The UK Government’s decision to create a dedicated digital markets unit within the competition authority is unique in the world, and highlights the Government’s resolve to have a competition framework fit for purpose for the digital economy. Competition reforms elsewhere such as at the EU level, in Germany or the US have not gone as far as creating a new body to oversee these markets.
The targeted approach of the Strategic Market Status regime, and it only relating to specific activities, should ensure proportionality and strike a reasonable balance between preserving competition and allowing Big Tech the necessary freedom to innovate.
The remedies that will apply to SMS designated firms will also be targeted. However, some elements of the Government’s proposal here risk undermining the proportionality of this approach by making it too broad in scope. As things stand, the DMU would be given powers to intervene in other markets even where a firm has not been designated with SMS. This could create uncertainty not only for Big Tech, but also for end users.
In an attempt to stop so-called ‘killer acquisitions’, firms designated with SMS will face more control on the mergers and acquisitions they intend to carry out. A reporting obligation has been designed to ensure none of these transactions slip through the regulator’s net, and the standard to block an acquisition could become stricter. An intervention we are increasingly seeing being used elsewhere.
For the first time, a competition authority will gain a dedicated digital markets unit
In 2020, the UK Government showed its resolve to reforming the competition regime for digital markets by adopting all six recommendations of the Furman review (established in 2018 to consider the potential opportunities and challenges the emerging digital economy may pose for competition policy). A key recommendation was to create a new Digital Markets Unit (DMU) within the existing Competition and Markets Authority (CMA). The purpose of which is to oversee a new framework that will be created through legislation, and particularly the new Strategic Market Status (SMS) regime – through which dominant firms are to be designated. The DMU has been operating in non-statutory form since April 2021 to carry out preparatory work and support the Government in establishing the statutory regime. The creation of a dedicated unit recognises the need to provide regulators with specific capabilities to oversee digital markets.
The UK’s approach has been unique in the world so far. In the US, Congress is setting aside $1bn to create a similar digital unit within the Federal Trade Commission, though this would deal mainly with privacy issues and online harms. In Europe, the EU’s proposal for a Digital Markets Act (DMA) foresees the creation of a Digital Markets Advisory Committee, which would only provide an opinion to the European Commission. In Germany, rather than creating a dedicated digital markets unit, the competition authority was given wider powers back in 2017 to establish inquiries into the digital economy.
The UK Government has been consulting on this new regime for digital markets since July 2021 and will close the consultation on 1 October 2021. The DMU’s formal powers will be established once legislation is approved (expected during 2022). While stakeholder input has been sought on a range of issues, the most important have been how the DMU works with other regulators, the SMS regime and the choice of remedies that could be imposed.
Clearly defining the DMU’s relationship with other regulators is important. At the moment, the Government is inclined not to establish full concurrent powers for Ofcom and the Financial Conduct Authority (FCA) on the SMS regime. This is contrary to what was proposed by the Digital Markets Taskforce (DMT), which was set up in 2020 as a cooperation forum between regulators to provide advice on the new framework. The Government’s preferred approach needs to reduce the risk of overlap and inconsistencies, and leave the DMU to consider whether it is best placed to intervene. Mechanisms for cooperation between all the regulators involved in regulating digital markets (e.g. duties to consult or to cooperate) should allow these organisations to communicate effectively between one another.
The Strategic Market Status regime will designate which firms should be subject to ex-ante regulation
As with the SMP regime in communications markets, dominant firms are to be identified first and designated as such before remedies can be applied. The SMS regime is the key element of the new framework. The Government’s current proposal has a narrower scope than the DMT’s advice. While the DMT suggested applying it to all digital activities, the Government is targeting activities where digital is a ‘core component’. This is not a bad thing. It should retain a sufficient degree of flexibility while also ensuring more proportionality, because it rules out activities which have a digital component but are essentially non-digital.
The SMS status will relate to a specific activity, but will apply to a whole firm. The Government has considered four criteria to determine SMS. These include the size and scale of a firm, whether it is an access point to consumers, the risk of using that activity to further entrench market power, and a firm’s ability to determine the ‘rules of the game’. The DMT had suggested a fifth criterion related to the effects on ‘socially and culturally important markets’, but this has been rejected by the Government in favour of an approach more strictly focused on economic aspects. The SMS status will apply for a fixed period – likely to be five years.
Overall, there appears to have been a good level of acceptance of the overarching elements of the framework from Big Tech. Some companies were initially concerned that the scope could be too broad, but the DMT’s advice (and the Government’s subsequent proposal) are believed to strike a reasonable balance – particularly since they are intended to cover specific activities.
Remedies will apply to specific activities of Big Tech, but some provisions could undermine their proportionality
The SMS regime will have similarities with the familiar SMP in communications markets, in that SMS firms will be subject to remedies in the same way SMP operators are (e.g. access, transparency, non-discrimination). The DMU would be able to impose two types of remedies: codes of conduct and pro-competitive interventions (PCIs). The codes of conduct will have objectives and principles. The objectives will likely be established by the upcoming legislation, since the Government’s consultation endorses the three high-level objectives proposed by the DMT i.e. fair trading, open choices, and trust and transparency. From these, a set of principles will stem. The Government is proposing 11 as part of the forthcoming legislation, with a view to giving the DMU powers to amend them through secondary legislation.
The codes of conduct have been designed to only apply to certain designated activities. However, one principle being proposed could apply more broadly and apply to the whole firm. It relates to how behaviour in non-designated activities should not further entrench the firm’s market power in designated activities, unless there is a demonstrable benefit to users. If adopted, this provision could undermine the targeted approach of the regime. Whether or not behaviour in a non-designated activity can further entrench market power could be subject to dispute, as would be determining whether or not it benefits end users. The Government is seeking views on whether any explicit checks and balances should be considered. We expect Big Tech to highlight the risks of such a vague provision, and the uncertainty as to which activities would be relevant. Other stakeholders (e.g. consumer groups) may wish to seek further clarity on what is considered a benefit for end users, since a firm could provide a short-term convenience to them while crowding out a market in the long run. The DMT expects this principle to concern a minority of actions, though its boundaries are currently far from clear.
PCIs would be separate from the codes of conduct, and would address the root causes of substantial and entrenched market power. PCIs could include interoperability requirements to ensure access to data of an SMS designated firm, or functional separation to prevent an SMS from engaging in self-preferencing. To impose these PCIs the DMU would have to demonstrate there is an adverse effect on competition to address. The government is seeking views on whether PCIs should also include ownership separation – something that the DMT advised against, since the CMA would still have the powers to impose it if necessary. PCIs may also apply to non-designated activities if they address a concern in a designated activity. This is another provision Big Tech is expected to push back on, since it broadens the scope of possible intervention.
Big Tech will face a significantly higher bar when it comes to mergers and acquisitions
Under the current set of proposals, companies designated with SMS would face a stricter merger regime compared to other firms. Firstly, they would have to report all the mergers they intend to complete, giving the CMA a short period of time to decide whether to investigate. This would be a significant change since merger notification is currently voluntary. In deciding whether a merger warrants review, the CMA would have to consider two main criteria: the value of the transaction and whether there is a ‘UK nexus’ i.e. the target firm has assets, revenue, users, employees, R&D, or legal presence in the UK.
The transaction value threshold could be somewhere between £100m and £200m, although the Government is seeking views on how it should be designed. Some mergers meeting a higher threshold yet to be determined would be subject to mandatory review. Once the CMA decides to review an acquisition, Phase I will be the same as in the current regime – only assessing whether there is a realistic prospect of a substantial lessening of competition. Phase II would involve a stricter test, where the CMA evaluates the likelihood of harm to competition. The Government wants to set a level lower than the current 50%.
Big Tech is likely to have concerns over this proposal, since some have argued that the CMA’s recent activity shows it is already able to block mergers and does not need additional powers. However, internationally the trend is now towards a stricter regime for mergers involving Big Tech. For example, the Government’s consultation refers to Facebook’s acquisition of Instagram, and the 2020 report of the US Congress Judiciary Committee talks about ‘killer acquisitions’ Big Tech have made to neutralise competitive threats. What’s more, regulators are starting to see the whole pattern of acquisitions as problematic, rather than focusing on individual transactions. An FTC commissioner referred to a “PacMan strategy” whereby individual acquisitions may not raise concerns, but the collective impact of hundreds of smaller acquisitions can lead to monopolies. Big Tech is well aware of what’s to come, and have already spent hundreds of billions of dollars in acquisitions since the start of this year – twice the amount of the previous record in 2000, during the ‘dotcom’ boom.
