UK digital competition - it’s about your data, stupid

If you're a large digital platform company, the storm clouds have been gathering lately in the US, Europe, and the UK in terms of regulation and competition rules. Or perhaps there have merely been a few balls of vapour around an otherwise glorious sun, depending on how you believe the weather is looking in the digital realm.

Take the FAMGA group. Regulators worldwide - including in the US - may tut at their growing might, but Facebook's Q4 2020 revenues were up by one-third year on year, Amazon's by 44%, Microsoft's by nearly 17 percent, Google's by 24% and Apple's Q1 was up by 21% - topping $100 billion for the first time.

Recent anti-trust actions against Apple, Google, and others aside, there's little sign of plucky politicians and regulators hitting the US giants where it hurts, in their bottom lines, as the coronavirus pushes us all into the cloud.

The UK has been particularly active in examining its competition rules, but that's no surprise post-Brexit. Britain is now competing with 27 former partners who lack the trade barriers that Whitehall has erected between the UK and the continent. The promised future of ongoing borderless commerce with Europe has failed to materialise, so the UK may need to lower its barriers in other ways.

The Penrose report arrived in February to strengthen the UK's competition regime, with the Digital Markets Taskforce due to report later this year. Meanwhile, a new Digital Markets Unit (DMU) was proposed in November 2020 and has now gone live within the Competition and Markets Authority (CMA).

The DMU is designed to work with Ofcom, the Information Commissioner's Office (ICO), and other regulators to introduce and enforce a new code to govern the behaviour of tech platforms. The aim is to ensure that consumers and small businesses aren't disadvantaged in markets that are dominated by the giants.

At the DMU's launch, the government said:

There is growing consensus in the UK and abroad that the concentration of power amongst a small number of tech companies is curtailing growth in the tech sector, reducing innovation, and potentially having negative impacts on the people and businesses that rely on them.

The new code will set clear expectations for platforms that have considerable market power […] over what represents acceptable behaviour when interacting with competitors and users.

Good news. However, it's notable that the November announcement singled out the advertising-led behemoths, Google and Facebook, and suggested that they limit the ability of news organisations and quality journalism to flourish.

That may be true, but this odd focus on ensuring that a handful of media moguls can continue to thrive is far from the main issue when it comes to digital competition. What about intermediary services, search engines, social networks, video sharing platforms, interpersonal communication services, messaging tools, walled-garden operating systems, and more?

But the big question is this: strategically, can the UK risk clipping the wings of the digital giants in any of these areas? In the post-Brexit world, Britain wants to hang onto those companies and their huge inward investments, not push them away towards Frankfurt, Amsterdam, Dublin, and Paris like the banks that have been pulling assets out of the UK.

Access to data

A possible clue to the future can be found in recent comments about the incoming Information Commissioner (Elizabeth Denham steps down this autumn). At a Westminster eForum event on UK data strategy last month, Phil Earl, Deputy Director of Data Strategy, Implementation and Evidence at the Department for Digital, Culture, Media and Sport, said:

That person will be asked by the Secretary of State to not just focus on privacy, but to be really thinking about how they are helping to unlock the value of data again.

As previously reported, that ‘again' suggested the government believes the ICO's current focus on privacy has somehow prevented organizations from capitalizing on data in ways they had always been able to before.

It hasn't, but the comment created the impression that the government sees consumer privacy and protection as impediments to trade, rather than enablers - much like Facebook, Google, and Amazon, in fact. Indeed, one suspects that the government casts a jealous eye over those platforms' ability to suck up vast amounts of personal data with apparent impunity.

The newly appointed head of the Digital Markets Unit, Catherine Batchelor - formerly Assistant Director Policy & International at the CMA, is certainly interested in how data has fed the growth of the US big-tech giants. Speaking at a Westminster eForum on digital competition on 23 April, she said:

I think what we have to recognise is the dynamics of these markets. We took this phrase, ‘happy underdog start-ups' from the house antitrust subcommittee report. I think it's a very good description of the idea that these firms that were once garage start-ups from campuses and universities are now the most powerful firms in the world.

And we really do need to think about whether a new approach is needed. Why are these firms so powerful? There are some basic market characteristics, which have paved the way for these firms accumulating this powerful position. Things like their access to data.

So, she believes access to more data equals economic growth, which certainly chimes with the aims of the National Data Strategy. However, Batchelor acknowledged that for consumers this may - or may not - introduce the risk of harm, either to them or to the wider health of the market.

For consumers, you might say, ‘But it's free so where's the harm?', but […] there are questions as to whether the amount of data that they are providing is a fair exchange for what they're getting in return.

So, [platforms] have the ability to exploit consumers and businesses, but also to engage in what we would term exclusionary conduct. […] For example, to give their own product or services better placement or pride of place, so that they are at an advantage vis a vis their competitors.

This has a real impact on those innovative firms that are trying to compete with the big platforms and create a level playing field. The overarching impact of that is a less vibrant digital economy, so you don't have these new tech firms coming through to grow.

A change in approach

Lord Clement-Jones sees the opportunity for something substantial and far reaching in the UK's new regulatory regime. Chairing the eForum last week, the peer - who heads the House of Lords Select Committee on Artificial Intelligence - said:

What we're looking for - and many of us, I think, are quite impatient - is perhaps a change in approach, facilitated by legislation in terms of greater ex ante powers, greater powers over the ability to insist on structural remedies, and so on. And that means, specifically for the formation of the DMU, early legislation if we can have it, but of course we are in the interim promised a whitepaper. There's a very active EU in this space as well, and in the US market greater willingness to take on the tech giants.

Nicola Mazzarotto is Global Head of Economics and UK Head of Competition Economics at professional services giant KPMG, one of the government's strategic suppliers (Whitehall's own tendency to rely on a handful of giants has been growing of late).

He contrasted the EU's approach with the UK's and, while stating that the differences are "quite significant", suggested that some are really a matter of language or emphasis more than a shift of policy for the UK.

There is a starting point of identifying what kind of businesses are of concern, what are the market positions that raise alarm. These are formalised in what the European Union refers to as ‘gatekeeper companies' and the characteristics that those companies have, while in the UK they're referred to as firms that have ‘strategic market status'.

That's quite a similar concept, in that it captures the idea that these are firms that have significant market power and therefore can potentially exploit it. But also, a particularly entrenched position that, in the minds of the regulators, can easily be strengthened by taking actions that wouldn't necessarily, in the normal course of business, be captured by competition regulators using their current tools.

Alongside these principles that relate to the behaviour of specific companies, there are also concerns and actions that have been taken at the level of the sector as a whole.

So, once the focus is on gatekeepers there's a lot that would be of relevance for any firm acting in a digital market. Those kinds of market-specific initiatives relate, of course, to algorithms, as well as to the intersection between privacy laws and the use of targeted and granular data that some of the companies in these markets have access to.

But it's not obvious for anyone which digital services are under scrutiny and who should be concerned, or who should be preoccupied with dealing with these types of regulatory interventions. Here we have some guidance from the European Union, but not so much from the UK, which has been taking more of a case-by-case approach.

The Digital Markets Act states that is not designed to apply to all digital services; it will only apply to what they can provide as core platform services, and particularly those that are deemed to be gatekeepers in those platform services.

Intervention

Call it pragmatism by the government or a laissez-faire approach to a booming market, but from Mazzarotto's description, the EU is being clear, specific, and prescriptive, while the UK is saying, "Let's see what happens case by case".

The subtext of this should be clear: the EU is behaving like a big market, a bloc of 27 countries, and the UK - while still being a leading national economy - is now a much smaller market in global terms. As such, it has little real-world choice but to apply behavioural remedies and codes of conduct rather than structural fixes.

But for the DMU's new head, it's all about intervention to ensure competition. This suggests that the lack of competition is where real harm takes place - in the government's view, at least. Batchelor said:

We take it as read that every single decision we make as a regulator in this regime must be based on evidence. So, whether that's a decision as to whether the firm has strategic market status, a code of conduct, the shape of that code, a decision to implement a pro-competitive intervention, it absolutely must be based on evidence.

[We] need to ensure that any regulation is inherently pro-competitive and pro-innovation. And, you know, what we do not want is any instance of over regulation, which has a chilling, chilling effect on the innovation in these markets.

Mazzarotto offered a different perspective:

I don't think we need radical change. I think we need a lot more resources to apply the tools that we already have. My ideal outcome would be to give more budget and more scrutiny to the CMA and give it an ability to really use the tools, getting experts in the sectors, getting economists with bandwidth to work on complex cases.

The worry is that we're taking a bit of a shortcut to make intervention easier, but without recognising the complexity that that intervention requires to be grounded on, in terms of the evidence that's required to inform that decision-making.

So why can't problems simply be dealt with via existing competition law, a bit of extra cash, and some more experts? Batchelor said:

If you deal with this through competition law, or you have high-level prohibitions set out in legislation, and then you take five to 10 years to investigate whether conduct was a breach or not. And you might find that it was, and you put in place a remedy, but you only remedied that particular instance of misconduct.

But what you can't do that way is set out preventative, proactive rules of the game, which might prevent the firms from engaging in that conduct in the first place. And that's essentially what we're proposing in this new regime.

We're proposing a regime that enables us to set out, with far more clarity, what is and is not considered to be acceptable conduct, and to really work with the firms to shape their behaviour. So, you're preventing some of these actions before they occur, rather than waiting for them to occur and then taking 10 years to try and remedy a particular breach.

My take

Fair enough. But does anyone want to bet against the first major action or prescriptive move by the government being to protect a friendly news organization? Or that it will then sit back, point to its code of conduct, and learn from the likes of Amazon (now a strategic government supplier via AWS) and Microsoft (another strategic supplier) how to capitalise on data to achieve growth?

Whether the UK's new competition regime will be something substantial, rigorous, and bold, or more like an Amazon delivery box - big, delivered promptly, but largely empty apart from some paper - is unknown. Let's see what happens. After all, that's what the DMU is doing.