22/12/2020

The emergence of powerful digital platform companies has presented challenges to regulators around the world. In response, many are reaching for their traditional tools by filing antitrust suits against Facebook and Google, including here in Australia.

By contrast, the UK Government has been attempting to construct a new regulatory model for digital platforms that focuses on ex ante rules. This shift started in 2019 with the Furman Review which concluded that solely relying on merger and antitrust enforcement can create delays and uncertainty for all companies, big and small, and ex ante regimes are clearer and more effective in the dynamic digital economy.

Easier said than done. While the would-be administrator of this new approach, the Competition Markets Authority (CMA) has been assiduously building its ‘wish list’ of new powers, the UK Government, in whose gift those powers would be, has been much more cautious.

The CMA has recently released two key reports about how the digital economy should be regulated:

  1. The first CMA report, released in November, was a study into the digital advertising market which had four key recommendations (CMA study).
  2. On 8 December 2020, the CMA released their advice on the design and implementation of the new regime (CMA advice). The Government has not responded to the CMA Advice.

On 27 November 2020, the UK Government responded to the CMA Study (UK Government response). While the UK Government’s response goes some way to showing what the new regime will look like, there is still a lot to be determined.

 What has the UK Government agreed to?

The basic structure of the new ex ante regime is as follows:

  • The new regime will apply to firms deemed to have Strategic Market Status (SMS);
  • SMS firms will be subject to an enforceable and mandatory code of conduct; and
  • The enforcement agency will be the Digital Markets Unit (DMU), which will be set up within the CMA from April 2021. The DMU will both enforce the code and designate which firms have SMS.

What hasn’t UK Government has agreed to?

There are three key areas of the new regime that need to be worked out:

1. Which firms will be designated as having SMS

The CMA advice about which firms should be designated as having SMS is pretty broad and ill-defined. It states that SMS ought to mean “those with substantial entrenched market power and where the effects of that market power are particularly widespread and significant”.

The UK Government’s response is even more broad. It has only said that firms with “substantial and enduring market power” will be designated as having SMS. The UK Government’s response states that its “very likely” that Facebook and Google will be designated as having SMS because of their dominance in the market for digital advertising. However, the general tests provided by both the CMA and the UK Government give us no indication whether companies Amazon, eBay or Twitter will be designated as having SMS.

2. What the code or codes of conduct will include

The CMA recommends that each firm with SMS should have a tailored, legally binding code of conduct, which it says will enable the codes to focus on regulating conduct in areas where the companies have SMS. The CMA also recommends that while the overarching goals of the code should be set out in legislation, the DMU should have the power to create and vary the individual company’s code of conduct. They argue this will allow the ex ante regime to keep pace with the dynamic nature of the SMS digital platforms’ businesses and their power.

The UK Government response states that the high-level objectives of the code would be fair trading, open choices and trust and transparency. The UK Government has not provided much more detail than that. The one specific commitment the UK Government has made is that the code will govern the relationships between online platforms and news publishers, in a similar way to the news media bargaining code is attempting to in Australia.

3. What tools of enforcement the DMU will have

The CMA wants the DMU to have expansive tools of enforcement. It wants to be able to vary the code, undertake pro-competitive market interventions, have access to enhanced merger rules and monitor markets generally for any non-competitive conduct.

The UK Government’s response states that the code of conduct should be mandatory and enforceable and that it agrees “in principle with giving pro-competition powers to the DMU.” But in a clear warning sign to the CMA that it might not get everything it wants, the Government says “more work is required to understand the likely benefits, risks and interventions” of any pro-competition powers given to the DMU.

Conclusion

For a regime that is meant to be clear, transparent and open, there is still a lot of uncertainty. While, the UK Government has committed to establishing the DMU from April 2021, it’s unclear who it will regulate, what regulation it will enforce and how it will enforce that regulation. Meanwhile other regulators race ahead with their ex post litigation responses. That does not necessarily mean that the UK is headed in the wrong direction. The Furman criticism that existing antitrust enforcement can be “slow, cumbersome, and unpredictable” stands. It would be naïve to think that digital disruption does not disrupt regulators and regulation as much as the economic sectors they are overseeing. We will have to wait until the UK Government’s consultation period ends in 2021 to see how it all comes together.

This is the last bulletin for this year. We will be back in mid January. Happy Holidays and here’s to a more hopeful 2021.

 

Authors: Nick Perica, Peter Sergi and Peter Waters

 

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