Updated regulations for the Internet have been looming—and were finally unfurled in Brussels in December 2020. “So, for the world’s biggest gatekeepers, things are going to have to change,” warned EU vice president Vestager. The EU announced its aims to create “digital traffic lights to stop certain practices and allow others to proceed better” in a debatable metaphor that conveys its belief that web traffic should be regulated like road traffic. The EU’s regulatory proposals will shape how tech companies compete, innovate, and interact with market actors in digital markets. Like the General Data Protection Regulation’s (GDPR) extraterritorial effects, the European regulatory proposals will determine the competition rules for European digital players and non-European ones whenever they operate in Europe and potentially outside.
Together with the Digital Services Act (DSA), which updates the sensible E-Commerce Directive of 2000, EU commissioners Breton and Vestager presented the Digital Markets Act (DMA). Deemed “pretty aggressive” even by proponents of a heavy regulatory overhaul of the digital markets, the DMA constitutes a radical change in regulating digital innovation and competition. Against decades of improvement in antitrust knowledge and practice, the DMA introduces per se prohibitions of practices for a narrowly targeted set of companies—the so-called “digital gatekeepers.” These prohibitions are blacklisted practices enforced through ex ante interventions.
The DMA represents a paradigm shift from ex post analysis of antitrust liability wherein arguments are debated in courts toward ex ante regulatory obligations wherein the administration ensures compliance. The DMA exhibits the logic of the precautionary principle to competition rules at the expense of innovation.
The Commission attempted to introduce the blacklisted practices without any evidence of economic harm during the negotiations on the Platforms to Business Regulation in 2019. Many member states blocked this attempt because these prohibitions violated the fundamental principle of competition on the merits.
When these proposals were introduced, the Commission provided no basis for member states to be convinced by any ex ante regulations against digital gatekeepers. And many member states remained highly skeptical of the evidentiary elements available when the DMA was introduced in 2020. Despite some member states’ skepticism, the act ambitiously aims at ensuring a
contestable and fair digital sector in general and core platform services, with a view to promoting innovation, high quality of digital products and services, fair and competitive prices, as well as high quality and choice for end users in the digital sector. This … can only, by reasons of the business models and operations of the gatekeepers and the scale and effect of their operations, be fully achieved at Union level.
To keep digital markets fair and open to competition, the DMA rests upon two pillars. The first pillar is a list of “do’s and don’ts for big digital gatekeepers.” The second pillar is a “harmonized market investigation framework in place across the single market” to “investigate certain structural problems in digital markets” and to “take action to make these markets contestable and competitive.” These rules substitute the initially announced “new competition tool” and grant the Commission increased leeway to regulate and update gatekeepers’ regulatory oversight.
The DMA has narrowly confined the targets to the core platform services, or more specifically, digital gatekeepers, which are the popularly vilipended GAFAM companies (i.e., Google, Apple, Facebook, Amazon, and Microsoft).
The potential negative impact of the DMA on both digital markets and disruptive innovation cannot be overestimated. It has the power to deter innovation, distort competitive forces, and shape relationships among digital players however regulators see fit. Moreover, the implications of the DMA are significant given its inevitable extraterritorial implications. Again, the paradigm shift from ex post antitrust liability to ex ante regulatory compliance represents a resurgence of the precautionary principle concerning tech companies at the expense of innovation.
A confusingly consensus position has emerged concerning the necessity of an additional digital regulation at the EU level. This consensus is both bewildering and troubling. The DMA runs the risk of stifling innovation, harming consumers, and derailing the competitive process it aims to protect.
Ironically, the DMA aims to create “the right innovation incentives.” This report critically assesses the DMA from an innovation perspective. Section one raises concerns regarding the definition of the “digital economy.” Section two questions the very notion of gatekeeper. Section three argues that the DMA is illustrative of precautionary-infused regulations at the expense of innovation. Sections four and five study the newly created obligations derived from Article 5 and Article 6 of the DMA, respectively, with section five specifically discussing how the DMA embeds a precautionary approach to competition matters—namely, precautionary antitrust. Finally, the conclusion summarizes the assessment and offers recommendations.
The “Digital” in the Digital Markets Act
The fundamental premise of the DMA is that the digital sector has peculiar characteristics that need to be addressed by a specific economic regulation. This section argues that digital markets should not be subject to a different competition regulation than non-digital markets. The DMA applies vertically to the digital sector. But if it is to be implemented, it should apply horizontally to all sectors of the economy, including purely digital firms, to create a fair level playing field and avoid regulatory threshold effects between rival companies.
The European Digital Strategy acknowledges that “many European companies—and [small and medium-sized enterprises] in particular—have been slow at taking up digital solutions, and therefore have not benefitted from them and missed opportunities to scale up.” The Strategy proposes, without any logic or evidence that “Europe needs to continue to act and decide independently and reduce over-reliance on digital solutions created elsewhere.” But if digital solutions for small and medium-sized enterprises (SMEs) created elsewhere are superior to digital solutions created in Europe (and aren’t buyers of these solutions best positioned to make these decisions), then why would the EU want to limit best-in-class solutions for its own firms?
Invoking “European technological sovereignty,” the European Digital Strategy also identifies the need to ensure that “competition rules remain fit for a world that is changing fast, is increasingly digital and must become greener.” Again, while addressing climate change is key, there is no logic or evidence that competition policies are appropriate or needed to address energy issues in the digital space.
The Commission thereby assumes that current rules are inadequate for the digital age and that the digital sector needs tailor-made competition rules—and as such, the DMA focuses on regulating the “digital sector across the Union where gatekeepers are present.”
Yet, this is a new and bold position that is out of step with much EU thinking. In their advice for the “New Competition Tool,” the influential Economic Advisory Group on Competition Policy (EAGCP), which advises the European Commission, made clear that specific regulatory tools applied with a narrow scope to the digital industry were inappropriate because non-digital sectors may have the same competition concerns identified in the digital sector, thereby advising a broad scope for such a tool to preserve a level playing field essential for fair competition to take place.
Indeed, in their “Recommendation 2,” EAGCP stated, “We see a strong case for a New Competition Tool with a broad scope within and across sectors…. [because the] market features … surveyed … could in principle apply in any sector of the economy, we similarly see no benefit to limiting its applicability across sectors.”
However, the DMA’s obligations are not imposed with a horizontal scope (i.e., to all companies across all sectors), but rather a vertical one (i.e., to all companies within the so-called digital sector). This hinders competition and innovation because rival companies may be subject to different obligations, based not only on whether they are deemed digital but on their size (even if a smaller company is also a digital gatekeeper in a smaller market niche).
In addition, when the Commission consulted National Competition Authorities (NCAs) ahead of proposing the DMA, most argued that ex ante rules should not be applied to digital actors only: “As regards the scope of application, most respondents considered that such a tool should be applicable to all markets. Most respondents that expressed a view also indicated that the tool should not be limited to only markets/sectors affected by digitization.”
The DMA not only rejects such advice but diverges from U.S. legislative proposals that do not single out the digital sector. Yet, the DMA proposal itself points to the problems inherent in this approach, stating that “unfair practices and lack of contestability lead to inefficient outcomes in the digital sector in terms of higher prices, lower quality, as well as less choice and innovation to the detriment of European consumers.” It then concludes that
although some of these phenomena specific to the digital sector and core platform services are also observed to some extent in other sectors and markets, the scope of the proposal is limited to the digital sector as there the problems are the most pressing from an internal market perspective. Weak contestability and unfair practices in the digital sector are more frequent and pronounced in certain digital services than others.
This assertion proceeds from two implicit, and contested, rebuttable claims: The digital sector can easily be distinguished from the non-digital sector; and the digital sector has a greater probability of abuse of market power.
The Digital Sector Cannot Easily Be Distinguished From the Non-Digital Sector
Contrary to both shared beliefs and DMA’s fundamental misconceptions, there is no such thing as a digital sector or a digital market. Many industries, not just Internet platforms, are increasingly being transformed by digital technologies. Firms in more and more industries compete against one another to reach consumers through multiple business channels. Digital usually represents only one channel among many others. It often minimizes costs and is usually highly competitive.
Firms using data is the “relatively straightforward cost-focused approach,” but does it imply that data-driven companies with digital solutions are necessarily digital companies evolving in digital markets? The thin line between digital and non-digital companies is impossible to draw unless one grasps the notion that digital is a distribution channel—namely, an innovative business model—not a market.
Digital is a distribution channel—namely, an innovative business model—not a market.
The DMA defines the digital sector as the “sector of products and services provided by means of or through information society services.” Information society services are defined as any “service referred to in point (b) of Article 1(1) of the Directive (E.U.) 2015/1535.” In that Directive, there are “any service normally provided for remuneration, at a distance, by electronic means and at the individual request of a recipient of services.” This article further details essential concepts that delineate the scope of the DMA:
- “At a distance” means that “the service is provided without the parties being simultaneously present”
- “By electronic means” suggests that the “service is sent initially and received at its destination by means of electronic equipment for the processing (including digital compression) and storage of data, and entirely transmitted, conveyed, and received by wire, by radio, by optical means or by other electromagnetic means”
- “At the individual request of a recipient of services” finally specifies that “the service is provided through the transmission of data on individual request”
Technological innovation means that this definition now applies to many sectors of the economy, including banking, entertainment, insurance, real estate, information (including newspapers), health care, retail, legal services, and even manufacturing. Digital transformation also suggests that digital competition disciplines non-digital market actors. Jacques Crémer, one of the authors of the influential report that led to the DMA, recently recognized, “We have to adapt these laws to digitizing the economy. One of the problems is that everything is becoming a digital platform: lots of firms, even if they are not mainly digital, can have a digital part that is dominant in an important sector of the economy.” When everything is digital, what is digital?
Within a given industry, digital players and analog firms compete to reach end users through distinct means, each having its own particular costs and benefits. To illustrate, when Amazon decided to expand its business from selling books and music online to many any other catalog categories, it did not create a digital market. It entered (and admittedly disrupted) both traditional bookshop markets and well-identified music industry markets.
Let us assume that Amazon is the only online retailer of books and music, but has only 30 percent market share for each of the two markets. Does this make Amazon a monopoly in the digital market for books and music? Obviously not, because there is no such thing as an online bookshop market distinct from the off-line bookshop market. The same is true for the music industry market, like any other category of products. The only relevant market for antitrust purposes is the product market, encompassing online and off-line distribution channels irrespectively.
The French National Competition Authority (Autorité de la Concurrence) clearly adopted this position in the case of the merger between Fnac and Darty in 2016. In the two French retailers’ competition assessment, the French Competition Authority considered that off-line and online markets were part of the same relevant market for antitrust purposes. Indeed, the sales taking place through digital distribution channels greatly impact off-line sales in stores, and vice versa. Consequently, the competitive constraints come to play for products irrespectively of the distribution channels—be they in-store or digital.
“Digital” is not a market but a distribution channel: it is a different (often innovative) way of reaching end consumers in well-known markets. Thus, competition takes place in that product market, not on the digital channel.
This conclusion is interesting, as it underlies the increasingly irrelevant distinction between digital and non-digital distribution channels. More particularly, the blurring of the distinction between these distribution channels is encapsulated in the interesting concept of “phygital”: the digital becomes physically embedded and, reversely, the physical assets are mixed up with digital strategies. The only viable strategy appears to be the omnichannel strategy. This strategy optimally responds to patterns of consumption by consumers, such as “research online, purchase off-line” (ROPO) and “showrooming.” As an illustration, one can see that Amazon is opening physical stores. Simultaneously, successful brick-and-mortar companies are expanding their digital distribution channel, along with the data accumulation that comes with such a channel.
So what is the ratio of physical versus digital sales necessary for a company to be considered a digital company? For example, if Amazon were to increase its off-line sales, could it transform itself into a non-digital company under the proposed DMA? Regulating companies according to fixed, rigid categorizations runs the risks of misapprehending the business realities—let alone the business dynamics inherent to highly volatile and dynamic markets.
Indeed, the DMA could hinder the widespread adoption of digital technologies in each industry for two reasons. First, it creates extra regulatory costs for the industry actors that have adopted—let alone created—digital means to operate in the industry. These extra costs may undermine the competitiveness of these digital actors. Akin to the GDPR’s effects on helping big tech companies over other companies, the DMA creates extra regulatory costs that raise both existing barriers and barriers to entry—thereby preserving the current situation with the existing big tech incumbents. The dynamics of once-rapidly changing markets is perverted so that digital innovation may slow down. Second, the reduced competitiveness of the digital actors as opposed to the non-digital actors in the same industry deters the adoption of digital disruption, thereby stifling technological innovation.
Box 1: Data-Sharing Obligations and the Creation of an Uneven Level Playing Field
The regulatory obligation to share data, grant access, and encourage innovation among rivals makes it cheaper (if not free) for firms to copy market leaders’ innovations. The regulation makes imitation more attractive at the expense of innovation. Thus, the interaction between regulation and innovation yields a negative impact since excessive and artificially created competition stifles innovation.
In other words, innovation laggards benefit from the regulation, enabling them to imitate the innovation leaders that are thus deterred from innovating at subsequent stages in order to avoid further regulatory-driven free-ridership problems. Regulation-created rivalry artificially generates competition at the expense of innovative market leaders because asymmetric regulation requires disclosure and access be given to rivals—which thus gain a strategic and decisive advantage through regulation, at no cost.
This risk of free riding is present in the DMA in multiple instances. For example, the DMA states that “the gatekeepers should therefore be obliged to ensure access under similar conditions to, and interoperability with, the same operating system, hardware or software features that are available or used in the provision of any ancillary services by the gatekeeper.”
This obligation, laid down in Article 5 and 6 of the DMA, overlooks the innovation dynamics resulting from the initial creation and subsequent innovations, designing an operating system with proprietary services attached to it as an incentive to create the operating system in the first place.
More practically, what would be the innovation incentives for Apple if the company were prevented from favoring its own proprietary apps (e.g., iMessage, Maps, Safari, etc.) through either preinstalled or prominent placements in the App Store? Admittedly, the prescribed equal access would prevent self-preferencing and equally undermine essential proprietary assets and services of the company’s innovations. The obligation deters innovation both at the upstream level (e.g., updates on operating systems, as Apple’s ability to appropriate its innovations would decrease) and at the downstream level (e.g., updates and creation of Apple’s apps would be hindered since the expected benefits derived from these investments would decrease).
Similarly, should Android OS be granted equal access to app developers without Google being able to self-preference its apps, Android OS’s freely and openly licensable characteristics would be put at risk. Indeed, Google may recoup its investments and innovations through a more traditional, chargeable business model.
In both instances, innovation laggards would benefit from the regulatory obligations, whereas the innovation leaders would reduce their investment levels. The overall impact on innovation and competition would by no means be guaranteed to be positive.
Consequently, the two-level playing field generated by such asymmetric regulation prevents fair competition. This outcome clashes with the very objectives laid down in the regulation, which include fostering a fair competition. The DMA risks indirectly favoring less digitally innovative firms, encourages a race to the (innovation) bottom where less disruptive firms are insulated from intense competitive restraints thanks to the extra regulatory costs imposed only to more-digitally innovative companies.
Thus, it is detrimental for the DMA to create an unlevel playing field between rivals that are digitally advanced and those that are less innovative but also exempt from the DMA’s obligations. Consequently, not only will the DMA’s obligations punish digital investments and innovation as opposed to traditional businesses but it may also treat digital-specific abuses of market power that may constitute instances of digital disruptions. We now discuss these potential false impressions.
To impose a specific regulation such as the DMA on digital actors while not imposing it on non-digital actors of the same industry means the competition regulators wish to enforce an asymmetric regulation at the expense of a level playing field in each industry.
Box 2: Contestability of Digital Markets or Core Platform Services?
The concept of “market” is used confusingly in the DMA. Indeed, not only are digital markets a disputable notion, as we have demonstrated, but the very concept of market in the DMA reveals an overlap with the concept of “core platform services.” This latter notion is instrumental in designating gatekeepers.
However, it remains unclear whether the DMA wants to increase the contestability of digital markets in general or increase the contestability of the core platform services more precisely. Indeed, the DMA states, “Fairness and enhanced contestability in the digital sector would result in higher productivity, which would translate into higher economic growth. The promotion of greater contestability of core platform services and digital markets is also of particular importance in increasing trade and investment flows.” (Emphasis added.)
Does the DMA want to increase core platform services’ contestability as separate from the digital markets’ contestability increase? What does “greater contestability of core platform services” as opposed to “digital markets” imply?
The too-narrow focus on increasing the contestability of core platform services rather than digital markets—an already narrow objective—raises doubts about which other objectives are to be pursued. Indeed, core platform services’ contestability suggests that the DMA is exclusively designed to uproot the digital gatekeepers’ market positions in favor of other digital actors. Such an objective would be equivalent to an artificial selection of firms destined to replace current digital gatekeepers. Current digital gatekeepers seem condemned to be replaced by other digital players. It is therefore wrong to assume that current digital gatekeepers enjoy “unassailable” market positions.
By achieving greater contestability of core platform services, the DMA helps non-market leaders replace current digital gatekeepers. Such an objective does not convey clear benefits regarding consumer welfare and innovation, especially if the replacing firms provide services that may correspond less to consumer preferences. This objective also incentivizes rent-seeking behaviors of free riding at the expense of innovation incentives. To illustrate, does greater contestability of core platform services mean Google’s search engine needs to be subject to greater contestability by promoting Microsoft’s Bing or the French search engine Qwant? To pursue such an objective would ignore consumer preferences, and would inevitably deter Google’s innovation pace without increasing other firms’ innovation capabilities.
Consequently, it appears that the confusion between the promotion of greater contestability of core platform services as opposed to digital markets reveals the real intention of the Commission in this respect is to replace current digital gatekeepers with other digital players irrespective of consumer benefits and innovation. Consequently, the confusion over the notion of “digital market” reveals that the DMA’s essential notion is instead the alleged unassailable market position of gatekeepers.
Digitally Enabled Abuses or Digital Disruptions?
The digital distribution channel enables companies to disrupt sectors by offering lower prices and higher quality for products and services, thereby disrupting traditional markets by indirect entries. And they don’t impose that disruption; rather, consumers choose it freely.
Thanks to disruption, less innovative firms will be left behind. At the same time, those that are unable to embrace digital disruption will be disrupted. This is a positive development that is not something to be slowed, particularly given the EU’s productivity growth crisis. What is perceived as digitally enabled abuses often pare down to digital disruption—something that should be supported, not sanctioned.
Essentially new and disruptive, the enabling of digital disruption can easily be attributed to abusive practices, particularly by lagging competitors and civil society actors that inherently resist change. The convenient monopoly explanation proves useful and effective for inexperienced, dramatically new practices that are waiting to be more widely adopted by less innovative firms. First-mover advantage also comes with first-mover suspicion of disruptive practices.
One example of a practice that is assessed much more negatively online than off-line is that of default setting. Whenever a gatekeeper is considered to be enforcing default settings, such conduct is often seen as be abusive. Although it is commonly accepted that default/preinstallation settings on entry points such as handsets and browsers are not strictly exclusivity requirements, many believe that default settings can have remarkably similar effects, given consumer default bias. In his paper endorsing the DMA, Alexandre de Streel provided the example of the Google Android decision for Google Chrome and Google Search set up by default on smartphones. He raised concerns about Google paying Apple to preinstall Google as the default search engine on the iPhone/iPad.
Consumer default bias can be nothing less than consumer default choice. Default settings are also standard business practices that foster asset-specific investments, minimize consumers’ search costs, and develop complementarities.
The notion of consumer default bias is both unsubstantiated and debunked by the digital markets’ evolution. Contractually enforced default settings are often arrangements that minimize transaction costs among contracting parties such that innovation and competition can be maximized. Default settings can deliver fiercer competition by providing bundles of complementary products. Competition does not decrease, but rather strengthens. Innovation is not deterred but made possible through contractual certainty and predictability.
The Google Android case is a prime example. Absent the Google search engine and Google Chrome being preinstalled on Android OS smartphones, Google would have never entered the smartphone market and thus would not have innovated in that sector and become a strong competitor to Apple. And absent Google Android’s default setting, Apple would have perhaps enjoyed a much stronger position in the smartphone market.
The DMA is both confusing and incomplete in this matter. First, it states, “The mere offering of a given product or service to consumers, including by means of pre-installation, as well the improvement of the offering to end users, such as price reductions or increased quality, should not be construed as constituting a prohibited barrier to switching.” However, the DMA later criticizes self-preferencing: “[C]ertain software applications or services [can be] pre-installed by a gatekeeper. To enable end user choice, gatekeepers should not prevent end users from uninstalling any pre-installed software applications on its core platform service and thereby favour their own software applications.”
But the issue is not about being unable to uninstall preinstalled software. The majority of people who don’t use these applications simply move them to a folder of seldom-used applications. The only competitive issue would be if the firms prevented users from downloading competitive applications they do not.
In addition, to distinguish between “software applications or services” and the rest of the products and services in the economy is dubious. Why would default settings, in general, be accepted as pro-competitive but seen as anticompetitive whenever they concern gatekeepers’ software services? Companies preinstall products regularly, from autos that come with tires and radios to lights with light bulbs to products with installed batteries.
And what about the criticism of the Google search engine as a default setting, given it is not a software application but rather just a website with low switching costs for consumers? Indeed, consumers can easily download another free search app.
Moreover, to what extent can the preinstallation of software be objectively justified when required as part of an extensive free provision of services, such as in the case of Google Play Store preinstalled as part of the free provision of Android OS to manufacturers? Furthermore, how can providing the Google search engine as a default setting be considered problematic when rivals can also achieve default settings, such as Qwant as the default search engine on French administration computers?
The DMA’s stance is both overinclusive and underinclusive. It prohibits pro-competitive behaviors while exempting behaviors similar to those that are prohibited, thereby creating detailed delineation of practices in rapidly changing markets.
Even though default settings and linked products are almost considered consumer welfare enhancing, assume for a moment that they can have anticompetitive effects in the off-line world. In such a case, the particular focus made in the DMA suffers inconsistency in addressing anticompetitive effects in general. Default settings are inherent to business life. For example, when people buy a car, the default setting is to have the radio and tires installed. Mandating choice at the expense of default rules may alter consumers’ “choice architecture” without providing tangible benefits. It is widely accepted that “well-designed product or service defaults benefit both company and consumer by simplifying decision making, enhancing customer satisfaction, reducing risk, and driving profitable purchases.” Indeed, if the goal is consumer welfare, these default settings clearly do that.
Default settings, while neither good nor bad, are designed to efficiently provide consumers with the products and services they expect at a satisfactory quality level. As such, the Commission itself acknowledged precisely this in its Google Android decision of 2018:
The reason why pre-installation, like default setting or premium placement, can increase significantly on a lasting basis the usage of the service provided by an app is that users that find apps pre-installed and presented to them on their smart mobile devices are likely to “stick” to those apps … Users are unlikely to look for, download, and use alternative apps, at least when the app that is pre-installed, premium placed and/or set as default already delivers the required functionality to a satisfactory level.
Consumers stick with default settings precisely because they are satisfied with the quality of the provision of services they receive. The belief that default settings only lead to anticompetitive consequences is only partially true. In reality, default settings are widely accepted and typically produce satisfactory outcomes in the off-line world. Unfortunately, the DMA endorses such a partial view. Therefore, to prohibit default settings only in digital markets while allowing them off-line would not only hurt consumer welfare but generate unfair competition.
Another example of a practice that, when conducted off-line, is praised but despised when conducted online, is charging low prices. Charging low (or no) prices should be acclaimed by antitrust enforcers. However, low prices are loathed by antitrust enforcers when digital companies do it, as they are perceived as predatory prices or abusive business models for zero-priced products and services.
Popularized by the Neo-Brandeisian Lina Khan, the idea according to which big tech companies charge predatory prices first came to the fore with Amazon’s successful competition in the retail sector. Without economic data and evidence of the essential marginal cost, Khan made the assumption that Amazon charged prices below its marginal costs before recoupments. Unsubstantiated and unevidenced since the publication of the influential article in 2017, this assumption nevertheless generated groupthink such that it is now taken for granted that Amazon and other tech companies charge predatory prices.
Instead of traditional boutiques’ high-expenditure strategy, online businesses’ cost-saving rationale is overlooked whenever claims that low prices are predatory prices. From the perspective of traditional businesses, it may appear that digital retailers engage in predatory pricing. Rather than being an abuse of competition, because of low-cost business models, price competition is the essence of the competitive process. In that regard, one must recall Schumpeter’s description of the “perennial gale of creative destruction” when he wrote,
In analyzing such business strategy ex visu of a given point of time, the investigating economist or government agent sees price policies that seem to him predatory and restrictions of output that seem to him synonymous with loss of opportunities to produce. He does not see that this type’s restrictions are, in the conditions of the perennial gale, incidents, often unavoidable incidents, of a long-run process of expansion that they protect rather than impede. There is no more of paradox in this than there is in saying that motorcars are traveling faster than they otherwise would because they are provided with brakes.
Unfortunately, the DMA implicitly enshrines Khan’s flawed and ultimately ideological assumption. Indeed, it follows her argument that large platforms prioritize growth over revenue, and long-term market capitalization over short-term capital returns:
In addition, a very high market capitalization, a very high ratio of equity value over profit, or a very high turnover derived from end users of a single core platform service can point to the tipping of the market or leveraging potential of such providers. Together with market capitalization, high growth rates, or decelerating growth rates read together with profitability growth, are examples of dynamic parameters that are particularly relevant to identifying such providers of core platform services that are foreseen to become entrenched.
Yet, what is most ironic about this attack is it is precisely the kind of behavior many analysts and critics have argued EU and U.S. companies should engage in. In the 1980s and 1990s, Japanese companies were praised in the West because, much like large platforms today, they prioritized growth over revenue, and long-term market capitalization over short-term capital returns. In the last decade, while Western companies have been regularly attacked for focusing on stock market values and short-term capital returns, a set of companies that are not doing that has emerged. They are behaving in ways that maximize long-term shareholder and societal value—yet are being attacked for it.
Higher efficiency, scale economies, more significant innovation, and network effects are all enablers for digital platforms to offer lower prices and thereby enter different lines of business. According to the DMA, these positive parameters illustrate potential leveraging effects that are made possible by predatory pricing. Thus, “low prices” perceived positively offline are, according to the DMA, considered digital abuses of dominance in the form of “predatory prices.”
The same is true regarding zero-priced products. Ad-funded products are attacked for data accumulation abuses and subsequently construed as abuses of dominance. The ad-funded business model has existed since the rise of the advertising industry in the early 1900s, and has traditionally been praised rather than contemned by regulators. However, overlooking again the unparalleled consumer benefits associated with zero-priced products, especially to lower-income consumers, antitrust enforcers shun the pro-competitive benefits of zero-priced products to effectively prosecute and investigate practices that would, in the off-line world, be praised.
Would TV channels be investigated if TV advertisers enabled TV programs to be broadcasted for free while accumulating data on viewers’ attention patterns through such services as Neilson ratings? Would newspapers with free online services be investigated if they showed targeted ads? Would the French inventor J.C. Decaux have been investigated if he has offered free bus stops to communities under the condition that they include advertising spaces? Ad-funded business models are old, and have, unsurprisingly, entered the online space together with the digital disruption. Indeed, Wired magazine has argued that this business model is becoming widespread, even coming up with the term “freeconomics.”
The DMA makes ad-funded zero-priced products suspicious, whereas similar off-line zero-priced products are exempt from such suspicion and heavy obligations. Due to the disruptive effects of digital innovation on traditional businesses as illustrations of “gales of creative destruction,” what are considered conventional commercial business practices become digitally-enabled abuses of non-dominance under the DMA because they are ex ante prohibited.And regulators should remember that if the free model were made more difficult, upper-income Europeans would likely see insignificant impacts, as they could easily afford the resulting subscription fees. Lower-income Europeans would either be digitally excluded or have to make tough choices about where to spend their limited income.
Market Tipping and Market Concentration
One final rationale, only recently introduced in competition debates, for specifically regulating digital markets as opposed to other markets is that digital markets tend to “tip”. Market tipping suggests that one or few companies earn inordinately high profits and obtain market positions that are almost invulnerable to competition. Market concentration in the digital sector reaches unparalleled dimensions, as recital 26 of the DMA encapsulates,
A particular subset of rules should apply to those providers of core platform services that are foreseen to enjoy an entrenched and durable position in the near future. The same specific features of core platform services make them prone to tipping: once a service provider has obtained a certain advantage over rivals or potential challengers in terms of scale or intermediation power, its position may become unassailable and the situation may evolve to the point that it is likely to become durable and entrenched in the near future.
Market Tipping as a Superfluous Concept
The DMA’s underlying assumption is that gatekeepers exist only because network effects generate market tipping. But what are the characteristics of market tipping? When do they materialize? Market tipping describes a situation where firms have market dominance, thus describing a situation already covered by current EU competition rules. Market tipping is thus a superfluous concept in light of the traditional notion of market dominance.
The NCAs, in their contributions to the impact assessment of the new competition tool, defined mar
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