How Businesses Should Brace for Looming Digital Competition Policies
With high-profile players calling for the breakup of tech giants, organizations need to be ready—while delivering the best digital experiences to customers.
“It’s time to break up Facebook” reads the headline for a recent op-ed in the New York Times—a piece authored by, of all people, Chris Hughes, a cofounder of Facebook.
Hughes isn’t the only high-profile player calling for regulation around digital competition. Working on commission from the UK government, the Digital Competition Expert Panel (DCEP) released a report in March proposing a series of measures aimed at sustaining and promoting competition in digital markets. In June, the Competition and Markets Authority (CMA) put out a call for information and sponsored a report on ex-post assessment of mergers in the digital sector. The European Commission also released a report on the subject this year.
These reports outline a range of potential policy solutions to address the so-called “winner takes all” outcome—a result of network effects, low marginal costs and access to data—that makes it increasingly difficult for new firms to enter digital markets at scale. Yet while these policies (and their justifications) are well documented in the reports, less so are the challenges inherent in regulating this space, an understanding of what might realistically happen and how, given the lay of the land, businesses should best prepare.
Because no matter the specific policies, an increased regulatory focus on digital markets is inevitable. Now is the time to get these discussions off the ground within your organization—if you wait too long, it might be too late.
Key digital competition policy questions: proposals, challenges and predictions
The first step in readying your business is understanding the policy questions around digital competition and how they may be addressed, what challenges government bodies face in doing so and what might realistically happen over the next few years. Three key areas of focus are outlined below.
Who will regulate digital competition policy?
The challenges: The CMA is likely to be stretched, especially post-Brexit. While Ofcom does have experience taking on new responsibilities—postal regulation, BBC content, video-on-demand—and applicable skills, adding digital regulation to its already wide remit could provide it with a lack of focus.
Creating a new regulatory body altogether, of course, would be a complex undertaking: it would require clear principles, objectives and scope in an industry that’s vast and fast-moving; a fine balance between regulating firms and ensuring continued innovation; and finding a place within a complicated patchwork of other regulators.
Predictions: In the UK, Ofcom might have capacity come 2021–2022, when its next market review takes place. On the European level, the legislative process is slow (two to three years to develop formal policy; two or more years to implement it), though EU leaders have shown they’re willing to regulate. There has, for instance, been a large review of telecommunications infrastructure of late—digital would seem an obvious next step.
How will regulators increase merger oversight and competition in the digital space?
Regulatory proposals: The DCEP report suggests a “reset” in relation to mergers in digital markets, with the CMA taking “more frequent and firmer action” to challenge mergers.
The CMA’s call for evidence in relation to digital mergers explores a range of potential issues, including multisided markets, monetization of digital content and relevance of data assets. The call for evidence also considers new types of theories of harm and theories of harm that relate to complementary markets. The outcomes of this review could involve a full review of merger assessment guidelines; more emphasis on loss of future potential competition and innovation; moving to a “balance of harms” test, which takes into account the potential scale of impact as well as its likelihood; or a mandated notification for firms designated with strategic market status.
The European Commission, meanwhile, recommends a renewed focus on consumer welfare and identification of anticompetitive strategies rather than on market definition alone.
The challenges: Digital markets, characterized by rapid innovation and fluid, often multisided market boundaries, are challenging to define. It’s unclear what deemphasizing the role of such a definition could accomplish, as abuse of dominance and new merger frameworks can’t be identified without it.
Predictions: Regulators can adapt existing frameworks more simply than create new ones. Mandated merger notification and a “public interest” test are not outside the realm of possibility. The CMA could undertake a market study into specific areas (e.g., search, social media) to focus the proceedings. And because there’s no clear benefit to “standard” economic regulation (i.e., price controls) in what’s often a zero-price environment, issues might be better—-and more realistically—-addressed through consumer protection policies.
How will regulators address access to data?
Regulatory proposals: Some new policies—such as common standards for data—should promote data mobility and openness to allow consumers to switch between services, while others relate to the sharing of anonymized data.
The challenges: Not all data is created equal. Observed and inferred data require a certain investment by given companies. Observed data can also give competitors information on the business model of its original owner, so encouraging data transfer of this kind might stifle innovation. Data openness also creates privacy concerns: for instance, anonymized data can be deanonymized when combined with other data.
Predictions: Input data can already be transferred via the European Union’s General Data Protection Regulation, which took effect last year. And there’s an ongoing question around whether firms should be compelled to transfer inferred data. With the right input data, other businesses should be able to do the inferring themselves.
Five ways businesses can prepare for the coming digital competition regulations
Whatever the outcome of the above policy questions, the end result is the same: increased scrutiny on digital markets. And while tangible decisions and consequences might be far off, that doesn’t mean businesses shouldn’t start taking steps to prepare right now.
Demonstrate your awareness of the issue to regulators—because if you’re being proactive, you’ll have more control. Government bodies are looking at big digital firms and thinking, “They’re not doing anything to fight this problem, so we’ve got to step in.”
So grab hold of the narrative. Take actions now, and engage with regulators on these issues. Follow the banking industry’s lead and focus on consumer protection—creating guidelines for consumers, in, say, e-commerce, to help them avoid scammers.
Take data protection and access into account—at the outset. Be front-footed about your data, whether it has to do with protecting consumer privacy or demonstrating openness to competition. To this end, it helps to create, early on, a framework with internal guidelines to help answer questions like: Under what conditions will we sell/share data? How will we collect data appropriately? How will we protect consumer privacy in our use and transfer of data?
Build up a mini-regulatory team within your organization. All utility companies have dedicated regulatory and policy staff—so your digital business should, too. Doing this now will ensure that by the time policy decisions come down, you’ll have built up a body of expertise within the firm around these issues.
Perform an audit of your company that asks: is there a risk that any of these activities might be seen as anticompetitive? This would include, among other aspects, a risk assessment of the various parts of your business and how they interact with one another (e.g., internal transfer pricing), ensuring pro-competitive access to data that doesn’t stifle your own business and thinking through the restrictions put on consumers and businesses that use your service. For example, do you say to a business, if you interact with me, you can’t interact with others in my field? Does my operating system and search engine default to, say, Google, in a way that may entrench dominant positions?
Act in a way that ensures competition can happen while maintaining what makes your business successful in the marketplace.
Collaborate with other digital players. In lieu of government guidelines, industry associations can hold organizations accountable and formulate a set of best practices. Signing on and being engaged in such associations can be another way to show regulators you’re serious about being pro-competition.
Tech companies can help shape the regulatory landscape
As the calls for new regulations continue to make noise across the globe, it can seem that the size of a tech company alone is cause for concern. But being large in and of itself doesn’t necessarily make an organization problematic. What’s problematic is when size stops an organization from delivering the best digital experiences to consumers.
Even companies without the size and reach of a Facebook or Google should take note of this advice. If they focus their energies on ensuring quality digital experiences, while demonstrating a keener willingness to encourage competition and innovation that will ultimately serve their customers, they can help shape the regulatory landscape to come—rather than be swallowed by it.