The Positive Impacts of the EU’s Digital Markets Act

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The Positive Impacts of the EU’s Digital Markets Act

By Fatty Fish - November 1, 2022

The European Union’s Digital Markets Act, published in the Official Journal of the EU in mid-October 2022, entered into full force on November 1. This legislation was an effort by the EU to regulate large technology platforms and first came under consideration in the EU two years ago. It is a battery of competition and privacy rules targeted at the largest technology companies, like Amazon, Google, and Apple to name a few. The EU describes these companies as “gatekeepers” with an undue amount of control over the digital market and over digital consumers.

The EU characterizes gatekeepers by way of three distinctive attributes. First, they have strong network effects, meaning that their usefulness and value to an individual user increases the more users they have in total. For example, Amazon is the best place for consumers to find as many sellers as possible, and it is the best place for sellers to find as many consumers as possible. An identical platform with no built-in user base would be redundant and, quite likely, unsuccessful. Second, gatekeepers have an intermediary role between sellers and consumers. Continuing the Amazon example, listings and transactions are subject to Amazon’s interface, organization, and search engine. Third, gatekeepers have access to large amounts of data, including data from users or competitors. Obviously, Amazon can collect data on a very substantial proportion of all digital transactions.

The EU’s position is that this makes it too difficult for competitors to contest a gatekeeper’s position and leads to gatekeepers engaging in unfair competition against business users. Further, it has become increasingly difficult to tailor services to comply with all current national regulatory regimes on the subject.

Let’s have a closer look at some of the specific measures the EU is taking with the Digital Markets Act.

The EU’s Intended Effects on Competition Under the DMA

The EU intends to implement several measures pertaining to fair competition under the EU’s Digital Markets Act. Under this new law, gatekeepers must not contractually restrict business users’ ability to offer identical services through other intermediaries, and/or similarly permit direct interaction, and promotion thereof between sellers and consumers without the use of the gatekeeper’s service, not act to prevent business users from raising concerns with regulators, avoid bundling and tying schemes that would require a user to use one service in order to obtain another, and provide information to advertisers and publishers about the prices paid by the former and remuneration received by the latter.

These measures are all grounded in simple antitrust principles. Antitrust theory is based on the idea that in a hypothetical perfectly “efficient” market, prices will naturally arrive at the intersection of the supply and demand curves — the equilibrium price — since that will result in neither a shortage nor a wasteful surplus of the product or service. In this case, if one company’s product is overpriced for its quality, consumers will favor a different company with a lower price or better quality. However, an uncompetitive market is an inefficient market, and a monopolist can charge a great deal more than the equilibrium price.

A tech gatekeeper’s profits may not manifest as consistently higher prices, but the basic principle is the same. If most purchases of mobile applications must occur through the Apple Store, then Apple can, for example, favor products of companies that share large amounts of valuable data with them over competitors in search results. Thus, a product users might consider inferior becomes dominant to Apple’s profit, creating an inefficiency.

The DMA’s competition regime is targeted at behaviors that have long been observed among tech giants to restrict competition. It produced less in the way of specific legislative changes, but even the United States House of Representatives has investigated these issues extensively. There are some practices that are ignored, such as some predatory pricing schemes, but this generally would help limit the harmful effects of gatekeepers’ control.

The DMA’s Approach to Privacy

When it comes to the DMA’s approach to privacy, there is only one hard requirement that pertains to privacy, but it will likely have a significant effect. Under the requirements imposed by the DMA, gatekeepers will now be blocked from combining personal data of users from multiple sources. Clearly, this makes a severe impact on the ability to actually use this data to generate insights. Most tech giants have a wide base of offerings which interact with each other, and they anticipate being able to get separate kinds of insights about a customer from each source. For example, Amazon can correlate a user’s buying habits from their main website, interests, and audio data from an Alexa device, combined with viewing habits from Prime Video to create a much more detailed profile of a consumer’s interests than would be possible from any one of those sources.

This measure would seem to help limit the extent to which collected data can be personally associated with individuals. Generally, tech companies claim that the data is used only to observe trends, with individual users remaining anonymous. If this is so, then theoretically it should still be possible to utilize anonymized data to observe trends under this DMA requirement. If companies, however, are making heavy use of more specific and individualized information, then it should be considerably more difficult and limited to the specific service the information is associated with.

This does raise questions of how efficient it will be for the gatekeepers’ services to be restructured not to share data internally, however, along with how it will affect advertising-based business models that allow many services to be free for the end user.

Uncertainties: “Requirements That Need to Be Specified”

There is another set of provisions that have drawn more concern about both under- and over-enforcement. The DMA lists a number of guidelines which must be narrowed into actual policy through case-by-case negotiations with the gatekeepers themselves, pertaining to both subjects. The stated reason for this ambiguity is to allow flexibility since they may apply in different ways to different gatekeepers.

In terms of more competition-focused rules, gatekeepers must refrain from using competitors’ data to compete with them. They must allow the use of third-party software. They must be interoperable with competing platforms. They must not favor their own products over competitors in ranking or search engines. They must not restrict customers’ ability to switch to rivals. They must provide publishers and advertisers with access to any performance-measuring tools related to their content which the gatekeeper themselves have access to.

Much of this, while dependent on the nature of the platform it’s applied to, is fairly straightforward in its implications. Some provisions have raised more concern than others, like the question of interoperability. A common concern is that interoperability for services like messaging actually reduces the incentive to use competing services, because a user already active with the gatekeeper’s service will not need to switch to interact with a competitor’s user.

However, most of the others, if consistently enforced, will target common gatekeeper practices similarly to the hard requirements.

Regarding privacy, gatekeepers must allow users to uninstall any pre-installed software applications on devices, and they must provide full data portability to both consumers and business users, allowing them to access all data the gatekeeper itself is collecting. The latter requirement will not prevent collection, but it will generally increase transparency as to what data is being collected, enabling users to make informed decisions.

What Does the Future Look Like for Tech in Europe?

The EU already upended the tech industry from a privacy perspective in the mid-2010s with the passage and implementation of the GDPR. The EU’s Digital Markets Act looks to bring with it a similarly extensive and dramatic shift in the way Silicon Valley does business across the Atlantic. While there are several key new provisions relating to privacy, the Digital Markets Act’s restrictions are, as the name indicates, proportionately far more concerned with competition.

Like the GDPR, the DMA will necessitate an immediate overhaul of how gatekeepers approach business in Europe. This enters the territory of speculation, but one cannot help but wonder whether this will result in similar changes applying to American users or to geographically specific versions of the services becoming increasingly siloed. GDPR certainly resulted in quick behavior changes in the U.S. and in any country doing business in the EU, it only makes sense that the DMA will have a similar effect.

It has been observed since the nineteenth century that “power tends to corrupt, and absolute power corrupts absolutely.” What John Dalberg-Acton said in relation to the clergy then explains a great deal of public anxiety about the tech industry now. The major tech companies have the sort of power that can only come from being indispensable to the average person’s life. While it is, in some cases expected that they will be curtailed, the process is neither simple nor guaranteed to be effective. And for consumers, these changes can often result in changes in the way they behave that may, in some instances, seem unnecessarily complex based on what they are thus far accustomed to. Change, however, isn’t always a bad thing. That said, time will have to tell what the full extent of the DMA’s effect on the market will be, but there are many promising elements to it, alongside many elements that will no doubt require a great deal of work on the part of technology companies.

Disclosure: Fatty Fish is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.