Government plans to create a new ‘Digital Markets Unit’ risk stifling investment and innovation in the tech sector, according to a new report by the Institute of Economic Affairs.
Part of the Competition and Markets Authority, the DMU would regulate firms in the British digital sector, with specific powers to target businesses deemed to possess strategic and entrenched power in one area of commercial activity. These tech firms – designated with ‘Strategic Market Status’ (SMS) – would be subject to fines of up to 10% of their global turnover for falling foul of the regulator. This comes on the back of growing hostility towards ‘big tech’ amongst European legislators over the last few years.
Currently, the proposed codes of conduct in government plans would empower the CMA to substitute the business models of SMS firms with its own. If deemed to be in an entrenched position, DMU bureaucrats would be able to define the terms of core business, data sharing practices and platform interoperability of SMS. As argued in the report by the IEA’s Victoria Hewson and Cento Veljanovski, this proposal is a form of central planning, bringing with it a range of potentially adverse consequences.
There is a risk of regulatory capture as special interest groups take to lobbying the DMU for specific protections covering their business models. There is evidence of this taking place already. Upon the Unit’s announcement, the Professional Publishers Association called for it to tackle ‘specialist media-specific issues’. And recently, the CMA and OFCOM suggested that preventing large platforms ‘free riding’ on publishers is included in the DMU’s codes of conduct.
Demanding SMS firms make their core services interoperable with third-party platforms risks giving rise to a myriad of new security vulnerabilities. Firms subject to DMU action would need to develop software to facilitate data sharing with the services provided by other firms, introducing another attack surface for cybercriminals. Interoperability mandates could also be leveraged by malicious actors to syphon off user data. These types of risks would likely result in an ever-growing spider’s web of regulation to fix problems the DMU creates.
The government’s approach to digital markets is to act preemptively to prevent firms from engaging in anti-competitive behaviour. Consumer Minister Paul Scully said as much in May, proclaiming that these measures would ‘stop companies from using their powers to harm consumers’. For this to work without adverse effects, the DMU – a body stacked with state officials – would need complete information and foresight into how digital markets and firms operate. This is unrealistic.
At the core of these proposals is the perverse view held by the government that tech firms like Google and Meta are ravenous beasts, exploiting consumers on an industrial scale.
On the contrary, the services offered by big tech firms tend to constitute a mutually beneficial two-sided exchange. For example, Google and Meta offer services that are nominally free of charge, in return for user data to help generate advertising revenue and improve in-house algorithms. Furthermore, as noted in the IEA’s report, the data accumulation benefits accrued by big firms are often short-lived with spill-over effects that benefit, not harm, rivals.
As the government looks to sharpen the UK’s competitive edge, plans for the DMU should be reconsidered. It would be injudicious to set up a unit that is in effect designed to micromanage successful businesses when there are burdensome regulations like the GDPR, still in British law post-Brexit, that cause far more harm to small digital firms and challenger businesses than the tech giants do.