Q&A: Antitrust in the digital economy

August 2023  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2023 Issue

FW discusses antitrust in the digital economy with David Cardwell at Baker Botts, Veronica Roberts at Herbert Smith Freehills LLP and Josh Buckland at Simpson Thacher & Bartlett LLP.

FW: Could you provide an overview of the extent to which the digital economy has evolved and expanded in recent years? In what ways is increasing digitalisation reshaping competitive dynamics?

Cardwell: The digital economy has come through and continues to go through a substantial period of evolution and expansion: 10 years ago, many antitrust policymakers were focused on the expanding e-commerce sector with online shopping growing exponentially. The European Commission’s (EC’s) focus at that time was also on conclusions from its e-commerce sector inquiry, on its multiple investigations into the Google, Apple, Facebook and Amazon ‘big tech’ players, and myriad investigations into online most favoured nation clauses, geoblocking, and so on. More recently, the proliferation of online platforms and their role in the digital economy have continued to be subject to intense regulatory scrutiny. From an antitrust perspective, increased digitalisation is sharpening regulators’ focus on the significance of network effects and the role of data in potential theories of harm.

Buckland: The digital economy really is the economy at this point. It is no longer tenable to hold them out as separate concepts. Big tech stocks dominate the S&P 500. Almost every business in the world relies on digital tools in one form or another – from email and mobile phones to digital advertising platforms and back office software; they are omnipresent and indispensable. This cascading digitalisation of the global economy has created many new markets with their own unique competitive dynamics. For instance, we see many more multisided markets, which come with a host of interesting challenges for competition policymakers. But it has also complicated the competitive landscape for more traditional industries – because almost everyone has to consider issues such how they are using data and the way in which their brand is perceived on social media.

Roberts: The digital economy refers to all business activities that make use of online technology, either to support existing activities or to create new ones. The growth of the digital economy has been exponential over the last decade and encompasses almost every industry sector. While the growth of the digital economy has resulted in increased competition in a range of markets with significant benefits for consumers in terms of lower prices, better quality and greater innovation, digital markets also have features that create a range of challenges from a competition policy perspective. In many cases, digital markets are subject to tipping, in which a winner will take most of the market. The concentration of power among a small number of digital firms raises concerns around the conduct of large digital companies. On that basis there is an increasing trend toward adopting specifically tailored, ex-ante regulatory regimes to regulate the conduct of the most powerful digital firms.

FW: What are some of the key areas of concern for antitrust authorities regarding actual or potential anti-competitive conduct in digital markets?

Buckland: At a fundamental level, antitrust authorities want to ensure that emerging or nascent digital markets can develop with the benefit of healthy competition. They do not want to see the winners of yesterday’s battles – in online search or shopping, for instance – abusing their existing dominance to stifle innovation and erect moats around the technologies that will shape our future, such as artificial intelligence (AI) and quantum computing. As a result, there is significant concern around ‘killer acquisitions’ – where an established player seeks to acquire a potential rival merely to remove it as a future competitive threat – and ‘reverse-killer acquisitions’, where the larger player pursues an innovative target rather than organically launching its own offering in the same space. Concerns are now even being raised about the biggest technology firms acquiring complementary or unrelated assets where there is no clear-cut threat to potential future competition. The fear appears to be that – at least when a player like Google is involved – the scope for harm to competition may be greater than the sum of a merger’s constituent parts.

Roberts: The key concerns arise around issues stemming from the high level of concentration in digital markets. The ‘winner takes all’ nature of competition in many platform-based markets is resulting in a small number of platforms with significant market power, with high barriers to entry due to data-driven network effects, economies of scale and control of user data. Some of these concerns can be addressed under existing theories of harm, such as refusal to deal, exclusive dealing, tying and bundling or imposing unfair prices or other conditions on consumers, but for others the competition authorities have identified new theories of harm based on specific features of digital markets. This is the case for so-called ‘forced free riding’, where dominant firms that facilitate transactions on digital platforms make use of the data of their customers to the benefit of their own transactions on the platform. Another new theory of harm relates to abusive leveraging or self-preferencing, first identified in the EC’s Google Shopping case, where Google was fined for abusing its dominant position in the general search market by favouring its own vertical comparison shopping service in its search results page.

Cardwell: Although antitrust authorities have not shifted from the basic fundamentals of competition law in enforcing the law in the digital space, certain concepts and theories of harm have gained more prominence over the past 10 years or so. Authorities are particularly focused on the substantial degree of scale that some tech companies have achieved, and the potential for direct or indirect network effects arising from that scale. In investigating potential anticompetitive effects, while authorities are able to rely to an extent on ‘traditional’ theories of harm such as tying, more innovative theories linked to issues such as use of data and self-preferencing have come to the fore.

FW: Would you highlight any recent cases that exemplify the main issues?

Cardwell: One of most fundamental changes in the legal landscape in the European Union (EU) has been the introduction of the Digital Markets Act (DMA), which began application in May 2023, and which introduces a major shift in regulation in the digital space from mostly ex-post enforcement to more ex-ante regulation. It is still early days for significant cases related to the DMA to have materialised, though a set of commitments offered by Amazon and accepted by the EC in December 2022 in relation to Amazon’s Marketplace does touch on DMA issues. Aside from the DMA, there have been important decisions from the EU’s General Court annulling either partially or fully EC decisions in the Google Android and Qualcomm cases. The volume of cases either involving tech players directly or touching on digital markets is sure to continue to burgeon as new enforcement tools kick in and as antitrust authorities continue to hone existing theories of harm in enforcement of antitrust rules in an increasingly digitised market.

Roberts: A recent example of a forced free riding abuse is the case of Amazon, which has a dual role as a platform, as it runs a marketplace where independent sellers can sell products directly to consumers and at the same time it sells itself products on its platform as a retailer, in competition with those independent sellers’ activities on its platform. The EC opened a formal investigation into Amazon’s use of non-public data of its marketplace seller. In December 2022, the EC accepted commitments from Amazon under which it has agreed not to use non-public data relating to, or derived from, the independent sellers’ activities on its marketplace for its own retail business. At the same time, the EC was investigating Amazon’s practices in relation to the criteria it sets to select the winner of the Buy Box and to enable sellers to offer products under its Prime programme, which were seen as leading to preferential treatment of Amazon’s retail business or of the sellers using Amazon’s logistics and delivery services. In order to address these concerns, Amazon has now committed to treat all sellers equally when ranking the offers for the selection of the Buy Box winner and to set non-discriminatory conditions and criteria for the qualification of marketplace sellers and offers to Prime.

Buckland: An obvious highlight is the ongoing scrutiny that Microsoft is facing over its proposed acquisition of Activision Blizzard, although I am not at liberty to discuss that matter. Another example which touches on some of the key issues is the UK Competition and Market Authority’s (CMA) unwinding of Meta’s completed acquisition of Giphy. That decision was originally issued in November 2021, appealed by Meta, remitted back to the CMA and effectively reaffirmed in October 2022. A final order requiring Meta to divest Giphy in its entirety was published in January 2023. The CMA was worried Meta would prevent other social media platforms from accessing GIFs and felt the deal had removed a potential competitive threat in display advertising – despite Giphy’s extremely limited involvement in the latter field prior to the merger. The case shows that antitrust authorities are willing to test the boundaries of their powers to challenge perceived harms to competition in digital markets, and that they can win these battles – at least in the UK – even where the level of harm might be considered relatively low.

FW: To what extent are antitrust laws lagging behind growth of the digital economy, and the complexity it presents? Have there been any recent regulatory developments in this area?

Roberts: Governments and regulators across the world are facing the challenge of regulating digital markets. Competition regulators have not shied away from taking on the most powerful digital firms under their standard competition rules and the key competition regulators, namely those in the EU, US, UK and Australia, are all investigating the same digital companies for similar conduct. One of the issues with the existing competition enforcement regimes is the length of time it can take to complete an investigation and reach a final decision, compared to the speed of change within the digital economy. For instance, the EC first opened an investigation into Google’s alleged abuse of dominance in online search in November 2010. Three years were spent with the EC trying to resolve the issues through binding commitments before it launched a full investigation resulting in fines of €2.24bn being imposed on Google in the EC’s final infringement decision. Other potential shortcomings of competition law enforcement relate to its limited scope for intervention – under most regimes there needs to be an agreement between undertakings or an abuse of a dominant position – and its case-by-case approach, which will not always be able to address sector-wide issues. These have prompted a number of regulators to adopt tailored regulatory regimes specifically designed for the most powerful digital companies.

Buckland: The extent to which antitrust laws are lagging behind is certainly a question that is receiving a lot of attention right now. If you ask most regulators, they will probably tell you that the existing laws are inadequate and must be expanded. I am not sure that is warranted – antitrust laws in jurisdictions such as the EU, the UK and US are already incredibly broad and versatile. But that is a minority view at the moment – there is a clear trend toward adopting ex-ante regulatory solutions for digital markets, at least on this side of the Atlantic. The best examples are the DMA and Digital Services Act (DSA), which both came into effect toward the end of 2022. The UK also has the Digital Markets, Competition and Consumers (DMCC) Bill, which is currently before parliament.

Cardwell: There definitely has been a gap between the stage that the digital economy has reached and the antitrust laws that are supposed to regulate the economy, though I would argue that a lag is likely inevitable to an extent, given the speed with which the digital economy evolves and will undoubtedly continue to evolve in the coming years. The application of the EU’s landmark DMA represents a major attempt to update the regulatory landscape to match the reality of the digital economy, and the UK and other jurisdictions have been making similar substantial changes. The EU has also introduced substantial updates to its vertical block exemption and related guidelines, driven to a large extent by an increasingly digitalised economy. A separate but related question is whether we should be overly concerned about such lags or if the focus should instead be on recalibration of enforcement priorities, while using the existing antitrust legal framework to regulate the digital economy, where needed.

FW: In your opinion, do antitrust authorities need new policies and tools to monitor and enforce anti-competitive behaviours in the digital economy? What key challenges need to be addressed?

Cardwell: There remains sufficient flexibility in the existing competition law frameworks of many jurisdictions to tackle at least some of the novel issues and particular market characteristics that are features of digital markets. Less headline grabbing but important, incremental changes to existing frameworks could also help in calibrating the rules to effectively regulate the digital space, including steps such as enhancing existing merger control frameworks, issuing clear guidelines to firms so that there is better understanding of potential competitive issues arising in the digital space, and better, smarter use of agency resources, such as creating teams specifically focused on digital issues.

Roberts: Existing competition law frameworks do have some shortcomings when it comes to addressing anti-competitive behaviour in the digital economy, and as a result a number of key jurisdictions have opted for separate regulatory regimes for the digital sector. The EU has adopted the DMA, which is aimed at improving the contestability and fairness of digital markets, by imposing obligations and prohibitions on companies that provide ‘core platform services’ and are designated as ‘gatekeepers’. Similar legislation is currently going through the UK parliament that will create a new pro-competition regime for digital markets designed to proactively shape the behaviour of the most powerful technology undertakings designated with strategic market status. These regimes create ex-ante regulation for designated digital firms, mandating a set of prohibitions and obligations influenced by existing competition law infringement decisions and investigations. They typically exist alongside the standard competition law regimes but can promote other objectives such as consumer protection and data protection and privacy.

FW: How would you compare approaches to digital market regulation across the globe? What are the key difficulties involved in harmonising rules to avoid anti-competitive effects?

Buckland: There is a trend toward ex-ante regulatory solutions for digital markets in jurisdictions including the EU and the UK. But this is by no means a universal approach. It does not appear as though the US will introduce its own comprehensive digital markets regulation any time soon, for instance, despite being the home of the ‘MAMAA’ companies: Meta, Amazon, Microsoft, Apple and Alphabet. Even between the EU and UK, notable differences are emerging. A good example is the way in which the EU’s DMA has created a new set of prescriptive rules for firms which are designated as digital ‘gatekeepers’. By contrast, the UK’s DMCC Bill envisages a more flexible regime, with bespoke codes of conduct that are tailored to address the relevant activities of each designated firm. Neither approach is obviously ‘better’ than the other; some firms may prefer the certainty offered by the DMA, while others may hope for rules which are more fit for purpose under the DMCC Bill.

Roberts: Most jurisdictions are currently dealing with the regulation of digital markets, either by amending their existing competition rules or by introducing new digital platform-specific regulatory regimes. Unsurprisingly, these regimes are not harmonised but are designed to reflect the individual circumstances and priorities for each jurisdiction. But despite these differences in approach, we are seeing many points of convergence, which is to be expected as these regimes are all designed to address similar concerns. The EU’s DMA regime contains an upfront list of prohibitions and obligations for digital firms with gatekeeper status, whereas the UK’s proposed Digital Market Unit (DMU) regime intends to be more tailored with a code of conduct designed for each digital firm designated with strategic market status. But at the end of the day, the regimes are unlikely to be that different and the CMA’s proposed list of conduct requirements is not very different from the DMA’s list of prohibitions and obligations. The regimes themselves may therefore be different but the outcomes can be expected to be similar. In addition, countries will also learn from each other’s experiences and are likely to cooperate where it is in the interest of effective regulation, leading to increased harmonisation despite the differences in the design of the regimes.

Cardwell: At a very general level, there is similarity in the reactions of several major antitrust agencies, including the EU, Germany, the UK and Australia. But substantial differences lie in the details. There is a fairly clear imperative to encourage a degree of harmonisation between new or adapted competition regimes across the world. There is also a fairly obvious risk of inconsistency of approach between different jurisdictions and the resultant increase in companies’ compliance costs, decrease in legal certainty, and the potential for a digital player to engage in conduct across different jurisdictions, with that conduct being treated as perfectly fair and legal in one country but unlawful in another. The digital sector – more than many other market sectors – has global reach, with the antitrust issues arising in the sector tending to be the same cross-border. Facilitating cooperation and harmonisation as different agencies work toward the introduction of new tools could help avoid divergent outcomes in investigations of the same issues in different jurisdictions.

FW: Looking ahead, what is your long-term view of antitrust efforts in the digital economy? What overarching trends do you expect to see in this space?

Cardwell: When it comes to antitrust enforcement trends, I think past performance remains a reliable indicator of future performance: antitrust agencies, including but not limited to the likes of the EC and the UK’s CMA, have shown a tendency to devote significant resources to working out how best to establish new tools and policies to enforce competition rules in the digital space. The introduction of the DMA and in the UK the DMU are substantial steps to have been taken and I would expect there to be a period of enforcement and in parallel assessment of how effective the new frameworks are proving. But after that, I would confidently predict that antitrust agencies will continue to calibrate, to tweak, to formulate new tools in reaction to developments in the digital economy. Consider, for example, that tools such as the DMA have been built to handle challenges of the Web 2.0 universe, while we are surely headed in the coming years into a Web 3.0 environment – increased disintermediation and an increase in decentralised control, for example – with all the potential new antitrust challenges that come with that.

Roberts: Regulators will have the benefit of experience with issues in the digital economy and can be expected to be more focused and vigilant at the earlier stages of the development of new technologies, aiming to anticipate issues where possible. In the UK, the CMA has recently launched an initial review of competition and consumer protection issues in relation to artificial intelligence (AI) foundation models. The aim of the review is to help create an early understanding of the market for foundation models, how their use could evolve and the opportunities and risks they could bring. In addition, the new ex-ante regulatory regime has been designed to be flexible, allowing the CMA to bring in new conduct requirements where new concerns emerge, or remove some where they no longer apply, thereby at least to some extent future-proofing the regime.

Buckland: It is a safe bet that antitrust authorities will remain highly active in this space. We will not know for some time whether the current push for ex-ante­ regulation will have the desired effects. Those designated as gatekeepers under the EU’s DMA will be the guinea pigs in this respect – with the UK’s DMCC Bill following in its wake, assuming it is passed into legislation. Some commentators have expressed concern that the DMA is too rigid and focused on combatting the threats to competition in digital markets that we have seen over the past decade or two, rather than addressing the new fronts that will emerge over the next decade. I expect we will discover that nobody has got it exactly right, and that existing tools such as merger control and behavioural investigations will continue to serve a vital function alongside a constantly evolving – and diverging – set of regulatory regimes around the world.

David Cardwell is a partner in the antitrust and competition practice of Baker Botts’ Brussels office. His practice focuses on UK and EU competition law, including a particular concentration on EU and international merger control laws, and UK competition law, both mergers and behavioural. Mr Cardwell has represented clients in significant mergers and acquisitions across many industry areas, including the technology, pharmaceutical, media, automotive and heavy industry sectors. He can be contacted on +32 (2) 891 7330 or by email: david.cardwell@bakerbotts.com.

Veronica Roberts is an EU and UK competition law expert and heads Herbert Smith Freehills’ UK competition, regulation and trade practice. In addition, she also leads the firm’s global foreign direct investment group and is co-lead of the global TMT sector team. She has over two decades of experience working proactively with clients to help them secure merger clearances for acquisitions and joint ventures in the UK, EU and worldwide. She also helps clients to deal effectively with competition and regulatory investigations. She can be contacted on +44 (0)20 7466 2009 or by email: veronica.roberts@hsf.com.

Josh Buckland is a counsel in Simpson Thacher’s European antitrust and foreign investment group. He has deep experience in developing strategies for obtaining regulatory clearances on high-profile deals around the world. He also helps clients navigate a range of complex behavioural matters and investigations, particularly those by the UK’s CMA and the EC. He acts for private equity clients and other multinationals across numerous industries, including tech, media, telecoms, financial services, healthcare, industrials and retail. He can be contacted on +44 (0)20 7275 6260 or by email: josh.buckland@stblaw.com.

© Financier Worldwide

THE PANELLISTS

David Cardwell

Baker Botts LLP

Veronica Roberts

Herbert Smith Freehills LLP

Josh Buckland

Simpson Thacher & Bartlett LLP

Competition & antitrust

Q&A: Antitrust implications of ESG initiatives

Fix-it-first: navigating a seismic shift in US antitrust agency approaches to merger remedies

Contractual joint ventures and competition law issues

Employers beware: Canada’s wage-fixing and no-poach offence now in effect

Post-Amex – market definition and anticompetitive effects

Amended guidance and upcoming guidelines on exclusionary abuses – more enforcement and less clarity?

The new EU Foreign Subsidies Regulation: how will it impact business activities?

Dawn raids in the UK: how will increased investigatory powers affect businesses?

Can AI engage in price fixing?

Rules of the road: what governments should know when considering digital market regulation

Q&A: Antitrust in the digital economy