The British Government’s consultation on the design of the new regulatory regime for Big Tech (the “Consultation”) closed on Friday. We gave our initial thoughts on this legislation back in July. This blog post picks out some of the other important issues.
For the most part, the Government has followed the advice of the CMA’s Digital Markets Taskforce, which we have discussed with approval in previous posts. There is much to like in the Consultation: the test for strategic market status (“SMS”); the activity-based approach to SMS designation; the codes of conduct tailored to each SMS firm; the flexibility to impose pro-competitive interventions and then revise them later; the significant penalties for breaches of the rules; and the recognition of the need for cooperation between regulators.
In our view, the Government should spend the next stage of the process focusing on how to make the new regime more streamlined and effective, both in terms of getting to Day 1 of the new regime and also when the Digital Markets Unit (“DMU”) comes to enforce its provisions. There is a risk that years of hard work – from the Competition and Markets Authority (“CMA”), the relevant Government departments, and the businesses who have invested their time and money in contributing their views and data – will result in a regime that fails to make a material change to the lives of British consumers.
We therefore make the following suggestions.
1. SMS designations
By the time the legislation is passed, the CMA will have conducted detailed assessments of Google, Facebook and Apple’s market power (and we assume a market study into Amazon is also planned). The CMA’s analysis will have set out in impressive detail why these companies justify being SMS-designated. The issues contained in that analysis have already been subject to repeated consultation in a process that is arguably more transparent than any other competition authority in the world.
However, the Consultation proposes a further investigation lasting 12 months or 9 months in which the DMU would conduct an SMS designation process. There is no suggestion that such an investigation could be completed before the legislation comes into force, so the implication is that this process would kick off around 2023, with the DMU’s decision coming in 2024 and the subsequent appeals leading the new regime coming into force in 2025 or even 2026 – that would be seven years after the Furman Report! I do not believe this is the Government’s intention, but we urge them to take steps to make sure it does not happen.
The designation process could be made considerably shorter for those SMS firms that have been the subject of a CMA market study. In that situation, the DMU merely needs to apply the facts, which have already been set out in detail and do not need updating, to the new legal test, which is identical to the test already envisaged in the CMA’s various reports. All it needs is a short report with a 21-day consultation period (mirroring the period for replying to the provisional findings in a CMA Phase 2 merger).
The DMU should be given shadow powers, and a strong steer, to complete these processes for the initial SMS firms before the legislation comes into force. The legislation can state that any CMA or DMU decision published prior to the legislation coming into force, which finds that a firm has substantial and entrenched market power providing the firm with a strategic position, may be formally treated as an SMS designation.
For these initial designations, a full 12-month or 9-month investigation in which the DMU works through a fresh analysis would be procedural theatre rather than substantive investigation because the result would never have been in doubt.
2. Statutory deadlines
The Government rightly wishes to make the DMU’s timescales for SMS designations and other investigations as short as possible. However, it must also consider how to help the DMU to make such timescales achievable.
- The legislation could include the explicit ability for the DMU to rely on previous analysis that has already been subject to consultation, unless an affected business can show that the situation has materially changed.
- The legislation could also keep the decision-making processes as streamlined as possible – for example, specifying something to be a DMU Board decision (rather than a decision by senior DMU executives) adds weeks or months to the process.
- A formal hearing similar to a main party hearing in a CMA Phase 2 merger would add perhaps 1-2 weeks to an investigation timetable, so the Government and DMU should consider whether they are necessary for all of the DMU’s investigations.
- The legislation could require the DMU to inform the relevant parties of its decision by the statutory deadline but the time-consuming redaction process and then publication of the decision could follow within, say, a month of that deadline.
Such measures would not compromise the substantive outcomes or the ability of interested parties to contribute to the DMU’s thinking. It should remain a core principle that SMS firms and other affected firms are given a high level of consultation rights.
The Government should also bear in mind that regulators subject to short deadlines tend to frontload their work into the period before the formal statutory clock starts, which can be counterproductive when viewing the end-to-end timetable. For example, the European Commission’s Phase 1 merger investigations last only 25 days but the “pre-notification discussions” often last many months.
3. Interim measures
There are signs that SMS firms are starting to recognise that they need to consult the industry before making significant changes – see, for example, Google’s offer of commitments to the CMA in its investigation into the Privacy Sandbox proposals. Nevertheless, interim measures (called “interim code orders” in the Consultation) will be a major battleground in the new regime, where smaller tech firms will be pushing the DMU to suspend SMS firms’ conduct while it investigates them.
Interim code orders need to be imposed quickly at the start of investigations so as to preserve the situation pending the DMU’s decision (which will be quite prompt as the statutory deadline is proposed to be six months). However, the Government proposes to require the DMU to prove “irreversible change” or “significant damage” (paragraph 100 of the Consultation). This would make the process unworkable. Businesses could easily go bankrupt as a result of a discriminatory algorithm change (whether that change has been made intentionally or negligently by the SMS firm) before the DMU’s decision on the interim code order is issued.
Competition law investigations in the UK use a very similar test to that being proposed in paragraph 100 of the Consultation. The CMA has only ever imposed interim measures once, in a case involving airlines last year. And remember that this is a process with no statutory deadline, unlike the DMU’s investigations which are intended to take only six months. The interim measures in that CMA case were imposed more than two years after the case was opened.
We suggest a simple statutory test that would be less biased in the SMS firms’ favour:
- If considering whether to investigate, or investigating, conduct that has not yet occurred, unless it believes such action would be disproportionate to the harm caused, the DMU shall order the SMS firm to suspend the implementation of that conduct until such time as the code breach investigation has concluded.
- If considering whether to investigate, or investigating, ongoing conduct, the DMU shall consider whether its objectives are better served by ordering the SMS firm to suspend or reverse that conduct, or whether it should be allowed to continue, until such time as the code breach investigation has concluded.
- Only in the latter case shall the DMU provide the SMS firm with its reasons for imposing such an order.
The risks of not intervening must be given equal weight to the risks of intervening.
4. Leveraging market power from one market to the next
The leveraging of market power from an SMS firm’s core market to an adjacent market is one of the main issues to be addressed by the new regime. Any short-term benefit to competition by the SMS firm’s entry or expansion in the adjacent market is more than outweighed by the longer-term effects of the SMS firms extending their market power in a way that competitors – even those with a better product – cannot defeat.
This issue is dealt with briefly in the Consultation (paragraphs 92-93). The DMU would have the ability to prohibit the following:
- An SMS firm’s conduct in an SMS activity that affects competition in the SMS activity;
- An SMS firm’s conduct in an SMS activity that “tips” competition in an adjacent activity in its favour in the long term; and
- An SMS firm’s conduct in an adjacent activity that “further entrenches” its position in an SMS activity.
The understandable desire to keep the regime as narrow as possible could result in rules that ignore the overwhelming market power of SMS firms across the digital ecosystem, which does not confine itself to activities of a single description. For example, the DMU could not prohibit the following:
- An SMS firm’s conduct in an SMS activity that weakens the competition it faces in an adjacent activity in the short term or medium term (i.e., harms that fall short of “tipping”); and
- An SMS firm’s conduct in an adjacent activity that weakens the competition it faces in that adjacent activity.
The Consultation’s approach would allow activities detrimental to competition in the non-designated activity to carry on unfettered, even if they are closely related to the fact that the SMS firm has substantial and entrenched market power in nearby markets. It would also encourage lengthy litigation about the definition of “tipping” and the location of a type of conduct, i.e., in which activity the conduct should be legally said to have happened, which is divorced from the reality of how competition functions across activities.
The DMU should be given greater freedom to intervene in conduct that is “related to” the SMS activity so that the enforcement of the codes of conduct is aligned with the power to impose the pro-competitive interventions (see paragraph 123 of the Consultation).
5. SMS mergers regime
The enhanced mergers regime for SMS firms, especially the lower “realistic prospects” standard of proof for blocking their mergers, is perhaps the most controversial element of the Consultation amongst the Big Tech firms.
In the section at the beginning of Part 7 of the Consultation, which discusses the rationale for SMS merger reform, paragraph 164 states that, “[m]any start-ups (and their early investors), for example, aspire to be acquired or funded by large digital firms. This prospect can be important for these firms to grow to a sufficient scale or challenge others in the market.” This argument is employed by the large tech firms as a reason not to block their acquisitions of competitors who threaten to challenge them, but without evidence that a more interventionist merger control regime would dissuade a single entrepreneur from starting her own business. If smaller firms were unable to sell out to the SMS firms, they might continue to grow their businesses to eventually challenge the SMS firms’ market power. Even if the business did not ultimately remove the SMS firms’ market power, the economy would benefit from their innovation and competition in the meantime. The ability to cash in, just as a business is starting to threaten larger firms, may even be part of the reason why the UK has no tech firm in the same league as Google, Apple, Facebook and Amazon. Moreover, this argument seems to care only about the interests of investors rather than the consumers who would benefit from greater competition in digital markets.
To our mind, it would be unsatisfactory if so much effort was to be spent in designing a regulatory regime that will reduce the harms arising from excess market power, only to allow the accumulation of more market power through the acquisitions of nascent competitors. It’s like locking the front door when you leave the house, only to leave the side door open with a neon arrow sign pointing to it.
The Consultation sets out a complex multi-tiered SMS mergers system, which does not sit very easily with the Government’s parallel consultation on changes to the general merger regime, where the changes to the share of supply test seem likely to catch many SMS mergers in any case. It would be better to straightforwardly state that all acquisitions by SMS firms are subject to mandatory notification, perhaps subject to a low de minimis threshold where the costs of the merger control process are higher than the acquisition costs.
Overall, we believe the British Government is on the right track, but should now inject some more boldness, urgency and ruthless project management. It should weight the risks of not intervening as equal to the risks of intervening, and it should make sure the regime is equally balanced between SMS firms and the businesses and consumers who rely on them.
As the CMA says in its published response to Consultation: “While the UK has been a leader in setting this agenda up to this point, we will need to maintain the pace to avoid falling behind.” For our international friends, let me translate. That is British Civil Servant English for “Please hurry the hell up”.
[Disclosure: The author was previously Legal Director on the CMA’s Digital Markets Taskforce and clients of Geradin Partners are involved in these issues.]