The current legislative initiative on the Digital Single Market consist of a second regulation in addition to the Digital Service Act, which was the subject of a previous article: With the Digital Markets Act, the EU wants to target Core Platform Services and subject them to stricter regulations. The aim is to make digital markets fairer and to prevent inappropriate business practices. Read in this blog post which companies, as so-called “gatekeepers”, must prepare for new obligations arising from the Digital Markets Act and which new regulations will specifically affect these companies.
What is the Digital Markets Act?
With the Digital Markets Act, the EU wants to limit the power of Core Platform Providers, which have emerged over the last two decades as services with millions of users and annual revenues in the billions. These core platform providers, referred to as “gatekeepers” in the Digital Markets Act, include companies such as Amazon, Apple, Alphabet, Meta and Microsoft. If “gatekeepers” have a dominant position in the market, they can impose unfair conditions on other companies and end users and make it difficult or impossible for smaller platform providers to participate in the market under fair conditions.
Particularly in the rapidly developing technology markets, the European states were no longer able to counteract possible restrictions on competition with the existing (national) rules on antitrust and competition law. In addition, the application of different laws and regulations in the European states threatened to fragment the European Single Market, the functioning of which requires uniform rules. These rules are now to be established by the Digital Markets Act. As a European Union regulation, the Digital Markets Act applies directly in the member states and is intended to counteract the abuse of dominant market positions by so-called “gatekeepers” and create fair markets with low barriers to entry, thereby promoting innovation, growth and competitiveness.
Which companies will be covered by the Digital Markets Act as “gatekeepers”?
The Digital Markets Act targets “gatekeepers” with large revenues and user numbers. Art. 3 (1) Digital Markets Act sets out the narrow objective criteria that must be met for a company to be covered by the rules of the Digital Markets Act as a gatekeeper.
First, the company must operate at least one “Core Platform Service.” This means online intermediation services, search engines, social networks, video-sharing platform services, communication services, operating systems, cloud computing services and advertising services (including advertising networks), web browsers and virtual assistants.
An operator of Core Platform Services is designated as a “gatekeeper” if it
- has a significant impact on the internal market – this is assumed to be the case if the company has generated annual sales of at least EUR 7.5 billion in the European Economic Area in each of the last three financial years or if the average market capitalization or equivalent market value was at least EUR 75 billion,
- operates a Core Platform Service which serves as an important gateway for business users to reach end users – which is met if it had at least 45 million monthly active end users in the Union and more than 10,000 active commercial users established in the Union in the previous fiscal year; and
- enjoys an entrenched and durable position in its operations or it is foreseeable that it will enjoy such a position in the near future – which is fulfilled if the above-mentioned thresholds have been reached in each of the past three financial years.
If a platform operator reaches all of these thresholds, it must notify the European Commission within two months of reaching the thresholds.
The European Commission shall decide by resolution after 45 days at the latest whether the platform service provider is to be designated as a gatekeeper. In individual cases, however, the European Commission may decide that a platform provider is not to be classified as a gatekeeper despite having reached the thresholds or, conversely, that a platform provider is to be designated as a gatekeeper due to structural market characteristics even though it does not reach the thresholds.
What are the imperatives and prohibitions for gatekeepers under the Digital Markets Act?
Once designated by the Commission, gatekeepers will be subject to comprehensive behavioral controls and will have to comply with new imperatives and prohibitions designed to enable smaller platform providers and start-ups to compete fairly.
Gatekeepers must in particular
- ensure that the basic functions of their instant messaging services are designed to be interoperable. This means that messenger services must enable messages sent via their platforms to be received by other messenger services and, in turn, create technical options for receiving messages from other platform providers. Security mechanisms (end-to-end encryption) are to be preserved in the process.
- design their platform services so that unsubscribing from the service is as easy as subscribing.
- give commercial users access to their marketing or advertising services data on the platform.
- allow apps from other providers or other app stores to be installed.
- inform the European Commission about mergers and acquisitions.
It is forbidden to gatekeepers in particular,
- to favor their own services and products (e.g., in rankings) and rate them better than those of the competitors.
- to prevent users from easily uninstalling pre-installed apps or software or changing default settings in operating system.
- to track the activities of End Users outside the Platform Service for the purposes of targeted advertising without explicit consent.
This poses serious challenges, especially for platform services that have been strictly closed off to date.
If a gatekeeper fails to comply with the regulations set out in the Digital Markets Act, severe sanctions may be imposed, such as fines of up to 10% of the company’s total global revenue or up to 20% for repeated violations. Periodic fines of up to 5% of average daily sales may also be imposed. If a gatekeeper is found to be systematically violating the imperatives and prohibitions, the European Commission can also impose behavioral or structural remedies on it (e.g., the obligation to sell parts of the company). A systematic violation is considered to exist if there are at least three violations within an eight-year period.
When will the reforms take effect?
After the European Council and the European Parliament adopted the draft Digital Markets Act on 14 September 2022, it was published in the Official Journal of the European Union on 12 October 2022. The Digital Markets Act entered into force on 1 November 2022.
However, the Digital Markets Act will not apply until the end of a transitional period of six months after the effective date, i.e. from 2 May 2023. Platform operators that reach the aforementioned thresholds must notify the European Commission within two months (i.e., by July 3, 2023 at the latest). If platform operators are designated as gatekeepers, they must comply with the imperatives and prohibitions no later than six months after their designation.
What should companies prepare for?
Platform providers should investigate whether they meet the revenue and end-user figures shown in the Digital Markets Act for classification as a “gatekeeper”. If this is the case, they must notify the European Commission in due time. All companies that fall below the thresholds could benefit from the stronger regulation of their major competitors and seize new opportunities for their own platforms.