressed here, it would be a tragic mistake to designate such a large number of digital gatekeepers as it would reduce the support for the DMA, lead to a watering down of its rules, and impede effective enforcement. It seems that the CMA has well understood these dangers.

THE THREE PILLARS OF THE SMS REGIME

The Advice suggests that those firms that are designated with SMS should be subject to the following three pillars of the regime:

  • An enforceable code of conduct which sets out clearly how the firm is expected to behave in relation to the activity motivating its SMS designation. The code would set clear “rules of the game” up-front, preventing the firm taking advantage of its powerful position, such as through exploiting consumers and businesses or excluding innovative competitors. The proposed objectives of the codes of conduct would be as follows:
    • Fair trading: users are treated fairly and are able to trade on reasonable commercial terms with the SMS firm.
    • Open choices: users face no barriers to choosing freely and easily between services provided by SMS firms and other firms.
    • Trust and transparency: users have clear and relevant information to understand what services SMS firms are providing, and to make informed decisions about how they interact with the SMS firm.
  • Pro-competitive interventions that seek to address the sources of market power and drive longer-term dynamic changes in these activities, opening up opportunities for greater competition and innovation. For example, interventions relating to personal data mobility, interoperability, and data access, which can be used to address the factors which lead to the firm holding such a powerful position. Importantly, the Advice recommends that “[w]ith the exception of ownership separation, the DMU should not be limited in the types of remedies it is able to apply.” These interventions should, however, be “effective and proportionate remedy to an adverse effect on competition or consumers.”
  • SMS merger rules to ensure closer scrutiny of transactions involving SMS firms, given the particular risks and potential consumer harm arising from these transactions.

I like the idea of a code of conduct compared to a general set of rules that would apply to all SMS firms as it allows its content to be tailored to the activities, business model and potential harm created by these firms.

It is also important to note that “the code of conduct should be focused on the activity or activities which underpin the SMS designation – ie in those designated activities in which the firm has substantial, entrenched market power, providing the firm with a strategic position.” That makes sense. While for instance Apple clearly has “substantial, entrenched market power, providing the firm with a strategic position” in the market for the distribution of apps on iOS devices (as there is no alternative to the App Store, which should therefore be subject to a code of conduct), Apple may not be in the same position for its other activities (such as selling devices, etc.).

THE DMU’S POWERS AND PROCESSES

Regarding the DMU’s powers, the Advice makes inter alia the following recommendations:

  • The government should establish the SMS regime such that the “DMU can draw information from a wide range of sources, including by using formal information gathering powers, to gather the evidence it needs to inform its work.”
  • The DMU “should be able to open formal investigations into breaches of the code and where a breach is found, require an SMS firm to change its behaviour. These investigations should be completed within a fixed statutory deadline.”
  • Importantly, the DMU should be “able to impose penalties up to a maximum of 10% of worldwide turnover.”

I could devote much more space to discuss the Advice of the Digital Markets Taskforce, but it is probably enough for now. Needless to say that the hard work will start as the government needs to propose legislation, which has to go through parliament. One can expect strong lobbying from the firms that could be designated as having SMS. Yet, the Advice is a great piece of work and the Digital Markets Taskforce should be commended for its effort.

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