Background
Competition plays a key role in ensuring that markets deliver good outcomes for consumers. If a firm acts in an abusive or exploitative way towards its customers then an opportunity is created for competitors to offer better terms, and for consumers to switch to a cheaper or superior alternative. However, some markets are subject to fundamental economic forces that prevent competition from flourishing. Many technology products are subject to network effects—they become more valuable when more people use them (for example, a messaging app is more useful if more of your friends also use it). Other products exhibit economies of scale: larger firms can spread their costs over many consumers, giving them an advantage over smaller rivals whose per-consumer cost is higher. These forces both create an advantage for firms that are already large, which can result in one firm dominating its entire market and can make it difficult for innovative competitors to enter. Indeed, a small handful of firms have enjoyed an enduring position of dominance over many tech markets.
Policy authorities around the world have been working to design regulations aimed at addressing this problem. Unlike traditional approaches to regulation, which focused on dictating what firms should do (e.g., by directly regulating their prices), this new wave of regulation is aimed at identifying and removing the barriers that prevent competition from working—it is pro-competitive regulation. At the forefront of this development is the European Commission’s Digital Markets Act (DMA), which came into force in November 2022. The act allows the European Commission’s competition directorate (DG COMP) to designate “gatekeepers”— platforms that provide an important gateway between businesses and consumers—and the “core platform services” that they provide. Those firms and services will then be subject to special obligations designed to stimulate competition. For example, designated search engines will be required to share certain types of data to help smaller rivals design an effective search algorithm, while major mobile messaging apps will have to enable interoperability so that start-up competitors can offer a pre-existing network of potential contacts.
What has been announced?
In the latest phase of the implementation of the DMA, DG COMP has designated six gatekeepers and twenty-two core platform services. The designated gatekeepers are Alphabet (owner of Google), Amazon, Apple, ByteDance (owner of TikTok), Meta (owner of Facebook), and Microsoft. The core platform services they provide span device operating systems, search engines, mobile messaging services, social networking services, web browsers, online intermediation platforms, online advertising and video sharing services.
This designation appears relatively conservative. With the possible exception of ByteDance, the designated firms are those that most observers thought almost certain to be included (i.e., no obvious borderline cases have been designated). It appears that the Commission’s initial strategy is to focus on the most obvious gatekeepers and core platform services in application of the DMA and be quite narrow in applying their quantitative designation guidelines rather than exercising any discretion over which firms to designate. We should expect expansion of the list of designated firms and services in the future.
What to expect next
Recent confrontations between DG COMP and major US technology firms has become a source of diplomatic tension and this list is conspicuous for the absence of any EU-based gatekeeper firms. This may fuel accusations that the designation is essentially protectionist, but the more likely explanation is simply that no EU firm met the relatively conservative standards that the Commission wished to impose in this first phase. European competition authorities have had repeated run-ins with some EU-based firms in recent years and we may yet see the designation of some of those European firms in a future application of the DMA.
The DMA includes provisions for designating cloud computing services and personal assistant services as core platform services. DG-COMP has chosen not to make any such designation at this stage. Those markets are less mature and not obviously dominated by any one firm, so it may be that the Commission is reluctant to be too heavy-handed and risk stifling innovation. But several of today’s designated gatekeepers are active in those markets and see them as growth opportunities, so we may yet see their inclusion if the Commission judges that a competition problem is developing.
The DMA was drafted before the explosion of attention on AI earlier in 2023 and does not specifically provide for the designation of consumer-facing generative AI services. So, it’s no surprise not to see any such services designated today. Like cloud services and personal assistants, this is also a nascent market that is still subject to competition and rapid innovation. But we already see in those markets some of the forces for concentration that were mentioned above. If the strategic importance of that market continues to develop and a clear leader emerges then we may see the Commission bringing it into the DMA’s remit.
Lastly, Apple and Microsoft have challenged DC-COMP’s designation of some of their services. In particular, this means that iMessage is not currently subject to the mobile messaging interoperability requirement, while Microsoft’s Bing search engine, Edge web browser, and advertising service all also have a temporary reprieve. The Commission will now spend up to five months considering these objections before deciding whether to include those services in the designation. If they are ultimately included then consumers can expect to see major changes to the way these services work, such as the ability to send mobile messages between iMessage and Facebook Messenger users. The stakes are high so this will not be the last time that a designation is disputed.
Ultimately, the EC appears to be proceeding conservatively so far, but in line with expectations. Commentators will now be watching closely for signs that the DMA is serving its intended purpose by stimulating competition, and for further expansion of the Act’s application.
