One needed area of improvement for the Digital Markets Act: The designation of gatekeepers

The Digital Markets Act (“DMA”) is one of the core priorities of the French presidency of the Council of the European Union (“Council”), which commenced on 1 January 2022. According to several reports, the French presidency would like to pursue an aggressive agenda, with trilogue discussions being wrapped up by the end of March and adoption of the DMA following soon thereafter. Whether such an aggressive agenda is realistic remains to be seen, but it is not entirely unrealistic considering that the versions of the DMA adopted by the Council and the European Parliament (“Parliament”) are not far apart.

This means that the window of opportunity to influence or shape the content of the DMA is narrow. At this stage, it seems unrealistic to think that major changes of orientation can be introduced compared to the versions of the DMA produced by the Council and the Parliament and, as far as I am concerned, I do not think such major changes are necessary. Thus, it is reasonable to assume that the few weeks ahead should be used by stakeholders to suggest small, but potentially significant changes to improve the text that will be eventually be adopted by the Council and the Parliament.

In this blog post, I would like to revisit an issue that I already addressed a few months ago, which relates to the criteria and the procedure used to designate the gatekeepers to which the set of obligations contained, inter alia, in Articles 5 and 6 of the DMA will apply. Getting designation right is important for several reasons. First, there is no point in burdening platforms that do not exercise a gatekeeping function with demanding obligations. This would not serve any purpose. Moreover, because the implementation and enforcement resources of the regulator will be limited, it is better to concentrate these resources on platforms that are in a position to create harm. In an ideal world, the designation process should neither be overinclusive nor underinclusive.

There should be a conceptual link between the harm that the DMA seeks to address and the designation process. Recital 12 of the Commission’s DMA proposal suggests that the presence of digital platforms with certain characteristics (that is “extreme scale economies, very strong network effects, an ability to connect many business users with many end users through the multi-sidedness of these services, lock-in effects, a lack of multi-homing or vertical integration”) may lead to “weak contestability” and “unfair practices”. These are the two categories of harm identified by the Commission, which the DMA should seek to prevent.

Against that background, the Commission could have opted for a qualitative definition of gatekeepers that would have focused on the above, rather specific, characteristics. Instead, it decided to opt for a rather broad qualitative definition of gatekeepers, whereby a “provider of core platform services shall be designated as gatekeeper if: (a) it has a significant impact on the internal market; (b) it operates a core platform service which serves as an important gateway for business users to reach end users; and (c) it enjoys an entrenched and durable position in its operations or it is foreseeable that it will enjoy such a position in the near future.” (Article 3.1) The elements of this definition are, however, presumed to be met when a provider of core platform services exceeds certain quantitative thresholds in terms of turnover / market capitalization or fair market value and number of monthly active users (Article 3.2). As has been observed by academic commentators, the trouble with this approach is that these quantitative proxies measure size (see, e.g., Akman (2021) and Schweitzer (2021)), and thus may not be particularly relevant to the determination of gatekeeper or bottleneck power (see CERRE recommendations, 2021).

Aware of this problem, the Commission’s proposal allows providers of core platform services that satisfy the quantitative thresholds 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” (Article 3.4). While some of the elements listed in paragraph 6 are still focused on size, others are “far more useful” (Akman, 2021) to determine the presence of gatekeeper power, as they refer to the presence of “entry barriers derived from network effects and data driven advantages”, “scale and scope effects the provider benefits from”, “business user or end user lock-in” and “other structural market characteristics”. The most regrettable absence of this list of elements is the notion of “multi-homing”, considering it occupies a central place in the platform economics literature in determining the presence of gatekeeper power (Report from a Panel Economic Experts, 2021).

Most experts also observed that there should be a real possibility, in practice, to rebut the presumption established by Article 3.2 of the DMA proposal, especially given “the rather imperfect correlation between the quantitative presumption and the qualitative definition of a ‘gatekeeper’.” (Schweitzer, 2021) Otherwise, the designation process will result in capturing platforms that just happen to be big, but are not in a position to create the types of harm the DMA aims to prevent (i.e., lack of contestability and imposition of unfair terms) because they are, for instance, disciplined by alternatives.

With these caveats in mind, the system put in place by the Commission for the designation of gatekeepers was fairly balanced. But now, let us see what the Council and the Parliament made of it, with a focus on the possibility offered to firms meeting the quantitative thresholds laid out in Article 3.2 to show that they do not meet the conditions set up in Article 3.1.

As far as the Council is concerned, Article 3.4 of the General Approach reads as follows:

“The Commission shall, without undue delay and at the latest 45 working days after receiving the complete information referred to in paragraph 3, designate the undertaking providing core platform services that meets all the thresholds of paragraph 2 as a gatekeeper, unless that undertaking, with its notification, presents sufficiently substantiated arguments to demonstrate that, in the circumstances in which the relevant core platform service operates, the undertaking exceptionally does not satisfy the requirements of paragraph 1 although it meets all the thresholds in paragraph 2.

Where the undertaking presents such sufficiently substantiated arguments to demonstrate that it exceptionally does not satisfy the requirements of paragraph 1 although it meets all the thresholds in paragraph 2, the Commission shall designate the undertaking as a gatekeeper, in accordance with the procedure laid down in Article 15(3), if it concludes that the undertaking was not able to demonstrate that the relevant core platform service it provides does not satisfy the requirements of paragraph 1.” (emphasis added)

I have two observations on the approach of the Council.

First, it is hard to understand why Article 3.4 no longer requires the Commission to take the elements listed in Article 3.6 into account when assessing the “sufficiently substantiated arguments” presented by the core platform service provider in question. As we have seen, these elements are far more useful to the assessment of whether a given platform is a digital gatekeeper than the quantitative factors provided for in Article 3.2. Moreover, if these elements are relevant to the determination of whether a core platform service provider that does not meet the quantitative thresholds should nevertheless be designated as a gatekeeper, it is hard to see why they are not relevant to the determination of whether a core platform service provider that meets the quantitative thresholds should nevertheless escape designation.

Second, the Council makes matters worse in recital 23, which provides that

“[i]n its assessment of the evidence and arguments produced, the Commission should take into account only the elements which directly relate to the quantitative requirements for constituting a gatekeeper, namely the impact of the undertaking on the internal market beyond revenue or market cap, such as its size in absolute terms, leadership in technology and number of Member States where it is present; by how much the actual business users and end users numbers exceed the thresholds and the importance of the undertaking’s core platform service considering the overall size of the respective core platform service; and the number of years for which the thresholds have been met.” (emphasis added)

That approach makes very little sense. Why should an assessment to determine whether a core platform service provider that meets the quantitative thresholds could escape designation be focused on a further analysis of quantitative requirements? That approach is completely circular and, contrary to the position of academic commentators, effectively denies the company in question a reasonable chance to demonstrate that it does not hold gatekeeper power by producing relevant evidence (e.g., absence of barriers to entry and lock-in effects, presence of multi-homing, etc.). The risk that a provider of core platform services may not be given a fair chance to rebut the presumption that it is a gatekeeper seems to be exacerbated by the term “exceptionally”.

As far as the Parliament is concerned, Article 3.4 of the adopted text provides that

“[t]he Commission shall, without undue delay and at the latest 60 days after receiving the complete information referred to in paragraph 3, designate the undertaking providing core platform services that meets all the thresholds of paragraph 2 as a gatekeeper. The undertaking may present, with its notification, compelling arguments to demonstrate that, in the circumstances in which the relevant core platform service operates, the undertaking does not satisfy the requirements of paragraph 1.” (emphasis added)

Like the version of Article 3.4 of the Council, the Parliament’s text no longer requires the Commission to consider the elements referred to in Article 3.6 when assessing the “compelling arguments” presented by the firm in question. That is unfortunate for the reasons mentioned above, especially since the Parliament’s adopted version of Article 3.6 adds two factors that are particularly relevant to the assessment of the presence or absence of gatekeeper power: (i) “the degree of multi-homing among business”, included in the new point (ea) of subparagraph 2; and “the ability of the undertaking to implement conglomerate strategies, in particular through its vertical integration or its significant leverage in related markets”, added in the new point (eb) of subparagraph 2.

By contrast, the version of recital 23 adopted by the Parliament does not contain the same problematic language as to the elements that the Commission should take into account when assessing the arguments provided by the core platform service provider as the version of the Council. This gives the freedom to the core platform service provider in question to advance any compelling argument that it deems relevant to demonstrate that it does not hold gatekeeper power. However, like the Council, the Parliament’s version of recital 23 includes language which indicates that it is the “exceptional circumstances in which the relevant core platform service operates” that may make such a rebuttal possible.

In sum, in line with the approach suggested by academic commentators, the final version of the DMA should give a real chance to core platform service providers that meet the rather bold quantitative thresholds set out in Article 3.2 to rebut the presumption that they have gatekeeper power. For reasons of coherence, this exercise should be done by reference to the elements provided for in Article 3.6, which should ideally also comprise the two helpful elements that have been added in the Parliament version of that provision (i.e., the degree of multi-homing among business and the ability of the undertaking to implement conglomerate strategies).

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