DMU Insight #4: Who will be subject to the new SMS regime? The DMU’s (expansive) designation powers

DLast month, the UK Government introduced the long-awaited draft Digital Markets, Competition & Consumers (DMCC) Bill. This introduces a new regulatory regime that will apply to firms with Strategic Market Status (SMS) in respect of a digital activity linked to the UK.  

SMS firms will be subject to a number of additional obligations, including firm-specific conduct requirements; an obligation to report material M&A transactions; and potential pro-competition interventions.

The new Digital Market Unit (DMU) will have the power to designate firms that fulfil a set of cumulative criteria. The firm must: (i) be engaged in a digital activity; (ii) linked to the UK; (iii) with firm-wide global turnover of £25bn and/or UK turnover of £1bn; where the firm has (iv) substantial and entrenched market power; and (v) a position of strategic significance.

The first three criteria are, in practice, likely to be treated as the basic eligibility criteria. The DMU’s focus during a designation investigation, where there may be more scope for interpretation, is likely to be on whether the firm has “substantial and entrenched market power” and a “position of strategic significance” in relation to the digital activity.

The DMU is seemingly granted significant latitude in assessing these qualitative conditions. Several firms beyond the Big Tech companies already on the CMA’s radar could in due course fall to be designated and therefore subject to the SMS regime.

Basic “eligibility” for SMS designation

An SMS designation can only be made in relation to digital activities that are linked to the UK, and for firms with global turnover that exceeds £25bn or UK turnover that exceeds £1bn. This sets out the intended jurisdictional reach of the new regime, as well as quantitative thresholds as to which firms are in and out of scope.

A digital activity is defined broadly to include provision of services by means of the internet, and provision of digital content (i.e., data, including software produced and supplied in digital form), as well as any activities carried out for the purposes of those provisions. The DMU is not limited in scope to a fixed list of products and services, unlike the European Digital Markets Act (DMA) which applies to ten “core platform services”.

The criteria for a digital activity to be considered as having a link to the UK is also broad and covers any firm carrying on business in the UK.

The turnover threshold will exclude (at least for now) significant tech companies including Spotify, Epic Games and TikTok. While the DMU will therefore focus on larger players by revenue, the absence of any volume or user thresholds means that the net could be cast significantly wider than the DMA (which only applies to core platform services with over 45 million monthly active end users and 10,000 yearly active business users).

Substantial and entrenched market power

The DMU will assess whether a firm has “substantial and entrenched market power” by carrying out a forward-looking assessment of a period of at least five years, taking account of developments that would be expected / foreseeable if the firm is not designated as having SMS and those that may affect the firm’s conduct in carrying out the digital activity e.g., intervention by another regulator, or introduction of new legislation.

In referring to market power, this has some parallels with the concept of dominance, but the DMCC does not mirror the definitional language of dominance case law (i.e., power to act to an appreciable extent independently of competitors, customers and ultimately consumers).  The CMA’s Merger Assessment Guidelines provide some insight into how the CMA will assess dynamic and potential competitive conditions on a forward-looking basis in fast-moving markets. Further guidance, that will likely draw from these sources, will set out how the DMU should assess this criterion.

A position of strategic significance 

The DMU may find a firm meets this criterion if it has achieved significant size or scale; a significant number of other undertakings use the digital activity; it has the ability to extend its market power to a range of other activities; or it can substantially influence the way other undertakings conduct themselves in relation to the digital activity.  

Clearly by reference to these high-level principles, the DMU will retain significant discretion in determining whether these conditions are met. Unlike the DMA, there are no prescribed quantitative criteria that must be fulfilled. It is therefore hard to see in what situations (if any) a firm would fail at this hurdle having met the threshold for having substantial and entrenched market power.

A need for prioritisation guidelines? 

The proposed SMS regime is not self-executing. SMS designation can only occur after an investigation, that can take up to 9 months. The DMU does not have an obligation to investigate every company that potentially meets the SMS criteria and retains discretion on which designation assessments to prioritise.

The primary targets of the SMS regime are understood to be the largest tech companies that the CMA has already been scrutinising in recent years through market studies and competition investigations.  However, without any prioritisation guidelines or statutory protection, there is nothing to prevent the DMU from seeking to extend the regime widely. Firms in a range of sectors should follow developments in this area closely to consider whether they could end up within scope.