Explained | What is the E.U. Digital Markets Act?

The Digital Markets Act was enforced in the European Union on Tuesday, seven months after it was agreed upon by the European Parliament in March this year. It introduces penal provisions and quantitative thresholds to keep a check on undue dominance of certain companies in the tech space.

Updated - November 05, 2022 09:58 pm IST

Published - November 04, 2022 06:28 pm IST

Image for representation only: Social media apps are seen on a mobile phone on in Istanbul, Turkey

Image for representation only: Social media apps are seen on a mobile phone on in Istanbul, Turkey | Photo Credit: Chris McGrath

The story so far: 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 this year.

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. However, critics have put forth that this would hinder innovation in the sector, especially if they are asked to share information and expertise essential for their own competitive success. 

The Act will apply six months after it entered into force, that is, from May 2, 2023.

What does the law entail? 

The Digital Markets Actintroduces quantitative thresholds and penal provisions to keep a check on platforms that act as private rule-makers by virtue of their dominance in the space, thereby creating bottlenecks in the digital economy. The obligations mentioned under the Act are meant to open up possibilities for smaller and emerging players to compete in an equal market – based on the merits of their products and services, in turn, also generating the scope for further innovation in the space. 

As for consumers, the Act ensures access to a wider array of options as well as a lower price of services made possible by enforcing competition and de-exclusivities. 

The Act designates companies with sizeable dominance in any of the ‘core platform services’ as ‘gatekeepers’. These services include app stores, online search engines, social networking services, certain messaging services, video sharing platform services, virtual assistants, web browsers, cloud computing services, operating systems, online marketplaces and advertising services.  

Other than this, the emergence of newer innovations and more players are also expected to create more jobs in the sector.  

What is the quantitative threshold to be deemed a ‘gatekeeper’? 

In addition to managing a ‘core platform service’, a company must have accrued an annual turnover of at least €7.5 billion in each of the last three financial years in the E.U. or have an average market capitalisation of at least €75 billion in the last financial year.  

Operational qualifications require that it must have at least 45 million monthly active users in the Union and more than 10,000 annual active business users in the last financial year. 

And lastly, the position must be entrenched and durable, that is, meeting each of the criteria in the last three financial years. 

Additionally, a proportionate subset of obligations may apply should the company, presently a non-gatekeeper, attains the stipulated threshold in the future. This is to prevent them from acquiring the same ‘gatekeeper dominance’ by unfair means. 

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 or equally effective measures available, the European Commission can pursue additional remedies. These may include obliging a gatekeeper to sell a business or an essential part of it such as an important unit, asset, intellectual property rights or brand. 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, a retailer might not be able to do much about the entire phenomenon. However, with a more equitable platform and access to certain user data, s/he could ensure visibility for their products, by effectively mapping the profile of its buyers and accordingly pushing paid advertisements. 

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 businesses to use alternative in-app payment systems as well as 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. Additionally, as pointed out by researchers at the digital liberties advocacy group The Electronic Frontier Foundation (EFF), “Having multiple services for users, especially vulnerable users, to choose from may help protect against improper governmental surveillance and censorship.” 

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. However, several researchers, including the EFF, argue that the feature cannot be compromised upon. “It (encryption) is also critical to protecting human rights defenders who depend upon strong security while opposing or exposing abuses in dangerous environments,” the group says. 

S&P Analytics, quoting Senior Fellow at U.S.-based Open Markets Institute Johnny Ryan, said that the move would mean that companies unable to combine and cross-utilise data would not be able to create targeted advertisements. For example, ‘gatekeepers’ would not be able to push advertisements for phones after noting that a consumer was looking for the easiest route to a retailer. Thus, sharing of user data would be less than ideal because they are central to the company’s own competitive success.  

“Clauses such as these may help smaller tech companies to take market share from gatekeepers even in situations where it is not clear there has been an unfair practice,” observed Colin Wall, Associate Fellow at the Center for Strategic and International Studies. 

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. Advocacy group Allied for Start-ups said that certain players might not sustain in the long run, for whom acquisitions serve as a worthy exit prospect. Thus, as per critics, the provision only adds to an emerging entrepreneur’s unpredictability in the space.  

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