Fairness and the Digital Markets Act

The European Commission’s Digital Markets Act (DMA) establishes a new set of do’s and don’ts for so-called gatekeeper platforms.

Two of the obligations require designated gatekeepers to provide services to other businesses on terms and conditions that are ‘fair, reasonable and non-discriminatory’ (FRAND). However, what constitutes FRAND is not a straightforward economic or legal question. There is no clearly defined, objective test. We sat down with Peter Davies from our telco team to explore what “fair” and “reasonable” access pricing could mean in the context of the DMA, which came into force last November, and to discuss some of the implementation challenges that will need to be addressed.

Q: What exactly is the Commission concerned about?

A: “The DMA evokes FRAND terms in two obligations and it’s worth unpacking those separately as they relate to somewhat different concerns.

“The first one – Article 6(11) – involves a requirement on search engines like Google to make the data that they generate from user activity on their platform available to other businesses on FRAND terms. This includes data on what users search for, how results are presented to them, how they react to those results. The motivation for this is the idea that the quality of a search engine improves with the number of users or searches on it – this happens because the algorithm that the search engine runs on would have a lot more data to learn from and therefore improve the results it shows to all its users. So if a new entrant wanted to start a new search engine, it would not be able to match the incumbent search engine in quality because it doesn’t have the user data that it needs to train its own algorithm. The European Commission is looking to lower this barrier to entry by opening up access to this data.

“The second obligation (Article 6(12)) covers a wider set of services – app stores, search engines and social media platforms – and again requires gatekeepers of those services to treat their business users in a FRAND(ly) way. This obligation is concerned with ensuring that business users are treated fairly by gatekeepers providing these services. In practice, the types of businesses that use these services are different – business users for app stores are primarily app developers whereas for search engines and social media platforms, they’re typically advertisers – and the interpretation of what is meant by FRAND terms could be different for these two groups.”

Q: Focusing on the second obligation Article 6(12) – how do you think it would apply to app developers?

“In relation to app stores / app developers, the question of fairness is not entirely new. The DMA is vague when it comes to exactly the sorts of unfair behaviour it has in mind, but excessive pricing is likely to be a central concern. In the past, both Apple and Google have come under fire over the fees they charge to third-party app developers using their stores. Both firms have faced high-profile legal challenges from disgruntled app developers, notably Epic Games, which has described the 30% commission charged by Apple as exorbitant.”

Q: Do Epic Games and the other plaintiffs have a point?

A: “Determining whether a price is excessive is notoriously difficult, but the two-step approach followed by the EC in past cases involving excessive pricing (e.g. United Brands) is clearly relevant. The first step involves assessing whether the dominant firm’s profit margin is excessive – the so-called price-cost test. Now, applying such a test in the context of digital markets presents obvious headaches. How do you come up with a meaningful definition of cost for products that are part of a wider ecosystem and whose value stems primarily from intangible assets, such as brand, research, human capital, et cetera? The Commission would then need to come to a view on what is a reasonable margin to be allowed on top of the cost base to compensate investors for the big risks they take.

“Let’s move on now to the second step. This involves evaluating whether a price is ‘unfair in itself or in comparison with the prices of competitors’. Even if the Commission were to find that the fees charged by app stores were above some reasonable measure of cost, it doesn’t automatically follow that prices are unfair and/or unreasonable. Apple and Google would argue that their ecosystems have created enormous value by giving third parties a platform to develop new products and distribute them globally, and that their fees reflect this opportunity. Companies like Epic, of course, see things differently. They say that the fees are a function of the gatekeepers’ excessive market power.

“Clearly, both app stores and app developers, together, play an important role in generating value for consumers. In this context, FRAND could be framed as a question of whether each side is getting a ‘fair share’ of the pie. How the Commission will judge what is a fair share is of course the key question.”

Q: What’s the solution then?

A: “Presumably in recognition of these challenges, the DMA appears to lean towards a comparator approach: it identifies a number of yardsticks that it would use to assess whether access conditions are fair, including prices charged by other app stores and prices charged in different countries. This methodology looks more straightforward, but it still has some fairly fundamental drawbacks. The main one is that the most relevant comparators may be gatekeepers themselves, which makes them an inappropriate benchmark from the EC’s perspective. Newer entrants may have relatively low prices, but this may reflect lower risks that the gatekeepers took in building their ecosystems.”

Q: Finally, you mentioned the other FRAND requirement around search engines being required to share the data they generate with other business – what do you think FRAND terms are in that context?

A: "As discussed, this is about making the data generated by users more accessible to businesses other than the gatekeeper itself. But here as well, there would be questions around what a fair price for that data access might be – with challenges similar to those we discussed earlier around benchmarking prices of a product that is a by-product of other economic processes and which may have few good comparators.”

Q: With all these grey areas, how can FRAND terms possibly be enforced?

A: “Indeed. The jurisprudence on what constitutes fair and/or reasonable pricing is limited and is related to specific contexts. The DMA leaves open a lot of tough questions about how FRAND should be applied to digital platforms, which puts the onus on the gatekeepers to justify their terms. This is probably in part a deliberate attempt to futureproof the DMA and to give the EC maximum flexibility in how it tackles any issues that might arise.”

Q: It sounds as though the Commission will be treading gingerly for a while?

A: “Well, it might prefer a light-touch approach to FRAND, at least initially, and instead focus on the other aspects of the DMA to see whether they produce better outcomes. But gatekeepers will be obliged to comply with the DMA from day one, and it seems likely that third parties that feel they’re being treated unfairly will start filing complaints as soon as the DMA becomes operational  - probably in early 2024, as gatekeepers will have 6 months to implement any changes after their designation is completed by the EC in summer this year. So the EC will need to begin grappling sooner rather than later with all the complex challenges that FRAND throws up.”