This is the second entry exploring how innovation competition connects EU competition law and the DMA and how it could streamline their application in digital markets (for the first part see here). Stavros Makris*, lecturer in Competition Law at the University of Glasgow and member of CREATe, presented this research on 24 October 2023, at the Brazilian Institute of Competition and Innovation (IBCI)’s 6th International Conference on Competition and Innovation. CREATe contributed to the conference with a panel chaired by Konstantinos Stylianou where Amy Thomas, Aline Iramine, Kris Erickson and Stavros Makris presented their research into innovation and regulation in creative industries. IBCI has made a recording available on YouTube.
How does the DMA seek to protect innovation?
Unlike competition law, the DMA is a child of the economy of the intangibles and even though it is competition law-inspired it has different goals. So, what does it seek to do? First, the DMA seeks to restore and maintain fairness in digital markets. For instance, it imposes obligations aimed at restoring the bargaining power of business users and ensuring equality of opportunity (e.g., it prohibits parity clauses and anti-steering rules, tying and self-preferencing). In addition, it empowers end users to be able to make meaningful decisions (e.g., it prohibits gatekeepers from imposing usage restrictions and it enhances data portability). These obligations can be seen as fairness-inspired to the extent that they seek to restore the contractual and pre-contractual imbalance between the respective rights and obligations of gatekeeper and users.
Fairness can play an important role in promoting innovation. The underlying idea is that gatekeepers, due to their superior bargaining power, may prevent business users from fully capturing the benefits of their own contributions and, as a result, chill innovation efforts. By enabling end users to respond to business users (e.g., nascent competitors and start-ups) and by hindering gatekeepers from marginalizing business users, the DMA could enable market participants to adequately capture the benefits resulting from their innovative efforts. Such fairness-inspired obligations can promote incremental innovation (‘doing things better’) and disruptive innovation (‘doing better things’).
Second, the DMA could be viewed as a regulatory attempt to inject contestability into the digital sphere to ensure that digital markets deliver on the innovation front. For this purpose, it contains obligations aimed at promoting incremental and disruptive innovation by enabling business users to effectively overcome barriers to entry and expansion and challenge the gatekeeper on the merits of their products and services.
By precluding gatekeepers from using non-public data to compete with business users, or from engaging in self-preferencing and certain forms of tying, the DMA contains gatekeeper power. Such obligations – as well as the obligations to grant access and provide interoperability and portability – could therefore promote incremental innovation. If rivals can interoperate… if end users have low switching costs and can migrate to a new and superior business user without being locked-in to the incumbent due to lack of data portability… if gatekeeper’s rivals are not foreclosed from the market via self-preferencing or tying… then incremental innovation may flourish. More business users might be able to innovate around the existing core platform services and within the value network or architecture created by the platform. Platform users, for example, might be more able – under these circumstances – to introduce innovative complementary products (e.g., games, productivity apps for mobile operating systems). In that respect, the DMA extends the innovation policy choices made in competition law enforcement (e.g., in Microsoft, Google Shopping, Google Android).
The same or other obligations can also keep gatekeepers vulnerable to disruption (see DMA Impact Assessment, paras 130, 279). The prohibitions of tying, self-preferencing, parity clauses and anti-steering rules could, for instance, provide cover for disrupters. The data portability and interoperability duties could enable the funnelling of data to innovative entrants that would try to disrupt the value network or the dominant architecture. For example, business users will be able to transfer the data they obtained from Amazon to a novel online retail platform if such a platform emerges.
However, in that regard, we could trace a weakness of the DMA. Despite its intention to promote disruptive innovation through contestability, the DMA fails to effectively protect disrupters from strategic acquisitions. For start-ups and nascent rivals to become disrupters, they need to catch gatekeepers off-guard by side-lining them in non-core platform services and then make a value proposition that overthrows the gatekeeper’s castle (core platform service). Incumbents ordinarily dispose plenty of capabilities and strategies to obliterate such threats (e.g. leveraging, envelopment, strategic acquisitions). The DMA seems to dismantle some of them, yet it allows for strategic acquisitions to continue uninterrupted. As has been noted “it is better to buy than compete”.
Under the DMA, gatekeepers have an obligation to inform the Commission of their acquisitions. Nonetheless, a specific procedure and a substantive criterion of analysis are absent from the Act. Hence, even though the National Competition Authorities and the Commission can act on the basis of that same information for the purposes of merger control, the DMA seems toothless in front of strategic acquisitions especially since EU merger control has been proven to undershoot the mark. Without effective scrutiny of such acquisitions, sideways competition – which is of paramount importance for disruption – might remain dormant. In this setting, there would be little hope for a new search engine to outperform Google, for a competing social network to oust Facebook or for an alternative online commerce and retail platform to outcompete Amazon. This is especially true given that disruptions are never frontal assaults.
Consequently, despite the DMA impetus, network effects and market tipping (coupled with gatekeepers’ strategies) are likely to make disruption very difficult: imagine an online marketplace superior in every technical aspect with only a few hundred users. Such a platform would not pose much of a threat to Amazon’s unassailable position and would be easily acquired by Amazon. Moreover, big data analytics, AI and nowcasting technology offer gatekeepers the opportunity to eliminate virtually any potential disrupter. When Amazon and the publisher Hachette (hardly a disrupter) got into a dispute, Amazon downgraded Hachette’s books on its website and started delivering them two weeks late. Even more evocative is the story of Disconnect, an app that offered users the ability to see otherwise undisclosed web tracking and privacy policies, private search and private browsing. Disconnect was not secretly collecting users’ information, nor did it track users’ activities across the web. Yet, Google removed it from its Play Store on the basis that the app “interferes or accesses another service or product in an unauthorised manner”. In reality, though, this is a clear example of a gatekeeper that eliminates a new disruptive technology that sought to empower users (i.e. allow them to circumvent the ongoing harvesting of their data) simply because it posed a threat to its behavioural advertising model.
To these it should be added that venture capitalists are wary of investing in start-ups that compete against the core offerings of the tech giants. Such start-ups are known in the industry as providing offerings in ‘innovation kill zones’ or as standing in the ‘elephant’s path’.
Innovation competition: the key for streamlining the two regimes
Innovation competition seems to be the common thread that connects EU competition law and the DMA. As competition law cases appear to have inspired many of the DMA obligations, in an analogous manner, it can be expected or hoped that the DMA enforcement will inspire new theories of harm aimed at applying EU competition rules to preserve and promote innovation competition when the DMA fails to do so.
In that regard, interrogating what kind of innovation a particular DMA obligation (or its operationalization) seeks to protect might streamline the relationship between EU competition law and the DMA. If, for instance, a particular DMA obligation is operationalised to protect incremental innovation then further competition law enforcement may not be warranted and, in addition, it may raise ne bis in idem concerns. On the contrary, if the DMA fails to address a particular innovation harm, then EU competition law enforcement could come to the rescue.
Furthermore, innovation theory could help enforcers to concretise the DMA obligations. Different types of innovation elicit different strategic approaches, meaning they require different regulatory treatment. Therefore, a single obligation (e.g., the prohibition of self-preferencing) may require different implementation depending on whether the underlying objective is to protect incremental innovation via restoring fairness between business users and the gatekeeper or to enable disruptive innovation by preserving inter- and intra-platform contestability.
In the DMA, contestability and fairness are intertwined. The lack of contestability for a certain service can enable a gatekeeper to engage in unfair practices. Similarly, unfair practices by a gatekeeper can reduce the possibility of business users contesting the gatekeeper’s position. A particular DMA obligation, therefore, may be fairness- or contestability-inspired, or it might pursue both objectives.
This conceptual overlap might generate not only implementation problems (which can dissipate if we interrogate the type of innovation sought to be promoted), but also blur the ex-post criteria of performance assessment. How could we know whether the implementation of a particular obligation effectively addressed the issue at hand if there is no concrete benchmark of assessment? It might even be possible for the Commission to ex-post rationalise virtually any implementation option. Innovation theory may offer a lifeline in that regard: if the implementation of a particular obligation seeks to, for example, inject contestability to promote incremental innovation, then enforcers will be able to evaluate the outcome of their performance on that basis.
Consequently, unpacking the role of innovation in the DMA could optimise the implementation and ex-post assessment of the Act. Simultaneously, it could streamline the relationship between the DMA and EU competition rules and further inspire novel theories of harm reinvigorating competition law enforcement.
These are questions we seek to answer, here at CREATe. We are sure to follow with some answers and many more questions on innovation, creativity, and the regulation of digital markets.
*Pursuant to the ASCOLA Transparency and Disclosure Declaration, the author declares not to have any conflicts of interest to disclose. The author is grateful to Konstantina Bania, David Reader, Magali Eben, Alba Ribera Martinez, and Konstantinos Stylianou for their thoughtful suggestions. The usual disclaimer applies.