Why industry regulation of tech is coming, and what it will look like

Shortcomings in antitrust enforcement are causing jurisdictions around the world to consider industry regulation of tech. But instead of sweeping utility-like regulation, so far those efforts are targeting specific sectors such as digital platforms and particular conduct that is outside the reach of traditional competition laws.  

After years of analysis, debate, and enforcement efforts, policymakers are realizing that competition laws cannot deal with many of the social and economic problems created by the proliferation of digital platforms. The EU, UK, Australia, and Japan are taking a hard look at sector-specific regulation to deal with issues related to data access and unfair business practices that overlap with antitrust issues but cannot be clearly regulated by those laws. These new rules will redefine the legal landscape for online platforms and be a testing ground for industry regulation in other tech sectors.

Antitrust enforcement hits a wall in tech

Traditional competition law has several built-in limitations laid bare in recent years and which leave an opening for industry regulation in tech. Three of the major limitations follow below.

Lawfulness of obtaining a monopoly on the merits and the limitations of ex-post enforcement of abuse of dominance 

Many of the big tech players are big because they built superior products in winner-takes-all markets that tipped to the point where one dominant provider emerged. Some might call this a “natural” monopoly where the characteristics of the market essentially preordain that it will be made up of one or a few companies. Such competition “on the merits” is not unlawful under traditional antitrust laws. Achieving a monopoly in this way is considered the spoils of a victor in fair battle–indeed, it is considered the incentive that drives innovation and wealth-creation.

Still, once a company has become big enough to be considered “dominant” in a market, it has to avoid abusing that dominance by preventing a competitor from entering, expanding, or effectively competing in the market. But mainstream economic thinking and legal rulings in such “abuse of dominance” cases (called “monopolization” in the US) have developed over many decades to severely constrain the circumstances under which a dominant firm’s actions violate antitrust laws. Only clear-cut exclusionary conduct is prohibited, and even within that some jurisdictions (such as the US) are much more lax than others (like the EU). 

As a discussed on a recent post about the Google Shopping decision, even in jurisdictions where such antitrust enforcement is more common, it can still be a challenge for enforcers to fit new forms of abusive conduct in the digital sector into the shape of the archaic antitrust laws. And even if successful at showing a violation of the law, enforcers face many limitations on the type of relief they can impose in an abuse of dominance case.

In addition to the challenges arising from the substance of competition law, the procedures involved in enforcing them are also limiting. The cases are excruciatingly slow due to the fact-intensive nature of an investigation into a complex tech market, drawn-out administrative proceedings, and further delay caused by appeals. For example, the ongoing Google Shopping case will exceed a decade from the start of the government’s investigation through resolution of its pending appeal. Europe’s case against Microsoft in the early 2000s took nearly as long, while US antitrust authorities spent several presidential administrations wrangling with Microsoft. In the digital economy, entire industries can be borne, mature, and die during the course of a single antitrust investigation.

Inactive ex-ante merger enforcement against incipient and vertical deals

Another way that big tech players can attain a lawful monopoly is by buying potential (future) competitors in the form of small up-starts operating in their market or established players operating in adjacencies but not (yet) on the same market.

Incipient deals (sometimes referred to as “killer acquisitions”) are rarely blocked. A typical merger control regime requires predicting that harmful competitive effects may arise from a deal before intervening to stop it, and that is difficult to do when the company being acquired is small, insignificant, and operating in a dynamic digital market. Vertical deals–called that because it involves an adjacent market to the one the acquirer operates in–are also rarely blocked. Mainstream competition economic theory, which strongly influences case rulings and enforcement priorities, says that vertical deals are almost always good for competition because they combine companies with complementary products to achieve cost-cutting efficiencies. 

Given its fast-changing and start-up driven trajectory, combined with the existence of large ecosystems comprising many interrelated markets, the digital economy is a frenzied feeding ground for both incipient and vertical deals. The net result has been well observed: big tech players, in particular online platforms, have made hundreds of acquisitions in the last decade that either flew under the regulatory radar, or otherwise received clearance following (often limited) review by antitrust authorities.1https://www.gov.uk/government/publications/unlocking-digital-competition-report-of-the-digital-competition-expert-panel

Economic efficiency as the guiding principle for measuring effects on competition

Decades of jurisprudence, enforcement priorities, and academic thinking has focused modern competition law on economic efficiency. Economic efficiency (also called the “consumer welfare standard”) is how antitrust determines whether a market distortion has occurred. Whether it concerns an acquisition or conduct by a single company, it does this by reference to the impact on costs and prices (with the goal always being: lower is better). This means that, with some exceptions, conduct and deals are generally considered lawful under competition laws so long as they do not result in higher costs and higher prices–even if they cause other societal problems.

Recent efforts to try to wedge non-price considerations into antitrust enforcement in the tech sector have not been successful. The most notable example is a recent case where Germany’s competition authority ruled that Facebook abused a dominant position in violation of the antitrust laws when it combined user data across different products without sufficient informed consent from the users. This decision was suspended by a court skeptical of the government’s theory of the case mixing antitrust and data protection concerns, and is now on appeal.2https://www.wsj.com/articles/facebook-wins-appeal-against-german-data-collection-ban-11566835967 As another example, calls for using the antitrust laws to deal with the problems associated with mis-information spreading on Facebook have so far not led to any enforcement efforts (nor has it been explained clearly what the legal basis for an antitrust claim would be).3https://publications.parliament.uk/pa/cm201719/cmselect/cmcumeds/1791/1791.pdf; https://www.vox.com/technology/2017/9/22/16330008/eu-fines-google-amazon-monopoly-antitrust-regulation

Policymakers take notice and look to sector regulation to fill the enforcement gaps

Government reports have confirmed that competition laws can be a poor fit for dealing with some of the social and economic problems in tech, and that industry regulation targeted at gaps in antitrust enforcement is needed.   

Australia’s competition authority concluded that “holistic reform” including targeted sector regulation was needed following its comprehensive sector inquiry of digital platforms.4https://www.accc.gov.au/media-release/holistic-dynamic-reforms-needed-to-address-dominance-of-digital-platforms The EU conducted its own digital sector analyses and found that “a regulatory regime may be needed in the longer run”, though it did “not envision a new type of ‘public utility regulation’ to emerge for the digital economy,” but rather sector-specific regulation that would “complement” and “reinforce” competition enforcement.5https://ec.europa.eu/competition/publications/reports/kd0419345enn.pdf

A UK report on the digital sector also found utility-like regulation dis-favorable, and instead called for establishing a new “digital markets unit” to set out a “digital platform code of conduct” that would “extend beyond the reach of existing competition law” and offer “ongoing monitoring and a fast-moving enforcement function.”6https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf And Japan has been conducting its own inquiries into digital platforms with one of its stated aims the establishment of “appropriate control by sector-specific regulations.”7https://www.jftc.go.jp/en/pressreleases/yearly-2019/October/191031.html

The discussion in policy circles is moving away from an antitrust-can-cure-all-ails mentality to one that looks at industry regulation to deal with particular conduct in specific tech sectors. This is an antidote that some jurisdictions seem more inclined to take than others. But the approaches taken by the EU, UK, Australia and Japan show how sector regulation will reshape the legal landscape for digital platforms (and later, likely other tech sectors) in ways that go beyond a continued evolution of competition laws.

EU to use sector regulation to supplement antitrust efforts against self-preferencing by online platforms

The EU already tried to use traditional antitrust enforcement to deal with unfair competition resulting from “self-preferencing,” which occurs when a digital platform operator promotes its own products over those of third-parties using its platform. However, as discussed in a previous post, its Google Shopping case has been weighed down by doubts about the legal basis for injecting notions of fairness into the antitrust framework. On top of that, the case has suffered from an inability to fashion effective relief due to the limitations imposed by modern antitrust orthodoxy that disfavors imposing a commercial “duty to deal” on companies (even monopolists).

So it is no surprise that the EU’s upcoming Digital Services Act is expected to introduce sector-specific regulations to limit self-preferencing and tackle other aspects of “fair competition” and “fair trading conditions” for transactions occurring on online platforms.8https://www.europarl.europa.eu/RegData/etudes/IDAN/2020/649404/EPRS_IDA(2020)649404_EN.pdf; https://www.euractiv.com/section/digital/news/new-competition-tool-to-feature-in-digital-services-act-vestager-says/; https://app.parr-global.com/intelligence/view/prime-3033908

Australia to use regulation to restore bargaining position of online publishers vis-a-vis large online platforms

Australia’s competition authority conducted a deep-dive sector inquiry that showed how media companies (publishers) face non-transparent and unbalanced terms and conditions for the use of their content by online platforms like Google and Facebook. Areas of concern included: how a website is ranked or positioned, distinguishing original from copy-cat content, and access to user data obtained from use of the content. Another area of concern was the use of “snippets” of content for previews without paying the publisher for the value it creates on the platform.

To restore this “imbalance in bargaining power,” the report recommended that designated digital platforms be required to come up with a “code of conduct” that ensured fair and transparent commercial dealings with online publishers.9https://www.accc.gov.au/system/files/Digital%20platforms%20inquiry%20-%20final%20report.pdf When progress on those efforts was deemed to be going too slow, the Australian government recently ordered the competition authority to draft a mandatory code of conduct.10https://ministers.treasury.gov.au/ministers/josh-frydenberg-2018/media-releases/accc-mandatory-code-conduct-govern-commercial

UK to set up new regulator to impose rules for opening up access to big data held by online platforms

The UK published an influential report on competition issues in the digital sector that recommended a wide range of ex ante rules and codes of conduct to be put in place by a new regulatory body. Two particular areas it targeted for sector regulation were data portability (making it easier for consumers to move and control their data) and data interoperability (making it easier for digital businesses to make their services interoperable with established online platforms).11https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf In addition, sector regulation is also to require some form of “data openness” that causes online businesses to share data with competitors as an “essential and justified step needed to unlock competition.”

The UK government recently announced that it would go forward with all recommendations contained in the digital report.12https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/871799/Budget_2020_Web_Accessible_Complete.pdf

Japan to use targeted regulation to take on unfair trading practices by online platforms

As covered in a previous post, Japan is working on regulations to improve “transparency and fairness” by online platforms. Some examples of the conduct the regulations will cover include lack of transparency regarding (including changes made to): terms and conditions for use of a platform, rules governing how users are ranked or positioned on a platform, and the use of data collected by the platform. Also covered will be the fairness of the procedures that are used to deal with users who are found to have violated the terms and conditions of a platform, for example in rejecting a transaction or terminating an account. Affected platforms are to submit an annual report on their compliance with the regulation, as well as interim updates on changes to their terms and conditions. 

The future legal landscape in tech: antitrust enforcement with stop-gap sector regulation

The hands-off period that all disruptive industries enjoy is clearly over for the digital economy. Tech is now a grown-up industry that deals with mature legal issues, and regulation is naturally a part of that. But as can be seen in the EU, UK, Australia, and Japan, governments are proceeding methodically, relying on regulation only in specific sectors and for that conduct which traditional competition enforcement cannot reach.

All four of these jurisdictions have in common a reluctance to use the sort of utility-like regulation seen in telecom and other mature industries with the characteristics of natural monopolies. Instead, these countries’ initial test-runs at industry regulation in tech are targeted towards specific conduct (such as self-preferencing, transparent and fair terms and conditions, and data access) within particular sectors (online platforms). Whether it’s evening the bargaining positions between parties (Australia), limiting unfair business or trading practices (Japan), expanding data access (UK), or limiting unfair methods of competition (EU), the targeted regulations are getting at conduct that is outside the reach of competition laws hemmed in by a singular focus on promoting economic efficiency. In the process, the regulations will provide an avenue for changing industry-wide practices, as opposed to the particular circumstances of a given case and company that constrain the reach of an antitrust enforcement action.

This should be an encouraging sign for the tech industry, which has its own interests in industry regulation. The reasons for this can go far beyond the potential for steering the rules in one’s own favor.13https://www.washingtonpost.com/technology/2020/05/12/facebook-lobbying-american-edge/ For one thing, regulation can provide cover for companies from uncertain legal liability and public scrutiny. It can also encourage pro-consumer competition that benefits the industry as a whole (the way that data protection rules can push digital markets to adapt to consumer demand for privacy, as discussed in a previous post).

In fact, big tech has already been vocal about its support for industry regulation in various areas: Facebook for mis-information, privacy and data portability,14https://www.washingtonpost.com/opinions/mark-zuckerberg-the-internet-needs-new-rules-lets-start-in-these-four-areas/2019/03/29/9e6f0504-521a-11e9-a3f7-78b7525a8d5f_story.html Google and Microsoft for AI technologies,15https://www.ft.com/content/3467659a-386d-11ea-ac3c-f68c10993b04; https://www.geekwire.com/2020/microsoft-president-brad-smith-calls-ai-regulation-davos/ and Apple for data protection.16https://www.barrons.com/articles/apples-tim-cook-says-u-s-should-help-consumers-track-their-data-51547737135?mod=article_inline These companies have also pursued some of the same measures discussed above through self-regulation. An open-source initiative called the Data Transfer Project is an effort by the largest online platforms to introduce some data portability and interoperability across their services.17https://datatransferproject.dev/dtp-overview.pdf

But sometimes cooperation won’t work because incentives among competing players will not align around a particular issue. In those instances, tech players may actually prefer regulation in order to ensure a level playing field–for example, by ensuring that no one has an advantage over anyone else in the use of data, openness of a platform, or something else that could impact revenue.  

The first wave of sector-specific regulation of the online platforms will no doubt be a testing ground for other forms of targeted industry regulation of tech. This trend is a natural step in the process of dealing with the societal and economic impacts of the tech revolution that traditional forms of antitrust enforcement are not equipped to handle. And the industry can breathe a sigh of relief–for now–that all signs currently point towards narrow rules and codes of conduct, and not comprehensive utility-regulation of the industry as a whole.

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