Japan’s challenge to encourage competition in the smartphone software market

August 2024  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2024 Issue

Digital platforms have become the core business of the modern economy. Because of their strong market power, competition agencies around the globe are struggling to find better ways to establish free and fair competition in digital markets.

In Japan, the Japan Fair Trade Commission (JFTC) and other government agencies are trying to find the best solutions to introduce a strong framework of regulations and policies. This May, new legislation was enacted, which could be a turning point.

The new act

On 12 June 2024, the Act on Promotion of Competition for Specified Smartphone Software (Act) was enacted. The Act is scheduled to go into effect on a date to be specified by cabinet order within a period not exceeding one year and six months from the date of promulgation.

The Act aims to encourage a competitive environment for businesses using smartphones and other mobile devices. In particular, the current targets of the Act are operating systems, app stores, browsers and the search engines used on mobile devices.

Under the Act, the authority designates business operators that provide specified software necessary to use smartphones or engage in similar businesses and prohibits actions that may restrict competition related to this specified software, among other measures. Specified software is considered basic operating software, app stores, browsers and search engines.

Below is a concise overview of the Act.

Designation of specified software providers. The JFTC will designate business operators that provide specified software or related business activities whose scale is larger than that specified by a cabinet order (designated providers) as those to whom the provisions apply.

Prohibited actions and compliance mechanisms for designated providers. The Act establishes measures to be taken by designated providers, such as prohibiting unfair treatment of individual app operators, disclosing the nature of data acquisitions, and the like.

Designated providers must submit a report on their compliance with the Act’s provisions to the JFTC every fiscal year.

The major prohibitions and compliance measures include: (i) restricting competition between app stores; (ii) placing restrictions on the use of billing systems other than those of designated providers; (iii) placing restrictions on providing information to users within the app; (iv) prohibiting unfair treatment of app businesses; (v) prohibiting the use of browser engines other than those of designated providers; (vi) permitting users to change designated providers’ default settings for services; (vii) restricting designated providers from giving priority display to their own services in searches; (viii) prohibiting unreasonable use of data by designated providers; and (ix) placing restrictions on access by app developers to functions controlled by the operating system.

Measures against violations. The JFTC may investigate a suspected violation of the Act and issue a cease-and-desist order and surcharge payment orders. It is noteworthy that the amount of the surcharges would be 20 percent of the violating entity’s relevant turnover.

Analysis

The Act is said to be the first ex-ante competition regulations applied to digital platform operators in Japan. It appears that the JFTC thoroughly reviewed the European Commission’s Digital Markets Act (DMA) and, though there are major differences between the Act and the DMA, there are also similarities.

One notable similarity is that both acts impose ex-ante regulation on digital platform operators. However, compared to the DMA which covers undertakings with a variety of businesses, including social network, e-commerce intermediation and video sharing, and designates key entities as gatekeepers, Japan’s Act currently focuses only on businesses providing smartphone software. Also, the Act allows relatively large scope for exceptions to be applied with regard to certain major prohibited actions. Exceptions are permitted when the relevant actions are seen as justifiable. The JFTC explains that exceptions will be allowed for cases in which measures necessary for security, privacy, child protection, and so on, cannot be implemented by the designated provider otherwise. As such, restrictions under the Act are not as strict as those under the DMA.

Furthermore, enforcement measures are different between the two acts. Infringements of the DMA will be investigated and punished by the European Commission. In fact, several investigations against alleged infringements by gatekeepers are reportedly ongoing. Fines of up to 10 percent or more of global turnover may be imposed, depending on the nature of the infringement. In contrast, the JFTC explains that the Act provides a new policy framework rather than the traditional enforcement approach of the Anti-Monopoly Act in Japan. In particular, enforcement of the Act will aim to improve the business model of designated providers through continuous dialogue among the JFTC, designated providers and third-party application providers, rather than through unilateral investigations and severe penalties. The administrative surcharge to be imposed against an infringing business under the Act is 20 percent of the relevant turnover, far smaller than under the DMA.

Conclusion

Though the Act is similar to the DMA at first glance, they are substantially different as a competition policy tool against Big Tech.

In today’s economy, most businesses have close relationships with Big Tech companies. Smartphones and other mobile devices are among the most important contact points through which companies can reach their customers. Obtaining an accurate understanding of the latest regulatory framework on digital platform or smartphone software markets in Japan is important, not only for businesses with a substantial presence in Japan, but also for those that need to understand the DMA and alternative policy options designed to encourage competition in digital platform and smartphone markets.

 

Yusuke Takamiya is a partner at Mori Hamada & Matsumoto. He can be contacted on +81 3 6266 8744 or by email: yusuke.takamiya@mhm-global.com.

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Yusuke Takamiya

Mori Hamada & Matsumoto

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