Digital Markets Act: forcing change in the digital services’ industry, to ensure more competition

digital markets act

While the deadline for compliance with the Digital Markets Act is fast approaching, gatekeepers in the digital services’ market are (allegedly) frantically preparing themselves for compliance. But is this ever going to happen, by 5 March 2024, in light of the robust opposition and resistance to any change which may as much as weaken the monopolistic positions of the likes of Apple, Google, Microsoft, Meta, Amazon and Tiktok? Of course, none of these tech giants are European, and it is just not in the American, or Chinese, DNA, to have to suffer so much interference from a state-owned entity like the European commission, even for the sake of allowing a higher degree of competition and letting new players enter the market. So, what, exactly, is going on?

1. What is the Digital Markets Act?

Regulation (EU) 2022/1925 of the European Parliament and of the Council of 14 September 2022 on contestable and fair markets in the digital sector (Digital Markets Act) (‟DMA”) is a regulation from the European Union (‟EU”) that aims at ensuring a higher degree of competition in European digital markets by preventing larger companies from abusing their market power and by allowing new players to enter the market.

Indeed, the DMA is designed to prevent the leveraging of market power across different digital services (including through a prohibition on self-preferencing), reduce barriers to entry or expansion across digital markets, facilitate switching and multi-homing between services (e.g. through data portability and interface interoperability requirements), and control how user data are processed and when such data must be made available to users as well as third party competitors.

More specifically, the DMA applies to the markets where ‟core platform services” are provided to end users and business users, as follows:

  • online intermediation services;
  • online search engines;
  • online social networking services;
  • video-sharing platform services;
  • number-independent interpersonal communications services;
  • operating systems;
  • web browsers;
  • virtual assistants;
  • cloud computing services, and
  • online advertising services, including advertising networks, advertising exchanges and any other advertising intermediation services, provided by an undertaking that provides any of the core platform services listed above.

2. Who is affected and/or impacted by the Digital Markets Act? Gatekeepers

The DMA therefore targets the largest digital platforms operating in the EU, which are referred to as ‟gatekeepers”, in this EU regulation.

The term ‟gatekeeper” refers to the ability of intermediary platforms to act as the main ‟bottleneck” to a large number of participants, that are not reachable elsewhere.

Indeed, the DMA provides that an undertaking should be designated as a gatekeeper where it meets three qualitative criteria:

  • it has significant impact on the internal market;
  • it provides a core platform service which is an important gateway for business users to reach end users, and
  • it enjoys an entrenched and durable position, in its operations, or it is foreseeable that it will enjoy such a position in the near future.

The DMA also requires undertakings to notify the European Commission (the ‟Commission”) where they meet three quantitative thresholds, which act as a presumption for gatekeeper status:

  • the undertaking generates EU revenues of at least 7.5bn Euros in each of the last three financial years, or had an average market capitalisation of at least 75bn Euros in the last financial year, and the undertaking provides the same core platform service in at last three EU member-states;
  • in each of the last three financial years, the undertaking provides a core platform service with at least 45m EU monthly active end users in the last financial year, and at least 10,000 yearly active EU business users, or
  • the undertaking met the second above-mentioned criteria in each of the last three financial years.

Undertakings that meet these thresholds have the opportunity to argue why they should not be designated as a gatekeeper and thus to rebut the presumption.

Conversely, the Commission can designate an undertaking as a gatekeeper where it does not meet the quantitative thresholds, but nevertheless satisfies the qualitative criteria.

On 6 September 2023, the Commission designated for the first time six gatekeepers – Alphabet, Amazon, Apple, ByteDance, Meta and Microsoft – under the DMA. In total, 22 core platform services provided by those gatekeepers have been designated.

The Commission’s designations confer gatekeeper status on 22 core platform services, as follows:

  • Alphabet: Google Maps, Google Play, Google Shopping, YouTube, Google Search, Google (ads), Google Chrome and Google Android;
  • Meta: Facebook, Instagram, WhatsApp, Messenger, Meta Marketplace and Meta;
  • Apple: App Store, Safari and iOS;
  • Amazon: Amazon Marketplace and Amazon (ads);

More than one gatekeeper has therefore been designated for certain services.

After the designation of TikTok as a gatekeeper, its parent company ByteDance launched itself into applying for the suspension of the Commission’s decision designating the former as a gatekeeper, as well as bringing an action for annulment of that decision, in November 2023. However, the EU general court dismissed this application for suspension on the grounds that ByteDance failed to demonstrate the urgency required for an interim order in order to avoid serious and irreparable damage, on 9 February 2024.

Gmail, and Samsung Internet Browser also met the quantitative notification thresholds, but their owners (Alphabet, Microsoft and Samsung) were able to persuade the Commission that the relevant services should not be designated as they did not satisfy the qualitative criteria. Having examined the submissions that were made to it, the Commission has accepted that the presumption attached to the quantitative thresholds had been successfully rebutted for each of those services.

Similar submissions were made to the Commission in relation to Bing, Edge, Microsoft Advertising and iMessage and, on 12 February 2024, the Commission adopted decisions closing four market investigations under the DMA, finding that Apple and Microsoft should not be designated as gatekeepers for the following core platform services: Apple’s messaging service, iMessage, Microsoft’s online search engine Bing, web browser Edge and online advertising service Microsoft Advertising.

Also, the Commission has initiated a market investigation (which must be completed within the next twelve months) to determine if iPadOS should be added to the list of designated core platform services, notwithstanding the fact that the quantitative notification thresholds are not met.

3. What are the obligations that gatekeepers have, under the Digital Markets Act?

Alphabet, Amazon, Apple, ByteDance, Meta and Microsoft have six months from 6 September 2023 (i.e. the date on which some of their above-mentioned core platform services were listed in the Commission’s designation decisions) to comply with the obligations set out in the DMA that apply to designated gatekeepers.

So, the deadline for compliance is 5 March 2024. And this is why we hear so much about the DMA at the moment, as the gatekeepers frantically prepare themselves for compliance with the following DMA obligations, inter alia:

  • the gatekeeper shall not prevent business users from offering the same products or services to end users through third-party online intermediation services or through their own direct online sales channel at prices or conditions that are different from those offered through the online intermediation services of the gatekeeper;
  • the gatekeeper shall allow business users, free of charge, to communicate and promote offers, including under different conditions, to end users acquired via its core platform service or through other channels, and to conclude contracts with those end users, regardless of whether, for that purpose, they use the core platform services of the gatekeeper;
  • the gatekeeper shall allow end users to access and use, through its core platform services, content, subscriptions, features or other items, by using the software application of a business user, including where those end users acquired such items from the relevant business user without using the core platform services of the gatekeeper;
  • the gatekeeper shall not directly or indirectly prevent or restrict business users or end users from raising any issue of non-compliance with the relevant EU or national law by the gatekeeper with any relevant public authority, including national courts, related to any practice of the gatekeeper;
  • the gatekeeper shall not require end users to use, or business users to use, to offer, or to interoperate with, an identification service, a web browser engine or a payment service, or technical services that support the provision of payment services, such as payment systems for in-app purchases, of that gatekeeper in the context of services provided by the business users using the gatekeeper’s core platform services;
  • the gatekeeper shall not require business users or end users to subscribe to, or register with, any further core platform services listed in the designation decision, or which meet the above-mentioned thresholds, as a condition for being able to use, access, sign up for or registering with any of that gatekeeper’s core platform services;
  • the gatekeeper shall provide each advertiser to which it supplies online advertising services, or third parties authorised by advertisers, upon the advertiser’s request, with information on a daily basis free of charge, concerning each advertisement placed by the advertiser, regarding th price and fees paid by the advertiser, the remuneration received by the publisher, the metrics on which each of the prices, fees and remunerations are calculated;
  • the gatekeeper will have to submit detailed compliance reports to the Commission, with the first reports due by 5 March 2024, where such reports explain the measures that have been adopted by the gatekeeper to comply with the DMA, including any action taken to inform end users and/or business users of these measures and the feedback received from these users, and
  • the gatekeeper will be under a duty to report planned acquisitions to assist the Commission in monitoring market developments and potentially problematic transactions which may fall below EU and national merger control thresholds.

If a designated gatekeeper fails to comply with its obligations, the Commission, as sole enforcer of the DMA, has the power to impose fines up to 10 percent of the worldwide annual turnover, or up to 20 percent in the event of repeated infringements. The Commission also has the power to impose periodic penalty payments of up to 5 percent of average daily turnover and (in case of systematic infringements of DMA obligations) behavioural and structural remedies, including by ordering the divestiture of (parts of) a business.

4. Why was the Digital Markets Act adopted by the EU?

By way of background, Apple’s App Store and Google’s Play Store create local monopolies because consumers are locked-in by monetary costs and by convenience. Firstly, consumers are locked-in because they incur the monetary investment costs of having all choices. There cannot be competition between app stores when consumers can only choose the one app store that is tied to their phone. To have competition between app stores, consumers would need to purchase another phone, which is costly and inefficient. Secondly, consumers are locked-in because of their convenience or ‟laziness”. Apple exploits this convenience by allowing the one-click purchase option only for their own payment system. To use the external payment, consumers must click several links, which is costly in terms of time and effort.

So, the DMA will spur competition by eliminating lock-in effects from both monetary investment and from convenience. For instance, phone makers will be forced to allow all app stores and give equal treatment to external payment systems.

For the reasons mentioned above, the market power of big tech firms like Google, Apple, Facebook, Amazon and Microsoft has long been a thorn in the eyes of the Commission (and experts in the tech sector).

Such concerns and frictions arose, in particular, with respect to several ongoing lawsuits and legal complaints, lodged by the likes of Epic Games and music streaming platform Spotify, against, in particular, software and hardware behemoth, Apple.

4.1. The Epic-Apple case

The Epic-Apple court decision in the USA illustrates why regulation in digital markets is complex and difficult.

The situation escalated when Fortnite, a free-to-play cross-platform game, was banned from Apple’s AppStore in August 2020. Fortnite developer Epic Games was unwilling to pay the so-called ‟Apple Tax” of 30 percent, which grants automatically one third of all profits coming from apps and in-app transactions to Apple.

Epic, eager to reclaim the total ownership over its profits, tried to circumvent this ‟tax” by integrating a link into the game. This URL link recommended users to buy directly from Epic at a 20 percent discount using virtual money ‟VBucks”, instead of Apple Play. Apple then banned Epic from the AppStore because the implementation of the link violated Apple’s anti-steering clause that forbid developers to offer alternative payment systems in their apps.

Only a few hours after the ban, Epic Games filed a lawsuit against Apple’s abuse of market power. Google followed Apple in throwing out Fortnite from its own App store.

Some of the claims raised by Epic Games against Apple revolved around the following key points: Do Apple and Google create illegal monopolies with their app stores? Are Apple and Google abusing their in-app market power? Are consumers and users paying too much for apps and for items in these apps? Should there be regulation of the App stores of, in particular, Apple and Google?

The tepid court decision on this case, handed down on 10 September 2021 by the US district court for the Northern District of California, contains a mixed ruling which favours both parties but, in any case, fails to acknowledge Apple’s monopoly from lock-in effects.

On the one hand, the judge Yvonne Rodgers sets out that ‟the court cannot ultimately conclude that Apple is a monopolist” and that its ‟App store is not in violation of antitrust law”. This part of the decision allowed Apple to continue its prohibition of third-party app stores and in-app payment systems. It further implied that consumers who buy from Apple’s app store still must pay the ‟Apple tax” price, containing its commission of 30 percent. Judge Rodgers consequently ruled against Epic Games, requiring them to pay Apple USD3.6 million, 30 percent of the revenue that was withheld to Apple related to their attempts to bypass the app store, and further stated that Epic Games violated its contractual terms as a developer.

On the other hand, judge Rodgers decided that Apple partly engages in anticompetitive conduct, in breach of the California unfair competition law, by implementing its anti-steering clause that forces consumers to buy apps and in-app purchases directly from Apple’s app store. Trying to foster effective price competition, her judgment forces Apple to allow developers the integration of links into their apps that redirect users away from Apple’s in-app purchasing system towards alternative payment systems. Judge Rodgers issued a permanent injunction, that, in 90 days from the judgment, blocked Apple from preventing developers from linking app users to other storefronts from within apps to complete purchases or from collecting information within an app, such as an email, to notify users of these storefronts.

Epic Games immediately appealed the judgment from the US district court. Apple also appealed. In appeal, the three-judge panel found that the lower court judgment should be upheld. However, the Ninth circuit court of appeal agreed to stay the injunction requiring Apple to offer third-party payment options in July 2023, allowing time for Apple to submit its appeal to the US supreme court. Both Apple and Epic Games have escalated this appeal decision to the supreme court in July 2023. And Epic Games’ emergency request to lift the Ninth circuit’s stay was denied in August 2023. So, under the US justice system, Apple can, in all impunity, still refuse to let Fortnite back onto its app store, until the completion of all litigation related to the dispute, which might have taken a minimum of five years, if not more, thereby prolonging the resolution of the dispute until 2026.

However, on 16 January 2024, the US supreme court declined to hear the appeals from Apple and Epic in this case, with all charges dismissed except for the anti-steering charge. To implement this, Apple allowed developers to include ‟metadata buttons, external links, or other calls to action that direct customers to purchasing mechanisms”, but required that developers give Apple 27 percent of all sales made within seven days of being directed to these external sites, which Apple described as a ‟reasonable means to account for the substantial value Apple provides developers, including in facilitating linkedin transactions”. In addition, the Apple’s app store posts a warning screen stating that Apple is not responsible for any security or privacy issues related to third-party payment systems when clicking through to one of these systems. Epic Games stated that these changes are in bad faith compliance with the court orders, maintaining a 27 percent anti-competitive tax and a ‟scare screen” that are intended to dissuade developers from using third-party payment systems, and planned to challenge these changes in court. Apple requested the lower court to order Epic Games to pay 90 percent of Apple’s legal fees estimated at USD73 million, based on the fact that nine of the ten claims Epic Games filed were dismissed by the court.

This legal saga shows how, pre DMA, the lock-in effects play an important role and shift market power to gatekeepers like Apple, in the digital economy.

Apple announced, in January 2024, that, to comply with the DMA, it will now allow third party storefronts to be loaded onto iOS devices in March 2024. In response, Epic Games stated that they plan to bring the Epic Games Store as well as Fortnite to iOS in Europe. However, Epic Games still argued that the new terms for use in the EU, of Apple’s app store, were a ‟new instance of malicious compliance” and would continue to challenge those through legal routes.

4.2. The Spotify v Apple beef

Many companies, such as AirnBnB and even Facebook, publicly sided with Epic Games.

The top music streaming platform, Spotify, had even filed an EU antitrust complaint against Apple on 13 March 2019, with the Commission, alleging that the ‟Apple tax” harms consumer choice and stifles innovation.

EU competition regulators initially sent a statement of objections to Apple in 2021, raising their own concerns that Apple’s in app payment rules were anticompetitive.

Two years later, an updated statement of objection was sent by the Commission to Apple, announcing that the investigation had been narrowed to specifically focus on the anti-steering provision (i.e. the fact that app developers cannot sign-post users to other payment options outside of their apps). The Commission took the preliminary view that Apple’s anti-steering obligations are unfair trading conditions in breach of article 102 of the Treaty on the functioning of the EU.

On 19 February 2024, the press unanimously reported that, nearly five years after Spotify first submitted its formal complaint, EU regulators are about to fine the tech giant 500 million Euros for breach of competition law.

The EU regulators have reportedly concluded that Apple’s app store rules regarding the highlighting of payment options outside the Apple ecosystem are prejudicial against streaming services that compete with the tech giant’s own Apple Music. These rules are unfair trading conditions, according to the EU regulators, reportedly.

Spotify – and many other app developers – have long criticised Apple’s app store rules in relation to in-app payments. Those rules state that, with certain apps, all in-app payments must be taken using Apple’s own commission-charging transaction platform. Not only that, but app developers cannot sign-post users to other payment options outside of their apps – the rule referred to as the anti-steering provision.

Apple’s commission on in-app payments is up to 30 percent. As Spotify’s profit margin is also in the region of 30 percent, it would need to pass on the Apple charge to the customer, which makes a Spotify subscription look more expensive than an Apple Music subscription.

The other option, which is the one Spotify took, is not to take in-app payments at all. But that makes up-selling premium subscriptions to free tier users much harder, and the introduction of pay-to-access tools within the Spotify app – to monetise podcasts and audiobooks – basically impossible.

While Apple says that it has already made some changes to its app store rules in Europe, in order to comply with the DMA, Spotify argues those changes do not deal with the issues it has raised about Apple’s in-app payment rules. Spotify’s summary of Apple’s plans is that app developers will have other options for taking payments, but will still have to share any income from in-app transactions with the tech giant. ‟Apple is still charging a 17 percent rent on developers for existing in the app store if they offer alternative payment methods or link out to their own website”, Spotify explains. Plus there is a ‟completely new 0.50 Euros fee per download, every year, in perpetuity, to Apple for just allowing developers to exist on iOS”. ‟The ball is in your court, European Commissioners”, Spotify says in its blog, ‟and once and for all you must reject this blatant disregard of the very principles you worked so hard to establish”.

To conclude, the DMA is going to create tectonic shifts in the digital services’ industry, what with the deadline of 5 March 2024 fast approaching. Gatekeepers must change their ways, in the EU first, but, gradually around the world, otherwise they will be handed down hammering fines and penalties from the Commission (and other competition authorities in the world), which will just make it unsustainable for them to keep on offering services in the EU. Let’s hope that the likes of Apple and Google get the message quickly, because neither natural persons customers, nor business users, stand to gain anything, if Apple, Microsoft and Google desert our European shores.

Crefovi’s live webinar: Digital Markets Act – forcing change in the digital services’ industry – 23 February 2024

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