This year has seen increased public scrutiny of Big Tech, not least following the release of films (ironically on a streaming platform) like this year’s Netflix documentary ‘The Social Dilemma’, which, through interviews with many former employees and executives from top tech companies, explores the rise of social media and sets out what it sees as the damage it has caused to society. Readers are equally likely to have seen in the press growing calls from both federal and state regulators in the US to limit the powerful reach of the biggest social media firms, accusing them of buying up their rivals to illegally squash competition. Indeed the Furman Review (published 13 March 2019) noted that over the last ten years, the five largest digital firms have made over 400 acquisitions globally, with none of these being blocked by competition authorities.
Here in the UK, following a request by the Government in March 2020, the CMA was asked to lead the Digital Markets Taskforce to, working with Ofcom, the ICO and the FCA, provide advice to the government on the design and implementation of a new pro-competition regime for digital markets.
The advice issued is very clear that digital markets are hugely important and have revolutionalised our lives, with rapid and profound changes for consumers and businesses. However, a fresh look at this sector is needed now that many of these firms are no longer competing to gain a foothold in the wider economy but are instead among the largest and most powerful corporations in the world. The advice notes that any lack of effective competition for these firms is often the result of specific market features, like network effects, economies of scale or unequal access to data, but has also arisen as a result of targeted M&A activity design to build up a strong position and then to reinforce it, creating ‘ecosystems’ of complementary products and services.
The advice issued therefore makes the following recommendations:
- The establishment of a Digital Markets Unit (DMU), to be a centre of expertise for digital markets, with the technical capability and knowledge to understand digitally based business models.
- A regulatory framework which will apply to firms with ‘Strategic Market Status’ (SMS) – ie firms which have ‘substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position’. This designation should be a decision of the DMU, as an independent regulatory body that can exercise expert regulatory judgement. The decision should be taken in an open and transparent manner and should be based on formal (non-binding) guidance of the key factors it will take into consideration, which, as currently proposed would include:
- the firm’s revenue (initial suggestion is annual UK revenue of +£1bn and a particular focus on those having annual global revenue of +£25bn – so the vast majority of digital firms would not be caught);
- the activity taken by the firms (initially focusing on things like online marketplaces, app stores, social networks, web browsers and search engines, and cloud computing services); and
- whether a sector regulator may be better placed to address the issues at hand.
- The regulatory framework itself will consist of the following three main pillars:
- New Legally binding code of conduct – to manage the effects of market power, for example preventing practices which exploit consumers and business or exclude innovative competitors
- Pro-competitive interventions – for example ensuring data mobility, interoperability and data access, in order to seek to drive longer-term dynamic changes in these activities, opening up opportunities for greater competition and innovation. This could be similar to Ofcom’s Significant Market Power regime and would be regularly reviewed to keep such measures relevant.
- Enhanced merger rules – to ensure closer scrutiny of transactions involving SMS firms. While the UK regime remains broadly fit for purposes, the tests used in M&A activity, ie the ‘substantial lessening of competition’ test (SLC), is often difficult to establish in digital mergers where there is significant uncertainty about how the market is likely to develop in the future. Additionally ‘hold separate’ orders are thought to be insufficient where digital firms are complex and interconnected. The advice therefore proposes additional features, like reporting obligations for any transactions entered into by SMS firms, mandatory notification regimes and lowering the standard of proof of the SLC test (currently this is on a ‘more likely than not’ basis).
- The advice makes clear that this regime should apply ex ante and should focus on proactively preventing harm by fostering a compliance culture, however, it notes too, that to make this happen, the DMU will require the ability to take tough action, including the implementation of pro-competitive interventions, but stopping short of full ownership separation, which power would remain with the CMA following a full market investigation. The DMU will be able to open investigations for breaches of the code or breaches of the PCI orders, and ultimately the proposal is for the DMU to impose penalties up to a maximum of 10% of worldwide turnover (putting this in to context, Google made worldwide revenues of $160bn (£120bn) last year; Facebook made $70.6bn).
- Interestingly, the report notes some other key recommendations on which, based on existing evidence and experience, the CMA believes action is necessary:
- Action to address unlawful or illegal content, such as fake online reviews and scam advertisements, including powers to require online platforms to take appropriate steps on an ongoing basis to effectively tackle unlawful or illegal activity, or content which could result in economic detriment to consumers and businesses when it occurs on, or is facilitated through, their platform;
- Action to enable effective consumer choice, including addressing instances where choice architecture leads to consumer harm (eg, designing an app to ‘nudge’ or ‘push’ users in a direction that may not be in their interests – this will be familiar to those who have watched the Social Dilemma mentioned above!). This could be addressed through a development of the consumer protection regime explicitly directing firms to take reasonable and proportionate steps to reflect consumers’ interests, and setting out a duty of care to enable effective consumer choice; or
- Stronger enforcement of the Platform to Business Regulations (an EU regulation containing rules intended to create fair, transparent and predictable business environments for smaller businesses and traders on online platforms) which at the moment only allows for court-based enforcements – often an unsatisfactory remedy for smaller firms taking on some of the bigger players.
The advice itself notes that given there is similar activity being taken by regulators and governments around the world (including the US, Europe, Australia and Japan), there is a clear opportunity for the UK to lead the way in championing a modern pro-competition, pro-innovation regime. The Government, however, has committed to consult on these proposals in early 2021 and to legislate to put the DMU on a statutory footing ‘when parliamentary time allows’. It will be interesting to see whether to government prioritises these findings, bearing in mind the challenges faced in other areas as a result of Covid and Brexit, and the likely challenges from the authorities in the US (where most of the Tech Titans are based), who may see this as an attack of sorts on “their” companies.