Tech Giants Risk Breakup Under Strict EU Digital Rules

Natalia Drozdiak

16 Dec 2020, 02:24 PM IST

(Bloomberg) -- U.S. and other major tech platforms that treat their own services more favorably, at the expense of rivals, could be forced to sell businesses and pay billion-dollar fines under strict rules unveiled by the European Union.

Under the EU’s new Digital Markets Act, companies deemed to be so-called “gatekeepers” won’t be allowed to rank their offerings above rivals on their own platforms, or use competitors’ data to compete with them, according to the proposed regulation released on Tuesday.

Companies like Amazon.com Inc, Apple Inc. or Alphabet Inc.’s Google could face fines of as much as 10% of their revenue if they don’t comply, while a company that has repeatedly breached the rules could face orders to divest businesses, confirming a Bloomberg report on Monday. Gatekeepers will also need to inform regulators about smaller acquisitions that would otherwise fall below traditional merger-review thresholds.

Tech Giants Risk Breakup Under Strict EU Digital Rules

The separate Digital Services Act could also foresee fines as high as 6% of revenue for social media platforms if they don’t comply with orders to remove terror propaganda or other illegal posts, along with other obligations such as carrying out reviews of systemic risks to their sites. The U.K., which left the bloc earlier this year, also announced similar rules on Tuesday.

”With today’s proposals, we are organizing our digital space for the next decades,” said EU Industry Commissioner Thierry Breton.

The regulations are some of the strictest set of technology rules to be proposed by the EU and aim to quash bad behavior by powerful platforms they see as posing a threat to the bloc’s society and economic markets. They could hamstring platforms from entering into new markets and tightly control how they develop new services.

Some tech representatives are already voicing their concerns with the plans.

“While we will review the commission’s proposals carefully over the coming days, we are concerned that they appear to specifically target a handful of companies and make it harder to develop new products to support small businesses in Europe,” said Karan Bhatia, Google’s vice president of government affairs & public policy.

The commission declined to list companies that would be deemed gatekeepers, but an internal review published separately on Tuesday showed a list of unfair practices based both on antitrust investigations and complaints raised by interviewees responding to the EU’s survey.

The study lists, among others, unfair contract terms by Apple with its app store and by Booking.com, as well as anti-competitive use of third party data by Amazon in its marketplace. It also flags Apple, Amazon and Booking as charging potentially excessive commissions.

Apple declined to comment on the proposals. Booking didn’t immediately respond to a request for comment about the EU plans. Amazon pointed to a blog it posted before the proposals were published Tuesday, saying that the same rules should apply to all companies.

EU officials say the gatekeeper regulation will complement antitrust law, and hopefully speed up investigations, by putting the onus on large players not to engage in anti-competitive behavior instead of placing the burden on antitrust enforcers to prove their practices breach the law.

Key Points From the Digital Markets Act
Companies will be designated gatekeepers based on their impact on the single market, whether they operate a service that’s an important gateway to reach users, and whether it “enjoys an entrenched position” in the market EU also to consider a company’s revenue, market capitalization, number of users or business users when deciding gatekeepers Gatekeeper companies won’t be allowed to treat their own services more favorably in rankings, or use data about business users to compete with them. Companies will also have to allow users to opt out of combining personal data across services, allow business users to offer same products at different prices and conditions than those on the platform Gatekeepers also obliged to offer fair terms to business users using their platforms, like app stores, as well as granting outside providers access and interoperability to hardware, software used by tech company. Gatekeepers will also be obliged to inform about planned acquisitions, including small ones that would otherwise fall below traditional merger review thresholds Fines for non-compliance wouldn’t surpass 10% of revenue or 1% for breaches of more procedural matters In cases of “systematic non-compliance,” the EU could order changes to how a service is provided for, as a last resort, order structural separation or divestitures in Europe.

Key Points From the Digital Markets Act

Companies will be designated gatekeepers based on their impact on the single market, whether they operate a service that’s an important gateway to reach users, and whether it “enjoys an entrenched position” in the market
EU also to consider a company’s revenue, market capitalization, number of users or business users when deciding gatekeepers
Gatekeeper companies won’t be allowed to treat their own services more favorably in rankings, or use data about business users to compete with them.
Companies will also have to allow users to opt out of combining personal data across services, allow business users to offer same products at different prices and conditions than those on the platform
Gatekeepers also obliged to offer fair terms to business users using their platforms, like app stores, as well as granting outside providers access and interoperability to hardware, software used by tech company.
Gatekeepers will also be obliged to inform about planned acquisitions, including small ones that would otherwise fall below traditional merger review thresholds
Fines for non-compliance wouldn’t surpass 10% of revenue or 1% for breaches of more procedural matters
In cases of “systematic non-compliance,” the EU could order changes to how a service is provided for, as a last resort, order structural separation or divestitures in Europe.

Companies will in part be deemed gatekeepers if annual revenue in Europe in the last three years is equal to or above 6.5 billion euros ($7.9 billion), or if average market capitalization in the last financial year amounted to at least 65 billion euros and the company provides a core service in at least three European countries. The EU said it will also look at whether a company controls distribution for business users, based on whether the platform has more than 45 million monthly active end-users in Europe and more than 10,000 yearly active business users.

Under the Digital Services Act, platforms would face a sliding scale of obligations based on their size. Very large online platforms will have to adhere to additional rules, including assessing risks of social harm such as the manipulation of their system to propagate inauthentic material.

The legislation also clarifies that platforms won’t be made liable for any content posted to their sites unless they’ve been made of aware of it. If a platform pro-actively identifies illegal material to take it down, they wouldn’t be exposed to greater liability, the EU said.

The commission proposals will still need sign-off from the bloc’s other lawmaking institutions, including the European Parliament and the Council of European member states, before they become law.