Chen Bing: Why does the EU's Digital Market Act target the six overseas technology giants?

China-Singapore Jingwei, September 9 Question: Why does the EU's Digital Market Act target the six overseas technology giants?

Author Chen Bing is a professor and deputy dean of the Law School of Nankai University, and the director of the Competition Law Center of Nankai University

Chen Bing

On September 6, local time, the European Commission designated Alphabet, Amazon, Apple, ByteDance, Meta and Microsoft as "gatekeepers" for the first time under the Digital Markets Act (DMA), covering a total of 22 core platform services provided by these six companies, including Google Search and browser Chrome, Safari, App Store and iOS operating system, ByteDance's TikTok, Facebook and Microsoft operating system Windows PC OS, among others. After the news was released, the stock prices of U.S. technology companies fell sharply on the same day. Among them, Apple fell 3.6%, the market value lost hundreds of billions of dollars overnight, and the shares of Amazon and Google also fell by about 1%.

Why does the Digital Markets Act target tech giants?

The legislative purpose of the Digital Markets Act is clear: to establish and maintain contestable and fair markets in the digital sector. The reason why the enforcement targets of the Digital Markets Act are shown to be tech giants is determined by the inherent characteristics of competition in the digital economy.

Competition in the digital economy has obvious network effects, tipping effects, and preemptive and winner-take-all characteristics. Technology companies that are the first to enter the market to provide an innovative product or service, after successfully gaining the favor of a certain number of consumers, will quickly siphon other consumers, thus occupying the top position in the market. Leading enterprises in the field of digital economy tend to develop related goods or services on top of their core businesses, and then gradually form and expand their own ecosystems.

The platform's multi-sided market business model allows technology companies in the digital economy to provide "free" services to consumers and obtain profits from other fee-based services. On the consumer side, while attracting consumers through "free" services, platform companies will continue to obtain consumer data and provide more personalized services, thereby playing a role in targeting consumers. With the blessing of consumer user loyalty, platform enterprises can act as "gatekeepers" between consumers and platform merchants. At this point, what consumers see is determined by the platform, and consumers only see what the platform wants them to see.

To take a simple example, in a non-platform scenario, if an enterprise wants to discredit its competitors, it must disseminate the defamatory information, while in the platform scenario, the company only needs to maliciously complain to the "gatekeeper" platform to achieve the same effect as disseminating defamatory information. Because once the "gatekeeper" platform deletes the link of the discredited merchant, it is equivalent to closing the door between the defamated merchant and the consumer, and the consumer cannot see the relevant information and cannot choose the relevant goods.

At the merchant end of the platform, these "gatekeeper" platforms are in a position of comparative advantage, with the ability to control trading conditions and engage in unfair trading practices. Although the EU Anti-Monopoly Law can also regulate the unfair trading behavior of some leading enterprises in the digital economy field, these regulations are ex post facto, and the application of the Anti-Monopoly Law needs to examine whether the head enterprises have a dominant market position, whether the behavior excludes or restricts competition, among which it is very difficult to determine whether it has a dominant market position, involving relevant market definition, market competition structure analysis, market share/power determination, etc. Based on the actual situation of the development of the EU digital market, the European Commission believes that it is necessary to formulate the Digital Market Act to supervise "gatekeepers" in advance. The Digital Markets Act summarizes a series of typical unfair trading practices, requiring "gatekeepers" not to carry out these acts in principle, complementing the ex post facto supervision of the Anti-Monopoly Law.

What are the negative effects of the Digital Markets Act?

Although the introduction of the Digital Markets Act by the European Union has antitrust and pro-small business considerations, it is hardly fair.

First of all, none of the six enterprises identified by the EU as "gatekeepers" for the first time is a local EU enterprise, so its intention is still very obvious, which is equivalent to giving foreign companies a special obligation to operate in the single market within the EU, which has a strong political color to a certain extent. Although there is a defense period, the possibility of the defense being established should be relatively small, which to a certain extent is equivalent to restricting the development of non-local enterprises in the EU. To put it bluntly, it is hoped to create a development space for the growth of technology-based platform enterprises in the EU by restricting the development of enterprises outside the region.

Secondly, the Digital Markets Act also has a strong industrial regulation color. It is to approach the innovative development of the digital economy by adopting an industrial regulation approach. From the perspective of market competition logic, regardless of the size of the enterprise, there should be fair treatment to participate in market competition, if it is determined that some enterprises have specific obligations, in fact, it is equivalent to wearing colored glasses. From the logic of market competition regulation, ex post facto supervision should be the norm, and even if ex-ante supervision is introduced, more attention should be paid to the competition behavior itself and limited supervision should be done.

Third, the introduction of the ex-ante supervision model of industrial control is prone to regulatory fallacies. Because there is no guarantee that prior supervision will be optimal, in this case, there may be "accidental injury" to the enterprise. And the reason why the EU chose to ignore this may be because he is beating other people's "children".

Finally, the EU's approach could trigger a butterfly effect. It was you who took protection and hit my "child". Sovereign states that are "parents", including some emerging economies, will also choose to protect their "children". And the rise of this kind of anti-globalization protectionism will lead to higher and higher barriers between countries.

Of course, although the EU has some problems in institutional design, it cannot completely deny it as a pioneering regulatory model. Our country should also view this policy rationally and not blindly follow it.

How does the Digital Markets Act affect tech companies?

The Digital Markets Act clearly regulates the obligations of "should-do" and "do's" that "gatekeeper" enterprises must comply with. In the event of a violation of the relevant requirements of the Act, the "gatekeeper" business may face fines of up to 10% of the company's annual global turnover, or up to 20% in the case of repeated violations, or regular payments of up to 5% of the average daily turnover. Therefore, the EU's Digital Markets Act is equivalent to putting a "tightening curse" on the high-tech giants developing in the EU. If you are disobedient, chant the mantra, and pay some money to continue to develop.

For other enterprises, some trading activities that can be decided independently, the Digital Markets Act imposes special obligations on the "gatekeeper", which will restrict the business activities of the "gatekeeper", may need to change the existing business model, and in the short term, the interests of the "gatekeeper" will be affected. How the "gatekeepers" respond to compliance with the Digital Markets Act and what measures will be introduced will be directly related to the actual effect of the Digital Markets Act.

It should be emphasized that the market environment of fair trade and fair competition is the basis for the healthy and sustainable development of the digital economy, and only by allowing the sustainable and healthy development of the digital economy can large and small enterprises in this field obtain the space and time for innovative operation, and the majority of consumers can also benefit from it. (Zhongxin Jingwei APP)

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Responsible editor: Song Yafen