Research Notes

Will the Digital Markets Act as enforced by EU competition head Margrethe Vestager check the market power of Big Tech? We doubt it.

The European Union is finalizing its latest weapon against Big Tech, the Digital Markets Act (DMA). Now approved by the EU Parliament, it goes to the Council and member states and is expected to take hold in 2023. The key questions for Strand Consult are whether the legislation will stimulate monetizable innovation by EU players and increased investment in broadband networks. Strand Consult is skeptical that the legislation will achieve its goals given that the policy interventions are undertheorized and the provisions untested. The DMA is nebulous without concrete, measurable outcomes making policy measurement difficult and leaving the door open to shifting interpretations of success. It appears to be yet another EU policy promising more competition, innovation, and investment that never delivers. Moreover, Strand Consult is concerned DMA will consume telecom operators in another regulatory death spiral from Brussels.

The new rules are marketed as tools to combat the market power of “gatekeepers” in Europe and beyond and entail fines up to 10 percent of global turnover for non-compliance. The legislation is designed to capture the “winner take all” players like Google/Alphabet, Apple, Facebook, Amazon, Microsoft, Netflix etc. with thresholds for “durable” market position related to number of users, revenue, and market capitalization.

DMA provisions includes rules against combining data from two different services belonging to the same company (e.g. Facebook and WhatsApp), platforms preferencing their own services (e.g. Google searches leading to Google Shopping), pre-installation and bundling of services (e.g. Google Android) and measures to ensure interoperability, data portability, and protection of business users like advertisers and publishers.

The DMA proposal suggests that gatekeepers’ success is a mere function of being big and acquiring smaller companies, for example Facebook’s acquisition of WhatsApp and Instagram. Little if any credence given to Facebook’s innovation or ability to execute. It is not the first instance of EU hubris purporting that policymakers can control existing platforms to enable market entry of competitors.

Strand Consult doubts that EU intervention will succeed to create European competitors which can rival Big Tech. Innovation is more complex than the EU suggests, and the EU has tried and failed similar measures before. The DMA is just the latest in a series of EU proposals promised to create a “level playing field” for competitors. With each successive EU proposal, the market share and profit of the gatekeepers appears unchanged, if not greater. Indeed the EU made similar promises with the General Data Protection Regulation (GDPR) in 2018 and its threat of fines of 20 percent of global turnover, but many EU ad tech companies were either acquired or exited the market because of crushing compliance costs. Today it is difficulty identify any new EU startup which emerged from EU policies to combat gatekeepers.

Big Tech is the perfect villain for political theatre

It’s predictable that EU policymakers, unable to create policy to stimulate EU innovation, should vilify Big Tech as the problem. Indeed Commissioner for Competition Margrethe Vestager has built her media image as the woman who fights Big Tech. However equity returns for GAFAM and FANG during Vestager’s tenure have been excellent, almost 500 percent. Indeed Big Tech has been thriving while under the EU’s attack. This is because regulation purported to protect consumers too often becomes just another cost of business which Big Tech can absorb, further cementing its market position.

EU unwittingly strengthens Big Tech by undermining EU competitors

Moreover Vestager has waged war against European companies which wish to consolidate to compete  in the face of Big Tech. Vestager has styled herself as the protector of “innovation” by deterring mobile operators’ attempt to merge so as to get a better business case for investment in 5G. One operator challenged Vestager’s merger block in court and won, but it took years and millions of euros. Few actors other than Big Tech have the time and resources to challenge Brussels.  Strand Consult’s report on 4 to 3 mobile industry mergers demonstrates EU competition authorities’ efforts to block mergers has worked against the ostensible policy goals of the EU: investment, innovation and growth.

Moreover, policymakers want the impossible: innovative platforms which the government controls. It’s like a junkie trying to regulate the illegal drug market.

Consider how policymakers who attack Big Tech use these platforms every day. The two largest TV stations in Denmark, Danish Radio and TV2, are state owned and unwittingly provide massive support to Big Tech’s platforms by posting, tweeting, publishing all their content on the platforms. Danish Radio made an exclusive deal with Netflix to distribute the popular, taxpayer-supported TV show “Borgen”, upsetting international sharing agreements with other national broadcasters.

The policymakers in Denmark, Europe’s leading digital society, don’t have unique insight to regulating Big Tech.

For some 20 years, the European Union has ranked member states with digital economy and society measures. Denmark consistently outperforms other EU nations in human capital, connectivity, technology integration, and egovernment.  But this performance does not necessarily mean that Denmark’s leaders are smarter about Big Tech. The Danish Minister of Culture, Ane Halsboe-Jørgensen and the Danish Minister for Industry, Business and Financial Affairs Simon Kollerup are just as clueless and ineffective as the European Commission, as recent inquiry demonstrates.

Danish People’s Party Dennis Flydtkjær posed a series of questions in the Danish Parliament to the majority party, the Social Democrats, and Halsboe-Jørgensen and Kollerup answered. These questions asked for the official Danish government view of Big Tech, market positions, and how public sector institutions like DR and TV2’s use of Big Tech affects competition, especially in relation to the challenge faced by local media.  Strand Consult reprints the exchange between the parties, which was documented on the Parliament’s website. 

  1. Q: Will the Minister explain the development in market share, turnover and earnings in Denmark and the EU respectively for companies such as Google/Alphabet, Facebook/Meta, Netflix and Amazon in the period from Margrethe Vestager became Competition Commissioner in 2014 onwards?
    • Answer: I have submitted the question to the Ministry of Industry, Business and Financial Affairs, which has stated the following, which I can refer to: “The Ministry of Industry, Business and Financial Affairs does not hold the requested information, as the companies are not registered in Denmark.”
    • Strand Consult’s comment: It is breathtaking that neither the Ministry of Culture nor the Ministry of Industry, Business and Financial Affairs knows the revenue of Google, Facebook, Netflix, and other Big Tech companies in Denmark. Many independent sources report this information. Moreover, these companies have employees in Denmark, and thus they register in Denmark. It is hard to reconcile how such Ministers can purport to regulate Big Tech when they don’t know the numbers for their own country. Halsboe-Jørgensen earlier thundered against the tech giants, proposing to toughen regulation or to establish a new regulatory authority.
  2. Q: Does the Minister believe that the extensive use of Big Tech platforms like including Facebook and Twitter by Danish state institutions and state media to convey official government messages helps to cement the market position of Big Tech, or does the Minister not think there is a connection to market power? The question is documented at the Danish Parliament.
    • Answer: The tech giants and their platforms have today become an essential part of the democratic infrastructure and a natural part of the everyday lives of many Danes. It is the Government’s position that much greater democratic control of the platforms is needed. But we do not believe that Denmark is better off without social media. Therefore, state institutions and state media, like everyone else, must also be able to communicate with the Danes on these platforms. To me, there is no contradiction between having a political ambition for greater democratic control of the tech giants and at the same time wanting to meet the Danes on the social media platforms, where a large part of the public conversation today takes place.  This official answer is archived here.
    • Strand Consult’s comment: Policymakers want more control of tech platforms and social media, but that does not mean that their efforts to take control will work. Just as the policymakers fail to explain technological innovation, it seems that they will fail to explain democracy on platforms and how the platforms are “democratic infrastructure.”
  3. Q: Does the Minister think that it would be healthy for competition if the Government, public institutions and state-owned media such as DR and TV2 to minimize the use of big-tech social media?
    • Answer: Cf. Answer to Question No. 206 (Part One), I do not think that it is desirable in itself to minimize the use of social media or that we solve the challenges of the great influence of the tech giants by cutting off access to social media for public institutions and the like. The government is currently working to ensure that there is agreement at EU level on a regulation of the tech giants that is as ambitious as possible, including the Digital Markets Act, which will ensure that platforms do not abuse their market position.  (See documentation).
    • Strand Consult’s comment: The Danish minister is aligned with the European Commission that the DMA will check the market power of Big Tech and create a level playing field.  There is not unique insight from Denmark, but rather what appears to be the “herd mentality” of getting behind Brussels. Strand Consult expects that the response would be similar from other EU nations that the DMA’s “ambitious regulation” is the way forward.   

Many European policymakers display the corollary to the sunk cost fallacy in business, the tendency to repeat the same method or policy, even if it does not work, because admitting to a mistake is too embarrassing. EU policymakers continue with the same kind of policies because that’s what they know. Admitting policy mistakes of the past and doing differently could work to achieve the stated outcomes, but it appears that policymakers don’t want to appear to have be wrong.

What to expect from the DMA

Strand Consult is skeptical that the DMA will achieve its stated goals. It expects that Big Tech firms will remain large and powerful and will only be disrupted by other technologies likely unknow and possibly from China.

That Big Tech always outsmarts policymakers is nothing new. This is predictable by rational expectations theory; actors will behave rationally on what they know and what they have experienced before. Big Tech expects that the European Union will impose similar regulatory instruments which have been used before. So while the EU goes through the process to implement the DMA, Big Tech companies will act in anticipation of the coming law. Here are some potential outcomes.

  1. Like GDPR, Big Tech can interpret that complying with the law is to its advantage because it has greater resources for compliance than competitors. Thus Big Tech create a superficial win-win for itself and policy makers. There are many ways in which Big Tech can act to enable the EU provisions such as data interoperability and portability.  However, whether the level playing field is achieved is another matter. Copying Google data into one’s own system does not make one more innovation; the key to innovation is doing something better and different than Google, and/or finding a way to exploit an opportunity that Google ignores. Fundamentally Big Tech firms likely realize that the EU policymakers don’t understand innovation, so they can out-innovate the EU’s attempt to regulate. This also suggests that the measures of the DMA have not demonstrated connection to the policy outcomes they purport to delivery. For example, if the EU was serious that it’s laundry list of provisions would work, it would conduct randomized trials of the different measures to see which, if any, worked. Instead, the EU just gloms on to a set of policy whose keywords ring in the ears of their voters. As such to win the next election, policymakers don’t need to delivery the outcomes; they only need to succeed in promulgating the policy.   That is, from the point of view of votes, talking a big game about what you will do to tame Big Tech is just as good as doing it. This rinse-repeat cycle will continue indefinitely until voters move with their feet (Brexit) or better policy ideas and competitors emerge. Meanwhile the market will change. For example, Chinese platforms are starting to eat into the market share of Silicon Valley. Exhibit 1: TikTok.
  2. On one level, there is a view that EU law is aspirational and thus, its barks is always worse than its bite. This means that firms can also adapt through interpersonal means (lobbying) directly with policymakers so that the provisions are interpreted in ways favorable to Big Tech.
  3. Big Tech firms may challenge DMA enforcements in court. Many of Vestager’s enforcements have been successfully challenged in court. The is greater media coverage of the enforcements, not the litigation.
  4. Big Tech firms will, as they interpret their relative risk and advantage, change structure and ownership to minimize impact. Google and Meta have already changed corporate structure. Enter Alphabet and Meta. The new ownership structure can be used to split these companies into three, four or five operating companies in which existing shareholders get a share in the new entities. In practice, these are structures designed to shield the parent from liability.  

Many still consider Amazon as an e-commerce platform, but increasingly, it is Amazon Web Services (AWS) which drives the enterprise. AWS comprises 18.4 percent of Amazon’s revenue and 74.5 percent of operating income, compared to 59.1 percent during the same period in 2020.

There are no shortage of lawyers and policy professionals who can find work arounds to the EU.

It’s time for a new approach.

European voters deserve better than many the policies promoted today with lack of evidence. Nevertheless, the “Big Tech is bad” narrative continues with an associated set of policies which haven’t worked. European voters who wish for a change typically move with their feet. Entrepreneurs, innovators, and investors move their capital and ideas to regions where they can get a better return than EU.

5G is an exciting development but it doubtful that operators will emerge the winners. Just like the operating systems and smart phones of Big Tech dominated 4G, Big Tech’s cloud platforms are poised to dominate on 5G. Just ask yourself what will be easier to implement in practice. Mobile operators building a new 5G ecosystem or Google, Apple and AWS adding 5G on top of their existing ecosystems?

There is little evidence that the DMA will address fundamental problems in the EU, like the low level of investment in broadband, slow growth, and the lack of innovation. European nations use to lead in these areas, but a series of actions from Brussels have depressed what was once Europe’s greatest strength. It would seem that the EU should do a post mortem on why it lost leadership.

There is a role for regulation, but not the policies that the EU proposes. For one, the EU can end the  policies which give Big Tech a free ride, things like unlicensed spectrum and free transit on networks.

At the very least, the EU can support that broadband providers receive compensation for the fair use of their networks. Strand Consult’s project on Middle Mile Economics: How streaming video entertainment undermines the business model of broadband documents how streaming video entertainment traffic is exploding but operators are unable to recover costs to provision. The report describes various approaches and solutions to this problem.

An interesting approach is emerging from South Korea, considered to be the world’s leading digital society for access, use, and skills by the ITU and OECD. Any digital content provider which comprises more than 1 percent of traffic or has more than 1 million users pays a traffic fee to the broadband provider. Dubbed the Netflix Law, the idea is to recover for South Korea networks the costs of operation. The policy is modest and realistic in that it does not promise to reshape Big Tech, but it least it allows South Korean operators to recover costs so that they can stay in business and continue to invest in the networks needed for the digital society.

The Korean law recognizes that content providers also have a responsibility to ensure the quality of content they delivery, not just broadband providers. More largely, it forces the Big Tech actors which consume resources in society to pay for their use.

For more than 25 years, Strand Consult has held strategic workshops for boards of directors and other leaders in the telecom industry. Its workshop Next gen telecom policy and regulation: Workshop for leaders in the telecommunications industry offers knowledge on global regulatory trends and the experience of operators worldwide and is packaged it into a workshop for professionals with responsibility for policy, public affairs, regulation, communications, strategy and related roles.

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