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A 'Watershed Moment' for Big Tech Regulation? The UK's Digital Markets Bill - Chloe Howgate

On 25 April 2023 the Digital Markets, Competition and Consumers (DMCC) Bill was introduced into the UK Parliament. The Bill aims to promote greater competition and innovation in digital markets by curbing some of the harmful effects and sources of the entrenched market power of Big Tech companies such as Google, Amazon, and Meta.


The Bill would introduce a new targeted digital markets regime whereby the conduct of a small group of the most powerful technology firms would be regulated by the Competition and Markets Authority (CMA). It would also give rise to significant changes in UK competition law, notably by introducing a new merger control threshold and increasing the CMA’s responsibilities and enforcement powers. For example, any company found in breach of the new rules could face fines of up to 10% of their global turnover.


What is the problem with Big Tech?


The government first promised to set up a watchdog three years ago, prompted by widespread concerns about the growing power of Big Tech. In its 2021 consultation, the government highlighted ensuring ‘vibrant competition in all digital markets’ as a key goal in its ‘vision’ for the economy. The concern is that Big Tech companies have weakened competition in digital markets which has had detrimental effects on the economy, small businesses, and consumers. These concerns have made the CMA more willing to challenge large digital firms under its new merger control powers. For example, on the same day the DMCC Bill was introduced, the CMA announced its prohibition of the $68.7 billion purchase of video game developer Activision Blizzard by Microsoft, covered on this Blog by Darren Trisno, because of fears the acquisition would supress competition in the cloud gaming market.


Competition is crucial for market economies. The phenomenon describes the rivalry between firms seeking to win consumers’ business and can be a key driver of economic growth. This is because healthy competition incentivises businesses to make their products and services the most appealing to consumers they can be, leading to better quality goods, more variety to appeal to different consumer tastes, and lower prices. Competition also boosts productivity since it encourages firms to make the best use of their resources and to innovate. Therefore, ensuring competition within digital markets is beneficial to the UK economy.


Digital markets are a particular concern because they have a propensity towards ‘tipping’ in which a winner will take most of the market. Tipping usually occurs once a certain scale is reached by a company that allows it to occupy a substantial portion of a market such that a snowball effect is created and that company gains a monopoly, which in UK competition law refers to a firm with a dominant market position. One key reason why digital markets are prone to tipping is that the phenomenon of a network effect often applies, where increased returns to adoption on the demand side improves the value of a good or service. For example, Facebook is more valuable as a company when it has more new users and active participants, because this improves its data, feedback, and technical capabilities, which can lead to improved content and user engagement. The network effect also grows the platform’s user base because the more people within an individual’s network use Facebook, the more likely it is the individual will use it too. This makes competition more difficult as large companies are likely to continuously grow and small companies struggle to attract enough users to compete.


According to the Digital Competition Expert Panel, this effect is compounded by the importance of brands and the behavioural limitations of consumers, who tend to default to familiar and prominent companies rather than explore the market competitors. It is also more efficient for both consumers and businesses for a small number of companies to dominate the digital market. This may be because a company has gained market dominance because it offers better products or services to consumers or because it is more efficient to have one firm with a large scope of network benefits instead of many firms. For example, Amazon offers consumers a wide range of products from other sellers and its own brand, innovative devices such as Alexa and Kindle, web services, entertainment, and delivery and logistics.


What will the new regulatory regime entail?


The DMCC Bill’s primary impact will be through the introduction of a new pro-competition regime for digital markets. It targets only the most powerful technology firms designated to have strategic market status (SMS). This is to ensure that regulation does not disproportionately affect businesses, so it will be targeted only to businesses and activities deemed to cause significant harm as a result of entrenched market power. The CMA can designate an entity as having strategic market status if it performs a digital activity linked to the UK and the undertaking has a substantial and entrenched market power and a position of strategic significance. To further narrow the scope of regulation, this only applies to digital firms with a global turnover of over £25 billion, or UK turnover of over £1 billion.


The impact of being designated with SMS is that the CMA will have wide discretion to impose conduct requirements, which are subject to the overarching objectives of fair trading, open choices and trust and transparency. Although these objectives are ambiguous, they demonstrate a concern for enhanced consumer protection from firms who may abuse their market influence. For the same reason, the types of requirements permitted are listed in section 20 of the Bill and relate mostly to complaints and dispute resolution and providing clear and accessible information. There are also many requirements directly aimed at reducing abuse of market dominance, such as self-preferencing, which involves the firm favouring its own products or services over those of its competitors, or tying practices, where the buyer of one product is then required to buy a second tied product.


The DMCC Bill will also introduce a new additional merger control threshold to target certain types of vertical and conglomerate mergers which had previously fallen into a gap in jurisdictional thresholds. The mergers affected will be those perceived as reducing dynamic competition, which refers to competition in innovation and investment, or the development of new products. The threshold applies where an acquirer has an existing share of supply of goods or services of 33% in the UK and a UK turnover of £350 million. This aims to crack down on ‘killer acquisitions’, as part of the reason Big Tech firms acquired entrenched market power was through acquiring hundreds of smaller companies, removing competition by integrating the products into their platform. For example, Google’s purchase of Android, YouTube and DoubleClick, or Facebook’s purchase of Instagram and WhatsApp.


Additionally, pro-competition interventions will be introduced to enable the CMA to address the causes of entrenched market power. The CMA will have such powers when it has reasonable grounds to consider that there may be an adverse effect on UK competition. These interventions can include anything that could be imposed in the context of a market investigation, which refers to a wide range of structural and behavioural remedies. The government claims these powers ‘have the potential to fundamentally transform digital markets.’ At this stage the details of the powers remain vague, but it is emphasised that the CMA will be given a broad discretion to design and implement remedies. Crucially, these powers are only available when a ‘robust’ investigation has occurred.


What will the commercial impact of the changes be?


The DMCC Bill provides what is effectively the UK’s first dedicated digital regulatory framework. It has the potential to allow significant intervention in digital markets. This is generally considered to be beneficial, given the concerns about Big Tech firms’ anti-competitive practices. Sarah Cardell, Chief Executive of the CMA, commented that the Bill has ‘the potential to be a watershed moment in the way we protect consumers in the UK and the way we ensure digital markets work for the UK economy, supporting growth, investment and innovation’. It will also bring the UK in line with EU regulation, as the regime shares the aims of the Digital Markets Act 2022.


The Bill will impact law firms because their clients will most likely need to update their consumer protection and compliance policies and provide new training to affected business divisions. This is because the DMCC Bill will require companies to take more proactive steps, for example to monitor online reviews to ensure they are genuine. Businesses should seek advise from law firms’ competition and regulation departments to ensure they comply with the new regulatory requirements.


What remains to be seen is how firms will respond to the changes to the scope of the CMA’s powers. A balance must be found between protecting competition in digital markets and not discouraging investment and innovation in the UK with an overly restrictive regime. The dangers of being too strict on regulation include a push back from firms who may withdraw from doing business in the UK. After the CMA’s Activision Blizzard decision, the company commented that the UK was ‘closed for business’. However, it is extremely rare for the CMA to block a deal, even across all sectors. In reality, the more common complaint has been that the CMA is too willing to accept an acquirer’s proposed remedies to competition concerns. Additionally, the UK’s regime is comparable to the EU and the US, where deals are also sometimes blocked. For example, the Activision Blizzard merger has also been blocked in the US, and so describing the UK as uniquely closed for business seems unfair.


Conclusion


Both Houses of Parliament must still approve the Bill before it passes into law, although it is expected to do so by 2024. This means there will be further debates and scrutiny by a specially convened committee, making amendments to the Bill before enactment quite likely. However, its central aims and principles should remain the same. The Bill represents a welcome move towards greater regulation of digital markets which should foster stronger competition and innovation. This is likely to have a great beneficial effect on the UK economy, should the balance be found between the interests of a pro-competition regime and a regime without undue restrictions.

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