On 8 December, the UK Competition and Markets Authority’s (CMA) Digital Markets Taskforce (DMT), published its advice to the UK Government on how to regulate Big Tech (DMT advice). The advice is the work of a team of experts from across the CMA, the Information Commissioner’s Office and Ofcom. It numbers hundreds of pages, and recommends reform across a broad spectrum of issues: from merger control, to the market investigation regime and, critically, the creation of a new regulatory regime for tech platforms with so-called “Strategic Market Status” (SMS).

Over the coming weeks, we will break-down the key themes of the DMT’s lengthy advice into a series of byte-sized Tech Insights. This first post provides a high-level summary of one of the DMT's core proposals: the SMS regime.

The SMS regime – what does it mean?

Under the proposals, firms with SMS will be subject to an additional (and much stricter) regulatory regime than the existing competition rules, under which it will be easier and faster for the CMA’s new Digital Markets Unit (DMU) – due to be established in April 2021 – to “intervene”. The SMS regime set out in the DMT advice has three pillars, each of which will have significant implications for the SMS firms (and other businesses who deal with them):

  1. Each SMS firm will be subject to its own code of conduct, enforced by the DMU.
  2. The DMU will have a broad-ranging power to impose “pro competition interventions”, most likely aimed at issues like data mobility and interoperability, but with the power to extend, at the extreme, to ordering structural separation of SMS firms.
  3. SMS firms will be obliged to tell the CMA about any acquisition they make, and acquisitions of a certain scale will be subject to mandatory pre-closing notification, with a lower legal test for intervention (i.e. remedies or prohibition).

Big Tech has been subject to intense regulatory scrutiny over recent years, with numerous high profile antitrust and merger investigations. But if the proposed reforms become law, they will herald a new age of tech regulation in the UK, in which continuous scrutiny of Big Tech’s day-to-day conduct becomes the norm, and the DMU will be able to “intervene” to correct perceived market failures without needing to go through a lengthy antitrust investigation.

Who will be caught, and how?

The DMT advice recommends that the power to “designate” a firm as having SMS should sit with the DMU. The proposed legal test for SMS is whether a firm has “substantial, entrenched market power in at least one digital activity, providing the firm with a strategic position”. Each SMS designation decision will focus on a single digital activity (which may involve a group of services or products), but it is possible (and indeed likely for the largest firms) that multiple activities may be “designated” for a single SMS firm.

The DMT advice suggests that “substantial, entrenched market power” be assessed by reference to a number of factors including market shares, evidence of barriers to entry and evidence of customer switching and behaviour. Whether or not a firm is said to have a “strategic position” will be assessed with reference to, among other things, its size or scale, its position as a gateway to other businesses or activity and its effects on socially or culturally important markets. This bears some similarity to the existing legal test for a dominant position, but it is not clear that all dominant digital firms would meet the test for SMS.

The fact that the relevant market power need only exist in a single digital activity to ground an SMS designation is significant, and means the regime has scope to apply beyond the largest platforms. The test places less emphasis than other proposed regimes (e.g. Germany) on vertical integration and power across markets – though this will doubtless be an important factor grounding some SMS designation decisions.

The DMT advice also names names: the CMA has long stated that it considers at least Google and Facebook to have SMS, but the DMT advice also mentions Amazon Marketplace.

Priorities and procedure

Under the proposals the DMU would have no obligation to designate a firm as having SMS, even if the legal test is satisfied: SMS designations will be a matter of discretion. The DMT advice sets out a proposal for how the DMU should prioritise SMS designation decisions. The advice recommends the DMU focus on firms with UK revenues of over £1bn particularly where those firms' global revenues exceed £25bn, but this is not a statutory “safe harbour”. In terms of the digital activities in focus, the DMT advice says top of the list will be “online marketplaces, app stores, social networks, web browsers, online search engines, operating systems and cloud computing services”. Before making a designation, the DMU will also consider whether another sector regulator would be better placed to address the issues of concern. 

The DMT advice recommends that the SMS designation process is subject to a statutory deadline of 12 months. A key challenge for the DMU will be keeping designations up to date given the fast-moving and dynamic nature of digital markets: the DMT advice recommends designations apply for a period of five years, with a review mechanism at the end of that period. 

A designation of SMS would be appealable, but only on judicial review grounds, meaning that a court would scrutinise the process but not the content of a DMU decision. In practice, this would be a high bar for SMS firms to reach to overturn a finding of SMS.

Where to from here?

Of course, the proposed reforms are just that, and require new primary legislation. We have written previously that there are question marks over legislative capacity and appetite to pursue radical reforms, given the concomitant pressures of the COVID-19 crisis and the end of the Brexit Transitional Period (and ongoing trade negotiations with the US). These question marks certainly apply to many aspects of the DMT advice. 

But the SMS regime, and at least the code of conduct pillar, seem likely to be first in line to become law: the Government has already committed to the creation of the DMU from April 2021 to administer the regime. How closely the DMT advice is transposed into law will be interesting to watch, but if its recommendations are brought in by April, it will put the UK among the first of the major economies to have a special regulatory regime for the tech sector, likely alongside Germany. Similar proposals in the EU for “gatekeeper platforms” are not expected to come into force until 2023.

Look out for further posts in the series, where we will examine the pillars of the SMS regime in more detail, and consider what can be gleaned from the DMT advice for the future of international cooperation and the CMA’s enforcement priorities more broadly.