What is a digital gatekeeper?

In the past couple of years, several reports have concluded that a small number of large digital platforms act as gatekeepers in that they are necessary gateways between business users and their prospective customers. This allows these platforms to take advantage of the dependency of these business users on their services by imposing unfair trading terms. Since this issue may not be adequately addressed through competition law, the European Commission has proposed a Digital Market Act (DMA) with a view to ensuring the fairness and contestability of digital markets.

Against that background, I wrote a paper entitled “What is a digital gatekeeper? Which platforms should be captured by the EC proposal for a Digital Market Act?”. This paper focuses on the question of which digital platforms should be subject to ex ante regulation and, thus, to the obligations contained in the DMA proposal. This question is important for several reasons. First, it is important for the platforms that may potentially be designated as gatekeepers, as in that case they will be subject to an extensive set of obligations and prohibitions, which will materially affect their business operations. Second, the designation criteria must avoid the pitfalls of being over- or under-inclusive. Over-inclusiveness may negatively impact the strength of the obligations and prohibitions imposed on designated gatekeepers, as some digital platforms that are not obvious gatekeepers (as they are not an unavoidable gateway between business and end users), but nevertheless fear that they will be designated (because they satisfy the quantitative thresholds set in Article 3(2) of the Proposal) will likely lobby against the DMA, hence reducing its industry support. Over-inclusiveness may also strain the implementation, monitoring and enforcement process, as the larger the number of designated gatekeepers the more the Commission’s resources devoted to the DMA will be stretched. There is therefore considerable merit in ensuring that the number of designated gatekeepers remains small (certainly less than 10 digital platforms). On the other hand, under-inclusiveness is also undesirable as it may fail to protect business users from the harmful practices that may be pursued by platforms holding gatekeeping positions. In short, it is critical that the obligations and prohibitions contained in the DMA apply to the right set of digital platforms.

More generally, as observed in the paper, the methodology used to designate gatekeepers cannot be divorced from the issue(s) that ex ante regulation is aimed to address, which is the imbalance of bargaining power resulting from the dependency of business users on the services provided by the gatekeeper controlling access to consumers and, thus, markets. It is the lack of credible alternatives what makes gatekeepers able to impose unfair terms and conditions on business users, which in turn affects consumers. Otherwise the DMA might end up regulating the wrong set of companies, i.e. companies on which business users are not “dependent” due to the presence of alternatives.

The DMA Proposal designates as “gatekeepers” providers of Core Platform Services (“CPS providers” – core platform services include search engines, app stores, social networks and more) that satisfy three cumulative qualitative criteria (Article 3.1). These criteria are presumed to be satisfied when the CPS provider in question meets size-related quantitative thresholds, such as market capitalization, turnover and number of monthly active users, etc. (Article 3.2). The advantage of relying on quantitative thresholds is that they are in principle objective, relatively easy to apply (although questions of interpretation may arise), and they should therefore facilitate and expedite the designation process.

There are, however, two issues with the way the DMA Proposal articulates the qualitative and quantitative criteria respectively set in Articles 3(1) and 3(2).

First, these qualitative and quantitative criteria are not combined; when a CPS provider meets the quantitative criteria, the qualitative criteria are presumed to be met. As a result, the DMA would capture, under the current designation process, a larger number of platforms than if such criteria were to be applied cumulatively. While I do not have access to the data allowing to determine which CPS providers would fall under the quantitative thresholds, some observers have suggested that they could capture up to 15 companies, including some companies that just happen to be large (AirBnB, Booking.com, Oracle, SAP, etc.), but do not seem to have any a gatekeeping position on the Core Platform Service.

Second, as discussed in the paper, in at least two cases, there seems to be a weak causal link between the quantitative threshold set in Article 3(2) and the corresponding qualitative criterion set in Article 3(1) of the Proposal. For instance, the Article 3(1)(b) criterion, which requires that the CPS provider operate a platform that “serves as an important gateway for business users to reach end users” will be presumed to be met, as per Article 3(2)(b), if the CPS provider’s platform has “more than 45 million monthly active end users established or located in the Union and more than 10 000 yearly active business users established in the Union.” Similarly, the Article 3(1)(c) criterion, which requires that a CPS provider “enjoys an entrenched and durable position in its operations or it is foreseeable that it will enjoy such a position in the near future” to be designated as a gatekeeper, would be met as per Article 3(2)(c) if the threshold set at Article 3(2)(b) (which looks solely at the number of users of the platform) was met “in each of the last three financial years.” It is hard to see how one could infer that a CPS provider “serves as an important gateway” or has an “entrenched” position in its operations from the mere fact that it has a large number of business and end users (in the case of the former) or it has had many business and individual users for the past three years (in the case of the latter). Whether a CPS provider “serves as an important gateway” or has an “entrenched and durable position” does not depend on the number of its users in the abstract.

As far as the risk of over-inclusiveness is concerned, Article 3(4) of the DMA Proposal provides that a CPS provider that satisfies all the quantitative thresholds set in Article 3(2) can still escape designation if it “presents sufficiently substantiated arguments to demonstrate that, in the circumstances in which the relevant core platform service operates, and taking into account the elements listed in paragraph 6, the provider does not satisfy the requirements of paragraph 1.” As far as the risk of under-inclusiveness is concerned, Article 3(6) provides: “The Commission may identify as a gatekeeper … any provider of core platform services that meets each of the requirements of paragraph 1, but does not satisfy each of the thresholds of paragraph 2 […].”

The “elements” listed in Article 3(6), which the Commission must consider in its assessment are generally helpful, although I regret that that the presence/absence of multi-homing is absent from the list as it is quite helpful in assessing dependency. Users “single-home” when they use only one platform, while they “multi-home” when they use two or more platforms (or I should say “primarily” single-home or multi-home as users are not necessarily homogeneous). While exploitative issues may arise when users single-home on both sides or single-home on one side and multi-home on the other side, no such issues can arise when the platform is characterized by multi-homing on both sides. In that scenario, both sides can meet on alternative platforms, so any attempt of the platform to exploit one side would be likely counteracted by users switching to rival platforms.

For instance, hotel reservation platforms are characterized by multi-homing on both sides in that most prospective travellers will consult more than one platform (and likely also other booking channels, e.g., the hotel’s own website) before booking a suitable room, while hotels will typically offer their rooms on their own websites, as well as on multiple platforms. Hotel reservation platforms cannot be gatekeepers as both sets of users can reach out to each other through various platforms. For instance, a prospective traveller seeking to book a room at the Sofitel hotel in London can make that booking through various channels (including various OTAs, the website of the hotel itself, tour operators, etc.), while the Sofitel in London can reach prospective travellers through a variety of channels.

A high-level Panel of Economic Experts on Platform Issues appointed by the Commission to produce an economic opinion on the DMA Proposal also emphasized the importance of multi-homing in the assessment of whether a platform should be designated as a gatekeeper:

“Article 3 (6) of the DMA allows for the possibility of identifying a gatekeeper based on a variety of more qualitative factors, such as entry barriers from network effects and data advantages.

We add that, in the platform economics literature, entrenched market power is often measured by the extent and cost of multi-homing. More competition and substitution on one side of the platform market can reduce its market power on that side. We suggest that the Commission could use objectively measurable proxies for this, including for example (a) dependence on referral traffic from major search engines, social media and advertising, and (b) the extent of multi-homing by users on each side of the market.” 

One may, of course, ask whether the emphasis on multi-homing could allow the likes of Google to escape ex ante regulation. I do not think so. For instance, in the “Multi-homing: obstacles, opportunities, facilitating factors” study realized under the aegis of the EU Observatory on the Online Platform Economy, it is observed that single homing characterizes Google Search, the Play Store and the App Store, but also potentially Amazon, “which has a very loyal user base, which is further supported by loyalty and discount programs, such as Amazon Prime.” As far as online advertising is concerned, many business users heavily rely on Google and Facebook to promote their products and services, which effectively enjoy a duopoly. Importantly, it is only when CPS providers can show that there is multi-homing on both sides of the platform that they should escape designation.

Photo by Nikola Knezevic on Unsplash

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