4 April 2023

Why the Digital Markets Unit poses a fundamental threat to British innovation


The government’s Digital Markets and Competition Bill is expected to be introduced into Parliament in the coming weeks. This innocent-sounding legislation to boost competition in the tech sector could cause significant damage to the British economy. It risks start-ups and entrepreneurs fleeing from the UK while hampering the tech giants’ ability to innovate and improve services for British users.

The Bill is intended to give a new Digital Markets Unit (DMU) powers to regulate large tech firms over concerns about anti-competitive behaviour. In truth, the Competition and Markets Authority (CMA) already has extensive powers to regulate tech companies – as demonstrated when the CMA blocked Meta from purchasing Giphy.

The DMU will operate differently from normal competition powers. It will be able to exercise ex ante controls, rather than intervening after competition issues have arisen. In practice, they will be empowered to direct business operations, how features operate and relationships with third parties. The tech companies could be required to ask for permission before launching products for British users – inevitably slowing down, if not completely preventing, innovation. This is excessively precautionary, demolishing the core principle driving the digital age – that companies should be free to create useful services.

The justification for these new regulatory powers is that there is an ‘unprecedented concentration of power’ among a small number of firms in digital markets, undermining consumer choice and economic growth. But, as Victoria Hewson and Centro Veljanovski argued for the IEA in a paper last year, the reason large digital companies exist is not because of barriers to entry, but because they provide useful services for billions of people. Competition regulators should only be concerned when largeness leads to perverse outcomes for consumers; not with size in itself.

In any case, policymakers are behind the times. Since the DMU proposals surfaced in 2021, there have been radical shifts in digital markets. Google’s search dominance is being challenged by the rise of OpenAI’s ChatGPT integration into Bing; meanwhile, Facebook’s social media dominance has been undermined by the rapid rise of TikTok. The presumption that there were large barriers to entry for competitors is being undermined before our eyes.

It remains as true as in 2007 – when a writer in The Guardian asked ‘Will MySpace ever lose its monopoly?’ – that digital markets are highly dynamic, competitive and unpredictable. This is why in just 2020, Amazon, Google, Microsoft, Apple, and Facebook spent an astonishing $127 billion on R&D – almost double the entire public and private R&D spending in the UK during the same year. The tech giants have a need to constantly improve their services to stay ahead of both each other and new start-ups.

The DMU is built on an extraordinarily arrogant premise – that a regulator sitting in the CMA’s office in Canary Wharf can not only comprehend complex and fast-moving global digital markets, but also predict how they will evolve under various scenarios and intervene to deliver better outcomes.

They will be able to do all this with extremely limited oversight from Parliament or, for that matter, the judiciary. As Sir Jonathan Jones, the government’s former top lawyer, and Verity Egerton-Doyle recently wrote: ‘The DMU will have power to decide who it is going to regulate, set the rules that apply to them, and then enforce those rules. This makes the DMU the effective legislator, investigator and executioner.’

Sir Jonathan and Egerton-Doyle specifically highlight that DMU’s decisions will only be contestable on a ‘judicial review’ standard – meaning appeals will only be heard based on failure to follow proper process and a court would only be able to send a decision back to be reconsidered. Astonishingly, that means it will effectively be impossible to question the merits of decisions made by a brand new regulator, exercising entirely unprecedented powers in a dynamic market.

The DMU poses a fundamental threat to innovation and British entrepreneurialism – the Government should look very closely at its powers and accountability before rushing legislation through Parliament.

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Matthew Lesh is the Director of Communications and Public Policy at the Institute of Economic Affairs

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