With the publication of a position paper on “Online market failures and harms”, the UK regulator Ofcom weighs in on the international debate on how to regulate tech companies. The paper identifies useful aspects for other regulators to consider, and suggests experimenting with remedies through ‘sandboxes’ before extending them to the wider market. However, in keeping with stances taken by other regulators around the world, it shows regulators are still very much at the ‘asking questions’ stage about which approach they should take, rather than being able to deliver convincing answers as to what regulation should look like. The use of sandboxes would allow regulators to test remedies meaningfully on a smaller scale, thereby limiting the risk to generate unintended consequences for an entire market, which could have a far-reaching impact. On the other hand, there could be limitations as to what sandboxes can do, as they may not be suited to test certain competition remedies (e.g. mandating company break-ups, or deciding whether to allow a merger).
Ofcom identifies five aspects which regulators need to be mindful of when overseeing tech companies
The position paper published by Ofcom on 28 October 2019 is a comprehensive summary of where regulators are with regard to online services. There is broad agreement about the fact that online harms warrant intervention, but these harms have not yet been identified clearly; in turn, the remedies to address these harms are not yet set out, and regulators are aware they need to tread carefully to avoid distorting the market. The paper’s starting point is framed in an economic perspective, aiming to explain how market failures in online services can result in harms to individuals and society; it also recognises the need for regulation to take a holistic perspective to reduce the risk of having unintended consequences.
Ofcom’s paper identifies possible market failures (market power, barriers to switching, information asymmetry, behavioural biases, externalities) and links them to a range of possible harms arising from them (competition harms, fraudulent/unfair practices, price personalisation, privacy harms, data breaches, security and resilience issues, risks to media plurality and quality, content and conduct harms, and harms to wellbeing). In online services, the link between market failures and harms may be stronger due to three factors: the tendency toward market concentration; the drive for data and attention; and the tailoring of services based on data analytics and algorithmic adjustments.
Within this context, online services generate unique policy challenges, since remedies set out to resolve a given harm may not be effective if they do not address all the market failures at source. Ofcom identifies five aspects which regulators need to be mindful of:
links between policy objectives (likely to be addressed by cooperation between different regulators, e.g. Ofcom and the ICO);
complexity of business models (e.g. identifying links between services or ecosystems in order to properly assess concentration and competition);
the variety and scale of online services (the risks of defining services either too narrowly or too broadly, and the challenges that come from the international nature of these services means more international cooperation between regulators);
the dynamic nature of the industry (where regulation could easily stifle innovation coming from both new and existing players or could become obsolete as new services emerge); and
consumer decision making (where consumer decision bias can lead to harm in new ways, due to the influence of algorithms).
Regulators may need ‘regulatory sandboxes’ to test and identify the right remedies
Ofcom’s paper highlights a key aspect of the current status of regulation for digital services – that regulators still find themselves on a very fine line between the identification of market failures and setting out remedies which are effective, proportionate, and do not generate unintended and undesirable outcomes. In other words, regulators are still unable to see clearly how they can respond to market failures without causing other problems elsewhere – some possibly as harmful as those they intended to address. To this end, Ofcom’s paper encourages cooperation between regulators with different competences (e.g. Ofcom and the ICO when it comes to privacy and interoperability of online platforms and indeed internationally), but also highlights that Ofcom does not hold a view on how future regulation should be structured.
While Ofcom stops short of setting out a clear picture of what future regulation might look like, it sees a way forward in how regulators should proceed to identify the best remedies to adopt: they could run tests on a smaller scale, with a view to extending those that appear to work. In order to test theories of harm and potential remedies, they could use so called ‘sandboxes’ to determine the competitive advantage a provider may get from having access to cross-service data through its ecosystem. The same idea of regulatory sandboxes was recently used by Uber’s CEO when referring to safe spaces for companies (particularly startups) to experiment and innovate without facing burdensome regulation. Much in the same way, regulators could assess whether certain remedies are appropriate before extending them to a whole market. After all, Ofcom is already proposing carrying out a similar experiment with telecoms providers, as it looks to test new consumer protection remedies on a sample of customers.
Regulators around the world are grappling with the same issues
Ofcom’s paper comes at a time when other countries are taking similar steps. As detailed in Assembly’s Platforms and Big Tech Tracker, agencies such as the Federal Trade Commission (FTC) in the US, the Australian Competition & Consumer Commission, and the European Commission are all conducting reviews and forging initiatives to determine the new role of regulators, as well as what shape the new digital markets take.
Between 2018 and 2019, the FTC carried out an extensive series of hearings on “Competition and Consumer Protection in the 21st Century”, focused on issues such as consumer protection in media and technology networks; market power and entry barriers in ‘platform’ businesses; and the implications of algorithms for consumer welfare. In Australia, the ACCC completed its Digital Platforms Inquiry in July 2019, which started in December 2017. The final report finds the likes of Google and Facebook to have “substantial market power”, and makes a broad range of recommendations: these span from changes to merger rules, to the implementation of a harmonised regulatory framework for media businesses, as well as stronger protections in the Privacy Act and the implementation of code of conducts for platforms’ relationships with media businesses and for the enforcement of copyright.
The European Union has been the most proactive in attempting to regulate big tech so far, as demonstrated by the recent Platform-to-Business Regulation and by the competition cases which have seen the EC impose large fines on Apple, Google, and Facebook. Nonetheless, a report published by the EC in May 2019 on ‘Competition Policy for the Digital Era’ shows how clarity is still lacking in the future direction that regulation should take. The report does not propose a new type of “public utility regulation” to emerge for the digital economy, but recognises there could be scope for mandating data access in some circumstances; it also calls for a flexible approach and recognises regulation needs to move at a faster pace to keep up with the speed of innovation.
