UK’s Digital Market Unit wants to ask Big Tech for a fight

Chris Middleton Profile picture for user cmiddleton January 17, 2022 Audio mode
Summary:
Grab the popcorn! Britain’s trainee competition enforcer goes through its paces. Will it land a punch or be knocked out in round one?

Image of some boxing gloves
(Image by Gerd Altmann from Pixabay )

The UK's Digital Markets Unit (DMU) is emerging from the shadow of the Competition and Markets Authority (CMA), where it has sat since formation last year. The DMU was founded in exploratory form in April 2021 to tackle the power of Big Tech platforms, in response to the Furman Review and recommendations from the CMA's own Digital Markets Taskforce.

Can it succeed?

As I noted in my report on AI standards, for a nation that is supposedly against European-style bureaucracy, regulation, and market controls, Britain is adept at stacking the digital space with layer upon layer of administrative complexity - a process that has, unsurprisingly, increased since Brexit. Could it be that Europe's interventionist regulators had the right idea all along? The UK has built precious few tech titans from its innovative start-ups, but it knows how to create public sector jobs on the back of them.

However, as I also noted in that report, Britain plans a new "pro-innovation, pro-competition regime", which - when considered alongside Whitehall chatter about abolishing human rights legislation - is likely to put less of a focus on protecting the citizen/consumer than the EU, and more on preventing harm to companies. Such an environment would favour business where possible, as part of the Plan for Growth - the Johnson-era document that replaced the more coherent Industrial Strategy drawn up by his predecessors.

As the CMA noted last year:

There is currently a lack of effective competition in digital markets. Powerful digital firms have built entrenched market power in certain key markets. Bolstered by strong network effects, control of valuable data flows and economies of scale, these firms are now in a position to frustrate competition and impose unnecessary costs on consumers, businesses, and the wider economy.

That much is obvious. Indeed, the DMU is 20 years too late. Cora Govett is Deputy Director Digital Markets, Digital and Tech Policy, at the Department for Digital, Culture, Media, and Sport (DCMS). She explains the thinking behind the new unit:

If we don't have competition, our digital economy won't flourish. The UK's tech start-ups will have very little prospect of ever growing and competing with these tech giants. And ultimately, this means less innovation, less growth, and fewer jobs in the digital economy.

But it's not just the digital economy that suffers. Huge swathes of our economy are increasingly dependent on Big Tech platforms, which often act as gateways into other markets. A good example that we think about a lot in DCMS is the press, who say that the viability of their business is dependent on decisions made by Big Tech.

The impression that an aging press baron has had a word with No 10 is hard to ignore - or perhaps we've just watched too many episodes of Succession.

Govett argues that, without competition, consumers suffer by paying higher prices - a view challenged by the examples of the UK energy, telecoms, and transport markets (big competition, big prices) - and by having insufficient control over their personal data. Businesses, on the other hand, pay too much for the advertising that has become the lifeblood of the internet.

An ex-ante regulator

But the question remains why the UK needs a dedicated competition unit to fix all this when the CMA exists and, as others have observed, most markets are now digital to some degree. Is the CMA no longer fit for purpose?

Govett says:

Digital markets are different from other markets. They share unique features like network effects and the intensive use of data and AI. And so, the bigger these companies get in these markets, the better able they are to exploit that size and entrench their market power. More fundamentally, once these firms have market power, the consequences are far reaching. They begin to occupy this very powerful strategic position in the economy.

The existing competition regime is simply not designed to address these problems, because it is by design a backwards committee. The CMA acts after the harms have occurred, and often it takes a long time. As a result, the DMU will ultimately be an ex-ante regulator. It will be designed to influence the behavior of Big Tech in advance.

The key element of this plan is establishing Strategic Market Status (SMS) - in other words, who should be subject to the new regime. The reality is very few companies, admits Govett.

The bar for meeting the SMS test is intentionally set very, very high. This regime is not about capturing successful digital firms, but about targeting the very small number of enormously powerful Big Tech companies.

Conduct requirements are designed to govern the relationship between Big Tech and all those people that rely on those businesses, and it will do things like make sure that Big Tech practices are fair, transparent, and offer open choices to users. Ultimately, these requirements are about managing the effects of market cap.

But alongside those conduct requirements are what we call pro-competitive interventions. And these are designed to tackle the root cause of market power and drive competition up in these areas. And that can include things like interoperability or mandating access to data.

The prospect of the DMU ordering a trillion-dollar walled-garden like Apple to be interoperable and release its data seems like a guaranteed win for Apple - especially as the UK can no longer count on 27 EU countries for support. But Govett continues:

It is really important that the DMU has discretion. This is perhaps where we differ from other regimes that are being designed across the world. These are very complicated markets, and they're very heterogeneous, so we strongly believe that there's no ‘one size fits all'. We need to give the DMU the powers and the tools to identify remedies according to the harm.

It's important that the DMU has the powers to force remedies where needed, including substantial fines for non-compliance, so it needs to be a robust regime. And that the DMU has the mechanisms and incentives to work with other regulators. 

Competition issues don't sit alone in a silo, they interact deeply with other things that we care about, and regulators care about, from data privacy to plurality, and potentially financial stability.

Implementation

This theme of the UK's regulators acting in a more centralized, integrated, government-mandated way has been clear in recent Whitehall announcements - a surprise, given that it would appear to be the opposite of ‘small government' Conservative thinking. Either way, Whitehall's consultation on the plans closed in October, and DCMS will publish its response soon.

So, what about implementing the plans when finalised? That will be the job of Will Hayter, Senior Director of the Digital Markets Unit. He uses the example of Google (shopping) vs the European Commission to illustrate how things will be different.

The Commission's decision and its fine were recently upheld in the European Court over 10 years after the case started. Two things are clear from that: First, the way Google uses market power indeed caused problems for competition, and second, 10 years is too long to be useful to anyone […]. The remedies were too narrow and ineffective.

None of that's a criticism of the Commission. It's a criticism of the suitability of traditional tools on their own. The solution to address these problems - and the core purpose of any framework, we think - is to make these markets more open and more contestable.

What does that mean in the real world? Hayter says there will be five key principles:

The first is evidence driven and effective. How we implement the framework must be tailored to specific markets, based on evidence. A one-size-fits-all model could have damaging results, because the activities undertaken by the most powerful digital firms are themselves very varied. And that's within each firm, let alone across different firms.

Second, it should be proportionate and targeted at addressing specific problems, thereby reducing the risk of unintended consequences. Third, we're aspiring to be proactive and forward looking. So, the DMU should be focused on trying to prevent harm rather than enforcing ex-post. It should try to understand how digital markets might evolve and the risks this poses to competition and innovation.

Fourth, it should be coherent, by which we mean both coherent domestically and with other regimes internationally [both Hayter and Govett stressed G7 collaboration]. And finally, it should be open, transparent, and accountable. We're going to consult a wide range of parties and will need to articulate very clearly why we've reached decisions and be held accountable for those.

Now, you might say that is just good regulatory practice - and you'd be right - but we have put a particular emphasis on participatory regulation. That means working closely and collaboratively with all parties that have an interest to ensure that solutions can be found as fast as possible.

Can it make a difference? 

The DMU certainly has big cats in its sights, he says, such as the big two mobile ecosystems.

We see a market that offers many attractive products and services, but at the cost of quite extreme control by Apple and Google, and the risks to competition that come with that. Practically every phone or tablet that people use today is powered by iOS or Android and there is very little switching between the two. So that gives them the power to control and influence the way that tens of millions of UK consumers get hold of content or buy things online.

And then within the two ecosystems, Apple and Google each face little competition to their app stores and browsers. We think for Apple that's because it bans alternative app stores and its own browser Safari is set as a default, and it limits the functionality of rival browsers because it controls the underlying technology.

While Google allows more freedom in this respect, it achieves similar outcomes through the web of contractual agreements that it has in place with device manufacturers like Samsung. Through these agreements, it has maintained a strong position for its store and for its browser and search engine, which come pre-installed on Android devices.

Yes, WE KNOW. As does Microsoft, which lost the mobile world to its rivals while Steve Ballmer was stomping and whooping like an ape who escaped from the 1990s. But so what? This late in the day, do Google or Apple give a damn what the UK thinks? After all, this is the country where Apple can simply swap dollar signs for pounds - $999 becomes £999 - and thus charge British consumers more for its products. Isn't it a bit late for a fight?

Hayter says:

We've identified some real-world examples where consumers seem to be missing out on innovative new services. For example, we have concerns that Apple may be holding back cloud gaming or game streaming services by preventing them from being accessed freely through his app store. And it also limits the functionality and viability of web apps, which could provide a valuable alternative to the native apps we're all familiar with.

This study is a key part of our work to build our understanding of these markets as we gear up for the DMU role. And it's one of a series that started with the previous study on online platforms and digital advertising. But I recognise these are complex, fast-moving markets, and the information asymmetries between companies and competition authorities or regulators are bigger than in any other industry. So, we don't underestimate the task.

We don't expect to get everything right first time. But the government's proposals are a good basis on which to take on the challenge, and to support innovation, both from the biggest firms and the smallest.

My take

No sensible person doubts that a handful of megacorps are worth more than most nations and certainly wield greater power. But while China is adept at slapping down homegrown innovators who get too powerful for the collective good, the US regards them as geeky offspring who somehow earned more than the handsome jocks with guns, so it shrugs and leaves them to it.

Meanwhile the UK has been making bold claims for itself since Boris Johnson took over - "world leading", "science and technology superpower", and so on. These make it look weak and, in light of its political upheavals, increasingly ridiculous. So, can the DMU put on big gloves and deal a knockout blow? Perhaps only with the support of any tech titan that feels left out. And that may be a risk in itself: that the DMU becomes a weapon in the war for market supremacy.

Disclosure - Govett and Hayter were speaking at a Westminster eForum on UK competition policy on 14 January 2022.

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