Misconceptions About Digital Competition Are Damaging the EU’s Technology Ambitions – Center for Data Innovation

The Digital Markets Act (DMA), the EU’s biggest change to antitrust law in decades, is expected to be formally approved this year. Unfortunately, the law seems to fundamentally misunderstand how competition in the digital marketplace works and applies flawed remedies, to the detriment of the EU’s technology sector and European consumers. As a result, the DMA fails to resolve the antitrust and user protection issues it is supposed to address. Unless corrected, the DMA will hamper the vibrancy of Europe’s economy for decades to come.

EU policymakers created the DMA in response to the widely held perception that “something has to be done” about Big Tech. It sets out rules for how large online platforms—firms with a market capitalisation greater than €65b—can compete in the EU. The law gives regulators aggressive enforcement tools: violations can lead to fines of up to 20 percent of global turnover, and regulators can compel repeat offenders to break up their businesses. 

But the primary focus of the DMA seems to be on punishing companies that are too big or too American. Green MEP Kim van Sparrentak, who sat on the committee that negotiated the law, was jubilant after its passage: “We are finally talking about [how] they [technology companies] are too big, about interoperability, something they really, really didn’t want. These are big, big wins.” Or consider comments made by Andreas Schwab MEP, the DMA’s lead negotiator, who emphasized that Google, Apple, Amazon, Facebook, and Microsoft are in the law’s crosshairs, and not their European counterparts. As he explicitly stated, “Let’s focus first on the biggest problems, on the biggest bottlenecks. But let’s not […] include a European gatekeeper just to please Biden.” 

EU policymakers often lament the dominance of U.S. technology companies but overlook the EU’s considerable strengths in the IT sector. Moreover, they rarely tackle the structural causes of Europe’s economic decline. Thibault Schrepel, a law professor at the Free University of Amsterdam, uses a compelling analytical framework to flesh this out further. The DMA organizes digital markets on the assumption that these markets are largely static: the law assumes that competition is likeliest to emanate from services that are perfect substitutes for the incumbents. Hence the law introduces mandatory service interoperability, data portability, and prohibits data sharing across multiple platform services without explicit consent. In practice, however, digital competition takes place via orthogonal tools and services that innovatively develop an incumbent’s offering and take it in a new direction: think Snapchat’s and Tiktok’s demonstrated ability to eat away at Meta’s social media market dominance. Similarly, Prof. Schrepel argues that DALL-E, an AI-enabled image generation service, could soon compete with an image database provider like Getty. The DMA does absolutely nothing to support this form of creative competition. What’s worse, the DMA’s prohibition on using platform data to create new services that compete with other large market players actively constrains another proven form of competition. For instance, the DMA prohibits a company like Apple from harnessing its user data in order to launch a search engine that could compete with Google. Other antitrust lawyers have pointed out the negative externalities associated with a competition law predicated entirely on the precautionary principle, which implicitly enshrines a non-dynamic competition policy into the Digital Single Market.   

Critics of Big Tech hold sway not just over policymakers, but the journalistic class too. The Financial Times, supposedly a business newspaper, often includes hyberbolic anti-tech sentiment without any fact-checking or context. For example, one recent article features the founder of ProtonMail—a Gmail competitor offering encrypted email services—arguing that the DMA is necessary because “Tech giants could today remove us from the Internet with zero legal or financial repercussions.” This far-fetched scenario is given more prominence than the very real fact that ProtonMail has amassed over 50 million users, despite Big Tech’s alleged risk to competition. 

Those actively cheerleading the EU’s anti-growth tech policy agenda ignore the DMA’s many flaws. For example, the DMArequires that all personalised services must offer an identical non-personalised alternative, a provision which is itself a logical contradiction, and its interoperability requirements will substantially reduce user safety. This latter point is worth investigating more. Messaging services have gone to great lengths in recent years to ensure they are cryptographically secure. The DMA’s insistence that all messaging services must be interoperable with each other weakens, by government edict, this end-to-end security architecture. Most cryptographers agree that it is enormously difficult to ensure encryption between different apps. The DMA thus gives third-party services a legal right to access messaging platforms, meaning they can flood such services with spam, undermine limits to forwarding misinformation, and ride roughshod over privacy by having read/write access to messages they deliver within larger platforms. Software developer Alec Muffett expounds on the interoperability point by comparing the requirement to an order that all large restaurant chains must accept and serve orders from other restaurants: interoperability “is dressed up as making the customer’s life easier, but in the process exposes the customer to metaphorical food-poisoning: connections from fake identities, bad data/food, bad food-handling/interception or tampering, and expanded oversight/surveillance,” all while imposing massive costs in the form of building hugely complex interoperability gateways. This is not speculation: in 2014, third-party apps with access to Snapchat were saving content that was supposed to have been delivered and deleted. 

The DMA is a sad indictment of how the EU fails to deliver the fruits of the digital revolution to its citizens. The act is vague and at times contradictory, suggesting that it was spurred into being primarily by an urge to act rather than a clear understanding of what policies would actually increase public welfare. As is usually the case with this approach to regulation, the only guaranteed winners are lawyers and auditors who will be commissioned to submit reams of compliance documentation to regulators, automatically disadvantaging small and new market entrants. As per Thibault Schrepel’s analysis, the DMA falsely takes existing digital markets as fixed and regulates on that basis. It is thus a purely redistributive law which does nothing to tackle the root cause of Europe’s digital sclerosis: the structural barriers that make wealth creation much harder than in more liberal markets. Policies that encourage the creation and growth of businesses often involve deregulatory measures, like reducing taxation on capital investment and capital gains achieved by setting up new businesses. Policymakers prefer to add rules than tackle supply-side constraints that hinder wealth creation: passing the former is easy, removing the latter painful and hard. European politicians do not want to confront the fact that their ever-thickening web of digital rules and regulations will over time make the EU poorer and less innovative than it could be. This is a tragedy of Europe’s own making, akin to the decades of head-in-the-sand thinking that led to the EU’s dependence on Russian fossil fuels, with its now catastrophic consequences.