3 June 2021

Beware the dead hand of the digital regulator

By

Should bureaucrats decide how Google designs its search results page? The Government seems to think so. It plans to set up a new body that will regulate tech companies in much the same way as British Gas and Thames Water, with all the box-ticking and drag on innovation that involves. What’s worse, over time, this regulator is likely to become an economy-wide super-regulator, overseeing the activities of many of the most successful companies in Britain. And, so far, almost nobody seems to have noticed.

The plan is to set up a “Digital Markets Unit” (DMU), sitting within the Competition and Markets Authority (CMA), that would set out bespoke regulation for the companies it governs. And although this will start with Big Tech companies like Google and Facebook, the plans will lead the DMU to govern more and more other firms as more and more of the rest of the economy becomes “digital”. 

Here’s how that could happen. Right now, the DMU’s powers are proposed to relate to companies with what’s called “strategic market status” in digital markets. This concept is similar to the EU’s idea of a “gatekeeper” – the sort of platform that creates a market that other firms depend on to reach their customers, like Amazon’s marketplace. But the DMU’s remit would be even more expansive than the EU’s plans, and would apply in principle to any company with entrenched market power that gives it a “strategic” position. The CMA defines ‘strategic’ expansively to include firms that are simply very big, have an ecosystem of related products, or even merely have “broader social or cultural importance”. Watch out, Tiktok. 

So far, the CMA has argued that Google should get this definition, for its Search and digital advertising businesses, and Facebook, for its social media products (which include Instagram and WhatsApp, as well as Facebook itself). It’s likely that other big digital platforms like Amazon (for its Marketplace, and maybe its cloud computing service AWS), Apple (for its App Store), and Uber will get this designation, as well. In the past, this might have included companies like Microsoft, Yahoo, and AOL. 

So far, this is all in line with what the government wants: a new regulator to rein in Big Tech. This DMU will create Codes of Conduct for each of these firms, which dictate rules on how they can use user data (above and beyond the existing rules around that like the GDPR), how they have to deal contractually with third party companies, what sort of product changes they’re allowed to make, and so on.

These companies would also have to get approval from the DMU before they can make changes to their products and, under the CMA’s current proposals, would be all but banned from making new acquisitions, even if, on balance, those acquisitions were thought by the CMA itself to be likely to increase competition and lower prices.

In a new report out today, we detail some of the problems with these proposals. Codes of Conduct effectively give up on competition and move instead to a regulatory model of “managing monopoly”. “Codes of Conduct” are a euphemism for regulation. Though they are intended to be vague and high level, they could become increasingly specific over time. More and more rules would be added to try to address every complaint from every “stakeholder”, and as the DMU itself tries to give clarity to the regulated companies about what its high level principles really mean. 

The DMU’s goals are not focused on competition. They instead are based on vague principles like “fair trading” and “trust and transparency”, which may be contradictory with each other, let alone with competition itself. 

This is the sort of approach that might make sense in utilities markets, where new entry is physically difficult and, in some cases, impossible. But it is seriously misguided when it comes to digital markets, where even big incumbents rapidly experiment to improve their products, and where the direct effect of new regulation will be to slow this down – and perhaps to make new entry harder. 

De facto bans on acquisitions also run a serious risk of reducing competition and innovation. For one, Big Tech companies often use acquisitions to compete in new markets – like Google did by buying Android to compete in the smartphone market, and Walmart did with Jet.com to build a rival to Amazon. Startups are often able to get investment precisely because of the possibility that they will later be acquired; some evidence suggests that investment in startups falls if you make acquisitions more difficult. Other proposals, like requiring DMU approval for product changes before they can be rolled out, are practically designed to slow innovation.

Even if you did believe that companies like Google, Amazon, and Facebook really are unassailable monopolists, to support these proposals you would also have to believe that a government regulator could design their products and services better than they have done themselves, and that the cost of this kind of regulation did not create significant burdens of its own.

We don’t have to give up on competition like this. If competition is possible – either within the existing rules, or with new interventions designed to support new entrants – then that should be the mechanism that governs these companies’ conduct. 

Some of the CMA’s proposals, to make some of these services interoperable with competitors’, or require them to share anonymous data with new entrants, bear serious consideration if they could increase competition in this way; this should be where the CMA is focused. But these proposals are a world apart from the rest of the DMU plans. And other policies that the CMA does not control are probably much more important for driving competition — things like high-skilled immigration, access to funding for startups, and land-use planning.

All of these are reasons to be sceptical of the DMU proposals. But what’s really worrying is that these powers are unlikely to be restricted to these firms alone. In a few years, the idea that there is such a thing as a distinct “digital market” will be as meaningless as referring to a “market that relies on the roads”. Everything will be a “digital market”, and every firm that succeeds in these markets could fall under the control of the DMU.

Groceries, entertainment, house buying, and travel are all digital markets to a significant extent now, and most others are heading that way too. There is nothing that limits the DMU from eventually regulating the “strategic” companies in these markets, be they Sainsbury’s, Netflix, Rightmove, Booking.com or whatever other firms end up succeeding. That means regulating all of them in the top-down way we regulate utilities, and doing so with few checks and balances on the regulator’s powers. 

This is dangerous, and may come to be remembered as one of the biggest regulatory interventions ever – led by people who don’t realise that there is no limiting principle to the powers they want for themselves, and given to them by a government that would rather think about other things. It will be hard to reverse once it’s done: big, well-funded and attractive-sounding government agencies are hard to get rid of once they’ve been set up.

So we are, unwittingly, walking towards the creation of an economy-wide super-regulator that could someday dictate the day-to-day business of every big company in the economy. Anyone who cares about competition and open markets, let alone the UK prospering with a less regulated, more dynamic economy after Brexit, should be trying to stop it.

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Sam Bowman is Director of Competition Policy at the International Center for Law and Economics.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.