Contestability in the digital sector: the Digital Markets Act vs. disruptive innovation

Lisanne Hummel

This blogpost is part of a series of short commentaries on the European Commission’s proposals for a Digital Markets Act and a Digital Services Act, released on 15 December 2020. Stay tuned for more.

With the Digital Markets Act (DMA) the Commission wants to ensure a contestable digital sector, where the threat of new companies entering the sector keeps the existing firms’ market power in check. The DMA aims to increase the threat of new companies by imposing certain obligations on gatekeepers, who will most likely be the big tech companies: Google, Amazon, Facebook, Apple and Microsoft. However, these big tech companies strongly believe that it is not regulation but innovation that has kept the digital sector contestable and will continue to do so. The question is, will the DMA make the digital sector more contestable or should we keep relying on innovation?

Opposing positions

Traditionally, the Commission and big tech companies have contrary opinions on the contestability of the digital sector. The Commission thinks the digital sector is not contestable because there are few new companies entering the market to keep big tech companies’ market power in check. The lack of new companies is partly blamed on big tech companies’ control over access to the digital sector: they are the so-called gatekeepers. And even if a new company enters the market, for users it appears to be very difficult to switch from these big tech companies to a competitor.

Big tech companies on the other hand find the digital sector to be contestable because of disruptive innovation. In short, disruptive innovation is a new product or technology that renders an existing product or technology obsolete. According to big tech companies, new disruptive innovations are constantly looming to disrupt their market power. For example, the move from the PC to smartphones made Instagram a threat to Facebook’s market power (after which Facebook acquired Instagram, consolidating their position as a dominant social platform).

DMA and contestability

In a contestable digital sector, big tech companies should feel threatened by new companies in their core platform services. For example, Facebook’s position might be threatened by a new social platform if it has a significant amount of users. However, users will only join a new social platform if enough friends have already joined. Users are already “locked-in”. New social platforms currently cannot get enough users to become a competitive threat to big tech companies, making for a poor contestability of the digital sector.

While the DMA is supposed to improve this poor contestability, I am unsure whether the current proposal of the DMA fully achieves this. For example, as emphasized in a report by the UK Competition & Markets Authority, forcing Facebook to ensure interoperability with new social platforms should improve the contestability of the digital sector. The interoperability will make it easier for users to switch to a different social platform, which is now nearly impossible. However, while the DMA contains several interoperability obligations, social platforms seem not to have been included.

For the other big tech companies that will face an interoperability obligation for their core platform services under the DMA, I sincerely doubt whether this will help new companies get enough users to compete with big tech companies. Big tech companies have been able to create whole ecosystems of their services: using one service of the company makes it beneficial to also use their other services. Switching away from (a part of) this ecosystem just might prove to be too much of a hassle for users. I therefore question whether the current interoperability obligations in the DMA will pose a true threat to big tech companies’ market power.

To make matters worse, if disruptive innovation promotes competing with big tech companies, the DMA might even be detrimental to the contestability of the digital sector. The DMA makes it less attractive to invest in disruptive innovation and try to ‘become’ a big tech company. While big tech companies have been able to enjoy over a decade of monopoly profits in core platform services, new companies will already have to deal with extra obligations after 3 years of attaining a significant user base. This might not deter new companies completely but it makes it at least less attractive to be a big tech company in the EU than in any other part of the world.

The DMA is an ambitious proposal to rein in the abusive practices of gatekeepers (which I applaud). However, it remains to be seen what the effect will be on the contestability and innovation within the digital sector. Only time and the final text of the DMA will tell!

This post also features on the blog of the Utrecht University focus area Governing the Digital Society