Baba’s Explainer – E.U. Digital Markets Act

  • IASbaba
  • November 9, 2022
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  • GS-2: Effect of policies and politics of developed and developing countries on India’s interests.
  • GS-3: Economic Development

Context: The Digital Markets Act (DMA) entered into force in the European Union (EU) on November 1, seven months after it was agreed for by the European Parliament in March 2022.

  • The bill, which was first proposed by the European Commission in December 2020, endeavours to put an end to unfair practices by tech companies that act as ‘gatekeepers’ in the online space.
  • In simpler terms, it seeks to confront the domination of Big Tech which restrains the growth of new and alternate platforms.
Who are the targets of the DMA?

The DMA’s focus is on companies termed as ‘gatekeepers’, which include Apple, Facebook, Google, etc. These companies will have to comply with the new rules. Following are the metrics used to identify ‘gatekeeper’ companies:

  • Dominant Role in Digital Ecosystem: The reason the law refers to these companies as gatekeepers is that they often control distribution, whether it is for apps or ads on the platform, or even communication.
  • Revenue & Valuation: A company will be termed as a gatekeeper if it has an annual turnover of at least €7.5 billion within the EU in the past three years, or a market valuation of at least €75 billion.
  • User Base: Any player with over 45 million monthly end-users, and at least 10,000 business users established in the EU, also qualifies as a gatekeeper.
  • Exemption: Small and medium enterprises are exempt from being identified as gatekeepers.
  • Platform Services: The Company must also control one or more core platform services in at least three EU states. These services include marketplaces and app stores, search engines, social networking, cloud services, advertising services, voice assistants, and web browsers.
  • A category of ‘emerging gatekeeper’ has been identified, aimed at “companies whose competitive position is proven but not yet sustainable”.
  • Even if the list of Gatekeepers has not been released yet, the “Big Tech” – GAFAM (Google, Amazon, Facebook, Apple, Microsoft) – are likely to be the main subjects of the act, but not the only ones.
What are the DMA’s provisions?
  • Pre-loaded apps: It crack down on pre-installed apps, common in Apple, Google and others. Users will have the right to choose and install their apps. So, future iPhones might not come with Safari, or even iMessage or Siri, pre-loaded.
  • Interoperability in messaging services: This could mean that a user on WhatsApp and one on iMessage should be able to talk to each other.
    • Large internet companies are often criticized for operating “walled gardens,” closed systems that make it harder for a user to ditch one provider for another.
  • Third-party app stores: Gatekeepers must allow the installation and effective use of third party apps & app stores, even while they can take “proportionate measures” for security.
    • Companies like Apple have for long opposed third-party app stores citing security as the reason.
  • Fair access to developers: The EU wants app developers to get fair access to supplementary functionalities of smartphones, for example the Near Field Communications chip.
    • Also, gatekeepers cannot establish unfair conditions for business users or require app developers to use certain services (e.g. payment systems or identity providers) in order to be listed in app stores.
    • App developers such as Epic Games, Spotify, etc. have long accused Google and Apple of holding them hostage to their payment systems.
  • Transparency in Ad Performance data: Gatekeepers will have to give sellers access to their marketing or ad performance data on the platform.
  • Mergers & Acquisitions: The gatekeepers will have to inform the European Commission of their acquisitions and mergers. This is significant because big players tend to buy out some of their upcoming competition.
  • Fairness in ranking: The new rules also forbid the gatekeepers from ranking their own products or services higher than others, and from reusing private data collected during a service for the purposes of another service.

The new law will prevent these giants from using the data generated on their site by business customers to better compete with them, as Amazon has been accused of doing.

What happens when rules are violated?
  • In case of non-compliance, the Commission can impose fines of up to 10% of the company’s annual revenue accrued from global operations. This would extend up to 20% in case of repeated infringements.
  • Violations shall also invite periodic penalty payments of up to 5% of its daily worldwide turnover. 
  • For systematic infringements, and in situations where there are no alternatives, the European Commission can pursue additional remedies. These may include obliging a gatekeeper to sell a business or an essential part of it.
  • Other than this, the ‘gatekeeper’ could be barred from acquiring a company in the same space or that collects similar data to that involved in the observed non-compliance.
How does the implementation look in reality?
  • Broadly, DMA would ensure that ‘gatekeepers’ would not be able to disfavour services and products offered by third parties on their platform for their own similar services and products.
  • Additionally, it would ensure interoperability with platforms offering similar services.
  • More importantly, ‘gatekeepers’ would have to permit businesses to access data that was generated when they used the latter’s platform. This is to ensure that users do not unfairly benefit from their dual roles.
    • For instance, if a company operates a search engine and an online marketplace, it could leverage the data from a user’s online searches to push certain products. In the absence of user data, any other business firm might not be able to do much about the entire phenomenon. However, businesses with access to certain user data could ensure visibility for their products.
  • Other important changes that ‘gatekeepers’ will have to implement are ensuring that end users are able to easily unsubscribe from core platform services – including pre-installed apps, preventing the installation of default software along with the operating system, allowing end users to download alternative app stores.
    • It is pertinent to recall that the Competition Commission of India (CCI) recently imposed a penalty of Rs 936.44 crore on Google for “abusing its dominant position with respect to its Play Store policies”.
What about inter-operability?
  • Interoperability among platforms would be a particularly important factor with respect to messaging services.
  • For perspective, the provision would entail, say, WhatsApp users being able to freely send and receive messages (including media attachments) from a competing messaging app, say iMessages.
  • The functionality would be instituted as per a stipulated timeline. When the Act enters into force, ‘gatekeepers’ would have to ensure interoperability for text messages between two individual users.
    • More complex functionalities, such as group text messaging, would have to be instituted after two years of enforcement, while audio or video calls between users may be instituted within four years.
  • It is pertinent to note that only users of non-gatekeeper companies would have the option to refuse the interoperability.
  • The idea is to avert any entry barrier that may deter users from opting for a non-gatekeeper service and prevent ecosystem captivity.
  • Also, “Having multiple services for users, especially vulnerable users, to choose from may help protect against improper governmental surveillance and censorship.”
What is the significance of DMA?
  • The law makes the digital sector fairer and more competitive in the EU market.
  • It helps prevent abusive business practices of large platforms and is compared to historic antitrust reforms to the banking, energy and telecom sectors.
  • It widens consumer choices.
  • It gives rivals a better chance to survive against the world’s powerful tech companies
  • Once implemented it sets a new precedent for tech regulation worldwide.
  • It averts years of procedures and court battles needed by EU to punish Big Tech’s monopolistic behaviour where cases can end with huge fines, but little change on how these giants do business.
  • The law will give Brussels unprecedented authority to keep an eye on decisions by the giants
What are the criticisms?
  • Critics argue that interoperability in messaging might bother end-to-end encryption of messaging apps.
  • Though mandated by the law, it would a particularly tough precondition considering that communication now would be cross-platform, that is, beyond a platform’s controllable dominion.
  • Encryption is also critical to protecting human rights defenders who depend upon strong security while opposing or exposing abuses in dangerous environments.
  • Further, critics have suggested that the ‘gatekeeper’ threshold may emerge as a deterrent to further innovation for both emerging and established companies.
  • The trade-off between further innovation and compliance requirements on attaining the threshold might not appeal to some.
  • And lastly, it has been suggested that the DMA’s penal provision of forbidding acquisitions in the space would hamper start-up lifecycles. Certain players might not sustain in the long run, for whom acquisitions serve as a worthy exit prospect. Thus, the provision only adds to an emerging entrepreneur’s unpredictability in the space.

Main Practice Question: What is European Digital Markets Act and what can India learn from it with regard to regulation of new age technological companies?

Note: Write answer his question in the comment section.

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