The Digital Markets Act proposal (DMA) is a collection of complex obligations imposed on certain digital service providers. We previously described the salient features of the DMA here. In this article we focus on the definition and designation of gatekeepers, the powers of the EC compared to Member States and the potential effects of the DMA initiative within CEE.
Brief background
The European Commission (EC) has identified the emergence of large digital service providers as one of the most pressing issues that come with digitalisation. These entities tend to establish their own online ecosystems which allow them to act somewhat independently of regular market constraints and end up as entrenched oligopolists, or, as the EC puts it, "gatekeepers".
The recently published DMA proposal is designed to manage the emergence of these gatekeepers and the novel market environment which forms with them. The DMA describes gatekeepers as "structuring elements" of the digital economy which enjoy an entrenched intermediator position. Network effects inherently aid gatekeepers in creating significant dependencies for their users (businesses and consumers alike). These dependencies may allow gatekeepers to freely utilise unfair practices and ultimately harm consumer welfare. Regardless of harmful effects, gatekeepers have a major impact on digital markets and require oversight. Hence the Digital Markets Act.
Definition of gatekeepers
The DMA builds a sophisticated methodology for identifying gatekeeper entities. This methodology is based on a variety of complex criteria, however, it is also designed to provide sufficient opportunities for the EC or even Member States to pinpoint an entity for gatekeeper-designation.
To understand which entities may be designated as gatekeepers, we need to have the following steps in mind:
1. Only core platform services
As a basis, only providers of "core platform services" may be designated as gatekeepers. These providers have the possibility to affect a large number of businesses and end-users, while their platforms are potential hotbeds for unfair practices. Intermediation, video-sharing, communication, cloud-computing and advertising services are all core platform services, together with search engines, social networks and operating systems which also fall in this category.
2. Qualitative criteria and presumptions
Once a provider is qualified as a core platform service provider, it may be identified as a gatekeeper based on the subjective qualitative criteria set out by the DMA. The proposal also includes presumption thresholds which provide certainty as to when each of the qualitative criteria is presumed to be met. However, even if the presumption thresholds are not met, the EC still has the possibility to identify an entity as a gatekeeper. We visualise this system below.
Qualitative criteria
provider has a significant impact on the internal market
Presumption threshold
if the undertakings which owns the provider of the core platform service
- achieves an annual EEA turnover equal to or above EUR 6.5 billion in the last three financial years
OR
- its average market capitalization or the equivalent fair market value amounted to at least EUR 65 billion in the last financial year, and;
- it provides a core platform service in at least three Member States
Qualitative criteria
the service is an important
gateway for businesses to reach end users
Presumption threshold
if the core platform service has (in the last financial year):
- more than 45 million monthly active end users established or located in the EU, and;
- more than 10 000 yearly active business users established in the EU;
Qualitative criteria
the provider's position is entrenched and
durable, or will be in the future
Presumption threshold
if it meets the important gateway presumption thresholds in each of the last three financial years.
3. Identification of gatekeepers and opposing the designation
The purpose of the above dual framework is to provide flexibility for enforcement:
- The qualitative criteria allow the EC to designate, as gatekeepers, any providers of core platform services that exhibit similar risks for fairness and contestability to those large actors which are caught by the presumption thresholds. Member States may also initiate the designation process based on the qualitative criteria with the EC.
- The presumption thresholds provide a degree of legal certainty to market players. They also provide a basis for reporting, since the DMA envisages a system where core platform service providers are obliged to notify the EC within three months if the presumption thresholds are met.
Even if the presumption thresholds are not met, the EC may freely identify providers as gatekeepers if they meet the qualitative criteria. In turn, providers caught by these tests may attempt to oppose the designation (refute the presumption) before the EC by providing evidence that they do not enjoy a gatekeeper position. In both of these cases, the EC has to ultimately assess the size, operations and position of the provider, the number of businesses depending on the platform, the number of end-users, the entry barriers generated by the advantages inherent to the provider's platform and capabilities (network effect, data), the scale and scope effects benefitting the provider, lock-in effect for users and other structural market characteristics.
Discovery processes in practice
The EC has the possibility to identify and designate gatekeepers both through targeted inquiries and overarching market investigations.
Within the framework of its targeted powers, the EC may first request information from the provider, including the possibility of access to databases or algorithms. It could also turn to the Member State governments and authorities to gather information on potential gatekeepers and their conduct. The EC may also carryout on-site inspections (raids) at the premises of an undertaking with the assistance of auditors or experts.
The DMA also allows the EC to open an overarching market investigation to identify and designate potential gatekeeper entities. The EC is relatively free to define the scope of these investigations, the only constraint the DMA proposal envisages on the EC is that it must "endeavor" to ensure that the investigation is closed within a 12-month timeframe.
In addition, Member States may also notify the EC on potential gatekeepers.
Am I a gatekeeper? – a CEE outlook
To summarise: The objective presumption thresholds are in the forefront of the DMA. They are designed to capture enormous systemic players, search engines, e-commerce sites or social networks which permeated society often on a global scale. Nevertheless, the DMA provides ample opportunities to the EC and (in a way) to the Member States as well, to discover and designate other entities as gatekeepers.
The CEE region has several emerging players which are not (yet) global gatekeepers. Nevertheless, they are intermediaries connecting CEE businesses to end-users. In fact, there are several gatekeeper-like entities from the USA or Western Europe which hesitate to grab a foothold in CEE possibly due to certain established competitors.
This phenomena is likely to lead to a process where the EC's attention (besides the relatively straightforward designation of well-known global gatekeepers) will turn to more localised EU / CEE players, which showcase the same tendencies as global gatekeeper platforms, only on an EU / CEE scale. The EC will also have to deal with the fact that certain obligations imposed on global players with the introduction of the DMA could potentially give significant advantages to smaller-scale providers who might attempt to "fly under the radar" at first.
Ultimately, the market effects related to the presence of these entities, together with the signaling of national authorities could lead the EC to designate large CEE providers as gatekeeper entities rather sooner than later.
How does the DMA relate to local laws and enforcement?
The challenges which the DMA aims to manage have been present ever since the first gatekeepers emerged. Therefore, Member States have already made legislative and enforcement attempts to handle these issues locally. E.g. merger control laws have been amended to capture concentrations of digital players where turnover data is not a meaningful measure to show relevance. On the enforcement side for example, the Hungarian authority has taken the initiative to ensure consumer welfare in the digital space through its consumer protection powers and initiated proceedings against players like Google or TikTok (the latter still ongoing). As another example, the Polish authority has initiated proceedings against Allegro, Poland's largest e-commerce platform, to assess Allegro's practices vis-à-vis its business users.
The DMA attempts to avert these local attempts which risk a fragmented regulatory and enforcement approach.
- Local laws: In the proposal the EC takes the view that legislative initiatives of Member States will not be sufficient to address the problems with gatekeepers and might lead to negative effects due to the fragmentation of the regulatory environment. It argues that these initiatives are national in scope, while the gatekeepers often operate cross-border and regularly deploy their business models globally. Therefore, the EC is better placed to deal with these issues. Importantly, national authorities appear to agree with the EC's take. During the consultation prior to the proposal, the authorities expressed support for a European gatekeeper instrument proposed by the DMA and the EU-level approach.
- Local enforcement: The same arguments (pan-European reach of gatekeepers) also exclude a potential decentralised enforcement model for the DMA, which would once again risk regulatory fragmentation and deviation in the practical implementation of the rules. Therefore, enforcement is proposed to stay with the EC, however, in order to integrate national expertise in the enforcement efforts the DMA envisages the Digital Markets Advisory Committee composed of representatives of Member States. The EC is envisaged to request the opinion of the Committee prior to certain important decisions being made (e.g. non-compliance, fines), however the Committee's opinion is not envisaged to be binding or obligatory.
In line with the above, the DMA also prohibits Member States from imposing additional localised obligations on gatekeepers for the purpose of ensuring contestable and fair markets. National authorities are prevented from issuing decisions which would run counter to a decision adopted by the EC under the DMA.
However, the above does not prevent Member States and their local authorities enforcing distinct laws which relate to other legitimate public interests. Therefore, the DMA does not prevent competition investigations into anti-competitive agreements, consumer protection proceedings into the potential misleading of consumers, or any other practices of gatekeepers.
To summarise, the DMA constitutes a framework of additional obligations, rather than a power-grab from local authorities to the EC. However, national authorities will not have the possibility to counter the decisions of the EC which were adopted under the DMA.
We expect that, just as they did before, the EC and Member States will continue to work in cooperation in their enforcement action. Authorities, which were active in their enforcement (e.g. Hungary) will likely remain active even after the DMA becomes effective, as the proposal will impose an additional layer of obligations rather than a centralisation of existing rules.
The influence of Member States
It is important to add that Member States will have a degree of influence over the designation of gatekeepers. They will have the possibility to request the EC to open a market investigation to this end if they feel that a provider should be designated as such. If three or more member states submit this request (with relevant evidence) the EC will have the obligation to examine whether there are reasonable grounds for such investigation, within four months.
Comments
The DMA provides the EC with a tool to deal with global gatekeepers. However, the proposal will also affect smaller EU / CEE providers of core platform services. The EC (possibly due to prompt from Member States) will likely consider using the DMA as a toolkit to ensure a fair and safe Digital EU even when smaller but still influential providers are under scrutiny. In any case, the gatekeeper identification mechanism clearly provides room for local actions, regardless of the presumption threshold. Therefore, smaller EU providers of core platform services are advised to prepare for the age of new, often complex obligations, under a new Digital EU.
By Christoph Haid, Partner, and Andras Nagy, Attorney at Law, Schoenherr
