The UK’s New Digital Markets Unit: A Deep Dive into Regulation of Tech Giants

A newly established unit within the UK’s competition watchdog, focused on the impact of major technology companies on digital markets, is beginning to outline its potential operational approach. This comes prior to receiving full statutory powers, including the ability to penalize problematic platforms and potentially enforce structural separations.

Government Intent and the Rise of Pro-Competition Regulation

The government signaled its intention to regulate Big Tech in November of last year, aiming to establish a “pro-competition” framework. This initiative seeks to address concerns related to digital markets, such as ‘winner-takes-all’ dynamics driven by network effects.

The exact timing of this regulatory shift remains uncertain, dependent on parliamentary schedules. However, the UK is forging its own path in digital regulation following its departure from the European Union.

Navigating a Landscape of New Digital Rules

EU lawmakers have recently proposed comprehensive rules for digital services – the Digital Services Act – and ex ante requirements for the largest tech companies – the Digital Markets Act. Furthermore, draft regulations for high-risk AI applications are under consideration in the EU.

The UK also has an Online Safety bill in development, scheduled for proposal this year. This creates a complex environment with the potential for conflicting regulations, necessitating coordination among lawmakers.

Despite expectations of divergence between the UK and EU approaches, UK lawmakers intend to collaborate internationally to ensure alignment in principle with global standards for Internet platforms.

The Digital Markets Unit (DMU) Launches

The UK’s Digital Markets Unit (DMU) commenced operations earlier this month. Its initial role is to support the government in drafting legislation to establish its statutory footing and prepare for its function as the primary British overseer of Big Tech.

Catherine Batchelor Outlines the DMU’s Approach

At a recent conference, the head of the DMU, Catherine Batchelor, detailed the unit’s intended approach and the powers it has recommended to the government. These powers are crucial for fostering competition in digital markets prone to dominance by a few key players.

Understanding the Evolving Dynamics of Digital Markets

Batchelor highlighted the need for a new regulatory approach due to the changing dynamics of digital markets. She noted the transformation of companies “who were once garage startups” into global powerhouses.

Tech giants have accumulated significant market power due to characteristics inherent in digital markets, including data access, network effects, economies of scale, and the ability to build ecosystems around their core businesses.

This consolidation of power can lead to exploitation of consumers and businesses, manifesting as increased prices for services like marketplace listings, app store access, and advertising.

Data, Attention, and Fair Exchange

Batchelor also raised concerns about the exchange between consumers and digital service providers. She questioned whether the amount of data provided by users represents a “fair exchange” for the services they receive.

Tackling Exclusionary Tactics: Self-Preferencing

Self-preferencing, where tech giants favor their own products and services, was identified as a problematic “exclusionary” tactic the DMU will address. This practice stifles competition and hinders the emergence of new tech firms.

From Reactive to Proactive Regulation

Existing competition law is often reactive, addressing anti-competitive behavior after it occurs. The DMU advocates for a proactive approach, establishing rules to prevent such conduct in the first place.

Avoiding Over-Regulation: A Flexible Approach

Unlike the EU’s Digital Markets Act, the DMU does not support a rigid list of ‘dos and don’ts’ applicable to all platforms. It prefers a more flexible approach, tailoring requirements to the unique characteristics of each platform.

Defining ‘Strategic Market Status’ (SMS)

The unit recommends an “evidence-based assessment” to determine whether a firm has ‘strategic market status’ (SMS). This signifies a position that is unlikely to be temporary.

To qualify for SMS, a firm must demonstrate substantial, entrenched market power and a strategic position derived from factors like barriers to entry and expansion.

The assessment of ‘strategic position’ considers the widespread or significant impact of the firm’s market power.

Criteria for Strategic Market Status

Factors considered for SMS include the firm’s size, its role as a crucial access point for businesses reaching customers (akin to the EU’s ‘gatekeeper’ designation), and its ability to leverage market power across different sectors.

The regulator will conduct the SMS test, consulting stakeholders throughout the process, which could take up to a year.

Fixed Designation Period

The DMU proposes a fixed period for the SMS designation – a recommended five years – to ensure regular review and adaptation to market changes.

A Preventative Code of Conduct

Firms meeting the SMS criteria will be subject to a preventative code of conduct, with general objectives set out in legislation. The government has accepted this approach.

Pro-Competition Interventions: Addressing Underlying Power

The DMU also envisions pro-competition interventions to address the root causes of market power, potentially involving significant changes to market structures.

International Collaboration and Consultation

Harry Lund, from the Department of Digital, Media, Culture and Sport, emphasized the importance of international collaboration and shaping the global debate on digital competition.

A consultation will be launched later this year to outline the government’s vision for digital competition and its specific proposals for the new regime.

Potential Pro-Competition Remedies

Examples of pro-competition interventions include data mobility, interoperability, data access for competitors, common standards, and separation remedies – potentially separating different business divisions within a firm.

A More Cautious Standard of Proof for Mergers

The DMU proposes a more cautious standard of proof for mergers involving firms with SMS, potentially making it more difficult for tech giants to gain regulatory approval for acquisitions.

Enforcement and Penalties

The DMU seeks the power to order firms to comply with codes of conduct and pro-competition interventions. For negligent or intentional breaches, it proposes penalties of up to 10% of a firm’s global annual turnover.

Tailored Regulation and Continuous Evaluation

The DMU emphasizes a tailored approach, allowing for variations in codes of conduct based on specific firm activities and business models. It also stresses the importance of continuous evaluation and adaptation of regulations.

The unit believes in the ability to adjust regulations, easing them where unnecessary and strengthening them where needed.

The development of each code will occur alongside the SMS designation process, with parallel consultations on both aspects.

This new competition regime represents a major change to the regulatory landscape, requiring careful consideration and implementation to ensure its effectiveness.