In September 2018, UK Chancellor Philip Hammond announced that an Expert Panel would examine the competitive landscape in the digital marketplace in order to assess whether new polices are needed to guarantee a fair market.
Before the panel was put together, some within the tech space were concerned that large tech companies were dominating the industry. The Panel published its 150-page report, titled Unlocking Digital Competition, which came to the conclusion that tech giants do not face adequate competition. The outcomes of the review were that, while the digital sector has created substantial benefits, these benefits have come at the cost of increased dominance of a few companies, subsequently this is limiting competition and consumer choice and innovation.
The panel therefore decided that this issue must be addressed with relevant policies in order to ensure that companies operate to optimise customers’ choice and benefit.
After analysing the market landscape, the panel wrote in the report that it rejects the narrative – mostly pushed by tech giants themselves – that competition is thriving online, therefore no policy needs to change. At the same time, the panel also rejected the claim that digital platforms are “natural monopolies” and competition should be imposed with a utility-like regulation.
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The panel’s conclusion is actually in the middle of these two extremes, with the report stating that greater competition among digital platforms is both necessary and possible. The in-depth report also stated that the UK should take a farsighted approach to the issue by creating and enforcing clear rules to limit anti-competitive actions by the most prominent digital platforms, while at the same time reducing structural barriers that currently undermine fair competition.
A major obstacle to fair competition, in the eyes of the panel, is that incumbents tend to acquire younger companies as soon as they start gaining traction, turning competitive threats into allies. Obviously, there is some good to this: a lot of smaller companies with great products get the chance to reach huge number of users, thanks to the resources of the larger acquirer. However, this also means that tech-giants can buy-out any competitor, removing the incentive to innovate for the customers’ benefit and creating an environment where there is less competition in the market. Subsequently, a lack of competition in the market could lead to customers paying higher prices and handing over more personal data.
In order to overcome this obstacle, the panel advised the CMA to intervene with a stricter policy on digital mergers and acquisitions, shifting the focus from short-term impact to long-term effects on innovation and customer choice.
The panel urged the CMA to give higher priority to the scrutiny placed on digital mergers, noting that over the last 10 years, the 5 largest tech firms have made over 400 acquisitions globally, with very few facing inspection or being blocked.
The panel also noted that the sector is naturally skewed towards market concentration as it relies more and more on user data, which gives more power to those platforms which collect more (or more specific) customer data.
Additionally, the online advertising market works with a complex network of opaque terms among subsidiaries of major platforms. This gives the bigger players an opportunity to exploit their favourable position in order to retain more value than their competitors would.
In timely fashion, the week after the publication of the report the European Commission announced that Google was fined £1.49bn for obtrusive practices in online advertising. Substantially, the company was using their own advantage position to avoid other advertisers to post on third-party websites.
The outcome of the panel review may be welcomed by scale-up and start-up businesses, as well as the consumer market. Ensuring there is lively competition could help drive forward a diversified marketplace, subsequently enabling consumers to have autonomy over who they choose as their service providers and, even more importantly, who they provide their data to. The report’s acknowledgement of a need for increased scrutiny over M&A activity could ensure that disruptive and innovative start-up businesses do not end up at the mercy of larger incumbents. Looking forward, the changes called for by the panel will hopefully ensure that the new wave of start-ups are able to harmoniously collaborate with incumbents while simultaneously being able to lead innovation in their own way.
By Adam Brodie, Partner, Ignition Financial
Ignition Financial is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities
