The UK's new competition regime for digital markets: to remedy a gap in the CMA's toolkit

The Government has promised to introduce a new Digital Markets, Competition and Consumer Bill in this session of Parliament, which is expected to have a significant impact on how competition law is enforced in the digital space. In this briefing, we therefore take a look at what recent CMA activity tells us about the rationale for the new legislation once it is in force, and how it has highlighted a desire for key reforms to the UK competition law regime.

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What are the proposed reforms?

As set out in more detail in our August 2021 and November 2022 briefings, the Digital Markets, Competition and Consumer Bill ("Bill") is expected to improve the effectiveness of the existing UK competition law regime in dealing with competition concerns arising in digital markets and the tech sector, in particular in response to the alleged market dominance of a few players.

While the Bill has not yet been published, following the recent disbanding of the Department for Business, Energy and Industrial Strategy and its replacement with four new Government departments (including a Department for Science, Innovation and Technology and a Department for Business and Trade), we anticipate that the shift and transfer of digital-related policy may bring some renewed focus to the Bill and its publication, with the current expectation still being that the first reading of the Bill will take place in spring of 2023.

In the meantime, based on information resulting from several Government consultation processes, it is envisaged that under the terms of the anticipated Bill the new Digital Markets Unit ("DMU") (which is already set up in shadow form within the Competition and Markets Authority ("CMA")) will become responsible for promoting and regulating competition in digital markets. Although subject to the Bill's final terms, the expectation is that the Bill will contain significant and wide-ranging reforms that give the DMU the power to designate firms as having 'strategic market status' ("SMS") where it concludes that a firm has 'substantial and entrenched market power' in at least one activity, and that this power provides it with a 'strategic position'. Designation would mean that a new mandatory Code of Conduct ("Code") will then govern the behaviour of those companies designated as having SMS, and robust enforcement powers will underpin the Code with pro-competitive interventions expected to become available to the DMU alongside it.

In addition, the Government is considering whether the CMA should have specific powers to scrutinise and intervene in certain mergers involving SMS designated companies (and what substantive standard should be applied where a review takes place).

What has incentivised the proposed new regime?

The existing competition law regime has, in the CMA's view, not adequately enabled the CMA to ensure that competition works well in digital markets in the UK, given in particular the alleged market dominance of a few key tech companies and the unique and dynamic nature of digital markets.

The proposed new regime plans to introduce tougher competition oversight over major players in the tech sector, and is intended to promote a more coordinated and interventionist approach by the DMU within the CMA (among other regulators, such as the Information Commissioner's Office).

Which CMA competition cases have contributed to or highlighted the need for these reforms?

The CMA has initiated a range of different competition cases in the tech sector over recent years, including market studies and reports, behavioural investigations and merger investigations – we explore some of the most notable cases below.

A number of the same themes repeat themselves across these cases, supporting the rationale for the Bill and the dedicated DMU.

Recent digital market studies, reports and investigations

The concerns identified by the CMA in the digital market studies and reports which it has carried out to date, set the scene for the types of issues which the DMU may be expected to address in monitoring the behaviour of SMS firms, and provide context to the other CMA cases discussed below.

Online platforms and digital advertising

In June 2020, the CMA launched a market study into online search and social media platforms and digital advertising due to competition concerns, in the CMA's view, potentially arising from the behaviour of the largest players – most notably Google and Facebook (now Meta) – and how such behaviour could be impacting consumers.

While fundamentally the platforms provided by Google and Meta are free for users, the CMA's report noted that both involve the sale of advertising services to businesses – including, for example, for adverts to appear higher up in Google's search terms, or to appear on a user's Facebook home page. The CMA estimated that in 2019, Google and Meta's revenues in this regard made up 80% of all digital advertising revenues in the UK with both, according to the CMA, having dominant positions in the search advertising and display advertising markets respectively.

In the CMA’s view, its findings suggested that self-reinforcing economies of scale for the biggest players in the search advertising and display advertising markets have created an uneven playing field, with competitors unable to compete on equal terms, potentially resulting in reduced innovation, choice and higher advertising prices for consumers.

Ultimately, the CMA's final report identified the CMA's existing enforcement powers as unsuitable for effective regulation of issues of the 'scale and nature' identified, concluding in the report that a dedicated regulator is required to address the sources of the market power and harm to competition that the CMA believes do or could arise.

A speech by Dr Andrea Coscelli (the Chief Executive of the CMA at the time) on 9 October 2020 highlighted these points and set the scene for why the incoming Bill and DMU are considered necessary by the CMA and the UK Government more generally. Coscelli noted that, the 'unassailable market positions' of players such as Meta and Google, who are 'protected by network effects' and active over many adjacent markets, have created a situation where the CMA believes that rivals cannot compete on equal terms.

Coscelli indicated that the case for a new ex-ante regulatory regime was therefore 'clearly made out', noting in a later speech of 28 October 2021 that: (i) the CMA's existing tools are 'too slow to grapple with fast-moving digital markets', (ii) competitors and consumers who are losing out cannot afford to wait for years of enforcement action and potential litigation to conclude, and (iii) the CMA's remedies are in any event often insufficient to restore competition, in particular noting the ineffective deterrent effect that large fines appear to have on the largest firms.

Mobile ecosystems

A year later, in June 2021, the CMA undertook a study into the mobile ecosystems of Apple and Google (which cover the operating system, app store and default web browser employed by a mobile device).

The CMA found that Apple and Google effectively exercise a 'duopoly' over mobile ecosystems, allowing them to determine the terms and conditions ("T&Cs") for the distribution of apps and choice of web browser on iOS and Android devices – for example, Safari and Chrome are the default web browsers on all iOS and the majority of Android devices respectively, and the App Store and Google's Play Store are also the only way of downloading and accessing apps on iOS devices and most Android devices. The latter then enables Apple and Google to determine which apps are available on iOS and Android devices and to set the T&Cs that app developers must accept in order to access iOS and Android users.

The CMA concluded that, as a result of their ecosystems, both Apple and Google therefore have 'substantial and entrenched market power' which allows them to 'determine the rules of the game' and make it difficult for rival businesses to compete. The CMA stated that the nature of the issues identified here would consequently again be better addressed with bespoke intervention by the DMU.

A speech by Sarah Cardell (the current Chief Executive and former General Counsel of the CMA) on 28 November 2022 picked up on many of these themes. Cardell noted the CMA's concerns that digital markets may tend to lean towards concentration by one or two large firms who dominate those markets. Further, that such dominance is often enhanced by network effects, economies of scale and data advantages, with the unprecedented scale of the ecosystems and breadth of activities of such players creating a dependency for the people and businesses who rely on them, including their competitors.

Cardell also commented on the limits on the CMA's toolkit, noting that it is (i) backwards looking and can only tackle harms once they have already occurred, and (ii) favours one-off remedies.

In a similar vein to earlier speeches by Coscelli, Cardell therefore stated that the DMU and incoming Bill will enable the CMA to be better equipped at addressing such concerns, establishing a more flexible, collaborative and forward-looking regime that the CMA anticipates will enable the DMU to engage constructively with SMS firms, shape behaviour as markets evolve and to intervene to address underlying sources of such market power, ultimately driving longer-term changes.

Mobile browsers and cloud gaming

Following the findings in the CMA's mobile ecosystems report, in November 2022 the CMA commenced a formal market investigation into the supply of mobile browsers and browser engines, and the distribution of cloud gaming services through mobile app stores.

The investigation is focused on identifying whether Apple and Google might be using their 'substantial and entrenched market power' in the supply of mobile browsers and engines, and mobile operating systems and app distribution, in order to restrict competition in the supply of web browsers and cloud gaming. The CMA is concerned this may lead to less choice for consumers and stifle innovation in the creation of new web browsers and apps, particularly in relation to cloud gaming (in light of it being a nascent market, and potentially an important new entrant in the wider video gaming industry).

It would therefore not be surprising if any findings by the CMA of restrictions on competition would eventually be addressed through the mechanisms which are intended to be made available to the DMU, in order to target the underlying causes of harm to competition.

This investigation is ongoing and we await the CMA's preliminary findings. However, Apple has in the meantime launched an appeal on procedural grounds against the CMA's decision to open the investigation. Apple argues that the CMA's reference decision did not comply with the requirements of the Enterprise Act 2022, and it is therefore seeking to obtain an order to quash that decision and for a declaration that the market investigation is invalid.

Recent digital merger investigations

The following recent merger investigations reflect action taken by the CMA to try to address some of the concerns identified in the above studies into the digital economy, using the powers currently available to it – particularly with regards to the online display advertising and cloud gaming markets.

Meta / Giphy

The completed acquisition of Giphy (a US online GIFs and animated stickers database and search engine) by Meta was called in by the CMA for review in 2020, with the CMA ultimately requiring Meta to divest Giphy (after a battle in the Competition Appeal Tribunal).

Despite Giphy having no turnover, assets, employees or physical presence in the UK, the key issues identified by the CMA were that the acquisition could lead to a substantial lessening of competition ("SLC") in the UK in two respects:

First, regarding the supply of display advertising in the UK at a horizontal level. Due to Giphy's 'paid alignment' model which it was considering expanding to the UK and which involved brands paying a fee in order to align their GIFs with popular search terms, the CMA's view was that the transaction could remove Giphy as a potential competitor to Meta in the UK display advertising market, thereby stifling innovation for UK businesses that pay for advertising space. In other words, the CMA found that absent the transaction Meta would have viewed Giphy as an increasingly dynamic threat in display advertising.
Second, regarding the supply of social media services worldwide, due to vertical effects resulting from input foreclosure. In the CMA's view, its findings suggested that the transaction could enable Meta to restrict other social media sites from accessing Giphy's GIFS, or make their terms of access unfavourable (including by limiting rival platforms' access to engaging features). Further, that this could make the platforms of those competitors less attractive to consumers, driving more traffic to Meta (with Meta's platforms already accounting for 73% of all time spent on social media in the UK in 2020).

Given Giphy's tenuous UK nexus, and the discourse surrounding whether a 'relevant merger situation' was in practice created, the expected provisions of the Bill may be welcomed, at least by the CMA, for the purposes of establishing (with ease) jurisdiction over future potential 'killer acquisitions' (i.e. where nascent start-ups are acquired by large market players before they become a competitive threat).

The CMA reached this finding despite the vexed local nexus, Giphy's core market being free searchable GIF libraries and its paid alignment model being in its very early days. The CMA's focus on the loss of 'potential' competition and innovation also clearly indicates a particular desire to take steps to protect any inkling of competition in these types of digital markets, and reflects a move towards a more unconventional theory of harm.

Indeed, Cardell acknowledged this shift towards 'novel' concerns in two speeches delivered on 25 January 2023 and 27 February 2023, noting that they are in part caused by the rapidly evolving digital economy and the ability of a few players to move into adjacent and nascent markets, which, in the CMA's view, risks competition from UK start-ups being hindered by the market power of 'digital giants'.

Meta / Kustomer

In July 2021, the CMA also investigated Meta's acquisition of Kustomer (a customer relationship management ("CRM") platform that included a proprietary live webchat channel for businesses to communicate with their customers ("B2C")). Through its Messenger, Instagram and WhatsApp channels, Meta was noted by the CMA as having an already significant share of the same B2C messaging market.

Although Kustomer's presence in both the B2C messaging and CRM markets was minimal, the CMA noted that concerns around any level of reduction in competition (even if only minimal) were heightened here by the CMA's view that Meta also had parallel existing significant market power in online display advertising.

However the CMA concluded that, due to the size of Kustomer, any potential increase in access to data gained by Meta through Kustomer's CRM services would not raise barriers to entry in online display advertising (by improving Meta's targeted advertising), nor would any potential foreclosure of access to Meta's messaging services for other CRM providers (in order to give Kustomer a competitive advantage in the CRM market) lead to a great deal of switching to Kustomer. As a result, the transaction was cleared at Phase I.

The European Commission reviewed this case in parallel to the CMA, and referred it for an in-depth Phase 2 investigation, before ultimately clearing the deal and rejecting the theories of harm that (i) it might result in an increase in Meta’s market power in online display advertising, and (ii) there might be harm resulting from Meta’s increased access to data.

Microsoft / Activision Blizzard

In July 2022, the CMA opened a merger investigation into the proposed acquisition of Activision Blizzard (a developer and publisher of games for PCs, consoles and mobile devices, including the best-selling franchises Call of Duty and World of Warcraft) by Microsoft, with the CMA ultimately referring the transaction for a Phase 2 review. The CMA's Phase 2 provisional findings were published on 8 February 2023.

The investigation reflects many of the themes and concerns arising from the CMA's mobile ecosystems report and its ongoing market investigation into mobile browsers and cloud gaming

The key theories of harm relate to the following vertical effects:

Input foreclosure in the market for gaming consoles and multi-game subscriptions. The CMA is concerned that Microsoft could make access to Activision games exclusive to Xbox or Xbox Game Pass, and/or degrade the content of or increase the wholesale price of Activision's games for competing gaming console and multi-game subscription providers, therefore reducing competition with other gaming consoles in the UK (such as Sony's PlayStation, for example). Central to this concern is the highly concentrated nature of the gaming console market and the fact there has been limited new entry over the last 20 years. In addition, multi-game subscription services present a rare opportunity for new entry into the wider gaming market, and in order to succeed Activision's gaming catalogue may be key to attracting users.

The CMA is exploring whether restricting access to Activision's catalogue could therefore raise barriers to entry into both the wider gaming market and the multi-game subscription market itself, reduce existing and potential competition from other current and much smaller providers, and entrench Microsoft's market position as the already leading provider of multi-game subscription services via its Xbox Game Pass.

Foreclosure of competing cloud-gaming service providers by leveraging Microsoft's broader ecosystem. The CMA has noted that cloud gaming is a new and rapidly growing market which could become a genuine rival to game consoles (a highly concentrated market with limited new entry for some time), since cloud-based games can be streamed directly on various devices, including computers.

The CMA considers that Microsoft may already be at an advantage over other cloud gaming competitors in this respect due to its ecosystem (which includes a leading game console (Xbox), a leading cloud platform providing the necessary infrastructure for cloud gaming (Azure), a cloud based steaming service (Xbox Cloud Gaming) and a leading PC operating system (Windows OS)), with the CMA noting that Microsoft already provides 60 to 70% of all cloud gaming services worldwide.

All of these aspects are considered important for cloud gaming providers to be successful, and most competitors lack their own infrastructure or, for example, are required to pay for a licence to run their games on PC operating systems. As a result, combined with Activision's gaming content, the CMA considers that Microsoft's integrated offering could be significantly strengthened and could enable Microsoft to further leverage its ecosystem in order to increase barriers to entry and foreclose current and future cloud gaming competitors.

In provisional findings, the CMA therefore indicated an initial view that the acquisition could harm UK gamers, resulting in "higher prices, fewer choices, or less innovation for UK gamers".

A parallel investigation is being run by the European Commission, in addition to a legal challenge brought by the Federal Trade Commission ("FTC") in the United States. Similarly to both the UK and EU regulators, the FTC has indicated that the acquisition may "enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business" in order to "harm competition in multiple dynamic and fast-growing markets", including by withholding Activision's game content.

While this case would appear to be an appropriate candidate for open access behavioural remedies, regrettably the CMA has to date been reluctant to impose behavioural remedies even though at times the European Commission has seemed more sympathetic to this type of remedy. In a speech delivered on 27 February 2023, Cardell reconfirmed this position, noting that the CMA typically considers that behavioural remedies do not address the underlying causes of competition concerns identified and also lead to practical challenges in terms of designing and monitoring an effective remedy capable of restoring competition.

In connection with this, a senior director in Mergers at the CMA recently acknowledged the impact which the Bill could have on such merger investigations, in particular noting that behavioural remedies could be used more commonly to address harmful mergers in the online economy once the DMU becomes fully functional. This may in part be due to the DMU's potential ability to monitor the behaviour of firms with SMS status on an ongoing basis, which is something that the CMA considers its 'backwards-looking toolkit' is not necessarily well-equipped to do.

Recent digital behavioural investigations

It is perhaps unsurprising that similar concerns to those identified by the CMA in market studies and merger investigations repeat themselves in behavioural investigations related to the digital sector, which the CMA has recently taken on.

Google's Privacy Sandbox

In light of Google's strong market position in digital advertising and ad tech services (as highlighted in the CMA's online platform and digital advertising market study above), in January 2021 the CMA opened an investigation into whether Google's 'privacy sandbox project' would amount to an abuse of dominance under Chapter 2 of the Competition Act 1998 ("CA98").

The Google privacy sandbox project aims to disable third party cookies on the Chrome browser and replace them with a new set of proprietary tools for targeted advertising and consumer privacy, transferring key functionality to Chrome.

Given the important role that third party cookies play in assisting businesses with personalising their adverts and funding the free online content of publishers (such as newspapers) via tracking user activity, the CMA raised concerns that the project could lead to advertising spend becoming even more concentrated on Google's own services and impact the ability of publishers to generate revenue from and continue to produce valuable free online content. Ultimately, the CMA was concerned that this could entrench Google's already strong market power in ad tech services by, amongst other things, creating unequal access to user tracking functionalities (with Google retaining this functionality for itself in Chrome but restricting access by third parties), and Google self-preferencing its own advertising services.

A suite of final commitments were therefore agreed between the CMA and Google in February 2022, including that the CMA will play a role (alongside the Information Commissioner's Office) in designing Google's proposals to ensure competition in digital advertising is not adversely impacted.

Given the CMA's ongoing role in the design, development and implementation of the proposals, it is expected that this work will fall under the DMU's particular remit once it is properly in force, and again supports the CMA's rationale for a dedicated unit.

Apple and Google's App Store Rules

In March 2021, the CMA commenced a Chapter 2 CA98 investigation in relation to Apple's distribution of apps on iOS devices and the T&Cs that app developers must accept in order to access and distribute their apps on the App Store (noting that this is the only way to download apps on iOS devices and therefore to reach Apple's wide customer base).

Such T&Cs include requiring that all 'in-app' purchases for, for example, app add-ons or upgrades must be made using Apple's proprietary App Store payment system (rather than, for example, the consumer being diverted to the app developer's own website to make payment), essentially tying these payments to the App Store's exclusivity in iOS app distribution and enabling Apple to then charge a commission of up to 30% on all purchases made.

The CMA's theory of harm explores whether Apple is using its bargaining power to abuse a dominant position in the distribution of apps on Apple devices and enforce unfair or anti-competitive terms on app developers to its own benefit. This reflects similar points that were later highlighted in the CMA's mobile ecosystems report, as discussed above.

Potentially in connection with the findings of that report, in June 2022 a similar investigation was initiated against Google in relation to the distribution of apps on Android devices and the T&Cs of its Google Play Store (again including the fact that all in-app purchases must be paid for using Google's own payment system).

While both investigations are ongoing, it is likely that the themes identified in the mobile ecosystems study will continue to be relevant, and could perhaps be picked up by the DMU in respect of the anticipated enforceable Code that firms with SMS designated status will be expected to abide by in order to combat exploitative or exclusionary abusive practices.

Indeed, in an interview on 25 January 2023, Cardell openly acknowledged that many of the CMA's current competition law cases may be more effectively tackled through SMS designation, the conduct requirements under the Code and the pro-competitive interventions available to the DMU once it is in force. This is in part due to the DMU's anticipated ability to address the market power of players such as Apple and Google in a forward-looking manner (which is not currently possible), to monitor the behaviour of SMS firms and to work with 'dominant platforms to set conduct requirements to ensure they don't exploit UK businesses or exclude innovative UK competitors'

A parallel investigation is also being run by the European Commission, with a focus on whether Apple's role as a 'gatekeeper' to the distribution of apps on iOS devices is restricting competition in music streaming and e-books/audiobooks. The CMA has indicated that it will work closely with the Commission as the investigations develop.

Google's Ad-Tech Practices

In further keeping with the CMA's concerns around the behaviour of big tech firms with significant market power in digital advertising and ad tech intermediation (i.e. services which facilitate the sale of online advertising space between, for example, newspaper publishers and advertisers, forming an 'ad tech stack' supply chain), in May 2022 the CMA initiated an investigation into whether Google is abusing a dominant position under Chapter 2 CA98, in relation to its strong position at various levels of the ad-tech supply chain.

The CMA is exploring whether Google is (i) self-preferencing its own services at multiple levels of the chain (i.e. where it is both supplier and customer) in order to exclude and disadvantage rivals at each of the relevant levels, (ii) limiting the interoperability of its services with third party platforms at other levels of the chain to the advantage of Google's own competing services at those levels, and/or (iii) contractually tying its services to contracts with such third party providers, in order to exclude other competing providers.

This follows a Chapter 1 CA98 investigation, opened in March 2022, into Meta and Google's 'Jedi Blue' agreement, pursuant to which the CMA investigated whether Meta may have agreed with Google to halt its advert bidding initiatives for the sale of online ad space to multiple bidders at the same time (known as 'header or 'open bidding' which allows sellers to compare bids and encourage bidders to compete against each other for ad space, and would have rivalled bidding exchange services offered by Google, threatening Google's position as an 'ad exchange gatekeeper') – thereby stifling competition between them.

The CMA closed the case on 10 March 2023 on the basis of "administrative priority grounds" and without any anti-competitive finding.

This case was initially brought to light by an antitrust complaint filed in the US in a New York District Court. A parallel investigation was then run by the European Commission. The Commission closed its investigation in December 2022 without finding any competition concerns.

Amazon Marketplace

Amazon is subject to an ongoing Chapter 2 CA98 investigation by the CMA, which commenced in July 2022, surrounding its 'Amazon Marketplace' practices in the UK. The CMA's concerns around the use of online choice architecture by big tech firms are mirrored in this case.

More specifically, the CMA is considering whether Amazon may be using data obtained from third-party sellers on its Marketplace in order to unfairly advantage its own retail businesses, in addition to investigating how Amazon's algorithm chooses which suppliers' products are sold under the Prime label and/or offered with the one-click 'Buy Now' or 'Add to Basket' options (known as the 'Buy Box'), with those products ultimately more attractive to consumers due to saving time in the checkout process and including free delivery.

The CMA's theory of harm includes whether Amazon may be using a combination of these practices to influence consumers and self-preference its own retailers or the third-party sellers that use its Marketplace services (such as its fulfilment services for the storage, packaging and delivery of third-party sales).

As with the Apple and Google investigations, such behavioural concerns could again bear some relevance to the remit of the DMU and the Code that it is expected to be able to enforce against big tech firms.

A similar investigation into Amazon's practices was also conducted by the European Commission in relation to the same issues of self-preferencing and use of third-party Marketplace data. The Commission has since accepted final commitments from Amazon in this respect, which will ensure that Amazon does not use Marketplace data to give itself an unfair advantage as against independent sellers and that it grants non-discriminatory access to the Buy Box and Amazon Prime.

What conclusions can we draw?

It is evident from the CMA competition cases discussed above that the theme of a few big tech players acting as potential 'gatekeepers' in a range of markets – from online advertising, mobile web browsers and app stores, to e-commerce platforms and video gaming – is prevalent in each case, with the CMA demonstrating an increasing desire to protect nascent players and potential competition, and to take unconventional steps to try to even out the playing fields in the digital sector in light of the limits of its current enforcement toolkit.

The incoming Bill and the remit of the DMU are therefore expected to form a clearer regime for the CMA to address any underlying sources of market power, economies of scale and network effects which may benefit these players, and to bring together a combination of forward-looking and ongoing behavioural and investigatory measures and tools.

In this sense, while the Bill and the new regime will almost certainly entail additional competition regulation for certain tech players, it may (depending on how it is implemented) also over time result in a more predictable regulatory experience for those companies in the tech space, involving more regular dialogue with the CMA or the DMU, similar perhaps to that seen in other sectors (for example, telecoms and energy) which are already subject to a degree of forward-looking competition and economic regulation.

In the meantime, the existence of the DMU at least in shadow-form may at least assist in influencing the CMA's general approach to such issues, albeit within the confines of the CMA's existing powers.

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