The P2B Regulation: A Good-Intentioned Road to Hell

A group of Europe’s SME app developers—representing myriad economic sectors (including healthcare, mobility, software development, cyber security, gaming, and e-commerce businesses)—sent a letter to Members of the European Parliament (MEPs) urging them to reconsider its  legislative proposal on business practices of online platforms. The SME signatories warn MEPs that the Parliament’s Internal Market Committee’s (IMCO’s) proposed amendments to said legislation could lead to market fragmentation, legal uncertainty, and a reduction to consumer protection and choice in the European Union (EU). The developers say that if IMCO’s proposal becomes law, then it will stifle growth and hinder innovation in an industry that the European Commission (Commission) estimates contributes €63 billion a year to Europe’s economy.

“Europe is a world-leader in app development – producing brilliant, creative ideas, businesses, and jobs – which have flourished because of the supportive relationship it has with the platform companies which provide a route to international markets, consumer trust, and so much more… Changing this environment will jeopardise the prospects of many existing firms – holding back growth, investment, and innovation – and make it far harder for the next wave of start-ups to succeed.”

  – Augustin van Rijckevorsel, founder and CEO of Barefoot & Co.

“Europe’s digital single market is exactly what small tech firms need, so why are some politicians looking to empower national authorities when it comes to online platforms? That will just fragment the marketSmall businesses will be impacted more than large ones by heavy-handed legislation on the platform-to-business relationship. We need access to markets. We don’t have as many choices as larger competitors.”

– Fernando Guerrero, CEO of Nouss Intelligence and SolidQ

The advent of online platforms spurred a legion of European SMEs to participate in the global economy. As we outlined in our comments to the Commission on its initial platform-to-business (P2B) proposal, this is because mobile platforms provide app developers with:

  • lowered overhead costs,
  • immediate access to international consumer markets,
  • simplified market entry, and
  • strengthened intellectual property protections.

 These benefits have almost been categorically ignored by Parliament’s IMCO based on proposed amendments to its P2B proposal.

The market-driven arrangement between developers and platforms is the cornerstone of the app economy’s success. For example, they allow SME developers to provide a diverse array of pricing structures, including free with in-app purchases, subscription-based sales, or one-time purchase. Moreover, app developers have the autonomy to dictate their own marketing and design without a platform’s influence. Though 90 percent of apps made available on major platforms (i.e., Apple’s App Store and Google’s Play store) are free, the platform provides tangible, cost-saving benefits for revenue-based app developers. In exchange for their services (e.g., absorbing the costs of financial transactions, protecting intellectual property, promotion, and enabling global distribution), platforms charge an annual fee to app companies.

Over the past few years, EU regulators have wanted to provide mechanisms for developers to deconstruct the standard contracts they have with platforms. Their underlying assumption is that these arrangements are inherently anticompetitive and unfair. However, this cannot be further from the truth as these arrangements allow SME developers to streamline negotiations with major platforms and place smaller companies on equal footing with larger companies. This means that Facebook is given no more negotiating power than our smallest EU member. By mobile platforms not playing favorites, it has, in part, allowed for more competition in the app economy. Now, these procompetitive arrangements are in dire threat given the recent developments on the national level in the EU.

What’s Going on, and How Did We Get Here?

In April, the Commission proposed changes to the “fairness of platform-to-business (P2B) trading practices in the online platform economy” which the Commission says tries to “establish a fair, trusting and innovation-driven ecosystem around online platforms across the EU.” Originally, the regulation sought to introduce a light-touch regulatory approach. It intended to increase transparency into the relationship between platform companies—or, as the Commission refers to them, “online intermediation services”—and their business partners (e.g., app developers). However, the Commission’s document took a more punitive and sweeping approach due to Parliament’s recent amendments that it will vote on in the coming days.

We expect Parliament to vote on IMCO’s proposed amendments to the legislation on Thursday, December 6. Additionally, the MEPs introduced their series of amendments to the text that Member States adopted in its Competitiveness Council last week. Both the Parliament and the Competitiveness Council will debate these two almost conflicting documents with the Commission in the next stage of the EU’s legislative process (i.e., the trialogue). Once the trialogue has ended, we expect the EU to reach an agreement on the terms of the proposed regulation by early next year.

What the Parliament’s Proposed Regulation Does

If Parliament’s amendments get matriculated into the final P2B regulation, it would existentially threaten the partnership app developers have with digital platforms. It would:

  • undermine the relationship developers have with platforms and the benefits they offer our members;
  • introduce uncertainty in our members’ contracts with platforms by allowing courts and other government agencies to rewrite their terms; and
  • “blacklist” certain commercial practices that actually help sustain equity for SMEs.

This regulation, if passed, favors larger businesses with deep pockets that can hire teams of lawyers to seek favorable treatment on various platforms. The ambiguous language within key provisions of the EU’s P2B proposal gives larger companies carte blanche to challenge whatever terms they find offensive in court. This is especially worrisome for our members that use app stores because it opens the door for companies like Spotify to completely rewrite and tailor a platform’s terms to their specific service, giving itself and only itself a greater edge over smaller app developers who do not have nearly the same resources. Ultimately, this will completely alter the competitive landscape and has the potential to exert an existential blow to the relationship our members have with online platforms. In effect, these new rules create an uneven playing field for small businesses that use platforms to provide their innovative products or services.

Maintaining the integrity of the platform and developer relationship is the necessary condition on which the continued growth of the app economy relies. If this proposed regulation moves forward with IMCO’s suggested amendments, it will strike at the heart of what makes the app ecosystem thrive and competitive. This is why the P2B proposal must either be significantly altered or completely rewritten.

By |2018-12-05T14:24:49+00:00December 5th, 2018|Blog, Competition|