The European Commission should be more precise and transparent when designating gatekeepers under the European Union’s Digital Markets Act.
The impact and effectiveness of the European Union’s new landmark digital competition law, the Digital Markets Act (DMA), will depend on the designation of ‘gatekeepers’ – or the hard-to-avoid platforms that dominate the digital economy and which will be covered by the DMA. Designation is critical since non-gatekeepers will not have to comply with the list of DMA obligations, including data restrictions and a ban on promoting gatekeepers’ own services over rivals. These obligations have the potential to change how consumers and businesses interact daily with the largest tech companies, such as Google.
Since the DMA came into force in November 2022, the European Commission, as the law’s sole enforcer, has been talking informally with potential gatekeepers in the context of ‘pre-notification’ before the formal designation stage starts in May 2023. The DMA sets out the rules for designation, but some important methodological considerations are missing. The Commission should take these into account in its assessments of potential gatekeepers.
Under the DMA, gatekeepers will be designated per relevant core platform service (CPS). These include online intermediation services, online search engines, online social networking services, video-sharing platform services, messaging services (the legal term is ‘number-independent interpersonal communications services’), operating systems, web browsers, virtual assistants, cloud computing services, and online advertising services by a firm that provides any of the above CPS.
To be designated a gatekeeper, a firm must meet three cumulative qualitative criteria. The DMA presumes that a firm meets the qualitative criteria if it meets three cumulative quantitative criteria. Table 1 lists them.
Table 1: Criteria for designating a firm as a gatekeeper under the DMA
|Qualitative criteria (Article (3(1))||Quantitative criteria (Article 3(2))|
|A firm has a significant impact on the European market||The firm’s annual EU turnover is at least €7.5 billion in each of the last three financial years, or its average market capitalisation/fair market value is at least €75 billion in the last financial year, and it provides the same CPS in at least three EU countries|
|A firm provides a CPS that is an important gateway for business users to reach end users||The CPS has at least 45 million monthly active end users and at least 10,000 yearly active business users in the EU in the last financial year|
|A firm has an entrenched and durable position, or it is foreseeable that it will have it in the near future||The CPS has at least 45 million monthly active end users and at least 10,000 yearly active business users in the EU in the three financial years|
Source: Articles 3(1) and 3(2) DMA.
If a firm fulfils the quantitative criteria, it must notify the Commission within two months of the thresholds being reached. However, a firm that self-assesses as meeting the quantitative criteria can rebut the presumption that it is a gatekeeper. The Commission can also open market investigations with the aim of designating a firm as a gatekeeper when the firm rebuts the quantitative criteria under Article 3(5), or if the Commission thinks the firm might meet the qualitative criteria under Article 3(8). Disputing the Commission’s presumption and the market investigation possibility both raise challenging issues.
Disputing the gatekeeper presumption
A firm that meets the quantitative criteria can dispute them in exceptional circumstances. It can argue that it does not fulfil the qualitative criteria by questioning the quantitative criteria on the basis of the circumstances in which the relevant CPS operates.
The DMA states that a firm cannot use economic arguments related to market definition or economic efficiencies to refute designation as a gatekeeper for a given CPS. It can only dispute the presumption based on elements that relate to the quantitative criteria, as follows:
- Market capitalisation: This criteria (Table 1) should be based on the firm’s average market capitalisation. The DMA also specifies that some factors, such as capitalisation that increases or drops in a volatile way, can bring into question whether a firm has a significant impact on the European market. But it is unclear how the Commission will assess these factors, especially in times of volatility following economic shocks, such as high inflation.
- CPS: Some firms might provide multiple CPSs, such as online search engines (eg Google) or video-sharing services (eg Google-owned YouTube). They might also provide different CPSs within the same category. For instance, Meta provides Facebook and Instagram in online networking services. A firm cannot claim that a CPS is different from another because of its geographic coverage. For example, Amazon cannot argue that Amazon France, Amazon Germany and Amazon Belgium are distinct CPSs because they use different domain names. However, a firm can distinguish one CPS from another in the same category on the basis that the CPSs are used for different purposes by end users and/or business users, or if offered in an integrated way, the CPSs do not belong to the same category of CPS. Meta could argue that Facebook and Instagram are two different CPSs because end-users do not use Facebook or Instagram for the same purpose. However, the meaning of ‘different purposes’ is still unclear because the DMA does not provide criteria for this situation.
- Active end-users and business users: The number of users refers to the concept of the unique user: a user who uses a CPS at least once per month for end users and once per year for business users. The number of monthly active end-users is calculated as the average number of monthly active end-users throughout the largest part of the financial year. The DMA allows gatekeepers to discount abnormal figures. An important remaining question is whether gatekeepers can argue that users who are inactive most of the time throughout the year (eg users that engage with Amazon marketplace during only one month over the year) can be discounted, as they will bias the computation of the average, leading to overcounting of the real number of monthly active end users.
If the Commission rejects the firm’s arguments, it will designate the firm as a gatekeeper. If it accepts the arguments, it may open a market investigation with a view to designating a firm as a gatekeeper under Article 3(5).
Market investigation challenges
The Commission can also designate a firm as a gatekeeper when it meets each of the three qualitative criteria but does not satisfy all of the three quantitative criteria under Article 3(8). It can do so after carrying out a market investigation that takes into account a list of quantitative and qualitative criteria. These include turnover and market capitalisation, the number of business users and end users, network effects and data-driven advantages, economies of scale and scope, the degree of user switching and multi-homing, a conglomerate corporate structure, and other structural business or service characteristics. The firm can challenge the market investigation’s preliminary findings.
The market investigation poses several legal and economic issues. It is unclear how the Commission will assess the different elements. The DMA is silent on the methodology and metrics used, and the potential thresholds that would lead a firm to be designated a gatekeeper. This will require an economic assessment using microeconomics and behavioural economics. Moreover, it is unclear whether the firm will be able to challenge the preliminary findings with legal and economic studies with pro-competitive elements (not related to market definition or economic efficiencies) that question the assessment.
The Commission should clarify these methodological points. In this respect, we make the following recommendations.
The market capitalisation assessment should be based on the median value over the last financial year rather than the average value, as the median would cancel out bias arising from unusually low and high outlier values.
The definition of different purposes to distinguish one CPS from another should rely on three criteria: (1) it is a CPS, (2) that performs another task different from the other CPS being considered (an objective way to distinguish between services), or (3) if two CPSs perform the same task, users can use each independently without needing to use the other.
For instance, Facebook and Facebook Messenger might be considered to be providing distinct CPSs because Facebook provides a news feed via which content can be shared with others. In contrast, Facebook Messenger provides only a communication channel to share content with a restricted audience, not visible on a public newsfeed. They thus perform different tasks. Therefore, Facebook should be considered a CPS in online social networking services, and Facebook Messenger should be regarded as a CPS in messaging services.
However, what about when end-users perform the same task? For instance, Google Search displays Google Maps when a user searches for restaurants. In this context, Google Maps and Google Search are used for the same purpose; end-users and/or business users cannot use Google Search independently as they cannot perform a search without a map being displayed. In that case, it is doubtful that Google Maps is a distinct service from Google Search, as they might be substitute services. They might therefore be considered part of the same CPS in online search engine services.
However, Google also offers Google Maps on a standalone basis through an application or from the web. In that case, Google Maps is likely a distinct service from Google Search and might be a complementary service to Google Search, as a user can perform a search on Google Maps without using Google Search. For instance, users can make location-related searches on Google Maps, whereas they make general queries on Google Search. Accordingly, Google Maps and Google Search might be considered two distinct CPSs – Google Search in online search engine services and Google Maps in online intermediation services. In this case, it will be thus difficult to distinguish CPSs. This point matters as considering a service distinct might make it subject to the DMA if it fulfils the other criteria.
Assessment of the average of monthly active end-users throughout the largest part of the financial year should exclude users who are inactive most of the year to prevent bias and overcounting of the average monthly active end users.
Finally, the Commission should describe the methodologies and metrics it is planning to use for its market investigations. It could consider using similar methods and criteria to the German competition authority to designate Alphabet, Meta and Amazon (under appeal) as gatekeeper-like firms under Germany’s DMA-like national competition law. Moreover, firms should be able to provide economic arguments that pro-competitive elements, such as positive network effects or low switching costs, can sufficiently constrain its entrenched position, so that a designation as gatekeeper would be disproportionate.
These recommendations, if applied, would provide clarity on criteria to help the Commission and potential gatekeepers identify which core platform services fall under the DMA scope and thus are subject to the DMA obligations. The recommendations would also ensure more transparency from the Commission when it undertakes market investigations as part of the process of designating gatekeepers.