In December 2020, the European Commission unveiled proposals aimed at overhauling the digital market. To address concerns about the dominance of big tech companies, the Digital Markets Act lays out new obligations for the gatekeepers of the digital world.
Online platforms have transformed the way consumers look for information, transactions and social interaction. In doing so, they have become central facilitators in digital markets. Because of network effects, online platforms see their value increase with the number of users. As a result, digital markets tend to become concentrated. The business model that has emerged on these two-sided markets offers consumers services and content for free, while revenue is generated by charging fees to business customers and showing advertisements to consumers. To increase advertisement revenues, ad-supported platforms design their digital services to hold consumers’ attention and encourage them to disclose personal data.
Search engines, social networks, and e-commerce platforms increasingly act as gatekeepers, controlling access to key digital services for both consumers and businesses. Big tech platforms determine not only which users are allowed to participate in the ecosystem or the way transactions are to be carried out via the platform, but also which offers or content corresponding users should receive.
The Competition Law Toolbox: Too Little, Too Late
As the power of big tech companies has grown, so too has the concern over how online platforms choose to wield their gatekeeping powers. The tremendous success of GAFAM – Google, Amazon, Facebook, Apple and Microsoft – has attracted the scrutiny of the European Commission and national competition agencies. Over the past years, competition watchdogs have examined GAFAM’s acquisitions and contractual agreements, and vigorously enforced provisions on abuse of dominance against these digital giants. The GAFAM platforms have been accused of abusing their dominance by leveraging their market power into neighbouring markets or by violating consumers’ privacy.
Despite the efforts of competition authorities, competition law interventions are increasingly perceived as being “too little, too late” in fast-moving digital markets. Competition authorities have struggled to apply competition law concepts, such as market definition and abusive conduct, to the peculiarities of platform markets. In markets where services are free and platforms take up a dual role as both gatekeeper and competitor, competition agencies have had to develop suitable theories of harm to consumers. This has resulted in tedious procedures that were in stark contrast to the dynamics of digital markets. The Commission’s Google Shopping decision, for instance, was rendered seven years after the investigation was opened. More than three years later, Google’s appeal is still pending before the European Courts. In the meantime, Google Shopping could continue to grow, illustrating that lengthy proceedings are problematic in markets that are prone to “tipping”. Once incumbents gain dominance, it can be difficult for newcomers to lure consumers away. As part of the remedies in the Google Shopping case – next to a record fine of €2.42bn – Google agreed to allow competitors to bid for advertising space at the top of a search page to channel traffic to their sites. However, in 2018 rivals complained that Google’s compliance mechanism is ineffective, which was confirmed by a 2020 study.
The Digital Markets Act: Changing the Rules of the Game
The new platform law proposed by the European Commission aims to curb these drawbacks of competition law by proposing a new tool: ex ante regulation for the largest platforms which are regarded as having “gatekeeper” status. Gatekeepers are companies that play a particularly important role in the market because of their size and importance as a gateway for businesses to reach their customers.
The Digital Markets Act aims to prevent gatekeepers from imposing unfair conditions on businesses and consumers and to ensure the openness of important digital services. Some new obligations aim to help promote new entry, by allowing data portability and interoperability and encouraging user choice. If adopted, under the Digital Markets Act gatekeepers will no longer be allowed to prevent users from removing pre-installed software or apps. Other obligations govern the relationships between platforms and their business users. Platforms are to be prohibited from using data obtained from their business customers to compete with these business customers (which is also the subject of an ongoing Commission antitrust investigation into Amazon). Finally, the new obligations aim to enhance transparency between platforms and advertisers.
Penalties for non-compliance will be up to 10% of worldwide annual turnover and may include behavioural remedies, mirroring the sanctions under competition law. Structural remedies, including breaking up companies, will be an option if companies systematically fail to comply with the rules.
Overall, the Digital Markets Act legislates some of the rules that the Commission has up until now tried to achieve via competition investigations against platforms. By setting out clear rules, the hope is that the regulation will be able to respond more quickly and effectively to competition problems in digital markets. While the new obligations will certainly be costly for platforms, they promise to reinforce competition and trust in the platform business environment.
