Explained | What is the EU Digital Markets Act?

The Digital Markets Act came into effect in the European Union on Tuesday, seven months after the European Parliament agreed on it in March this year. It introduces criminal law provisions and quantitative thresholds to monitor an undue dominance of certain companies in the tech space.

The Digital Markets Act came into effect in the European Union on Tuesday, seven months after the European Parliament agreed on it in March this year. It introduces criminal law provisions and quantitative thresholds to monitor an undue dominance of certain companies in the tech space.

The story so far: The Digital Markets Act (DMA) came into effect in the European Union (EU) on November 1, seven months after the European Parliament approved it in March this year.

First proposed by the European Commission in December 2020, the bill seeks to end unfair practices by tech companies that act as ‘gatekeepers’ in the online space. In simpler terms, it tries to confront the domination of Big Tech, which is inhibiting the growth of new and alternative platforms. However, critics have argued that this would hinder innovation in the sector, especially if they are asked to share information and expertise essential to their own competitive success.

The law will apply six months after its entry into force, i.e. from 2 May 2023.

What does the law mean?

The Digital Markets Act introduces quantitative thresholds and penalties to monitor platforms that act as private regulators because of their dominance in the space, creating bottlenecks in the digital economy. The obligations mentioned in the law are intended to provide opportunities for smaller and emerging players to compete in an equal market – based on the merits of their products and services, which in turn also creates the space for further innovation in the space.

As far as consumers are concerned, the law guarantees access to a wider range of options and a lower price of services, made possible by enforcing competition and de-exclusivity.

The law designates companies with significant dominance in one 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.

In addition, the emergence of newer innovations and more players is expected to create more jobs in the sector.

What is the quantitative threshold for being considered a ‘gatekeeper’?

In addition to operating a “core platform service”, a company must have achieved annual revenue of at least €7.5 billion or have an average market capitalization of at least €75 billion in each of the past three fiscal years in the past three fiscal years. financial year.

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

And finally, the position must be anchored and sustainable, that is, meet each of the criteria in the past three financial years.

In addition, a proportionate share of the obligations may apply if the company, currently a non-gatekeeper, reaches the established threshold in the future. This is to prevent them from unfairly acquiring the same ‘gatekeeper dominance’.

What happens if rules are broken?

In case of non-compliance, the Commission can impose fines of up to 10% of the company’s annual revenue from worldwide activities. This would increase to 20% in case of repeated infringements. Violations will also result in penalties of up to 5% of daily worldwide turnover.

For systematic infringements and in situations where no alternatives or equally effective measures are available, the European Commission may pursue additional legal remedies. This may involve requiring a gatekeeper to sell a business or an essential part of it, such as a major unit, asset, intellectual property rights, or brand. In addition, the ‘gatekeeper’ may be prevented from acquiring a company in the same space or collecting data similar to the non-compliance detected.

What does the implementation actually look like?

Broadly speaking, DMA would ensure that ‘gatekeepers’ would not be able to penalize the services and products offered by third parties on their platform over their own similar services and products. In addition, it would ensure interoperability with platforms offering similar services.

More importantly, “gatekeepers” must allow companies access to data generated when using the latter’s platform. This is to ensure that users do not take advantage of their dual role unduly. For example, if a company operates a search engine and an online marketplace, it can use the data from a user’s online searches to push certain products. Without user data, a retailer may not be able to do much about the whole phenomenon. However, with a fairer platform and access to certain user data, he/she can ensure visibility of their products, effectively mapping the profile of their buyers and pushing paid ads accordingly.

Other key changes that “gatekeepers” will need to make include making it easy for end users to opt out of core platform services – including pre-installed apps, preventing the installation of default software along with the operating system, giving businesses alternative in-app payment systems and that allows end users to download alternative app stores.

It is pertinent to recall that the Competition Commission of India (CCI) recently fined Google Rs 936.44 crore for “abusing its dominant position in relation to its Play Store policies”.

What about interoperability?

Interoperability between platforms would be a particularly important factor with regard to messaging services. For perspective, the provision would mean that WhatsApp users can freely send and receive messages (including media attachments) from a competing messaging app, say iMessages.

The functionality would be set according to a set timeline. When the law comes into effect, ‘gatekeepers’ should ensure interoperability of text messages between two individual users. More complex functionalities, such as group texting, should be introduced after two years of enforcement, while audio or video calls between users could be introduced within four years.

It is pertinent to note that only users of non-gatekeeper companies would have the option to deny the interoperability.

The idea is to avoid any barrier to entry that might deter users from opting for a non-gatekeeper service and to avoid ecosystem captivity. Additionally, as noted by researchers at the digital freedoms advocacy group The Electronic Frontier Foundation (EFF), “having multiple services for users, especially vulnerable users, to choose from can help protect against inappropriate government surveillance and censorship.”

What are the critiques?

Critics argue that interoperability in messages can hinder the end-to-end encryption of messaging apps. While required by law, it would be a particularly onerous condition as communication would now be cross-platform, i.e. outside of a platform’s manageable dominion. However, several researchers, including the EFF, claim that its function cannot be compromised. “It (encryption) is also critical to protecting human rights defenders who rely on strong security while opposing or exposing abuses in hazardous environments,” the group says.

S&P Analytics, citing Senior Fellow of the US-based Open Markets Institute Johnny Ryan, said the move would mean companies that can’t combine and inter-use data from creating targeted ads. For example, “gatekeepers” wouldn’t be able to push phone ads after noticing that a consumer was looking for the easiest way to a retailer. So sharing user data wouldn’t be ideal as they are central to the company’s own competitive success.

“Clauses like these can help smaller tech companies take market share from gatekeepers, even in situations where unfair practices are not apparent,” said Colin Wall, Associate Fellow at the Center for Strategic and International Studies.

Furthermore, 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 in reaching the threshold may not appeal to some.

And finally, it has been suggested that the DMA’s criminal law provision to ban acquisitions in space would hinder a startup’s lifecycle. Advocacy group Allied for Start-ups said certain players may not last long-term, for whom acquisitions are a worthy exit perspective. So, critics say, the stipulation only adds to the unpredictability of an emerging entrepreneur in the space.

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