By 2024, the regulation of digital markets in the EU and the UK is set to change. The EU Digital Markets Act (DMA), which entered into force on November 1, 2022, will become fully operational by March 2024. The DMA aims to redress the imbalance of power in the digital sector to ensure that these markets remain open and fair by requiring large online platforms to comply with certain obligations.
Likewise, the Digital Markets, Competition and Consumer Bill (DMCC), which is currently going through Parliament, seeks to introduce a similar regulatory regime in the UK.
Why are new regimes being introduced?
There are currently a handful of firms that provide core digital platform services, such as distributing and advertizing products, which have the ability to connect third party business users with many customers through their services. This, in turn, enables large online platforms to leverage certain advantages, such as access to large amounts of user data which could threaten competition within the relevant markets.
The European Commission (Commission) and the UK competition authorities consider their current competition law tools to be inadequate to promote competition in digital markets. They are mainly backwards-looking in that they can only be used if they suspect an infringement of competition law and do not promote competition. Furthermore, they are often lengthy and costly for all parties involved.
How will DMA and DMCC promote competition?
The DMA and the DMCC introduce rules to prevent large online platforms from imposing unfair conditions on businesses and end-users, and ensure the openness of important digital services. The goal is to foster innovation, growth, and competitiveness.
The Commission will be the main enforcer of the DMA, working in cooperation with the national competition authorities and courts of the EU Member States. The Competition Markets Authority (CMA) will be the main enforcer in the UK.
Who will be subject to the new rules?
In the EU, companies designated as “gatekeepers” will be subject to the DMA. This will be the case if they:
- have a significant impact on the internal market. This is presumed if the company achieves an annual turnover of at least €7.5 billion ($8 billion) in each of the three preceding financial years, or if its average market capitalization or fair market value is at least €75 million ($80 million) in the last financial year, and if it offers the same core platform service in at least three Member States;
- operate a core platform service, which services as an important gateway for business users to reach end-users. This is presumed if the core platform service attains a user base exceeding 45 million active users per month and serves more than 10,000 active business customers per year within the EU in the last financial year; and
- enjoy an entrenched and durable position in their operations. This is presumed if the company meets the second criterion in each of the last three financial years.
On September 6, 2023, the Commission designated six companies as gatekeepers relating to 22 of their core platform services.
In the UK, the DMCC will apply to companies which are designated as having “strategic market status” (SMS). These are currently defined as being:
- very large businesses with global turnover of over £25 billion ($31 billion), or UK turnover of over £1 billion ($1.25 billion);
- which have “substantial and entrenched market power”; and
- “a position of strategic significance” where digital activity is linked to the UK.
Companies designated as having strategic market status will have to comply with a bespoke ‘code of conduct’. The types of obligations are likely to be similar to those in the DMA.
What will gatekeepers and SMS firms have to do?
The DMA outlines specific obligations which all gatekeepers must comply with, whereas in the UK, SMS firms will be required to comply with a bespoke code of conduct.
The types of obligations under both the DMA and the DMCC are, however, likely to be similar. These include allowing third-party interoperability, providing data access for customers, easy unsubscribe options, stopping pre-installed software, and prohibiting unfair practices such as favoring their own products over competitors. The obligations will also have implications for data privacy and consumer law.
Are there new M&A rules?
The DMA will require gatekeepers to inform the Commission of any proposed transactions where the merging parties or the target company provide core platform services or any other services in the digital sector or enable the collection of data. This obligation applies regardless of whether the merger needs to be notified to the Commission or a national competition authority based on the applicable merger control regulations. The Commission will be obliged to publish annually a list of all deals notified under the DMA.
The DMCC also introduces a new reporting requirement for SMS firms. However, unlike under the DMA, this obligation will apply to all of their M&A deals, where:
- they acquire a certain proportion of shares or voting rights in a company which is active in the UK (less than 15% to 15% or more, 25% or less to more than 25%, or 50% or less to more than 50%); and
- the value of that holding is at least £25m ($31m).
The main purpose of these reporting requirements is to allow the Commission and the CMA to observe market developments in the digital sector and detect “killer acquisitions”. These refer to instances where prominent corporations acquire promising start-ups with low revenue but have a significant early-stage potential.
Are there any other key differences between the DMA and the DMCC?
The DMCC will give the CMA the power to carry out targeted ‘pro-competitive interventions’ in relation to SMS firms. This could involve SMS firms being obligated to comply with orders from the CMA, for example, certain structural or behavioral remedies.
What are the penalties for non-compliance?
Non-compliance with the DMA can result in significant penalties. The Commission can impose fines of up to 10% of a company’s total worldwide annual turnover, or 20% for repeated infringements, along with periodic penalty payments. In cases of systematic non-compliance, additional remedies can be imposed, including structural remedies such as selling parts of the business or banning acquisitions in the digital sector. Private enforcement is also possible under the DMA, with provisions for cooperation between the Commission and national courts, as well as the potential for class actions.
The potential sanctions in the UK will be similar to those in the EU except that individuals can also be penalized. Directors may be disqualified and ‘nominated officers’, being a senior manager of the business who is in a position to fulfil the requirements under the DMCC, may also be subject to individual penalties. The CMA will also be able to use a ‘final offer mechanism’ to resolve breaches of conduct requirements relating to unfair payment terms.
In the EU, the designated gatekeepers will have until March 2024 to comply with the requirements of the DMA. They will each be required to publish a compliance report demonstrating their effective compliance with their obligations. The gatekeepers will have to update these compliance reports annually.
Ensuring fair competition
Unlike the DMA, the timing of the new UK digital markets regime is unclear. It could reportedly take until Spring 2024 for the DMCC to become law. We expect that it will then take a number of months before the new digital regime becomes operational.
The new digital regimes in the UK and EU represent a significant step change in the regulation of digital platforms and ensuring fair competition. Whilst both the CMA and the Commission will continue to be able to use their traditional powers to enforce competition in digital markets, the new regimes should, in theory, reduce the need for such lengthy and time-consuming investigations.
The DMA and the DMCC provide opportunities for smaller platforms, small and medium-sized enterprises, and start-ups to thrive. However, it will be crucial for the competition authorities to carefully monitor the implementation of the new regulatory regimes to strike the right balance between fostering competition and innovation whilst avoiding unintended consequences.