For far too long, large online platforms have ensnared millions within their walled garden ecosystems. Even eye-watering penalties levied against tech firms for a torrent of antitrust violations have done little in reality to reshape the deep-rooted culture of Big Tech strangling smaller competitors with their market dominance. The days of Big Tech operating with virtual impunity in the digital space, resulting in outrageous practices such as Apple and Google taking a generous 30% share of all purchases made via their respective App Stores will become history as the European Union’s Digital Markets Act (DMA) becomes fully applicable to gatekeepers from March 2024.
Image Credit: European Commission Press Release, 6 September 2023
The DMA - a novel approach to antitrust regulation
Under the DMA, large online platforms that wield significant market power will face enhanced regulatory scrutiny over their EU operations. The sister legislation of the Digital Services Act, the DMA aims to level the playing field for large and small tech platforms alike by establishing a singular series of rules for the first time, thus effectively addressing the issue of regulatory fragmentation caused by overlapping national legislation in various EU Member States. Also known as an ex ante legislation, the DMA seeks to stop anticompetitive conduct before such behavior results in market distortion. Presently, 6 have been designated as gatekeepers by the European Commission: Apple, Amazon, Alphabet, ByteDance, Meta and Microsoft. Penalties for non-compliance range from hefty fines to the ultimate threat of forced divestiture.
User Data
At the heart of the DMA lies sweeping changes to how gatekeepers collect and handle user data. Often known as liquid gold, insights gleaned from vast troves of user data from existing users of online platforms allow them to further entrench themselves within the market. For instance, Amazon is no longer permitted to use data gleaned from product sales to compete against individual sellers with its own products (such as those from its private label brand, AmazonBasics). Now barred from aggregating user data across its plethora of online services, Meta has introduced the option for Facebook and Instagram users to manage their accounts separately without sharing user data between the 2 social media sites.
Self-preferencing
Another section of the DMA tackles the issue of self-preferencing - whereby online platforms favour their own products or services over similar ones offered by a third-party competitor.
The gatekeeper shall not treat more favourably, in ranking and related indexing and crawling, services and products offered by the gatekeeper itself than similar services or products of a third party. The gatekeeper shall apply transparent, fair and non-discriminatory conditions to such ranking.Article 6(5) of the Digital Markets Act
Since Google’s formal foray into the travel industry with its launch of Google Travel in 2019, the search engine giant has rapidly gobbled up market share during the pandemic, aided by its discriminatory ranking strategies. With multiple studies over the years consistently concluding that the top three search results capture the bulk of organic traffic, it comes as no surprise that consumers find themselves navigating to Google’s own travel sites instead of a competitor’s, such as Booking.com or Tripadvisor. Other examples of self-preferencing include "tying and bundling" - whereby Google was accused of illegally combining its App Store, search engine and browser into a single bundle to device manufacturers. This, along with several other offences, eventually netted Google a 4.34bn euro fine from the European Commission in 2018.
Interoperability
Let’s examine another section of the DMA, specifically Article 7 that obliges gatekeepers to maintain interoperability of their platforms with third-parties.
The ability to exchange information and mutually use the information which has been exchanged through interfaces or other solutions, so that all elements of hardware or software work with other hardware and software and with users in all the ways in which they are intended to function. Interoperability as defined by the Digital Markets Act, Article 2
In other words, interoperability allows digital services to communicate with each other. For example, messenger services such as WhatsApp and Facebook Messenger are obliged to maintain interoperability with each other - starting with text messages between individual users and subsequently moving on to more complex features like video calls within the next 2 - 4 years. Interoperability in the DMA largely refers to horizontal interoperability that affects directly competing platforms - economic theory suggests that innovation is likely as a result of enhanced competition between these platforms that seek to attract and retain users with novel features. Naturally, what sounds good on paper is far from the case in reality. Grave privacy concerns have been raised as many note that mandatory interoperability may come at the expense of user security (such as end-to-end encryption for WhatsApp messages), at least in the short term as gatekeepers grapple with bridging the technical gulf between their respective platforms. Given the European Commission’s long-standing emphasis on user privacy and security, it is certainly not inconceivable to see clauses in article 7 struck down in future legal challenges if the security of user data is compromised in the name of fairer competition.
An End to the Walled Garden?
Beyond the surface-level changes that some gatekeepers have introduced ahead of the compliance deadline, many have questioned the true efficacy of the DMA. For instance, the choice screen is touted by Google as its solution to complying with the DMA - whereby consumers are now able to select their preferred default search engine from as many as twelve options. However, given that the lack of a qualified challenger to the vast majority of consumers, most will instead default to what they are familiar with - handing an easy victory to Google or Bing. Apple, too, has offered a similarly dubious alternative for developers to transition away from processing transactions through its native App Store. Using rival app stores attract a €0.50 fee for each app downloaded for those that have in excess of a million downloads in addition to a 17% commission. Recall that the status quo is a 30% commission. Such a Kafkaesque cost structure in effect discourages developers, especially those of popular apps, from leaving Apple’s ecosystem.
Historically, the European Commission has found as part of a highly-controversial incentive balance test back in 2004 that the positive impacts on industry-wide innovation outweighed that of any potential implications to Microsoft’s own dynamic efficiency. However, the most scathing critique lies with the DMA’s potential to stifle innovation within Europe’s tech sector. Already, tech investment in European firms lags behind that of the US and the ex ante nature of DMA legislation disincentivises online platforms that are just under the user threshold for the classification of a gatekeeper to expand their services (and acquire more users) threatens to accelerate this trend. Similar concerns are echoed by opponents of the United Kingdom’s proposed Digital Markets, Competition and Consumers Bill (seen as UK’s answer to the DMA) who warn against the detrimental effects on tech investment as a result of such heavy-handed legislation.
Merely days have passed since March 6 but numerous legal challenges are well underway as gatekeepers try their best to skirt around the legislation. As a last-resort option, the DMA permits regulators to order a breakup of the offending gatekeeper. Will political will in Brussels run out before then? Only time can tell.
References
Broadbent, M. (2021, September 15). Implications of the digital markets act for transatlantic cooperation. Center for Strategic and International Studies. https://www.csis.org/analysis/implications-digital-markets-act-transatlantic-cooperation
Doctorow, C. (2023, December 21). The Great Interoperability Convergence: 2023 year in Review. Electronic Frontier Foundation. https://www.eff.org/deeplinks/2023/12/great-interoperability-convergence-2023-year-review
Duquesne, G., de Bernard, T., Prasad, K., Armstrong, P., & Bowman, T. (2023, December 8). What constitutes self-preferencing and its proliferation in digital markets. https://globalcompetitionreview.com/guide/digital-markets-guide/third-edition/article/what-constitutes-self-preferencing-and-its-proliferation-in-digital-markets
Inbar, T. (2024, February 6). Inside the digital markets act and its implications for advertisers. AppsFlyer. https://www.appsflyer.com/blog/measurement-analytics/digital-markets-act-implications/
Official Journal of the European Union. (2022, October 12). Digital Markets Act. https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32022R1925
Peitz, M. (2022, November). The prohibition of self-preferencing in the DMA. https://cerre.eu/wp-content/uploads/2022/11/DMA_SelfPreferencing.pdf
Rise of google as a powerhouse in online travel - case study. Research and Markets - Market Research Reports . (2022, January). https://www.researchandmarkets.com/reports/5546598/rise-of-google-as-a-powerhouse-in-online
Stolton, S., & Deutsch, J. (2024, March 7). All about the EU’s DSA and DMA laws to rein in Big Tech platforms. Bloomberg.com. https://www.bloomberg.com/news/articles/2023-08-29/all-about-the-eu-s-dsa-and-dma-laws-to-rein-in-big-tech-platforms
The digital markets act: Ensuring fair and Open Digital Markets. European Commission. (2022, October 12). https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/europe-fit-digital-age/digital-markets-act-ensuring-fair-and-open-digital-markets_en
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