The European Union’s implementation of the Digital Markets Act (DMA), whose stated goal is to bring more “fairness” and “contestability” to digital markets, could offer some important regulatory lessons to those countries around the world that have been rushing to emulate the Old Continent.
The first regards “regulatory humility.” Designing ex ante regulation to promote competition by applying blanket prohibitions to digital platforms as different as search engines, operating systems, social networks, and streaming platforms (among others) is no simple task. It was foreseeable that these blanket prohibitions could have unintended consequences.
To comply with the DMA, digital platforms will have to adapt their business models, governance, and even their “digital architecture,” which will affect how they provide services and monetize their assets. These changes will be felt not only by the platforms themselves, but also by the services that run on them (whether called “business users” or “complementors”) and by consumers, all of whom will be forced to grapple with new risks or a potential reduction in quality.
This was even predicted. For instance, Giuseppe Colangelo and Oscar Borgogno have explained that:
… such regulatory proposals may ultimately harm consumers. Indeed, by questioning the core of digital platform business models and affecting their governance design, these interventions entrust public authorities with mammoth tasks that could ultimately jeopardize the profitability of app-store ecosystems. They also overlook the differences that may exist between the business models of different platforms, such as Google and Apple’s app stores.
Along the same lines, Lazar Radic has pointed out that:
… there are a range of risks and possible unintended consequences associated with the DMA, such as the privacy dangers of sideloading and interoperability mandates; worsening product quality as a result of blanket bans on self-preferencing; decreased innovation…
Well, some of these consequences are already materializing. Google, for instance, will implement additional consent screens for “linked services.” If users do not provide consent for each service (and that is not easy, given regulations like the General Data Protection Regulation), they could end up receiving a product of inferior quality (i.e., a search for a restaurant not being linked to a reservation option or to a Google Map address) or not receiving valuable recommendations at all (i.e., “what to watch” on YouTube).
Apple has been more explicit about the DMA’s consequences:
The new options for processing payments and downloading apps on iOS open new avenues for malware, fraud and scams, illicit and harmful content, and other privacy and security threats.
Apple has also implemented a “core technology fee” to be paid for apps distributed on alternative app marketplaces. Some have considered this a form of “bypassing” the rules imposed by the DMA, but the regulation included no explicit prohibition of this kind of fee (and it is only reasonable that the owner of a valuable platform would like to receive compensation for access to it).
One developer has complained that “the tech giant [Apple] treats iPhones as its territory”. Well, they are Apple’s territory. Of course, consumers own their smartphones, but when we buy an iPhone we are also signing up to a platform (or platforms) that has rules, security concerns, and maintenance costs. The operating system (iOS), the application store (AppStore), and the native applications that come with an iPhone all have costs that are not necessarily included in the price. Commissions help to cover those costs. Some people, like Spotify’s CEO, consider the fees set by Apple “too high” (“unaffordable”) but unless you want to impose some kind of price regulation (and we already know how those can end), it’s better to leave that to the market.
This is related to a second lesson. The reaction to some of the gatekeepers’ announcements regarding their DMA-compliance plans shows how we could quickly be thrown into a downward spiral in which regulations beget more regulations. Once the first layer of regulations fail to yield the desired results, politicians, consumers, and business users demand more regulation. This leads, in the end, to more heavy-handed rules like the aforementioned price controls or structural separations.
As we learned, however, from the deregulation movement that began in the late 1970s—focused primarily on transportation, telecommunications, energy and financial services–the regulation of competitive industries has anticompetitive effects: with less entry comes less innovation and higher prices (see, e.g., Richard Posner’s “The Effects of Deregulation on Competition: The Experience of the United States“).
Finally, there is a third lesson: being “late” in the regulatory race could be actually a good thing. Several jurisdictions have been rushing to approve their own DMA-like regulations, with regulators openly boasting about being the first to regulate new products like artificial intelligence (AI). Countries that take their time, however, to study markets, perform proper regulatory impact analysis, and enact a serious notice-and comment-process, will be those most able to learn from the experience of other regulators and markets. These regulatory impact analyses should, of course, also consider the possibility that the regulation in question may not be necessary at all, as I think is the case.
All in all, it may be wise to follow the example of South Korea, which has hit the pause button on its proposal to regulate digital markets.