The European Union’s big policy bet against the tech giants
At a roundtable in Brussels in May, NYU law professor Harry First described the European Union’s proposed Digital Markets Act (DMA) – an ambitious regulatory proposal aimed at large platforms it identifies as ‘gatekeepers’ – as “81 pages of dense, hard to understand language.” He half-jokingly added, “it is written in English … I know it’s written in English … but it takes some work to go through.” Professor First’s difficulties with the DMA text raises the question: beyond its stated ambition to improve ‘contestability’ and ‘fairness,’ what is the EU trying to achieve in digital markets?
The answer lies in the fine print. According to the DMA, access to data is key to business success in the digital economy. The DMA’s prescriptions invite the idea that imposing data access, interoperability and mobility obligations on gatekeepers can promote entry and improve competition and ultimately innovation. Requiring gatekeepers to silo their data can restore a level playing field with existing and new firms.
So far, so good. There is, indeed, some truth to the idea that ‘data is the new oil’. But the DMA’s implementation of this idea is based on assumptions about the relationship between data and competition which need to be carefully reviewed.
Problems with the DMA’s rivalry policy
The DMA embodies a specific approach to creating business rivalry through sectoral regulation. First, it wants to improve the competitive potential of ‘business users’. Business users, including sellers on Amazon, advertisers on Google and Facebook and influencers (or their agencies) on “online social networking services” or “video sharing platforms”, will obtain far-reaching access to the data of gatekeeper platforms. Can business users who benefit from these data sharing obligations compete with the gatekeepers in their core platform services (CPS)? Clearly, the DMA data obligations can improve the quality of business users’ product offerings. But this is irrelevant from a ‘contestability’ perspective. Instead, the relevant economic question is whether the DMA makes it relatively easy, and not too costly, for business users to reposition or extend their product lines in order to compete with the gatekeepers in their CPS.
A more effective rivalry policy of disruption through substitutes would promote competition from other tech giants, not business users. Unfortunately, the DMA takes the reverse approach, imposing restrictions around how gatekeepers can use their data in different lines of business. As a result, it disincentivises entry or expansion into other CPS. One of its key provisions, for example, forbids gatekeepers from combining data sources.
Furthermore, pressure from complements, not substitutes, is a substantial source of disruption for established firms. We expect more competition to result from business users building the next-generation products – like voice assistants, virtual reality or self-driving cars – that complement existing ones. This could mean, for example, that rather than competing with Google in online search engines, an entrant could disrupt online search by developing an entirely new way of indexing or finding information online.
The right focus is human capital, not data
The DMA’s emphasis on data underestimates the critical role of non-technological inputs as the source of contestability in the digital economy. It is worth being very explicit about the nature of the problem. Most indicators show a long-term decline in the price of data infrastructure. Particularly, the costs of cloud computing – for data storage or to train algorithms, for example – have fallen.
By contrast, human capital is not cheap. The skills required to work with data are costly due to a global shortage of engineers with the skills to add IT‑ and software‑ driven functionality to new products and services. A better distribution of ‘technical managers’ (as Nobel Prize laureate Kenneth Arrow calls them) across geographies and industry sectors might improve innovation, and the emergence of competitive firms outside of the US.
Why not, then, refocus the policy discussion on gatekeepers’ ‘acqui-hire’ M&A transactions (firm acquisitions that are motivated by acquiring talented employees rather than any firm-specific assets) or non-compete clauses in employment contracts? Similarly, EU policymakers might further promote the immigration of high-skill workers and education in STEM fields if they want European companies to compete with the gatekeepers. Such policies could lift real constraints on the effectiveness of the DMA’s data obligations.
The digital economy also has trade-offs
In any policy development exercise, trade-offs must be considered. Yet, the DMA mostly assumes the digital economy is free of trade-offs.
Consider first the trade-off between contestability and privacy. The DMA prohibits gatekeepers from combining personal data sources from CPS with other personal data. Here, the provision does not appear based on privacy concerns; if this were the case, then non-gatekeeping firms would not be left free to combine personal data as they see fit either. More problematically, the DMA’s various data sharing requirements pay little heed to the privacy implications of increasing flows of personal information between gatekeepers and business users. This is a step backward from the EU’s strong commitment to effective privacy protection in the digital economy, especially when economists are increasingly emphasising the full importance of privacy considerations.
In online advertising the trade-offs are even more complex. With more contestability in advertising, prices for online ads should decrease, and advertisers’ demand for advertising space should increase. This means more ads, not fewer. And it raises a hard policy question: are more ads a consumer welfare improvement? We believe the answer is not obvious, yet competition authorities act as if it is. For example, the UK Competition and Markets Authority’s (CMA) intervention against Facebook’s acquisition of Giphy is based on the preservation of competition to the primary benefit of advertisers, but it is less clear if and how UK consumers stand to benefit from this.
Overall, it is very hard to see on the basis of which economic, social, or even ethical grounds the DMA would attempt to resolve the abovementioned trade-offs, beyond a dogmatic belief in the merits of competition.
New data access rules are not a quick fix for big questions in digital markets
The DMA has not been adopted yet, so there is still time to improve it. In this essay we have tried to show where the DMA might not be effectively addressing the true sources of market power in the digital economy, and which targets policymakers should pick if they are truly concerned about restoring competitiveness. To start with, we recommend lowering the expectations placed on data access as a silver bullet to promote competition.
Alternative readings of the DMA exist. As we have said elsewhere, the DMA has an ancestor in the US consent decree with AT&T of 1956, which forced Bell Labs to openly license 8,600 patents and get out of all business unrelated to communications. The DMA’s spirit plausibly pursues a similar goal: make gatekeepers’ data, APIs and other key assets widely available and trust that innovation will happen. Alternatively, the DMA might be rationalised as an attempt to allow alternative players to address unserved segments of the market (for example, assisting the search engine Ecosia in its attempt to serve users interested in sustainability).
We close with a note of caution. Experience teaches us to avoid picking winners and saving losers, although it remains a favourite pastime of governments enamoured with industrial policy. If policymakers are notoriously bad at picking winners when they allocate subsidies, can we trust they will do any better when it comes to targeting digital gatekeepers?
Philip Hanspach is a PhD researcher in the Economics Department, working on competition policy and digital economics. He previously worked as economic consultant in the competition sphere and is an incoming trainee at the Chief Economist Team of the European Union’s competition authority DG Comp.
Nicolas Petit is a Joint Chair in Competition Law at the Department of Law and at the Schuman Centre. A member of the European Commission High Level Expert Group on Artificial Intelligence since 2017, he is the author of Big Tech and the Digital Economy: The Moligopoly Scenario.
This EUIdeas post is a shortened version of an article that first appeared on ProMarket.org.