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The European Digital Strategy: rules for governing digital services

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Digital Markets Act in writen word

The European Digital Strategy: rules for governing digital services

How the EU wants to diminish the power of big tech

As part of the European digital strategy, also known as Shaping Europe’s Digital Future, the European Commission announced that it would upgrade the rules for governing digital services in the EU. The European Commission proposed two legislative initiatives: the Digital Services Act (DSA) and the Digital Markets Act (DMA).

A core concern and background for the introduction of the DMA and DSA is the trade and exchange of illegal goods, services and content online. Another concern is big tech and the treat of digital online services being misused by manipulative algorithmic systems to amplify the spread of disinformation and for other harmful purposes. The new regulations should combat this.

The DSA and DMA have two main goals:
1. to create a safer digital space in which the fundamental rights of all users of digital services are protected
2. to establish a level playing field to foster innovation, growth, and competitiveness, both in the European Single Market and globally.

The Digital Services Act (DSM)

The DSA covers digital online services within the European Union from online marketplaces, social media networks, content-sharing platforms to app stores, hosting parties and Internet service providers and domain name registrars.

Where facilitating digital platforms were generally excused from an active responsibility to detect and remove content, the DSA introduces stricter obligations for platforms to detect and remove illegal content or products, such as unsafe, dangerous or counterfeit products. A useful overview of the measures per service provider can be found here.

In addition, the Digital Services Act prescribes that all Member States appoint a so-called Digital Services Coordinator who oversees the enforcement. This coordinator may investigate, enforce (including imposing fines) and impose access restrictions. The violation of obligations under the DSA may lead to fines and penalties of up to 6% of the worldwide revenues.

Digital Markets Act (DMA)

The DMA includes rules that govern gatekeeper online platforms. Gatekeeper platforms are digital platforms with a systemic role in the internal market that function as gateways between businesses and consumers for important digital services. Examples are search engines, social networking services, certain messaging services, operating systems and online intermediation services. The accelerating digitalisation of society and the economy has created a situation where a few large platforms control vast important ecosystems in the digital economy. I won’t go naming and shaming, but the former CEO of one of these platforms recently took his penis-shaped rocket to space.

These platforms have emerged as gatekeepers in digital markets, with the power to act as private rule-makers. There is often simply no escaping the use of these big tech platforms. Their own law-like rules, however, may very well, and they occasionally do, result in unfair conditions for businesses when using these platforms. This can also mean less choice for consumers.

Scope of the Digital Markets Act

Specifically, there are three cumulative criteria that bring a company under the scope of the Digital Markets Act:

1. an annual turnover in the European Economic Area (EEA) equal to or above € 6.5 billion in the last three financial years, or where its average market capitalisation or equivalent fair market value amounted to at least € 65 billion in the last financial year, and it provides a core platform service in at least three Member States;

2. the company operates a core platform service with more than 45 million monthly active end users established or located in the EU and more than 10,000 yearly active business users established in the EU in the last financial year;

3. a steady and resilient market position, which is presumed to be the case if the company met the other two criteria in each of the last three financial years.

If a company meets these three objective criteria, the company is presumed to be a ‘gatekeeper’, unless that company submits substantiated arguments to demonstrate the contrary. Once identified as a ‘gatekeeper’ pursuant to the DMA, the company needs to ensure an open online environment that is fair for businesses and consumers, and open to innovation by all.

The do’s and don’ts under the Digital Markets Act

The Digital Markets Act sets forth a series of do’s and don’ts that need to be implemented in daily operations.

Examples of the “Do’s”:
– Provide advertising companies with access to the performance measuring tools of the gatekeeper and the information necessary for advertisers and publishers to carry out their own independent verification of their advertisements hosted by the gatekeeper;
– Allow third party users to promote their offers and conclude contracts with their customers outside the gatekeeper’s platform;
– Provide third party users with access to the data generated by their activities on the gatekeeper’s platform.

Examples of the “Don’ts”:
– Prevent users from un-installing any pre-installed software or apps;
– Using data obtained from third party users to compete with these third parties;
– Restricting users from accessing digital services that they may have acquired outside of the gatekeeper platform;
– Treating services and products offered by the gatekeeper itself more favourably in ranking than similar services or products offered by third parties on the gatekeeper’s platform.

Gatekeeper platforms violating the obligations under the DMA risk a fine of up to 10% of their worldwide revenues. More importantly, additional remedies may be imposed in case of systematic infringements of the DMA obligations by gatekeepers, including non-financial remedies such as the divestiture of (parts of) a business.

Developments in The Netherlands in light of the DMA and DSA

The Dutch government supports the introduction of the DMA and DSA. Some political parties have suggested to strengthen the enforcement options for the Dutch Authority for Consumers and Markets (ACM). Topics such as influencing consumers online and access to digital platforms and ecosystems rank high on the ACM’s agenda. In this respect, the ACM has performed several market studies regarding the role of big tech companies such as Apple, Amazon, Google and Facebook. The ACM also provided guidelines for online platforms.

Recently, in a letter dated 16 July 2021, NL Digital and the Dutch Startup Association made an appeal to Dutch Parliament to timely present their position regarding the DMA thereby taking into account the effects on companies and consumers in the Netherlands. Although NL Digital and the Dutch Startup Association support the purpose of the DMA, there are concerns about the unintended effects of the DMA because of the potential restrictions that make platforms and digital services less attractive to consumers and that could create barriers for start-ups and scale-ups with strong growth ambitions.

Status of the DSA and DMA

The proposals for the DSA and DMA have been submitted by the European Commission to the European Parliament and to the Council of the European Union on 15 December 2020. The Acts are not expected to be implemented until the year 2023.

While this process will take several more years, I believe it is clear that ‘projected gatekeepers’ are under scrutiny. Following further digitalisation and the increased market power of digital companies, competition authorities such as the ACM seem to be chasing the big tech companies more and more.

We look forward to the developments in this legislative process and will keep you updated.

Do you have a question about the Digital Services Act and Digital Markets Act, or the implications thereof in relation to your business? Do not hesitate to contact Chantal Bakermans.

Penrose law firm, Amsterdam.

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