Following multiple public consultations, the European Commission released a proposal for the Digital Markets Act (DMA) on 16 December 2020 (see our statement here). If enacted, this legislation could significantly impact the way the app economy functions. In this blog, we dive into the DMA proposal and what it means for small businesses. We also recently released our DMA position paper, which we use to share our thoughts on the proposal with EU policymakers.

What is the DMA?

The DMA is part of the European Commission’s “Digital Services Act package”. The package also includes the Digital Services Act (DSA), legislation which focuses on illegal online content and the liability of online platforms. You can read more about the DSA here.With the DMA, the Commission intends to regulate the behaviour of large digital platforms, so-called “gatekeepers”. The DMA defines “unfair” practices and introduces various obligations and prohibitions on gatekeepers.  It also enables the Commission to conduct market investigations to designate gatekeepers and address any market imbalances the Commission believes stem from the gatekeeper platforms’ behaviours.

What is in the DMA?

While the DMA would enter into force in all Member States of the European Union (EU), it only applies to the providers of “core platform services”. This group encompasses large digital platforms, including social networking, search engines, messaging services, operating systems, and other online intermediation services.

The DMA proposal considers a platform a gatekeeper once it meets all three of the following criteria:

  1. It is active in at least three EU countries and has an annual turnover of over 6.5 € billion in the last three financial years or an average market capitalisation of over 65 € billion.
  2. Its core platform services exceed 45 million monthly active end-users in the EU and 10,000 yearly active EU-business users during the last financial year.
  3. It has or is expected to establish a stable and durable market position. The Commission presumes companies that have met the first two criteria to fulfil this criterion.

When a platform meets all three criteria, it must notify the European Commission. Then the Commission determines whether or not to designate the platform in question as a gatekeeper. Importantly, the Commission can assign gatekeeper status based on market investigations, even if a platform does not meet the criteria above. Once the Commission designates a platform as a gatekeeper, it must comply with the DMA’s rules that prohibit certain practices and impose new obligations.

The obligations listed in articles 5 and 6 of the DMA are probably the most consequential provisions the proposal includes. Both articles contain long lists of conduct-specific obligations. We will summarise them broadly here but you can read about them in detail in the proposal. Mainly the obligations order gatekeepers to:

  • Constrict data accumulation and take steps to comply with the General Data Protection Regulation (GDPR);
  • Refrain from requiring third parties to use gatekeeper services for access to another core service;
  • Constrain the use of data/non-public information that gatekeepers gather from third parties’ business activities on their platforms;
  • Halt bundling of software and allow uninstallation of pre-installed software applications;
  • Further the interoperability and the ability to switch between third party services and software applications;
  • Refrain from self-preferencing (i.e., gatekeepers cannot treat their own services or apps more favourably); and
  • Make access to core platform services fair and non-discriminatory.

The Commission can also conduct broad and in-depth market investigations into platforms’ new services and practices to identify new unfair practices and update the list of core platform services. To enforce compliance, the Commission can impose fines of up to 10 percent of a company’s global annual turnover and periodic penalty payments of up to 5 percent of a company’s global annual turnover. In cases of systematic infringements, the Commission can impose additional tailored remedies. These measures can be behavioural or structural.

What Does All of This Mean for Small Businesses?

Our members benefit from the network effects of the multi-sided platform market and the symbiotic relationship that exists between app stores, developers, and users. Therefore, our members could potentially benefit from the obligation for gatekeepers to refrain from self-preferencing their own services and products over similar ones provided by third parties. The obligations to enhance transparency in gatekeepers’ operations will further improve small and medium enterprises’ (SMEs) ability to compete in the Digital Single Market. However, we are concerned that small app developers will likely suffer from several of the DMA’s new obligations even though they may not qualify as gatekeepers. Without a case-by-case analysis of each obligation for each platform, the DMA may only help the largest players compete on the same level rather than levelling the playing field for everyone.

Unintended Consequences

Many of the obligations listed above have multiple side effects, both positive and negative. For example, the obligation to enable side-loading does not specify how third-party apps should regulate content. Neither does it include any safeguards to protect consumers from malicious actors. This provision risks damaging the trust consumers have in the app stores and related ecosystems. Only large developers with brand recognition will benefit from this obligation. Small developers who rely on the platforms to gain consumer trust and who do not have the resources to compete with the big brands will suffer. Provisions like these may level the playing field for larger actors, but they only widen the gap between small and large developers further.

The potential multiplication of the app stores would likely harm most SMEs. Making an app available on more than one app store costs time and money, and the more app stores there are, the more burdensome this process is. App developers may find themselves in a position where they pay more money to less trustworthy sources that split the consumer base. This would reduce both the network effects and additional benefits developers and consumers currently enjoy. Mandating interoperability between app stores may seem like a feasible solution. However, creating large data pools, and using a universal programming language, for example, could violate GDPR and weaken security, data privacy, and opportunities for innovation. Entering an interoperable app store system will likely also be costlier than current app store fees, raising the existing low entry barriers for smaller actors.

The DMA may also threaten a platform’s ability to provide advantages to SMEs and invest in research and development (R&D). If the DMA’s new obligations threaten the amount large platform companies or their challengers invest in R&D, it will disadvantage the entire ecosystem. If, for instance, app stores recoup their losses by raising the price of entry for developers or by reducing the number of resources available to developers, it would cause significant harm to our members. In turn, the resulting reduction in the quantity, innovation, or availability of apps would also harm consumers.

We encourage European policymakers to focus on developing flexible, general, and future-proof standards for the digital age. As the EU introduces ex-ante regulation on gatekeepers, it must take the entire online platform economy into account, including consumers, gatekeepers, and other business users.

Legal Certainty

The DMA enables the European Commission to update the operational threshold for gatekeepers and periodically review the list of designated gatekeepers. A frequently shifting threshold may decrease legal certainty for larger, not-yet-gatekeeper platforms in the Digital Single Market if these reviews are not transparent. Such uncertainty may unintentionally discourage larger platforms from scaling up. This scenario risks further entrenching the positions of current gatekeepers while endangering growth, investment, and honest mergers of smaller players. Moreover, each new gatekeeper added to the Commission’s list risks creating ripple effects that different verticals of the online platform economy will feel. The smallest actors with the fewest resources to react and adapt are likely to experience the strongest consequences.

Additionally, the DMA enables the Commission to designate a provider of core platform services as a gatekeeper when it has or is expected to establish a stable and durable market position. This is very hard to predict and the incorrect identification of a market as tipping and the subsequent introduction of new obligations could threaten medium and larger platforms’ ability to grow and challenge existing gatekeepers. Ultimately, we are concerned that the ability to regulate such “tipping” markets also threatens the legal certainty of both larger and smaller platforms. This provision risks stagnating the market instead of enriching it.

We recommend that the DMA allow sufficient time for the Commission to fully analyse the effect a new gatekeeper designation may have on the entire platform economy. To preserve high transparency levels, the DMA should also ensure that the European Commission consults all interested parties in the gatekeeper designation process. Lastly, the Commission should avoid the regulation of “tipping” markets altogether.

What is Next?

The EU Member States and the European Parliament will now discuss the DMA proposal. First, the European Institutions all have to agree on their own versions of the DMA. Then, they will need to settle on one final text before adopting the regulation. This process will likely take several years. Margrethe Vestager, the Commissioner for Competition, recently stated she hopes to reach an agreement by 2022. The DMA may cause significant consequences for online platforms. We thus encourage any company that might be affected to monitor this policy debate and let their voice be heard. We will continue to advocate on our members’ behalf throughout the process.