30 January 2025

At the CMA, the process has become the punishment

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There has been a blizzard of important announcements for the future of the digital economy from the Competition and Markets authority in recent weeks. New investigations into search engines and mobile ecosystems, provisional findings from its long-running cloud market investigation, investigations into reviews.

However, the regulator’s relationship with the Government has also become evidently strained, with the departure of its Chair, the Chancellor of the Exchequer expressing concerns that regulators were not doing enough to enable economic growth and the Labour Growth Group calling for a ‘rapid review of all ongoing CMA work with a pro-growth lens’. How can Ministers and the regulator ease that strain?

Competition plays a vital role in supporting economic growth and so the CMA rightly believes that it can support growth without going outside its normal function. However that does not mean that competition regulation is always pro-growth or that Ministers are wrong to ask questions about whether it could do more.

Like any regulator, if they cast their net too wide the demands of the CMA can be a deterrent to legitimate economic activity.

Take the example of the role better-established companies can play in providing funding and distribution for new businesses that complement their own work and support overall economic growth. When what became the Digital Markets, Competition and Consumers Act (DMCCA) was being considered in Parliament the Startup Coalition rightly pointed out the risk that ‘deals that are truly “investment” as opposed to “M&A” may be at risk’. Even though Ministers worked to avoid this in the new legislation, that concern still seems to have been borne out. Last year there were multiple investigations into AI partnerships that were ultimately cleared. Those investigations will still have been costly and disruptive for the companies involved, including challengers that the CMA should champion as a source of new competition.

Acquisitions play an important role as well. As smaller startups generally lack the option to exit via an IPO, reduced access to exit via acquisition leads to more businesses shutting down, fewer startups selling for more than they raised, and lower overall returns for investors. These are all bad outcomes for startup founders and venture capital (VC) investors. CCIA has studied this ‘process is the punishment’ problem in the US and found that ‘overly aggressive antitrust enforcement effectively removed acquirers who previously accounted for 16% of bid value from competition for acquisitions, and other potential acquirers failed to step up to replace those lost funds.’

There are also risks if the CMA uses its new powers under the DMCCA to define too closely how companies offering digital services are allowed to do business. If CMA goes too far and diminishes their ability to differentiate their services and integrate different functions, that will inhibit an innovative process that has yielded products consumers love. It could create the kind of arbitrary boundaries that have meant European consumers looking for a certain place have to search separately for a map. If the regulator makes it harder for companies to do deals, partnerships between hardware vendors and operating system developers for example, it will hurt diversity in the market as a source of funding dries up that should support the development of better devices for UK consumers.

What would improvement look like at this point, with major legislation having been passed in the final days of the last government?

The CMA can show that it is going to focus its activity on established problems in mature markets. This doesn’t mean that there is no work to be done in digital markets. However it makes a lot more sense to focus on areas where consumers are frustrated and have fewer options to switch to other products or services. It should move quickly to address the problems that its market investigation has found with restrictive legacy software licensing, for example, rather than intervening in cloud AI services which are regularly being shaken up by new entrants. The Chinese DeepSeek model, which purports to have achieved huge performance at a modest cost, appears to be only the latest example of a new offering shaking expectations.

The Government is expected to provide what is called a ‘strategic steer’ to the CMA that reflects its priority upon growth. Regulatory independence does not mean Ministers do not have a role. The actions of independent regulators have huge consequences for UK consumers and other government objectives, so the Government rightly has a democratic role to set the strategic direction and oversee its work outside the operational level at which independence is most important. Companies considering investment in Britain will look to that steer and other policy milestones such as the consultation on AI and copyright to see Ministers deliver on their commitment to public policy that supports innovation and growth.

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Matthew Sinclair is an economist with 15 years experience working in public policy and is now Senior Director at the Computer & Communications Industry Association.

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