(Bloomberg View) -- The European Union intends to tighten the standards regulating the digital economy. Even as internet companies change their terms of service to comply with privacy regulations that take effect next month, the European Commission published the draft of new rules governing the interaction of online platforms such as Amazon, Apple and Google with the businesses that sell through them.
The proposed regulations, which aim to increase transparency and fairness, are overdue but far from sufficient.
Relying solely on a personal website to sell physical goods online is increasingly a non-starter: 56 percent of U.S., U.K., German and French consumers use Amazon as the starting point of their buying process. For software developers, intermediaries such as Apple’s App Store and the Google Play Store are almost unavoidable, though some rickety alternatives exist. If you run a hotel that’s not on Booking.com, you’d better be able to fill it by word of mouth; most hoteliers can’t. About 42 percent of Europe’s small and medium-sized businesses use online marketplaces to sell their products and services.
Today, these businesses are at the platforms’ mercy. A marketplace owner, for example, can launch a competing product and sell it on more favorable terms than outside vendors. That’s what Spotify says Apple is doing by claiming a share of its monthly subscription fees. In return, the streaming music service sells the subscription at a higher price to iPhone users, which makes Spotify’s product more expensive than Apple Music — the platform’s own offering. In a brief sent to the European Commission last year, Spotify called for “imposing heightened obligations in cases where the platform operator competes downstream on the platform against its own business users.”
Another common complaint is that the platforms’ terms for sellers are too convoluted and subject to abrupt unfavorable change. The European Games Developer Federation complained to the Commission that “even legal experts are struggling to have a proper overview on the contracts their companies are having with distribution platforms, as a developer might have from 10 to 20 different contracts with a single platform.” (That’s not only a problem for game developers: Amazon’s package for third-party sellers on its Marketplace is quite complex, too.) The many agreements protect the platform but not the sellers, who often can be kicked off without much of an explanation.
Platforms have few obligations to sellers. Some leave them to navigate Europe’s 28 different fiscal regimes. Ranking alghorithms, which essentially decide how many buyers see a product, are notoriously opaque. Even if a seller only uses its own website, Google search plays the role of a platform with a ranking algorithm — and it doesn’t say how it works.
The new draft regulation attempts to tackle all of these complaints. It requires marketplaces to offer sellers clear and unambiguous terms of service (if a court decides they aren’t doing so, the terms are void), to provide early warning of any changes and to explain why a seller is being kicked out. If the rules are adopted, platforms will have to disclose any preferential treatment they provide to their own services or those of partners. Platforms and search engines will also have to explain their ranking principles.
To resolve conflicts, platforms will be required to set up internal arbitration mechanisms using independent mediators. If these fail to materialize or to work properly, sellers will have the right to file collective lawsuits against platforms.
The Commission’s intention is laudable, but the rules aren’t particularly strict or specific. They mainly require platforms to do a better job communicating their regulations and practices. “The Commission needs to couple transparency requirements with clear and enforceable non-discrimination obligations,” said Shivaun Raff, founder and chief executive officer of the U.K.-based shopping-comparison engine Foundem. “Otherwise, it risks providing the tools to uncover discrimination without providing the teeth to do anything about it.”
As companies’ handling of the privacy regulation has shown, calls for clarity and transparency are open to broad interpretation. The Silicon Valley method is to dodge and game regulations rather than respond to their spirit and fix the problems that made rules necessary. As written, the new EU policy mainly creates opportunities for sellers to complain and lets courts hammer out the specifics.
That’s not enough. While it would be unrealistic and counterproductive to require Google or Booking.com to disclose specific algorithms — that information would be exploited by unscrupulous players — the EU would be justified in prohibiting companies that function as intermediaries from running services that compete with those of outside vendors.
This would mean requiring Apple to spin off Apple Music and perhaps even all of its app and content business. Google would have to get rid of its shopping-comparison engine, which earned an almost $3 billion fine last year, and all similar products (for example, for airline tickets) that compete with anything that comes up in its “organic” search results. Amazon might need to spin off Marketplace (and offer its products on it on the same terms as other sellers).
Such drastic action would cause a major realignment in a number of markets. It could only benefit consumers, however: The spin-off services wouldn’t be unassailable giants, and better competitors might emerge. It’s a shame that, after years of studying how platforms treat smaller businesses, the EU has chosen a more timid course of action.
Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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