EC Finally Unveils Digital Services Act and Digital Markets Act

The EU releases its proposals to remake digital markets.

The European Commission (EC) has released its draft proposals to remake how the European Union (EU) regulates digital markets and digital services, the latest in the bloc’s attempts to rein in what it sees as harms and abuses to people and competition in Europe and the world. At the earliest, these proposals would take effect in 2022 and are sure to be vigorously opposed by large United States (U.S.) multinationals like Google and Facebook and will also likely faced more restrained pushback from the U.S. government.

The Digital Markets Act would allow the EU to designate certain core platform services as gatekeepers subject to certain quanitative metrics or on a case-by-case basis. Once a company is deemed a gatekeeper, it would be subject to much greater regulation by the EU and violations of the new act could result in fines of 10% of worldwide revenue.

In its press release, the EC asserted:

European values are at the heart of both proposals. The new rules will better protect consumers and their fundamental rights online, and will lead to fairer and more open digital markets for everyone. A modern rulebook across the single market will foster innovation, growth and competitiveness and will provide users with new, better and reliable online services. It will also support the scaling up of smaller platforms, small and medium-sized enterprises, and start-ups, providing them with easy access to customers across the whole single market while lowering compliance costs. Furthermore, the new rules will prohibit unfair conditions imposed by online platforms that have become or are expected to become gatekeepers to the single market. The two proposals are at the core of the Commission’s ambition to make this Europe’s Digital Decade.

In the Digital Markets Act, the EC explained the problem with large platforms dominating certain digital markets. The EC discussed the harm to people and medium and small businesses as some large companies control certain markets and use their size and dominance to extract unfair prices for inferior services and products. The EC listed the core platform services that might be regulated:

• online intermediation services (incl. for example marketplaces, app stores and online intermediation services in other sectors like mobility, transport or energy)
• online search engines,
• social networking
• video sharing platform services,
• number-independent interpersonal electronic communication services,
• operating systems,
• cloud services and
• advertising services, including advertising networks, advertising exchanges and any other advertising intermediation services, where these advertising services are being related to one or more of the other core platform services mentioned above.

Clearly, a number of major American firms could easily be considered “core platform services” including Amazon, Apple, Google, Facebook, Instagram, YouTube, WhatsApp, Microsoft, and others. Whether they would be deemed gatekeepers would hinge on whether they meet the quantitative metrics the EU will put in place, and this will be a rebuttable presumption such that if a firm meets the standards, it may present evidence to the contrary and argue it is not a gatekeeper.

The EC detailed the quantitative metrics in Article 3. A company may qualify if it meets all three of the following criteria subject to further metrics:

A provider of core platform services shall be designated as gatekeeper if:

(a) it has a significant impact on the internal market;

(b) it operates a core platform service which serves as an important gateway for business users to reach end users; and

(c) it enjoys an entrenched and durable position in its operations or it is foreseeable that it will enjoy such a position in the near future.

The other metrics include €6.5 billion in revenue over the last three years or a €65 billion market capitalization and the provision of core platform services in at least three member states to show a “significant impact on internal market.” For the second category listed above, a company would need to provide a core platform service to 45 million or more people in the EU and 10,000 or more businesses in the EU. And, for the last category, passing the 45 million user and 10,000 business threshold for three consecutive years would suffice. The act reads:

A provider of core platform services shall be presumed to satisfy:

(a) the requirement in paragraph 1 point (a) where the undertaking to which it belongs achieves an annual EEA turnover equal to or above EUR 6.5 billion in the last three financial years, or where the average market capitalisation or the equivalent fair market value of the undertaking to which it belongs amounted to at least EUR 65 billion in the last financial year, and it provides a core platform service in at least three Member States;

(b) the requirement in paragraph 1 point (b) where it provides a core platform service that has more than 45 million monthly active end users established or located in the Union and more than 10,000 yearly active business users established in the Union in the last financial year; for the purpose of the first subparagraph, monthly active end users shall refer to the average number of monthly active end users throughout the largest part of the last financial year;

(c) the requirement in paragraph 1 point (c) where the thresholds in point (b) were met in each of the last three financial years.

The EU would also be able to label a provider of core platform services a gatekeeper on a case-by-case basis:

Provision should also be made for the assessment of the gatekeeper role of providers of core platform services which do not satisfy all of the quantitative thresholds, in light of the overall objective requirements that they have a significant impact on the internal market, act as an important gateway for business users to reach end users and benefit from a durable and entrenched position in their operations or it is foreseeable that it will do so in the near future.

It bears note that a company would be found to be a gatekeeper if it is merely foreseeable that it will satisfy these criteria soon. This flexibility could allow the EU to track companies and flag them as gatekeepers before they, in fact, achieve the sort of market dominance this regulation is intended to stop.

Among the relevant excerpts from the “Reasons for and objectives of the proposal” section of the act are:

• Large platforms have emerged benefitting from characteristics of the sector such as strong network effects, often embedded in their own platform ecosystems, and these platforms represent key structuring elements of today’s digital economy, intermediating the majority of transactions between end users and business users. Many of these undertakings are also comprehensively tracking and profiling end users. A few large platforms increasingly act as gateways or gatekeepers between business users and end users and enjoy an entrenched and durable position, often as a result of the creation of conglomerate ecosystems around their core platform services, which reinforces existing entry barriers.
• As such, these gatekeepers have a major impact on, have substantial control over the access to, and are entrenched in digital markets, leading to significant dependencies of many business users on these gatekeepers, which leads, in certain cases, to unfair behaviour vis-à-vis these business users. It also leads to negative effects on the contestability of the core platform services concerned. Regulatory initiatives by Member States cannot fully address these effects; without action at EU level, they could lead to a fragmentation of the Internal Market.
• Unfair practices and lack of contestability lead to inefficient outcomes in the digital sector in terms of higher prices, lower quality, as well as less choice and innovation to the detriment of European consumers. Addressing these problems is of utmost importance in view of the size of the digital economy (estimated at between 4.5% to 15.5% of global GDP in 2019 with a growing trend) and the important role of online platforms in digital markets with its societal and economic implications.
• Weak contestability and unfair practices in the digital sector are more frequent and pronounced in certain digital services than others. This is the case in particular for widespread and commonly used digital services and infrastructures that mostly directly intermediate between business users and end users.
• The enforcement experience under EU competition rules, numerous expert reports and studies and the results of the OPC show that there are a number of digital services that have the following features: (i) highly concentrated multi-sided platform services, where usually one or very few large digital platforms set the commercial conditions with considerable autonomy; (ii) a few large digital platforms act as gateways for business users to reach their customers and vice-versa; and (iii) gatekeeper power of these large digital platforms is often misused by means of unfair behaviour vis-à-vis economically dependent business users and customers.
• The proposal is therefore further limited to a number of ‘core platform services’ where the identified problems are most evident and prominent and where the presence of a limited number of large online platforms that serve as gateways for business users and end users has led or is likely to lead to weak contestability of these services and of the markets in which these intervene. These core platform services include: (i) online intermediation services (incl. for example marketplaces, app stores and online intermediation services in other sectors like mobility, transport or energy) (ii) online search engines, (iii) social networking (iv)video sharing platform services, (v) number-independent interpersonal electronic communication services, (vi) operating systems, (vii) cloud services and (viii) advertising services, including advertising networks, advertising exchanges and any other advertising intermediation services, where these advertising services are being related to one or more of the other core platform services mentioned above.
• The fact that a digital service qualifies as a core platform service does not mean that issues of contestability and unfair practices arise in relation to every provider of these core platform services. Rather, these concerns appear to be particularly strong when the core platform service is operated by a gatekeeper. Providers of core platform providers can be deemed to be gatekeepers if they: (i) have a significant impact on the internal market, (ii) operate one or more important gateways to customers and (iii) enjoy or are expected to enjoy an entrenched and durable position in their operations.
• Such gatekeeper status can be determined either with reference to clearly circumscribed and appropriate quantitative metrics, which can serve as rebuttable presumptions to determine the status of specific providers as a gatekeeper, or based on a case-by-case qualitative assessment by means of a market investigation.

The Digital Services Act would add new regulation on top of Directive 2000/31/EC (aka the e-Commerce Directive) by “[b]uilding on the key principles set out in the e-Commerce Directive, which remain valid today.” This new scheme “seeks to ensure the best conditions for the provision of innovative digital services in the internal market, to contribute to online safety and the protection of fundamental rights, and to set a robust and durable governance structure for the effective supervision of providers of intermediary services.”

The Digital Services Act is focused mostly on the information and misinformation present all over the online world and the harms it wreaks on EU citizens. However, the EC is also seeking to balance fundamental EU rights in more tightly regulating online platforms. Like the Digital Markets Act, this regulation would focus on the largest online content, product and services providers, which, as a practical matter, would likely be Facebook, Amazon, Google, Spotify, and a handful of other companies. Once a company has 10% of more of the EU’s population using its offerings, then the requirements of the Digital Services Act would be triggered.

Additionally, the Digital Services Act unites two online issues not usually considered together in the United States (U.S.): harmful online content and harmful online products. Even though it seems logical to consider these online offerings in tandem, there is clear bifurcation in the U.S. in how these two issues are regulated to the extent they are at the federal and state levels.

The Digital Services Act “will introduce a series of new, harmonised EU-wide obligations for digital services, carefully graduated on the basis of those services’ size and impact, such as:

• Rules for the removal of illegal goods, services or content online;
• Safeguards for users whose content has been erroneously deleted by platforms;
• New obligations for very large platforms to take risk-based action to prevent abuse of their systems;
• Wide-ranging transparency measures, including on online advertising and on the algorithms used to recommend content to users;
• New powers to scrutinize how platforms work, including by facilitating access by researchers to key platform data;
• New rules on traceability of business users in online market places, to help track down sellers of illegal goods or services;
• An innovative cooperation process among public authorities to ensure effective enforcement across the single market.”

The EC explained

new and innovative business models and services, such as online social networks and marketplaces, have allowed business users and consumers to impart and access information and engage in transactions in novel ways. A majority of Union citizens now uses those services on a daily basis. However, the digital transformation and increased use of those services has also resulted in new risks and challenges, both for individual users and for society as a whole.

The EC spelled out what the Digital Services Act would do:

This Regulation lays down harmonised rules on the provision of intermediary services in the internal market. In particular, it establishes:

(a) a framework for the conditional exemption from liability of providers of intermediary services;

(b) rules on specific due diligence obligations tailored to certain specific categories of providers of intermediary services;

(c) rules on the implementation and enforcement of this Regulation, including as regards the cooperation of and coordination between the competent authorities.

The EC explained the purpose of the act:

• this proposal seeks to ensure the best conditions for the provision of innovative digital services in the internal market, to contribute to online safety and the protection of fundamental rights, and to set a robust and durable governance structure for the effective supervision of providers of intermediary services.
• The proposal defines clear responsibilities and accountability for providers of intermediary services, and in particular online platforms, such as social media and marketplaces. By setting out clear due-diligence obligations for certain intermediary services, including notice-and-action procedures for illegal content and the possibility to challenge the platforms’ content moderation decisions, the proposal seeks to improve users’ safety online across the entire Union and improve the protection of their fundamental rights. Furthermore, an obligation for certain online platforms to receive, store and partially verify and publish information on traders using their services will ensure a safer and more transparent online environment for consumers.
• Recognising the particular impact of very large online platforms on our economy and society, the proposal sets a higher standard of transparency and accountability on how the providers of such platforms moderate content, on advertising and on algorithmic processes. It sets obligations to assess the risks their systems pose to develop appropriate risk management tools to protect the integrity of their services against the use of manipulative techniques.

The EC summarized how the act will work:

• The operational threshold for service providers in scope of these obligations includes those online platforms with a significant reach in the Union, currently estimated to be amounting to more than 45 million recipients of the service. This threshold is proportionate to the risks brought by the reach of the platforms in the Union; where the Union’s population changes by a certain percentage, the Commission will adjust the number of recipients considered for the threshold, so that it consistently corresponds to 10 % of the Union’s population. Additionally, the Digital Services Act will set out a co-regulatory backstop, including building on existing voluntary initiatives.
• This proposal should constitute the appropriate basis for the development of robust technologies to prevent the reappearance of illegal information, accompanied with the highest safeguards to avoid that lawful content is taken down erroneously; such tools could be developed on the basis of voluntary agreements between all parties concerned and should be encouraged by Member States; it is in the interest of all parties involved in the provision of intermediary services to adopt and implement such procedures; the provisions of this Regulation relating to liability should not preclude the development and effective operation, by the different interested parties, of technical systems of protection and identification and of automated recognition made possible by digital technology within the limits laid down by Regulation 2016/679.
• Union citizens and others are exposed to ever-increasing risks and harms online – from the spread of illegal content and activities, to limitations to express themselves and other societal harms. The envisaged policy measures in this legislative proposal will substantially improve this situation by providing a modern, future-proof governance framework, effectively safeguarding the rights and legitimate interests of all parties involved, most of all Union citizens. The proposal introduces important safeguards to allow citizens to freely express themselves, while enhancing user agency in the online environment, as well as the exercise of other fundamental rights such as the right to an effective remedy, non-discrimination, rights of the child as well as the protection of personal data and privacy online.
• The proposed Regulation will mitigate risks of erroneous or unjustified blocking speech, address the chilling effects on speech, stimulate the freedom to receive information and hold opinions, as well as reinforce users’ redress possibilities. Specific groups or persons may be vulnerable or disadvantaged in their use of online services because of their gender, race or ethnic origin, religion or belief, disability, age or sexual orientation. They can be disproportionately affected by restrictions and removal measures following from (unconscious or conscious) biases potentially embedded in the notification systems by users and third parties, as well as replicated in automated content moderation tools used by platforms. The proposal will mitigate discriminatory risks, particularly for those groups or persons and will contribute to the protection of the rights of the child and the right to human dignity online. The proposal will only require removal of illegal content and will impose mandatory safeguards when users’ information is removed, including the provision of explanatory information to the user, complaint mechanisms supported by the service providers as well as external out-of-court dispute resolution mechanism. Furthermore, it will ensure EU citizens are also protected when using services provided by providers not established in the Union but active on the internal market, since those providers are covered too.
• With regard to service providers’ freedom to conduct a business, the costs incurred on businesses are offset by reducing fragmentation across the internal market. The proposal introduces safeguards to alleviate the burden on service providers, including measures against repeated unjustified notices and prior vetting of trusted flaggers by public authorities. Furthermore, certain obligations are targeted to very large online platforms, where the most serious risks often occur and which have the capacity absorb the additional burden.
• The proposed legislation will preserve the prohibition of general monitoring obligations of the e-Commerce Directive, which in itself is crucial to the required fair balance of fundamental rights in the online world. The new Regulation prohibits general monitoring obligations, as they could disproportionately limit users’ freedom of expression and freedom to receive information, and could burden service providers excessively and thus unduly interfere with their freedom to conduct a business. The prohibition also limits incentives for online surveillance and has positive implications for the protection of personal data and privacy.

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