Digital competition - the legal and economic challenges exposed

Chris Middleton Profile picture for user cmiddleton January 17, 2022 Audio mode
Summary:
The second of two reports from the Westminster eForum on digital competition policy.

An image of three arrows hitting a target
(Image by 3D Animation Production Company from Pixabay )

Enforcement of competition laws and regulations in the UK lags other countries when it used to be ahead. That's the view of Tim Cowen, Chair of the antitrust practice at law firm Preiskel & Co. Cowen, who welcomes the emergence of Whitehall's Digital Markets Unit (DMU) at the Competition and Markets Authority (CMA), positioned as a new champion for businesses struggling to get a foot through the door.

As my previous report on this issue set out, the Big Techs dominate, not just in the world of technology platforms, but also everything connected to them by being gateways to a huge range of services. The DMU wants to give FAMGA - Facebook, Amazon, Microsoft, Google, and Apple - a bloody nose. Not after market harms have occurred, but before they happen.

But one of the challenges facing the DMU's ex ante, prescriptive approach is the same one facing lawyers, regulators, and competition authorities who seek to address harms after the fact.

He notes:

There are David and Goliath issues when you're representing smaller companies. But pretty much every company in the world is smaller than FAMGA, which are now each worth a trillion dollars. The sixth most heavily capitalized company in the world is Saudi Aramco, but there's about a $500 billion gap. So, it just tells you something about the scale of what we're dealing with.

In fact, that isn't true. At nearly $1.9 trillion, Saudi Aramco was the third biggest company by market cap last year - some way behind Apple and Microsoft, but ahead of Amazon, Alphabet/Google, Facebook/Meta, Tencent, Tesla, and Alibaba.

This is the problem of assessing companies by their constantly changing share prices rather than by revenues. It induces a kind of myopia, a worship of theoretical buying power over shorter and shorter timescales: a year, a quarter, a month, a day. Look at this list of 100 leading companies by revenue and you would think that retail, oil, cars, and banking ruled the roost, not Big Tech.

But for a lawyer, the big picture is this:

[Big Tech platforms] appear to be breaching multiple laws frequently. And so, when you're dealing with investigations and enforcement, you're not just dealing with competition, but also the need to enforce privacy laws, plurality laws, security, consumer protection. We see in the US the use of the Attorney General's powers to prosecute for breach of all the laws at the same time, because it's quicker!

I believe that there's a need for public interest litigation, that we actually have a rule of law problem in relation to the major platforms. It seems to me that we should enable bodies like the DMU to prosecute where they find a breach. Because this isn't just a problem for the structure of markets. It's a problem for entry, for new business, for life chances and for people's opportunities. So, it affects how the market economy works in democratic societies worldwide.

Few would disagree with that assessment. He adds:

Browsers are the gateway to the internet. That's the Microsoft case of the 90s, of course, but it's being replayed today in the Google privacy sandbox case, and in all the app store cases. Browsers are still the gateways, the principal control points, the gathering of information points, the mechanism by which the open web is closed down.

But if we look at different jurisdictions, the UK hasn't done much enforcement. So, we've got an enforcement gap - and an experience and knowledge gap.

An imbalance of power

One of the problems of taking the legal fight to Big Tech is that the defence invariably has all the evidence, he says:

You need access to it, but it's confidential and confidentiality is treated in different ways in different jurisdictions. So, the defendant can say, ‘No, I'm not giving you that. I'm going to give you this instead. I'm not going to give you the same evidence base for the enforcement in different jurisdictions.' This means that enforcement can be controlled by the defence.

And what happens when we've got a breach of multiple laws? We end up with what I call the Keystone Cops [silent movie comedy] problem. They scrambled to get in one car to investigate the crime, and then they all crammed into the same doorway at the same time. If you have all the authorities trying to investigate the same matter at the same time, the likelihood is they're going to get in each other's way.

The solution to all this is a DMU properly empowered to take enforcement action on multiple fronts in the public interest, he says.

Beyond the legal challenges, there are questions around assessing economic harms, says Dr Nicola Mazzarotto, Partner and Global Head of Economics at KPMG:

The data advantages of Big Tech incumbents drive barriers to entry, they tilt the level playing field against potential new entrants. And network effects similarly tend to lock users into a specific platform. They create an environment where market power is entrenched. But where things start to get complicated is that when you look at the way these features apply to different digital markets, and to different firms in those markets, you see that the picture is quite heterogeneous.

The challenge, therefore, is that while FAMGA and other Big Tech players have market cap, technology, and some form of user lock-in in common, they are very different companies. Meanwhile, being an Apple customer, for example, doesn't prevent you from also being a customer of Microsoft, Google, Facebook, and/or Amazon, and vice versa in each case. Nor does it prevent you from accessing content, products, or services from countless others.

This makes strategic market status much harder to prove - to be specific about - beyond identifying a seat of power. So, the risk is that while the DMU may seek to give the FAMGA giants a bloody nose, the reality is likely to be landing a series of small blows in areas where competitors believe they are locked out.

Digital is now pervasive 

And there's another question: in 2022, what is a ‘digital market' anyway?

Kate Collyer is Chief Economist at the Financial Conduct Authority (FCA), which oversees the UK's banking and financial services sector. She explains just how much of her time is now taken up with what we call digital markets.

It is six months to the day since the FCA published our business plan for this year. And looking at it, it's striking how much issues around digital markets feature.

I would argue that this calls into question whether the UK's existing competition authority, the CMA, is really fit for purpose. If all markets are now digital (as many observe) and the CMA isn't set up to deal with them (it set up the DMU after all), what is its core purpose?

But how is the FCA's Collyer dealing with this challenge in her organization, given how dynamic, diverse, and innovative the FinTech sector is?

We will continue to become a forward-looking and proactive regulator. A large part of that is how we respond to the profound forces that are transforming the landscape of financial services, in particular digitalization.

Our approach to regulation is one of taking a principle-based, ex ante approach. We authorise firms, we set minimum standards, and we then supervise those firms and enforce our standards. And an important part of how we do that is by improving how markets operate. So, in line with our objectives, we look to encourage innovation in digital markets, so long as it's in the interests of consumers.

But you need to get underneath the surface of that and figure out what that really means in practice, because it's easy to say but much harder to do. Ultimately, we want digital markets and services to deliver greater value for consumers. We do that by encouraging effective competition with appropriate protection. But we also want digitalization to provide consumers with greater choice, and a choice of good-quality products that meet their needs and are provided at competitive prices.

The FCA's regulatory sandbox has been one way of achieving this, she explains.

It aims to promote more effective competition by allowing firms to test products, services, and business models in a live market environment, while ensuring that there are appropriate consumer safeguards in place.

By trying to reduce the time and potentially the cost of getting innovative ideas to market, it seeks to enable greater access to finance for new business models, new firms, new products or services. And it does that by reducing regulatory uncertainty - which can be important, particularly in financial services. It also enabled more products to be tested, which is also important, and it has enabled us to work with innovators to ensure that appropriate consumer protections were built into new products and services.

We now have what we call our Digital Sandbox. We've used sprints to create synthetic data, which means we can create a digital, data-driven sandbox, which allows firms to test their services in a digital environment as well. We also launched cross-border testing. And finally, we've just launched an always-on sandbox.

All this is a great example of how we can facilitate competition and enable innovation in digital markets from a different perspective. But I want to make the point that we're conscious that innovation can create harms. And digital innovation is one way it can be challenging to anticipate that and be proactive as a regulator.

We need to make sure that we're set up to respond to developments on the digital horizon, while continuing our role in encouraging competition to make sure that we're delivering on our objectives.

My take

In some ways the new DMU is an outmoded concept. All markets are digital, but the UK's Competition and Markets Authority can only address harms retrospectively - often when it is too late. So, it has set up the DMU to take a more proactive approach - but only to the handful of companies that already dominate technology platforms, long after they have reached market caps greater than the GDP of most nations.

A better solution may be a sandbox. But then we are all at the mercy of the big children, with their rocket ships and cash. Perhaps they can be cajoled into playing.

Loading
A grey colored placeholder image