Digital Markets Act Has Big Implications for Online “Gatekeepers” in the EU
The EU's Digital Markets Act regulation is coming into force. Will it have the intended effect of leveling the online playing field and allowing smaller firms to compete with large platforms? Or will it just make life more complicated for everyone?
What is the Digital Markets Act regulation? (Summary)
As of May 2023, large online platforms that may be considered "gatekeepers" to online products and services must register with the European Commission. This is required by the Digital Markets Act (In German: Gesetz über digitale Märkte), which will take full legal effect in 2024.
The stated aim of the DMA is to ensure that large online platforms behave in a fair way, but there's potential for unintended consequences to muddy the waters.
What is a gatekeeper under the Digital Markets Act? (Definition)
The EC defines a gatekeeper as a company that:
• has a strong economic position, significant impact on the internal market, and is active in multiple EU markets,
• has a strong intermediation position, meaning that it links a large user base to a large number of businesses,
• has (or is about to have) an entrenched and durable position in the market, meaning that it is stable over time if the company met the two criteria above in each of the last three financial years.
Which platforms will be caught by the Digital Markets Act?
Clearly, companies that potentially qualify as gatekeepers might include Alphabet/Google, Facebook, Amazon, Apple, and similar large US firms. Each could be said to have either a monopoly or near-monopoly on their particular market and audience and to an extent, the DMA can be considered an anti-monopoly regulation for the online world in the EU.
If the EC decides that a company is in fact a gatekeeper, that company then has six months to ensure that it complies with all of the requirements of the DMA.
What are the obligations of the Digital Markets Act: Dos and Don'ts
It's not surprising that the EC has introduced this new regulation. If anything it's surprising that it's taken so long. Existing potential gatekeepers, most of which are not EU-based, have a huge first-mover advantage in their marketplace due to the network effect. It's almost inconceivable to imagine any new EU-based company attempting to compete on a level playing field with Facebook, for example.
So, to allow at least some competition, the DMA requires that platforms designated as gatekeepers play a lot more fairly within their ecosystem than they have done to date. Some of the requirements imposed by the DMA include:
• allowing third parties to inter-operate with the gatekeeper's own services in certain specific situations
• allowing their business users to access the data that they generate in their use of the gatekeeper's platform
• providing advertisers with the tools and information necessary to carry out their own independent verification of hosted ads
• allowing business users to promote their own offers and conclude contracts with customers outside the gatekeeper's platform
There's also a list of what gatekeepers will no longer be permitted to do, including:
• treating the gatekeeper's own products and services more favorably in ranking than similar products or services offered by third parties
• preventing consumers from linking up to businesses outside their platforms
• preventing users from uninstalling any pre-installed software or app if they wish to
• tracking end users outside of the gatekeeper's core service for targeted advertising without explicit consent
From a customer's perspective, this all sounds reasonable and should result in greater competition for products and services. For any smaller business forced by market realities to use a gatekeeper's platform, it also sounds good, as at least they will be competing on reasonably fair terms with the gatekeeper's own products or services. That's potentially a major game-changer.
Who will be impacted by the Digital Markets Act?
The scope of the regulation might impact the business model of the BigTech companies, in other words, GAFAM, including Google, Apple, Facebook (Meta), Amazon, and Microsoft.
Image: Unsplash
Not all DMAs are created equal
However, from the point of view of any designated gatekeeper company, the DMA is a legal nightmare. To start with, it significantly complicates the legislative landscape, even within the EU. One might assume that the EU DMA supersedes all individual EU member states' regulations, but this is not the case. Individual nations will still be free to apply their own rules.
This is already happening: Germany, for example, has its own Digitalisation Act (Section 19A), which overlaps significantly with the EU's DMA but, crucially, is not identical. Other EU states either have or will soon have their own versions of a national DMA. If state DMA rules conflict with EU DMA rules, it's not clear which would have priority. That will probably end up being determined via court cases.
What does the Digital Markets Act do: Arbitrary impacts and limited rights to defend
According to the Information Technology and Innovation Foundation [itif.org], the DMA qualifications for "gatekeeper" would result in some strange decisions. It would regulate Apple Music but not Spotify; it would regulate Google Flights but not Expedia; and it would regulate Facebook but not Twitter.
To give an idea of the impact of the DMA, it would potentially force Apple to no longer require the use of its App Store with its iOS operating system. Since the tying of iOS to the App Store is a key security feature touted by Apple, this would force the company to make a very difficult decision. In fact, complying with the DMA in this way could put the company in breach of other EU directives.
Not only that, but the DMA offers gatekeepers only limited legal defense for any charge laid against them. If a designated gatekeeper should breach the DMA, its only legitimate defenses are on the grounds of public health, morality, and security. No economic justifications are to be taken into account. So, if Facebook were to be charged with breaching the DMA, it couldn't use any economic or business-based argument in its defense. This in itself seems anti-competitive.
Who will enforce the DMA: Significant punishments for infringements
The DMA gives the European Commission the power to apply fines of up to 10% of a gatekeeper company's total worldwide annual turnover or up to 20% in the event of repeated infringements. Note that this is turnover, not profit. For some gatekeepers, 20% of global turnover may be enough to force them into bankruptcy. The DMA certainly has teeth.
Periodic penalty payments can be up to 5% of average daily turnover, and the DMA can also apply "additional remedies". These are undefined except that they would need to be proportionate to any systematic infringements. They could include forcing the break-up of a gatekeeper company.
We won't know for sure until 2024 which companies will be designated as gatekeepers, nor will it be clear exactly how the EU DMA will interact with state-level equivalents and other EU regulations that it appears to contradict. However, given the scale of the EU's recent fine against Facebook for GDPR breaches, nobody should underestimate the potential of the Digital Markets Act to disrupt online business in the EU - for better or for worse.
What is the UK equivalent of the Digital Markets Act?
The UK government has recently released the highly anticipated Digital Markets, Competition, and Consumers Bill, which introduces a new ex-ante regime for digital markets through proposed modifications to UK competition law and strengthened consumer protection. The bill, presented on April 25, 2023, is the UK's equivalent of the European Commission's Digital Markets Act and is expected to regulate the conduct of major technology firms once implemented.
