Last month, the European Parliament and the European Union council reached a political agreement to introduce the Digital Markets Act — a proposed legislation that intends to ensure fair competition in digital markets. While including broad-based obligations, the Act targets a specific set of tech companies, known as “gatekeepers”. They are defined as organisations that either have an annual turnover of at least €7.5 billion (Rs 621.2 billion) within the EU in the past three years, or have a market valuation of €75 billion (Rs 6.2 trillion), according to the proposal. They must also have at least 45 million monthly end-users and 10,000 business users established in the EU.
The Act is the result of policymakers’ frustration with traditional antitrust tools to remedy harms to competition. However, the European Commission may commence discussions to craft ex-ante regulations that can forecast distortions, to tackle level-playing field issues in innovation-led businesses. The calls for such regulations are growing louder in India too. So far, such issues are handled by the Competition Commission of India (CCI), which relies on an ex-post approach. In other words, the CCI swings into action only after the level-playing field has been distorted.
The Digital Markets Act
The Digital Markets Act (DMA) targets core services provided by gatekeepers. These include intermediation services, social media networks, communication services, operating systems, and cloud computing. Some of the notable obligations of the Act on large platforms include a ban on promoting their own products or services and limiting the ability to combine personal data from various platforms operated by a gatekeeper.
The proposed legislation has received significant media attention due to its intention to mandate interoperability between online messaging platforms operated by gatekeepers. In other words, the DMA may require communication platforms such as WhatsApp and iMessage to offer interoperability with competing services such as Signal and Telegram.
EU policymakers think that opening up large platforms by providing interoperability will limit user lock-ins due to the presence of network effects. In other words, a user will not be required to download WhatsApp on their phone only because their friends are on the platform. The proposal may seem attractive to decision-makers who are under political pressure to rein in big tech. However, a closer look reveals that the impact might not be so straightforward on consumers and the innovation ecosystem.
Interoperability isn’t straightforward
Interoperability by itself doesn’t have a very clear definition, and evaluating its costs and benefits would require a clear context and the degree to which it is being applied. Since the final text of the draft is yet to be released, we assume that the EU regulators are referring to complete interoperability between service providers. If that is the case, then their claim that non-interoperability among such services leads to network effects with lock-in isn’t necessarily valid.
First, it is worth noting that consumers are ‘multihoming’ while using digital products. It means that they access multiple platforms without incurring significant switching costs for doing so. This allows consumers to communicate with each other across all messaging platforms, without being subject to any significant inconveniences or extra monetary costs.
Further, the communications market today offers services that cater to varied consumer requirements — a reason why people choose to be present on more than one of these platforms. This acts as a strong incentive for firms to innovate. Now let’s consider a scenario where governments mandate complete interoperability. Here, the user of a large dominant platform will be disincentivised to download other applications as this one will allow them to connect with users of other smaller platforms. The dominant application will, therefore, further entrench its market position without consistently upgrading its quality of service.
Second, complete interoperability may raise concerns about user safety and privacy. In the last few years, some major platforms have taken several measures to enhance consumer security and safety. For instance, WhatsApp has introduced features such as limits on forwarding messages, end-to-end encryption, and detection and reporting of spam. Introducing limits on forwarding messages was one of the ways in which the company intended to curb the spread of misinformation. WhatsApp even claims that this measure has effectively slowed down the speed at which viral messages travel on the app. However, a smaller platform may not be under any obligation to introduce such features when interacting with WhatsApp, and can potentially compromise user safety.
The Indian experience
The Narendra Modi government has taken several efforts to minimise concentration in digital markets. Examples include the Foreign Direct Investment (FDI) policy for e-commerce, which prevents e-commerce marketplaces from adopting an inventory-based model where it has ownership or control over the goods and services sold on their platform. The intent of the policy is to prevent marketplaces from selling their own products or services to ensure fairness in their dealings with business users.
However, measures that focus on market participation by offering open solutions have been more effective in enhancing consumer welfare and increasing competition in the market. Illustratively, the development of infrastructure systems such as the United Payment Interface (UPI) has significantly democratised the payments ecosystem — a segment that has traditionally been controlled by a handful of companies. It is not surprising that India has emerged as a Fintech industry leader with the highest FinTech adoption rate of 87 per cent globally. In 2020, about 1.7 billion transactions worth Rs 3.29 lakh crore were carried out in the country.
Similarly, the Department for Promotion of Industry and Internal Trade (DPIIT) decided to set up an Open Network for Digital Commerce (ONDC) last year, which aims to provide alternatives to proprietary e-commerce sites. While the details of how the ONDC will operate remain unclear, reports indicate that the intent is to allay concerns about self-preferencing by e-commerce websites.
In contrast to the Modi government rules, measures to open up markets via innovation-led instruments have been more effective in fostering competition in digital markets. More importantly, such regulations can create artificial entry barriers for small businesses. For instance, an Indian communications start-up looking to enter the EU may find it challenging to attract new users, as the incentive for users to switch to a new platform will remain low. As countries explore different approaches to tackle new challenges in digital markets, India has a unique opportunity to demonstrate what consumer and innovation-friendly technology standards look like in practice.
The authors work at Koan Advisory Group, a technology policy consulting firm in New Delhi. Views are personal.
This article is part of ThePrint-Koan Advisory series that analyses emerging policies, laws and regulations in India’s technology sector. Read all the articles here.
(Edited by Srinjoy Dey)