Andrea Coscelli, Chief Executive of the CMA, delivers a keynote speech to the annual Fordham Competition Law Institute conference on the CMA’s existing tools and a new regime to support competition and innovation in digital markets.
Delivered on:
9 October 2020 (Original script, may differ from delivered version)
Dr Andrea Coscelli CBE
"Good morning and it’s a pleasure to be with you this morning (albeit virtually from my office in London).
I plan to focus on the CMA’s work in relation to digital markets, and in particular, our emerging views in relation to the design of a new ex-ante pro-competition approach to address some of the harms in digital markets we see. Furthermore, I’ll talk about how the CMA is maximising the use of its existing toolkit to deal with these problems.
Why is competition in digital markets important now?
No-one could have anticipated the situation many Governments around the world now find themselves in as a result of this pandemic. And clearly economic recovery is now dominating the agenda in most jurisdictions.
Competition is vital to supporting economic growth. Competition spurs dynamic innovation, which is crucial in fuelling improvements in productivity and growth. Digital markets are widely recognised as being one of the most dynamic and innovative areas of most economies, with huge potential for value creation. It is imperative that we ensure these markets continue to drive innovation.
The need for a new approach to promote competition and innovation in digital markets
Earlier in the year we published the findings and recommendations arising from our year-long market study into online platforms and digital advertising. This piece of work considered how advertising revenue drives the business model of major platforms. Our work found that large multinational online platforms such as Google and Facebook now have a central role in the digital advertising ecosystem and have developed such unassailable market positions that rivals can no longer compete on equal terms. In particular, their large user base is a source of market power, leading to weak competition in search and social media.
This matters to consumers who receive reduced innovation and choice but also will be paying higher prices for goods and services when producers pass the high cost of advertising onto consumers. We found that Google’s prices are around 30% to 40% higher than Bing when comparing like-for-like search terms on desktop and mobile.
Furthermore, we are concerned the largest platforms are increasingly acting as a brake on innovation, setting the terms of competition in a way that tips the balance in their own favour and undermining the business models of new entrants and potential challengers alike.
Our key recommendation was that a new regulatory regime is required in the UK to ensure these markets continue to deliver benefits to consumers, businesses and the economy as a whole.
For me, the case for regulation is clearly made. We have firms with very substantial and enduring market power, protected by strong network effects, who are able to leverage into adjacent markets, and who can engage in envelopment strategies that further protect their core sources of market power. These firms are active across many markets and in many cases also act as an important access point to customers, giving them a strategic position. They can use this to exploit the many consumers and businesses who rely on them and act to exclude or quash innovative competitors. Existing tools are clearly not sufficient to address these potential harms. For me, regulation seems to be the absolute best way at this stage to ensure digital markets continue to thrive – and deliver the wider benefits we value so highly. Structural solutions might be needed in some cases if regulation is not effective - similar recommendations are included in the recent report by the US Judiciary Antitrust Subcommittee.
In the course of our work we heard from many companies who told us that the significant market power of some online platforms poses an existential threat to their businesses. We believe that, without reform, existing market dynamics in these industries will mean that the next great innovation cannot emerge to impact our lives in the way that previous advances in digital markets have done in the past.
As the Furman Review had done previously, we recommended that within the new regime a ‘Digital Markets Unit’ should be established with the ability to enforce a code of conduct to ensure that platforms with ‘Strategic Market Status (SMS)’, like Google and Facebook, do not engage in exploitative or exclusionary practices, or practices likely to reduce trust and transparency, and to impose fines if necessary.
The DMU would also have the ability to impose ‘pro-competition interventions’ to drive greater competition and innovation in digital advertising markets. These include requiring Google to open up its click and query data to rival search engines to allow them to improve their algorithms so they can properly compete. It would also include requiring Facebook to increase its interoperability with competing social media platforms.
The CMA is now building on these recommendations in its work leading a Digital Markets Taskforce, which was commissioned by the UK Government earlier this year to provide advice on digital regulation. Alongside the code of conduct and the pro-competition interventions, as part of our advice we are also considering a third pillar which would form part of the new SMS regime - a parallel merger regime for acquisitions by companies with Strategic Market Status. We are considering whether the evidence supports a policy justification for such a regime, based on the particular features of digital markets that increase the risks of consumer harm arising from acquisitions by particularly powerful companies, and the heightened risks of underenforcement. In particular, we are analysing the extent to which such concerns cannot be fully addressed under the standard mergers regime.
As I will mention later on in this speech, the CMA’s approach to digital mergers has already evolved considerably. It is against this backdrop that we are considering the merits and characteristics of a special parallel regime.
Our current thinking is that any special regime would have its own jurisdictional and substantive tests. In relation to the jurisdictional test, in contrast with the UK’s standard voluntary mergers regime, companies subject to the special regime could be required to notify all transactions to the CMA, subject to certain limited exemptions. In relation to the substantive assessment, competition concerns could be assessed under the standard ‘substantial lessening of competition’ test. However, the inherent uncertainty that often characterises developments in these digital markets, combined with the increased risks of consumer harm where the acquirer already has Strategic Market Status, may justify the use of a more cautious standard of proof than the ‘balance of probabilities’ threshold under the standard regime. The regime could also accommodate a separate assessment of non-competition concerns such as data protection.
Why regulation?
The origins of economic regulation in Europe arose in the regulation of previous state-owned monopolies like utility companies. Here regulation was less about competition but more about controlling outcomes, like prices, to ensure consumers received a fair deal. However, over the past 30 years or so, economic regulation has become far more focused on promoting competition and innovation through opening up access to markets. For example, in telecoms, Ofcom’s work to open up access to parts of BT’s existing network has enabled innovative competitors to provide more advanced broadband services, and is now helping to stimulate investment in new fibre networks from challenger firms. ..."
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