Whether more competition allows for greater innovation or not has become a burning question in the context of the fast-changing digital economy. European legislators have raised concern over the market power of certain large online platforms (LoPs). The stake is particularly high for the European Commission considering that the 2020 Fortune Global 500, showed only three European companies, against twelve Americans and five Chinese ones. The European Union (EU) wants to position its leading digital platforms in the global digital economy, in a context of fair competition and contestability. Taking a step back, when it comes to regulation of digital markets, what are the issues at stake for small and medium-sized enterprises (SMEs) and how would such regulation impact them? Let us delve deeper into this question by tracing a roadmap of the DMA.

The DMA: a case of digital market regulation

Digital platforms constitute a new challenge for regulators and public authorities. Some of their worries relate to their share of market power and potentially concerning practices that come with it. For example, self-preferencing is associated with the unfair practice of firms competing for user attention, highlighting their own products first in a search engine.[1] We have previously seen such occurrences, first through accusations of Amazon ranking first its own products in its platform searches, and secondly through a similar example whereby Google developed an algorithm that penalised rival shopping search services and redirected to Google Shopping.[2] The European Commission acknowledged this situation where LoPs have gained tremendous market power, generating problems of consumer choice and competition. Also for this reason, the European Union launched a series of legal initiatives as part of its program “Shaping Europe’s Digital Future”,  such as the Digital Services Act package published in December 2020, composed of the Digital Services Act and the Digital Markets Act. The Commission particularly points out LoPs which act as “gatekeepers” and therefore promote unfair practices for business users and competitors, by “undermining effective competition and market contestability”. Its proposed DMA is proposing solutions to tackle issues related to fairness, contestability and innovation of LoPs on digital markets. Figure 1 presents a short recap of the DMA’s “legislative train”. As the regulation proposal will receive a final vote in July, the expected implementation period is of six months after entry into force, and will take place in 2023.

Figure 1

Does the DMA allow innovation to prosper?

According to a report by the European Commission, four in ten EU businesses are significantly dependent on platforms.[3] Indeed, platforms generate great value for businesses by providing them with access to demand for their products, or through certain platform-specific features which allow them to easily reach a large user base. The issue with such ‘dependence’ is that it may provide, on the one hand, added value through reduced costs, while at the same time the smaller businesses are ‘locked in’ to the choices and behaviour of such LoPs, with very high switching costs.

On the one hand, the DMA has been criticised as an intervention that may potentially harm certain SMEs in the scenario that large technology companies have diminished reach and reduced incentives to maintain its software at a lower cost, leading SMEs to i) use new and separate accounts for collection, analytics and targeting services which may lead to a reduced user reach; ii) increased inefficiency due to disaggregated services. While these remain possible scenarios, we ought to conduct a comprehensive analysis of the risks and potential impact of the regulation, which hints at an overall positive direct effect of the regulation, particularly on innovative SMEs. Indeed, as underlined by our position paper,  one of the key aims for intervening in the digital market is to ensure fair competition rules, not just for consumer protection, but to correct unfair commercial practices that distort the market for all players.

The DMA would ensure fairness in the Business-to-Business (B2B) setting in an ex-ante approach through the following:

• Preventing unfair leverage of gatekeeper power (Article 6): this would be the case for self-preferencing and bundling, practices whereby the large platform would ensure their own products and/or services would be listed ‘first’ or be guaranteed a higher user base compared to the services or products offered by third parties on the platform;
• Preventing unfair contractual terms and practices such as termination or suspension;
• Prohibiting gatekeeper platforms from using other businesses’ data to the detriment of competitors (Article 5);
• Tangible enforcement threats through sanctioning (Articles 18, 21, 24).
• Prohibiting the tracking of end-users beyond the gatekeeper’s platform services; this would aim at reducing concerns associated with targeted advertising infringing on consumer protection and users’ autonomy to operate online.

Overall, if we weigh the impact of the regulation on the incentives for SMEs to innovate, the DMA acts as a strong signal to protect the fair and transparent functioning of the European digital market. For innovative SMEs, the DMA will finally create the space and level playing field they need to be competitive. It would set a precedent of its own, through an ex-ante approach that introduces predefined obligations at an EU-wide level. For business users, this would mean being able to offer their services without being forced to comply with unfair terms and conditions forcing them to innovate according to the rules dictated by the gatekeepers. In the short-term, the DMA raised some concerns over the possibility of increased service costs for SMEs. However, this comes with the assumption that no alternatives and competition will be available to said customer base. On the other hand, through the regulation, the business owners will have more incentives to innovate, while the users will have wider access to more opportunities to actually switch providers and foster the European digital economy.

Obligations to guarantee market contestability

Beyond the prohibition-based obligations, the DMA includes a set of obligations to increase market contestability, which means to more easily allow new entries in the services offered on digital platforms. These obligations are defined as the following types:

1. Interoperability and access to API

The gatekeeper ought to provide interoperability to key services and access to key API to enable interworking between platforms that are substitutes for each other while maintaining the security and the integrity of the LoP.

2. Data sharing

Obligation to share large volumes of data at the request of another firm or user (while respecting good privacy practices). This obligation differs from existing data sharing obligations because it applies asymmetrically to LoPs, and horizontally to all sectors. This category of intervention opens up the platform ecosystem in a similar way that the telecommunications sector experienced a vertical integration of potential market entrants when the sector was liberalised in the 1990s in Europe.

The foreseen obligations would allow SMEs and other businesses to ‘compete’ in the dominant firms’ ability to influence the extent to which innovation happens. The interoperability requirement, for example, would lead more companies to be able to compete with dominant platforms without facing the LoP’s monopolistic-level network effects, as the SMEs would now be able to access large-scale data and information from which businesses may gain significant value.

Therefore, also when it comes to interoperability, the European DIGITAL SME Alliance, bringing together more than 45,000 SMEs, sees the DMA as an important tool to help European enforcers ensure a fair and thriving innovative marketplace that benefits society.

[1] De Streel, A. (2020). “Digital Markets Act: Making Economic Regulation of Platforms Fit for the Digital Age”. Centre on Regulation in Europe. Available from: https://cerre.eu/wp-content/uploads/2020/11/CERRE_DMA_Making-economic-regulation-of-platforms-fit-for-t he-digital-age_Full-report_December2020.pdf.

[2] Commission Decision of 27 June 2017, Case 39 740 Google Search (Shopping), available from: https://curia.europa.eu/jcms/upload/docs/application/pdf/2021-11/cp210197en.pdf.

[3] European Commission (2020) “Progress Report: Expert Group for the Observatory on the Online Platform Economy”. Work stream on Measurement and Economic indicators. Available from: https://platformobservatory.eu/app/uploads/2020/07/ProgressReport_Workstream_on_Measurement_and_Economic_Indicators