The UK Digital Markets, Consumers and Competition Bill – misconceived 20th century thinking for a 21st century issue?

Chris Middleton Profile picture for user cmiddleton November 29, 2023
Summary:
There's skepticism of how this important legislation has been formulated, a view shared by influential thinktank the Legatum Institute. Here's why.

digital

A critical piece of proposed UK legislation has been rather overlooked this year, amid all the fuss about Artificial Intelligence and AI safety, plus the Online Safety Act. That is the Digital Markets, Consumers and Competition (DMCC) Bill, which – among other things – seeks to fold aspects of the Competition Act 1998 and the Enterprise Act 2002 into a single set of laws more suited to the digital age.

But is it more suited?

While well intentioned, I would argue that the Bill is both 25 years too late and fundamentally misconceived. To see a handful of Big Tech titans as being of ‘strategic market importance’ (SMS), based largely on their size, ignores an obvious problem. Namely, that it is often smaller players, such as OpenAI and Spotify, which are really shaping what the future looks like – sometimes backed by Big Tech dollars, of course. 

What mechanisms exist to rein in those companies, should the need ever arise? Indeed, it is far from clear if the government even regards AI as ‘a digital market’. More on that later.

On the face of it, to respond to the might of Amazon, Apple, Microsoft, Alphabet, and Meta with a regulatory slap on the wrist seems like a good idea. But it risks ignoring key movements in the market that are actually of strategic, rather than incumbent, importance. 

More, it casts regulators in a support function to US giants, one akin to a script-prompter to some Hollywood star on the London stage. This means there is a risk of regulatory capture – of regulators becoming so focused on a handful corporations in the spotlight that they ignore both the public’s interests and the actions of every other player onstage.

For evidence of this, note the outspoken, uncritical support of the Bill by market-makers such as Spotify, who appear to see it as an opportunity to tie Big Tech in red tape.

The Bill also ignores the fact that markets are more complex than just platforms and customers. They also include suppliers, such as the many creative people who make and sell things on digital platforms. 

Many of those individuals or SMBs now find it impossible to sustain a living, thanks to the network effect, and to the likes of Spotify’s and OpenAI’s commoditization of skilled work. Who or what will protect those suppliers’ interests? Not this Bill, nor any other on the horizon. Where is the Digital Markets and Suppliers Bill?

Plus, there is another big-picture flaw in these proposals -what is a digital market? Isn’t every market digital today? In this regard, the proposals seem oddly backward-looking and antiquated, reminiscent of things that evangelists such as MIT Media Lab founder Nic Negroponte talked about in the mid-1990s, in books such as Being Digital.

Negroponte et al were wrong about the disintermediating effect of digital markets (they have created whole new generations of middlemen), but their core point was correct: in time, everything becomes a digital service. 

Quaint

So, to see ‘digital markets’ as something separate and distinct in 2023 seems almost quaint – a Web 1.0 perspective, three decades too late. What about AI, decentralized services, complex supply chains, cloud, and mobility? Will some Bill address those in 2053?

Interestingly, my criticisms of the DMCC Bill caught the attention of free-market, pro-Brexit thinktank the Legatum Institute, which is part-backed by Dubai-headquartered investment firm the Legatum Foundation (alongside other unnamed investors). 

The Institute is also critical of the Bill, but from a slightly different perspective - it believes that the UK risks breaking things it doesn’t understand in its moves to forge a new post-Brexit direction. (Some of us saw that as a major downside of leaving the EU, alongside the UK losing its influence among its top ten trading partners.)

The thinktank notes on its website:

The Digital Markets, Competition and Consumers Bill […] overturns decades of competition policy orthodoxy, and would give the Competition and Markets Authority unprecedented powers and authority to regulate the digital economy.

So much for sweeping aside EU red tape! The Institute adds that:

[The Bill] should be amended to limit regulatory drift; to protect British competitiveness; and to ensure proper standards of evidence and due process are followed by the regulator.

The authors’ core criticisms of the Bill are, in general terms, different to mine. For example, it sees as an urgent need to:

  • Limit mission creep, stopping the CMA from conducting fishing expeditions into almost any aspect of a business designated as having strategic market status.
  • Restore predictability to the system and maintain the strong advantages of the post-1998 competition law framework.
  • Remove the “sweeping and unaccountable powers” included in the Bill, which allow ministers to rewrite the enforcement regime regarding mergers. (In this regard, diginomica shares the fear that the CMA might have blocked a deal such as Google’s purchase of DeepMind, thus depriving it – and any other start-up – of a preferred exit to a US buyer.)
  • Provide proper recourse to justice, so that businesses that may be fined up to 10 percent of their global turnover are able to challenge the merits of the CMA’s decision in the courts.

On the latter point, the story has moved on. As previously reported, on 15 November the UK Government announced amendments to the Bill. The changes will ensure that the CMA “cannot impose an intervention on a firm unless it is proportionate to do so”. As per a written statement:

This will mean that eligible tech firms can challenge regulatory decisions on proportionality grounds throughout this process. […] This approach will enable the CMA to encourage the most powerful firms in dynamic digital markets to work with regulators to ensure competition is maintained on an ongoing basis, rather than allow legal challenges to cause the regime to get bogged down in the courts.

Amendments will also allow SMS firms to challenge any fines imposed for anti-competitive behaviour, both in terms of process and (in a notable change) substance.

White paper

Believing the UK has limited time to prevent the Bill from damaging UK competitiveness, the Legatum Institute will be publishing a detailed legal white paper on it before Christmas. 

Its authors were keen to discuss their findings, so I pulled up a chair with Fred De Fossard, Head of the thinktank’s British Prosperity Unit, and its legal advisor, competition and antitrust specialist, Stephen Dnes, Partner at Dnes & Felver and Head of the Law Faculty at Northeastern University in Boston, MA.

Dnes made the point that, while digital markets might now be well established, they do have some defining characteristics. He explained:

There is a difference relating to network effects. They're not unique to digital, but they are more pronounced. But to your point, why the SMS designation? It's being done on scale alone, potentially. They aren't obliged to look at the wider marketplace. They can proceed based only on the company they want to designate. So, it all seems short sighted. And designed very much with one conclusion in mind: designation.

The draft white paper says that the Bill “truncates” the normal evidence base. Expanding on that point, Dnes said:

The main point is the difference with the Enterprise Act. In an Enterprise Act investigation, you have to collect evidence about a market, which is specified at the beginning of the market study stage, then later in the investigation stage. And that definition of a market becomes the focal point throughout the investigation.

What that means, practically, is that if I'm on the receiving end of this regulation, I could go to the CMA and say, ‘Well, yes, I may have Instagram, but look at TikTok'. But the truncation this Bill seems to have in mind is to only look at the power of Instagram [in that example]. You could still make the argument that TikTok exists. But unlike the market investigation regime, there is no obligation for the regulator to look at that.   As a result, the CMA could just say ‘Well, you're a strategically significant company called Meta, and that means Instagram has to be fair.’ But there's no legal right to introduce wider evidence – such as TikTok.”

This chimes with my point about Big Techs having incumbent, rather than strategic, market status. New players may be redefining a market, but the Bill seems oddly focused on the incumbents – largely by dint of their size rather than their real strategic importance.

Is this why market-makers such as Spotify are so supportive of the Bill? Political spokesman De Fossard said:

Yes, but there's a remarkable naivety on behalf of a company like Spotify. Because as the Bill is written, there are few safeguards on how the thresholds for designation might change. Lots of companies might say these five big companies are 30 million miles ahead of everyone else, so it is safe to regulate. But where is the evidence base to say that? Digital monopolies are there until they're not – it sounds trite to say it, but in 2007 MySpace seemed to have an unassailable monopoly. And [in music today] Spotify has the market power in this space, not the Big Five.

Even so, companies like Amazon and Alphabet/Google have not voiced significant opposition to the proposals, beyond demanding a right of appeal – which appears to have been granted. Dnes responded that it depends on what risks the government is trying to mitigate:

The greatest risk arises not from that type of activity, but from new product chilling. There's this well-worn pathway in competition law that is to do with new product innovations, and whether you can integrate them into other existing products. But if there are to be fines in the UK – based on being seen to be unfair, as opposed to anti-competitive – then a company could say, ‘In the EU, they have a more clearly defined framework. It has issues of its own, but why don't we just launch this in Germany instead and see how we go?’

I think that’s a plausible scenario. And the risk with it is, it becomes a ‘known unknown’. Because would that product have been launched in the UK? There would be no evidence base for that. So, if the law is wrong in the UK on this, or it develops in a bad direction, without evidence there would be no real way of proving it, and much less of evaluating what the loss is.

In other words, poorly defined, ill-considered regulation could have a cumulative, chilling effect on UK competitiveness, with innovations haemorrhaging out of the UK – but without anyone being able to pull up any granular detail to prove it. De Fossard added:

It's important for nations to think very hard about what their comparative advantages are at all times.  It wasn't long ago that George Freeman [Minister for Science, Research and Innovation until 2022] was talking about wanting to make post-Brexit UK a sort of testbed nation for new technologies. But it follows that if you want that approach, then you need the most welcoming, permissionless innovation environment possible.

But might that be carte blanche for anti-competitive behavior, for tech corporations to see the UK as a patsy for whatever they wanted to do? Where would consumer protection stand in a scenario where Whitehall rolls over and tells Big Techs to do whatever they want? De Fossard argued:

It's very difficult for companies themselves to make some of these arguments, because you can very easily find yourself accused of trying to blackmail a democracy. But I think it's really important for ministers and policymakers to always think what might make a marginal decision go one way, or the other.

Europe is trying to compete with America on subsidies, but so far looks like it's failing. The Treasury in this country doesn't want to compete on subsidies – who can compete with the financial firepower of the United States? But if we can’t compete on subsidy, then we must find a way of competing on the regulatory environment.

My take

Bills can be amended before becoming law, of course, and that process seems to be ongoing. However, it will be interesting to see who has the ear of the government on these points. 

In the recent past, the Legatum Institute seems to have got Ministers’ attention. If so, it will be fascinating to see if the Bill becomes a kind of legislative fog or smokescreen. Being seen to do something, but very little of substance.

My position? The UK  Government needs to think strategically, and not in such a clumsy, 20th Century way. There’s no denying Big Techs have market caps greater than the GDPs of nearly every nation on Earth. And there’s no ignoring the fact that they sometimes use that power anti-competitively – and the EU has often caught them doing it.

But being massive is not, in itself, a benchmark for how markets behave in 2023. Not when it comes to protecting consumers – or those often-overlooked suppliers. Legislators need to be much smarter. Often Big Techs simply imitate what the upstarts are doing. Sometimes, that includes adopting behaviors or network effects that should have been addressed much earlier to prevent both consumer and supplier harms from becoming endemic. In other words, by the time Amazon, Apple, or Google are doing it, it may be too late to remedy. By then, the situation has become normalized.

At that point, we all have to live in a world where a trillion-dollar corporation can say to a supplier or content provider, 'Well done for your months of hard work! Here’s ten cents for your trouble. Minus our admin fee'.

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