Developments in European Technology Regulation: Digital Markets Act and Digital Services Act

Following their publication in the Official Journal of the European Union, the Digital Markets Act (“DMA”)¹ entered into force on 1 November 2022 and the Digital Services Act (“DSA”)² will enter into force on 16 November 2022. This alert provides an overview of the key objectives and timelines for the implementation of this important new European legislation.

Objectives of the Acts

Collectively, the stated overarching objectives of the DMA and DSA are as follows:

To establish a level playing field to foster innovation, growth and competitiveness, both in the European Single Market and globally; and
To create a digital space in which the fundamental rights of all users of digital services are protected.

Further, the DMA is aimed at making the digital sector “fairer and [more] contestable”.³ To this end, the DMA will essentially regulate large digital companies by, among other things, preventing those companies from:

Engaging in self-preferencing or unfair discrimination (particularly with respect to payment systems);
Advertising in a targeted manner without consent; or
Impeding interoperability.

In practice, this means that companies regulated by the DMA will be required to undertake or permit certain activities, such as:

Ensuring that end-users can uninstall pre-installed core platform services;
Allowing developers to use alternative in-app payment systems;
Allowing business users access to the data they generate; and
Allowing end-users to download alternative app stores.

A complementary piece of legislation, the DSA, aims to regulate the content of online platforms. For example, large online platforms and search engines will be obligated, among other measures, to:

Mitigate risks in respect of the spread of disinformation and cyber violence;
Counter illegal online content; and
Promote transparency measures for online platforms (including transparency on algorithms used for recommending content or products to users).

Which digital companies are captured by the Acts?

The DMA will apply to so-called “gatekeepers”⁴ where they have an entrenched position in respect of “core platform services”, including search engines, social networking services, app stores, certain messaging services, virtual assistance, web browsers, operating systems and online intermediation services.

Digital companies will be identified as “gatekeepers” based on the following turnover and user metrics:

They have a market capitalisation of at least €75 billion in the preceding financial year or an annual turnover of €7.5 billion in the preceding three financial years;
They provide certain services such as web browsers, messengers or social media, which have at least 45 million monthly end users in the EU and ten thousand annual business users in the last three financial years.⁵

By contrast, the DSA will apply to various online intermediary services including “very large online engines” (including online marketplaces, social networks, content-sharing platforms, app stores and online travel and accommodation platforms) which have more than 10% of the approximately 450 million consumers in the EU as users.

Monitoring and enforcement

The European Commission (“EC”) will monitor and enforce the DMA and the DSA and will form specialised teams to “centrally supervise very large platforms and very large online search engines as well as gatekeepers”.⁶ Enforcement of both texts is expected to be a key priority for the EC. To ensure compliance with the above rules, the EC could impose fines of up to 10% of gatekeepers’ worldwide turnover in the preceding financial year, increasing up to 20% in the case of repeat infringements.

Notably, on 1 September 2022, the EU opened a satellite office in San Francisco, the “global centre for digital technology and innovation”; this is seen as a “concrete step to further reinforce the EU’s work on issues such as cyber and countering hybrid threats, and foreign information manipulation and interference”.⁷

Implications?

Both the DMA and DSA seek to regulate digital companies based on their size – that is, based on turnover, average market capitalisation or equivalent fair market value. This approach departs from traditional competition law principles that aim (among other aspects) to regulate firms based on their exercise of market power within defined markets, and arguably reflects a return to a linear “structure-conduct-performance” view of market behaviour. In essence, the Acts potentially sacrifice flexibility for certainty, in a manner that has been said to be akin to public utilities regulation.

A comparison of the Acts and parallel reforms in the United States is set out in this published article by Mayer Brown’s Daniel Fenske and Felipe Pereira.

In Germany, a related provision – Section 19a of the German Act against Restraints of Competition – was introduced in 2021. Like the DMA, this provision focuses on gatekeepers, while it provides for different instruments and enforcement powers for the German Federal Cartel Office. More specifically, the provision applies in respect of abusive conduct by companies of “paramount significance” for competition across markets. Co-ordination between the EC, Federal Cartel Office and other national competition authorities will be important for the application of the DMA and other similar national legislation.

Next steps

Now that the DMA has entered into force, there will be a six-month transition period before the DMA will be applicable in practice. The DSA, on the other hand, will be applicable from 17 February 2024.⁸ Following designation, gatekeepers and very large online platforms and search engines will have six months and four months to comply with the DMA and DSA, respectively.

¹ Regulation (EU) 2022/1925 of the European Parliament and of the Council of 14 September 2022 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 220/1828.

² Regulation (EU) 2022/2065 of the European Parliament and of the Council of 19 October 2022 on a Single Market For Digital Services and amending Directive 2000/31/EC.

³ See https://competition-policy.ec.europa.eu/sectors/ict/dma_en.

⁴ Defined as “companies that play a particularly important role in the internal market because of their size and their importance as gateways for business users to reach their customers”. See https://ec.europa.eu/commission/presscorner/detail/en/QANDA_20_2349.

⁵ See https://www.europarl.europa.eu/news/en/press-room/20220315IPR25504/deal-on-digital-markets-act-ensuring-fair-competition-and-more-choice-for-users.

⁶ See https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_22_4327.

⁷ See https://www.eeas.europa.eu/eeas/usdigital-eu-opens-new-office-san-francisco-reinforce-its-digital-diplomacy_en?s=253.

⁸ See Article 93(2) of the DSA.