Britain's regulatory response to the digital economy needs to focus on network monopolies, which charge nothing upfront, but harvest and use customer data to make money instead. That's the view of John Penrose MP, who was invited by the government in September 2020 to conduct an independent review of UK competition policy and has today published his findings.
Penrose's report - entitled ‘Power to the people' - warns that the UK's new regulatory digital unit should have its powers ring-fenced tightly, so as to prevent regulatory creep, which could impact every digital sector of the economy.
It is advising that the the new unit, which is set to sit within the Competition and Markets Authority (CMA), be called the ‘Network & Data Monopolies Unit (NDMU) and only apply to individual firms that own and run new network and data mopolies, rather than the rest of the sector in which they work.
The government said that it will respond to the report's recommendations, with Business Secretary Kwasi Kwarteng stating:
The UK's competition laws and institutions are highly regarded across the globe, however as we build back better from the pandemic and start life as an independent trading nation, we have a golden opportunity to strengthen that reputation.
I want to thank John Penrose for his hard work on this independent report, which considers how the UK's competition regime can promote productivity, reward and encourage innovation and, most importantly, get consumers a better deal.
We will consider John's recommendations and respond in due course.
Why is this important?
The discourse around monopolies forming online is well known. The opportunity for technology giants - such as Apple, Google, Facebook - to create network effects (where people gravitate towards a platform that is used by everyone else) and then use data to build dominant positions, has been discussed for the best part of a decade.
This is coupled with the fact that these platforms typically have high fixed costs and low marginal costs, giving them huge economies of scale, making them far more profitable than their smaller rivals. Development times are much quicker as a result, as is the ability to acquire any smaller competition.
All of this equates to a harsh environment for new entrants.
Penrose highlights a couple of examples of how these problems can erode competition and consumer power too. They include:
How Google paid Apple approximately £1.2 billion in 2019 to be the default search engine in Safari in the UK alone, as holding this default buys it significant market share.
Limiting interoperability between market-leading incumbent firms or products and their rivals (for example Android and Apple) makes it harder or more expensive for customers to switch easily between rivals, or for challenger firms to make their products and services easily accessible for many customers either.
Harm to consumers
The report outlines how these restrictions have a real and detrimental effect on consumers. For example, ‘free' products and services offered by these ‘monopolies' typically come with a price of some form, usually in the form of consumers exchanging their data. Penrose notes that it is impossible for anyone to know the price we are paying for these products, if we don't know the value of the data we're signing away.
This means that it's impossible to know if we are being ripped off or getting a bargain, or to compare it to a rival offer which might be better.
Switching is also harder for consumers if services are less interoperable. This could also mean that firms take their users for granted, because they know it will be hard to move profiles and data to a new or rival service.
The result? A distinct lack of competition and choice. The report states:
The monopolies and barriers to entry mean innovative new companies can't get a look in. While the early years of the internet saw dynamic competition with new and better products and services launching all the time, things are now much slower.
The major players have remained largely the same for the last decade, and their products have changed at a much lower pace. Potentially-exciting new challenger products and services are being blocked or throttled, so consumers have less choice than in the past.
As noted above, Britain is creating a new digital markets unit that will be created within the CMA, with powers to create extra-strong upfront regulations to deal with competition in digital markets. Penrose argues that this is "exactly the right thing to do", as every sector is digitising and new entrepreneurial firms could emerge to create new digital network monopolies at any time.
However, the new unit also poses a threat that needs to be avoided too, he adds. Penrose writes:
It will have modern versions of the same extra-strong upfront powers as long-established sector regulators like Ofwat, Ofcom and Ofgem. Because these upfront powers are so strong, and usually quicker and easier to use than normal competition and consumer laws as well, the temptation for any regulator is to use them more and more, and the workaday competition and consumer ones less and less.
So upfront powers are a headily-addictive drug for regulators to use, but they come with a high cost because they add far more red tape costs and regulatory burdens than traditional competition and consumer powers too. As a result, upfront powers create a high risk of ‘regulatory creep' which adds red tape costs steadily over time; the huge growth in cost, time and complexity of price control decisions in the long-established sector regulators over the last 30 years shows what can happen.
As such, the new digital unit - which Penrose argues should be dubbed the NDMU, as highlighted above - should have its extra-strong upfront powers tightly ring-fenced, in order to prevent this regulatory creed. Otherwise there is a risk that they could spread to cover every digital sector of the economy.
NDMU should focus on individual firms that own and run network and data monopolies, rather than to the rest of the sector in which they work, and only apply to problems which CMA's existing competition and consumer powers can't solve already.
It's an important time for the UK to be considering this work. The pandemic and Brexit have created a distinctly challenging environment for the British economy. Balancing the desire to have these internet monopolies invest in the UK, whilst creating a competitive environment that allows for British entrants to thrive is not easy. However, there are standards that Penrose addresses that can help consumers. For example, helping consumers understand where their data is and what it is worth to these companies, for starters. Equally, regulating for the interoperability of these services, to allow for easy switching (as has been done with banking), should bolster competition in the market. None of this will be a quick fix, however, and there will be an ongoing battle of wills (and power) for years to come.