EU’s Digital Markets Act Delivers Unfair Blow to Small and Midsize Businesses and Would Likely Slow Innovation in the EU’s Digital Sector, New ITIF Report Warns

BRUSSELS—The European Commission’s proposed Digital Markets Act (DMA) aims to ensure that digital markets in the EU are “fair and contestable,” but in a paradigm shift for antitrust enforcement it does so by imposing special regulations on a narrowly defined set of large Internet firms it labels “gatekeepers.” Contrary to the proposal’s intent, this will deter innovation—and hold back small and medium-sized firms—to the detriment of the digital economy, according to a new report released today by the Information Technology and Innovation Foundation (ITIF), the leading think tank for science and technology policy.

“It is hard to overstate the potential negative impact the DMA will have on Europe’s digital markets. Distorting competitive forces and shaping relationships among digital players with precautionary regulation will deter innovation and growth,” said Aurelien Portuese, director of antitrust and innovation policy at ITIF and author of the report. “The DMA starts with a faulty premise by arbitrarily distinguishing digital from non-digital markets—even though digital distribution is just one of the many ways firms reach end-users—and it compounds that mistake by enshrining the nebulous new concept of ‘gatekeeper’ firms. Regulators should assess competition comprehensively instead of discriminating against certain sectors and categories of firms.”

ITIF’s report details the danger of DMA’s assumptions about digital markets and its new approach to regulating them. ITIF finds that vertically regulating companies that are currently digital will create an increasingly uneven playing field as more companies move online. Meanwhile, the DMA’s nebulous concept of a digital “gatekeeper” will have the effect of entrenching large digital firms and discouraging them from innovating to compete, and it will create a threshold effect for small and mid-sized firms, detering them from becoming too successful or large, since it would result in heavy regulation.

It is a paradigm shift for antitrust policy—from ex post antitrust enforcement, in which firms are held accountable for harms they cause, toward ex ante regulatory compliance, in which regulators rein in certain firms to ensure they can’t cause harms in the first place. This represents a seminal victory for the “precautionary principle” over innovation. By distorting innovation incentives instead of enhancing them, ITIF’s analysis shows that the DMA’s model of “precautionary antitrust” threatens the vitality, dynamism, and fairness of Europe’s economy to the detriment of consumers, firms of all sizes, and the EU’s global competitiveness.

ITIF proposes a series of improvements to help achieve the DMA’s objectives without stifling innovation or global competitiveness:

• Reforming competition law in ways that are applicable to all firms, not only those operating in “digital markets.”
• Eliminating the convoluted “gatekeepers” classification, which creates threshold and entrenchment effects, and will inevitably lead to endless legal disputes.
• Developing market investigation rules with capacity-building such as more staff resources to take evidence-based fact-findings exercises seriously.
• Creating a new team insulated within DG COMP to ensure that the regulators in charge of market investigation rules are not also in charge of antitrust enforcement, thereby avoiding conflicts of interests and confirmation bias.
• Recognizing the need to analyze competition issues dynamically, with an explicit focus on longer-term analysis, and providing firms with the opportunity to justify their conduct under a generalized rule of reason.

“The DMA threatens the vitality, dynamism, and fairness of Europe’s competitive landscape, fossilizes digital innovation and competition rather than jumpstarting it,” adds Portuese. “Given its fundamental flaws, the Act can only be improved at the margins, and the first steps should be eliminating the foggy ‘gatekeeper’ concept and leveling the playing field with reforms that apply to all firms—not just ‘digital’ markets. Ultimately, the EU should make sure that authorities in charge of market-investigation rules analyze competition issues dynamically, focusing on long-term, not short-term benefits.”

Read the report.