Comment

How the Digital Markets Act can tame big tech

Zach Meyers / May 2021

Photo: European Union, 2021

 

The European Commission announced at the end of April that it believes Apple has breached competition laws. This was predictable. iOS app developers, like Swedish music streaming company Spotify, have criticised Apple for years about the high commissions it takes on in-app payments, like Spotify subscriptions. The Commission is also concerned Apple does not allow Spotify to use its app to tell customers about alternative payment options.

The investigation will drag on for years.  In a similar case against Google, the Commission took another two years from this point before reaching a final decision. We therefore should not expect a final decision in the Apple case before 2023. Legal appeals will follow.

The slow pace and narrow focus of the Commission’s antitrust investigations means they achieve little change in digital markets. Years after the Commission’s fines against Google and Microsoft, many digital markets still appear to ‘tip’ towards one or two large players. The Commission’s investigation of Apple will not change this. The outcome might shift some revenue from Apple to larger developers, but Apple will still control how iOS app developers reach iPhone users. The Commission has already received other complaints about Apple’s conduct, unaddressed in the Commission’s late April announcement. Small app developers do not want to wait years for the Commission to complete these investigations.

To solve this problem, the Commission has proposed new competition rules for digital markets. Its Digital Markets Act would forbid large digital platforms from some types of unfair or anti-competitive conduct – like Apple’s treatment of Spotify. It would do so by singling out one category of firm which have to comply with the new rules: the so-called gatekeepers. Gatekeepers are large digital platforms which bring together businesses and consumers.

Compliance with these rules would change the gatekeepers’ established business models and practices – sometimes in fundamental ways. These changes may improve the position of consumers and businesses which use or try to compete with the gatekeepers, but they would also reduce the value of these gatekeepers to consumers. For example, in Apple’s case, the DMA would allow Spotify to promote cheaper subscription offers available outside its iPhone app. But the DMA would also require iPhones to be open to third-party software, which could reduce the performance of iPhones or the overall quality of iPhone apps. Apple might also respond by increasing charges for all app developers (most developers currently pay Apple no commission).

These risks could only be worthwhile if the gatekeeper rules allow the creation of new sources of competition which do not currently exist. However, under the current proposal, too many companies could end up being treated as a gatekeeper and not always for the right reasons.

One problem is that gatekeepers will initially be defined using crude criteria like turnover, rather than a proper economic assessment of whether they are entrenched. If a platform challenges that designation, the Commission must undertake a detailed analysis. However, the when the DMA first comes into force, the Commission must aim to undertake this analysis for all the large platforms which challenge their designation within 12 months. This timeframe reflects the widespread expectation that all the largest tech firms will be designated as gatekeepers, and fast (MEP Andreas Schwab, who will lead the proposal through the EU Parliament, has even said this process should be quicker). This timeframe is not realistic. Lawmakers should amend the DMA to allow more time to undertake this exercise properly and provide more assurance that all relevant evidence will be considered.

A second problem is that the DMA tries to impose gatekeeper rules on businesses which could become entrenched in future. If there is no entrenched player, then the Commission’s focus should be on finding ways to preserve competition. That is a fundamentally different challenge to regulating an entrenched gatekeeper.

Finally, the Commission applies the same rules to very different markets, even though competition problems between markets vary. It should focus on markets where competition problems are the most severe and a single set of rules makes sense. For example, there is good evidence that prices in the market for digital advertising are artificially high; whereas there is greater competition between online marketplaces.

Regulators and policymakers worldwide are converging on the view that there are competition problems in digital markets, and that competition law alone cannot address these problems. The Commission’s investigation of Apple will probably illustrate these weaknesses and give EU lawmakers more impetus to proceed with the DMA. However, the Commission needs to ensure its approach is properly targeted. Otherwise, it risks harming investment and innovation, without generating benefits for European businesses and consumers.

Zach Meyers

Zach Meyers

May 2021

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