Can the Digital Services Act and the Digital Markets Act finally get Big Tech to comply?
It was in fact quite the odd alliance that formed in October 2021. The heads of booking.com, Zalando, bol.com, Allegro, eMag, Delivery Hero, Vinted and Wolt penned a joint letter to EU lawmakers. What brought leaders from the food delivery, fashion, tourism and book sectors together? Proportionality and politics.
Since October, the EU has been hashing out the details on two major pieces of legislation aimed at major tech companies: the “Digital Markets Act” (DMA) and der “Digital Services Act” (DSA). On Thursday, the Digital Services Act cleared the next hurdle with the EU Parliament approving the proposed legislation. Both pieces of legislation are intended to set a legal framework for the digital world and establish a kind of digital constitution for Europe. By restricting the might of major US tech companies, like Apple, Meta (Facebook), Alphabet (Google) and Amazon, the acts are designed to level the playing field for competitors. Simultaneously, however, the new regulations could have a negative impact on European platforms—despite the fact that, when judged by company valuation, are in nowhere near the same ballpark as the US behemoths.
Hence, the concern of the aforementioned alliance. By aligning their interests and engaging with lawmakers across the EU, they hoped to successfully lobby the bloc for support. If recent history has taught European companies one thing, it’s that investing time and effort into lobbying yields results. Who did they learn that lesson from? The big boys stateside.
Previously, it was big tobacco, big pharma, big oil and major automotive companies that spared no expense in lobbying lawmakers in Brussels. Now, it’s big tech. In 2020, they spent nearly EUR 100m—the bulk of which came from major US enterprises. It’s not the first time US tech companies aggressively lobbied the EU to influence regulatory frameworks. In 2018, US tech companies poured in significant resources to defang GDPR, the EU’s privacy initiative, and succeeded. Lawmakers would seem to be in for more of the same as both the DMA and DSA could be up for a vote in the coming weeks. And with no consensus on the acts’ contents, the time is now for lobbyists.
What are the Digital Markets Act and the Digital Services Act all about?
The DMA and the DSA are two major pieces of legislation drafted by the EU Commission aimed at both restricting the might of digital platforms and establishing a kind of digital constitution for Europe.
While similar in nature, the pieces differ greatly in scope and target. The DMA sets its sights on gatekeeper platforms, i.e. major, dominant platform companies. These include search engines, online agency or placement services, operating systems, social networks, cloud services and video platforms. Bans laid out in the DMA are designed to force such companies to cease engaging in certain practices. Should they be in violation of the DMA, meaningful fines and penalties are to be levied. Thus, increased competition should result.
While the DMA focuses on companies, the DSA centers around consumers and their basic rights in the digital world. Among other things, these include an increased scope of opt-outs, more transparency in algorithms and stricter rules designed to prevent illegal content from being uploaded.
After the EU recently ratified a legal framework for WASN?! with the GDPR that drew international attention, the DSA and DMA represent the next logical steps for establishing European standards in the digital space.
What’s in a bill?
Exactly what the new regulations will entail will not be clear until the EU Commission, the European Parliament and the Member States have voted on the bills. Currently, the pieces of legislation contain the following:
The Digital Markets Act:
- applies to so-called gatekeeper companies. To be considered a gatekeeper company, it must generate an annual revenue exceeding EUR 8b in the EU economic zone and have a market cap in the EU north of EUR 80b. These thresholds have been raised from the original piece of legislation that the EU Commission sent to the EU Parliament, which pushed for 6.5b in annual revenue and 65b in market cap to be considered a gatekeeper. Additionally, the company must offer its services in more than three EU countries, have a user base of more than 45m and over 10k active business users.
- empowers users to remove all pre-installed software on any device at any time.
- increases the EU’s authority to block mergers and acquisitions in the digital sector. This is a direct response to Meta’s 2014 acquisition of WhatsApp. At the time, the EU Commission approved the deal as it saw no restriction of competition. WhatsApp was growing rapidly at the time, but did not generate any significant revenues. In hindsight, however, the deal helped Meta solidify its position as the leading communication platform.
- levies steep fines against companies in violation of the DMA ranging from 4 to 20% of global revenues generated in the previous fiscal year.
The Digital Services Act:
- requires platforms to remove content flagged as illegal. How quickly platforms would be required to at is open, possible due to concern that tech companies could implement so-called upload filters.
- permits messaging services, such as WhatsApp, Signal et al., to continue using end-to-end encryption, although legal authorities would like to insert backdoors to limit its effect.
- prohibits so-called “dark patterns,” i.e. user interfaces designed especially to deceive users. For example, this could mean declining cookies in the future is not made more complicated than accepting them.
- restricts business models based on personalized ads. If it were up to the EU Parliament, it will be completely prohibited to advertise to minors based on their online profiles. Originally, there were discussions about a blanket ban of personalized ads. For the moment, it remains mere discussion.
- provides transparency on the criteria platforms and their algorithms use to determine which content is displayed to which users.
- requires gatekeeper platforms to grant access to their data for research purposes. European Green Parties have also pushed for such data to be made available to NGOs for the same purposes.
Can the regulations reign in big tech?
The regulations are, of course, intended to limit the power of major US platforms. The EU Commission has made repeated efforts to pass legislation specifically aimed at the Big Four, but with only moderate success. Injunctions and appeals take years to sort out and penalties levied amounted to nothing more than a drop in a bucket. The Union hopes that the DSA and DMA will give them a legal framework to take on gatekeeper companies. However, the stricter rules may leave european tech companeis caught in the crossfire, i.e. those who signed the letter to EU lawmakers, Booking.com, Delivery Hero, Wolt, Zalando and Bol.com.
When do the acts take action?
In late 2020, the EU Commission presented its recommendations for the Digital Services Act and the Digital Markets Act. The current timeline has them both coming into effect in 2023, after both passed crucial hurdles in the past year. Before putting the plans up to a vote with EU member states, EU Members of Parliament analyzed and amended the original recommendations.
The amended version of the DMA was ratified last December by the European Parliament. This version is now under negotiation with Member States. Leading the council responsible for overseeing negotiations are the French, who have already held initial talks with representatives from the EU Commission, the EU Parliament and the French government. Currently, it is widely seen as likely that negotiations on the DMA will conclude before May, thus coinciding with French elections in the same month. New legislation that is tough on “big tech” would be a significant political victory to under-fire French President Emmanuel Macron
Members of the European Parliament have also already amended the EU Commission’s official recommendations for the DSA after receiving them last year. The finalized version, which is up for a vote today (Thursday, January 20, 2022), passed the IMCO Committee (Internal Market and Consumer Protection) and thus a crucial hurdle towards becoming law. People with knowledge of the situation also expect France to push for a final agreement between Member States, the EU Parliament and the EU Commission before May. However, as the DSA is considerably larger in scope than the DMA, that timeline is seen as very ambitious. Exactly when the plans are expected to come into effect, depends on the length of the implementation period, which has yet to be decided. Currently, a period of 18 months is on the table.
Can there still be significant amendments to the legislation?
Yes. During today’s vote there was a proposed amendment and there is, of course, ample time during negotiations between the EU Commission, EU Parliament and Member States to make amendments. In the end, every piece of major legislation is an exhausting exercise in compromise between various parties and viewpoints.
Where do EU stakeholders stand on tougher regulation?
Generally speaking, they welcome stricter regulations on big tech. “In recent year, European startups have been unable to reach their full potential due to high market entry barriers and in part due to unfari practices by the dominating market players,” says Christoph Stresing, director of Bundesverbands Deutsche Startups (German Association of Startups). “These regulatory measures would be a major step towards and could help Europe develop its own digital champions.” Thomas Duhr, Vice President of the German Association for the Digital Economy (BVDW) said that the DSA and DMA would out an end to the “Wild West practices” once and for all.
In the eyes of the BVDW, to whom various digital marketing companies belong, the devil lies in the details. They view some of the 500 regulations and guidelines in the DSA as contradictory. The BVDW is especially critical of the restrictions on personalized ads and concerned that there is no efficient way of monitoring if personalized ads are shown to minors. “The majority of online services have no way of knowing who is sitting in front of a screen.” In December, the BVDW warned of backdoor leading to a ban of personalized ads.
One of the many points of contention among the group of European digital companies that wrote lawmakers was over the definition of “active business user.” Does it refer to clients and customers in the general sense of the word or to each visitor to a given website? No small matter, especially for eCommerce platforms as the number of actual clients is dwarfed by the number of monthly users. If each visitor is in fact counted as an active user, the DMA could consider them a gatekeeper platform.
The German digital association Bitkom is also calling for “smart regulations” to ensure that the new legislation only impacts the gatekeepers. Bitkom’s director of trust and security Rebekka Weiß says that it’s crucial to avoid potential collateral damage for other companies.”
Stricter regulation beyond the EU?
China rushed ahead with plans to implement stringent regulations governing the way tech companies use algorithms. Finalized earlier this month, the rules are set to take effect on March 1, 2022 and will force tech companies to provide insights into how their algorithms work, give users the option of opting out of the algorithm and to change or delete tags. Algorithms lie at the core of tech companies and have been held like a closely guarded secret, they determine which products are displayed to a user on commerce platforms or which ads a user sees.
If the new Chinese law does indeed deliver on its promise to provide consumers a look into the inner workings of the algorithm, it would represent an absolute paradigm shift. Up to now, consumers have zero idea of the criteria used by platforms to determine which content to show users. Under the law, platforms would be required to grant users the option of choosing to remove tags used to categorize them. For example, if a user so wished, they could force a platform to remove “male,” so that they would see more gender-neutral content. Furthermore, users are to also be informed whenever algorithms are used as a rule. Of course, the Chinese government would also learn more about how algorithms work and could thus potentially exert more influence on a company’s algorithm. Investors figure to keep a keen eye on the impact of the new regulations on the business models of Chinese tech companies, such as Tencent and Alibaba.
In the USA, stricter regulations are in the works as well. Currently, several pieces of legislation are under negotiation aimed at curbing the influence of apex tech giants Apple, Amazon, Alphabet and Meta. In its prediction piece for 2022, the Washington Post tapped 2022 as being a “watershed moment” as it will turn discussions into laws. However, many members of the House of Representatives are facing midterm elections in 2022. These results are crucial in just how quickly we can expert more stringent tech laws. Nevertheless, China’s rapid ratification of legislation means that whenever the US or EU tech laws do come into effect, they will have the benefit of being able to monitor the initial impacts the legislation has on the Chinese tech landscape.