Digital markets - regulate the beasts or set them free into the wild?

Profile picture for user cmiddleton By Chris Middleton September 12, 2019
Summary:
Chris Middleton presents the first of two reports from the Westminster eForum policy conference on digital competition, post Furman.

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The spectre of Brexit hung over a Westminster eForum event this week, as delegates from government, law, regulation, technology, and media gathered to discuss the future of UK competition policy for the digital economy, in the wake of the Furman Review. The Rt Hon Sir Vince Cable, MP, had been due to chair the first half of the conference, but tumultuous scenes over the closure of Parliament in the small hours of the morning left him a no-show.

He was replaced by an American with a Belgian passport: Jay Modrall, Co-Chair of the Competition and Policy Committee of the American Chamber of Commerce to the European Union. That a US/Belgian antitrust lawyer with expertise in European crisis management should be chairing this UK policy conference was not only ironic, but also suggested that the Westminster Forum is waving the flag for British humour.

Modrall – deadpan and cautious  – described the 2019 regulatory and competition environment as “the most interesting and dynamic period” that he could remember in his profession. But the UK isn’t going it alone, he reminded delegates: among others, Germany, Australia, the US, and Canada are all reporting on exactly the same issues. 

He added: 

I would love to comment on the politics, but that’s probably best left to Professor Marsden.

He wasn’t wrong. Philip Marsden – Professor of Law and Economics at the College of Europe in Bruges – was one of the co-authors of the Furman Review into unlocking digital competition. His CV describes him as a “keen distance runner and rower”, perfect qualifications as the UK paddles upstream (or heads up creek minus paddle, depending on your viewpoint).

Relishing his time on the platform as history was being made less than a mile away in Parliament, the Professor invoked British tabloids’ Brexit posturing as metaphors for the digital economy. American giants such as Google and Facebook are “creeps”, he joked, and “horrible things are happening”, such as the Cambridge Analytica scandal. On the opposing side are populist movements determined to rein in the creeps – those supposed digital monsters that are often used by customers out of laziness, leading to a lack of real competition. 

He said:

What does competition law have to do with all this? Well, one of the arguments goes that in terms of the control of market power, maybe organisations have dropped the ball in some way. This has generated a narrative that says, ‘Leave competition law, leave the economists behind, and take back control. Just regulate these firms, break them up, do whatever you can to them, just do it. [...] Why would we need evidence or experts at all?’

On the other side of the debate is the Remain camp, which is ‘Remain calm, keep focusing on economic analysis and evidence’. But this Remain voice also says, ‘There’s nothing to look at here, move along, everything is fine...’

This was a good joke and a mischievous one, characterising a debate that is often loudest in continental Europe – about breaking up the American giants – as the ‘Leave’ voice, while the Remain camp is implicitly deaf to citizens’ concerns about the power of Facebook and Google. 

In the middle of all this are the benefits that apps and digital platforms provide. With their help, consumers are reverting to being primitive, pleasure-driven apes, tapping their smartphone screens to have the next banana delivered to their door. “Ingrates!” shout Google, Facebook, Uber, Amazon, and the rest, as populists decry their innovations and demand that they’re stopped, perhaps enabling a British competitor to replace them (such as the Matt Hancock app, one delegate joked).

Falling behind the pace of innovation

The problem is that markets are “tippy” and unpredictable, said Marsden, so a third voice has made itself heard in the debate: that of the competition authorities:-

[These authorities say] ‘Do not regulate them, do not change the consumer welfare standard, do not ignore the economists, or you’re going to threaten innovation incentives, harm competition, and harm the development of these new products.’ 

Maybe just give the competition authorities more money, give them a lot more staff, let them get on with their work, tweak a few things relating to standards, but remain focused on competition law enforcement, as that’s a very good way of understanding how these markets work.

This point was picked up by techUK Deputy CEO Antony Walker, who said:

I believe our competition authorities need to be much better resourced and have a more nuanced understanding of the issues.

Of course, that is precisely where the Furman expert panel came in last year, as authorities watched the law fall further and further behind the pace of innovation. One of the key recommendations of their 2019 report – which has been accepted by the government but not yet acted upon – is the establishment of a digital markets unit to, among other things, reset the issue of merger control. 

This relates to problems such as acquisitions that might appear to add customers, expertise, or useful code to the purchaser, but serve a less obvious commercial purpose in the long run. Merger law is under-interventionist in the digital world, said Marsden, because the real purpose of some M&As is never revealed to competition authorities. Over-payment for an acquisition should alert authorities about its potential market impact, he said – namely the removal of vital competition.

However, Caroline Thomas, Partner at law firm Norton Rose Fulbright (alongside Modrall), challenged the suggestion that a company paying over the odds for an acquisition should automatically ring alarm bells among the authorities. Such M&As can be expressions of power in a macho market, or evidence that an innovator doesn’t want to go it alone. Sometimes acquisition was the exit plan all along, when a startup had no realistic path to profit.

When PayPal splashed $2.2 billion on acquiring iZettle, it seemed possible that a hidden, anticompetitive benefit might be at play, she said, given that the purchase price was higher than the startup’s putative IPO valuation. However, when competition authorities examined the actual evidence, they found no problem and approved it. The point was: with fear and suspicion stripped out of the equation, there was no anti-competitive behaviour in this case.

Killer acquisitions rarely take place in digital markets, observed some speakers, as M&As tend to absorb expertise, CVs, code, or innovation, rather than merely seek to shut down a dangerous competitor.

A joint approach

Another of the Furman Review’s purposes was to look at ways for the UK to engage internationally and establish joint regulatory approaches with other countries. (If only there was some forum for doing this in collaboration with the UK’s 27 trading partners in Europe, to avoid replicating or diverging from their actions... but let’s leave that to the protestors in Parliament Square to debate.)

Many problems are related to the digital sector itself and not to antitrust failings, continued Marsden. Unique challenges include the ‘lazy monopolist’, platform lock-in, bias-related exclusion, and customers’ behavioural cues being triggered by artificial intelligence. 

This makes digital markets different to any that have gone before, especially when combined with the network effect and economies of scale. That said, I’ve observed in previous articles that platform-specific smart speakers are one technology that could enable antitrust behaviour that is hard to track. This is because they may be removing choice from consumers who order goods verbally but aren’t presented with alternatives, thanks to whichever ‘Skill’ they have downloaded.

Innovation advocates often point to the number of services that are free to use, such as the Facebook or Google platforms. But perhaps a zero-price is too high, Marsden suggested: we pay for these services with our data, and in some cases we are the products that platforms sell to their advertising partners. Shouldn’t these platforms in fact be paying us?

My own prediction is that Facebook may do exactly that when it launches its Libra digital currency. Regulators may then be presented with something unprecedented in terms of scale and destabilising effect in the global economy: a platform that is host to over two billion users giving customers a ‘free’ tranche of its own currency (to apologise for losing or abusing their data, perhaps), but then obliging them to spend it on Facebook services, or on partners’ goods. 

This would not be entirely without precedent, however: in the Industrial Revolution, it was commonplace for some companies – factories and large farms, for example – to pay workers in tokens, which they were obliged to spend onsite, on goods, services and food produced by their employers. Many workers ended up in debt to those companies – slaves in a walled garden, with no means of leaving and no real money to spend outside.

A change is needed

At the eForum, Marsden’s points were echoed by Dr Nicola Mazzarotto, Global Head of Economics and UK Head of Competition Economics at KPMG. For him, laissez-faire is not the right approach to ‘setting the dial’ for how and when market regulators should respond. What’s needed is a change in the very architecture of competition policy. 

The problem is that the debate is not being conducted with much precision, he observed. Critics often hint at authorities’ under-enforcement in response to M&A activities, for example, but present scant evidence on what real problems (if any) a deal has created. The risk is authorities coming to regard false positives as less important than false negatives.

Like Marsden, Mazzarotto argued for something that’s become unfashionable in this era of polarised politics: a third way, via increasing the power and capacity of competition authorities. Finding the right ‘theory of harm’ in each case will be difficult, he said, but should rely on sophisticated economics and hard evidence, not politicking.

Rocio Concha, Chief Economist and Strategic Policy Partner at Which?, said the core issue is that the consumers her organisation represents have limited power. They want insight into how their data is being used, but feel there are no alternatives to the platforms they’re using. 

This is why effective competition policy becomes more and more essential. Ultimately, consumer welfare is the right – and perhaps only – perspective from which to enforce policy decisions, she said. This was an excellent point.

For Richard Rous, a competition and regulatory strategy expert at Lloyds Banking Group, it is essential for both digital platforms and competition authorities to embrace the idea that data belongs to the customer. Digital players may own the value-added analytics, but getting the balance wrong in their approach to customers diminishes the value of their own technologies. 

The stakes are high but the issues should not be politicised, he concluded. The solution needs to stay small and expert: robust governance, via wise and independent decision-makers.

My take

In his keynote, Professor Marsden advocated for a ‘balance of harms’ test for any problems that arise from a lack of competition in the market, a broad solution supported by many of the speakers and set out in the Furman report.

So do we tame Google, Facebook, and the other big beasts? asked the Professor. In answer, Furman has written what Marsden called a “song sheet for industry”: a text for how competition authorities want digital platforms to behave in an ideal world. Evidence-based reform should then be applied after evidence-based discussion.

Mixing his metaphors, Marsden went on to suggest that failure to sing from that song sheet would mean that “winter is coming” for the big beasts on an epic and unprecedented scale. In short, the message was ‘Work with us, or we are coming to get you’.

Google is a giant baby. They’re in our house. We’re the daddy.

But while Marsden was incisive, witty, erudite, and well briefed, one flaw in the whole Furman exercise was exposed by Jay Modrall in the second half of the event (after Marsden had left the venue and Modrall was a speaker, rather than Chair). The problem is that all markets are now essentially digital, so establishing a discrete ‘digital markets unit’ is a retrograde move for the UK, he said; a fundamental misstep in policy design. 

The real answer is that market regulation needs to be rethought in its entirety to suit the digital age. And on this point – he suggested – Europe is leading the way. But he would say that, wouldn’t he? (Repeat Brexit argument ad infinitum, and fade.)

The second half of the event focused on digital advertising, and will be covered in a separate report.