Which digital market is the EU trying to regulate?

A hotel owner, an economist and a euro-nationalist agree on policy. What starts out as a joke – and a bad one at that – might become reality and manifest in the form of the Digital Markets Act (DMA) which is currently hobbling along the cobble-stoned road of EU policymaking.

The DMA is the ambitious sister of the Digital Services Act, the macro-economic tool to reign in tech giants, level the playing field on the virtual markets and pave the way for European champions to finally compete with Silicon Valley. Or so its proponents would have you believe. If it seems impossible for a piece of legislation to undo decades of delay in innovation, then it likely is. And yet, the Digital Markets Act has the potential to create an efficient, smooth and competitive online market. But as the row over the DMA continues, policymakers must ask themselves which digital market they want to regulate

At its core, the DMA sets up a flexible framework to regulate the tech giants that dominate the EU’s virtual space, no matter where their company is legally located. And it packs a punch. Companies found to abuse their market power can be fined up to 10% of their global annual turnover.

To fall within the scope of the DMA, a tech company must present a so-called gatekeeper function on the internet. In concrete terms, it would have to operate in at least three member states, serve more than 45mn users and account for more than €6.5bn in annual turnover. Nonetheless, in its current form, the DMA grants the Commission the possibility to make ad hoc exceptions to (de)classify a gatekeeper. To date, booking.com is the only EU-based company to match these criteria.

Gatekeepers usually serve a dual role as service providers for consumers and marketplace for merchants, hoteliers, app developers or creators. The first regulatory challenge arises from a gatekeeper’s sheer size. Holding a significant share in the market makes expansion easier as services become scalable at near-zero cost. At the same time, potential competitors struggle to break through consumer inertia as people have become used to using certain services. To add insult to injury, the gatekeepers on the European market are almost exclusively headquartered in the United States.

Policymakers have long been wondering as to why there is no European Amazon. After all, China gets to have one by the name of Alibaba. A post mortem on how Amazon, an outsider, managed to prevail over its European competitors has become less interesting than exploring the dynamics through which tech giants reinforce their dominant position and potentially distort entire markets.

Attempts to replace Google, Facebook or Amazon with European competitors are rare and thus far limited to individual member states. However, an even bigger concern for the EU should be the gatekeepers’ ability to abuse their power when engaging with business customers who use their service as a marketplace to sell goods and services. Frequently, businesses reach the majority of their customer base through one website alone. The platform which enables their business can also end it at the snap of a finger if the gatekeeper decides to vertically integrate into the partner’s business, stops recommending their products and services, or gives preferential treatment to their own products.

A popular, yet factual, talking point among the institutions emphasises that 99% of European businesses are small and medium enterprises. As economic activity continues to move online, facilitated by a handful of gatekeepers, regulating the daily points of contact between SMEs and tech companies must be the priority. It is low hanging fruit, but for once, it is rather tasty. The DMA would hopefully enable the EU to take swift action on unfair gatekeeper practices. Previously, such action would take years of legal battles and negotiations, as was the case with booking.com which took two years to reach a compromise with the Commission in December 2020.

It would certainly be desirable for the EU to empower European SMEs by copying a page from the Digital Services Act and granting business customers the right to legal remedies against unfair business practices, bans or discrimination. Ensuring fair and competitive virtual markets will boost commerce and increase trust of those who buy or sell online.

Surprisingly, despite prohibiting self-preferencing, the DMA stays silent on vertical integration and foresees no enforcement mechanism to prevent problematic merges in the virtual space, leaving this task up to the Directorate-General for Competition and missing out on a promising opportunity to expand the DMA’s scope.

While a European Amazon, Microsoft or Google might be a source of pride for a pan-European identity, booking.com has shown that being European does not absolve anti-competitive behaviour. Focusing on opening gatekeepers up to European competition misses the bigger picture. It would distract from the DMA’s potential to empower European SMEs vis-à-vis online gatekeepers. The digital market is not an abstract singular entity. It currently takes on various shapes of mostly American tech companies and it is up to the EU to regulate these markets in the interest of local businesses.