CCS Insight’s Predictions for 2023 and Beyond is rapidly approaching, with the online event due to take place on 18, 19 and 20 October — click here for details and to sign up. An inescapable theme at this year’s event will be regulation of the tech sector. Although the prospect of a tighter regulatory environment has been scrutinized in Predictions past, the world is now on the cusp of action rather than just rhetoric.
The Digital Markets Act in Europe, the American Innovation and Choice Online Act and Open App Markets Act in the US threaten to end an era of unfettered expansion, with significant curbs and penalties looming for large technology platforms. This could either be viewed as a hard reset for the entire industry or an ineffective and temporary spanner in the works for tech juggernauts — to some extent this is in the hands of European and US governments and regulators. However, we believe that change will be profound, permanent and have considerable consequences for society and the market environment in which tech companies of all sizes operate.
Although EU and US legislation differ in detail, their philosophies are broadly similar. Their aim is to prohibit big tech companies from arbitrarily discriminating against competitors, preventing the promotion of a company’s own products over rivals’ and ensuring an open and competitive ecosystem of applications for users.
Europe’s DMA applies to “gatekeepers”, defined as companies with over 45 million active users in the EU and 10,000 annual business users. Market capitalization must be at least €75 billion or annual revenue of more than €7.5 billion. By contrast, the American Innovation and Choice Online Act only affects those with a market capitalization of $550 billion in the past 12 months or at least 1 billion global users. It also requires at least 50 million monthly active users or 100,000 business users in the US. The Open App Markets Act refers to app stores with over 50 million US users. The DMA clearly casts a much wider net.
The DMA was passed by the European Parliament in July 2022 and the text is expected to be adopted in September or October 2022. Across the pond, the path for legislation is less clear. The American Innovation and Choice Online Act could go to a Senate vote in autumn before the midterm elections but isn’t yet scheduled. With the proposed bill sparking intense lobbying from opponents and a potential change in majority in the Senate after the midterm elections, the timing remains a question mark and the regulatory road could prove a long one.
CCS Insight believes that EU legislation will have the bigger impact in the near term. We predict that the DMA will force a change in behaviour from large tech players in Europe that is likely to ripple through business operations globally. It will also further motivate US politicians keen to avoid a scenario in which Europe defines the antitrust agenda without US involvement. A degree of harmony and consistency between US and EU legislation would be a clear advantage but is by no means assured.
Exactly what shape final legislation takes and when it gets passed is difficult to predict. There’s bipartisan support in the US for tighter rules, but considerable disagreement on key principles. The consensus is that the central role of digital platforms in economic and social prosperity means that innovation must be able to thrive broadly, rather than remain concentrated among the few.
However, the counterargument has a similar tone: clamping down on the tech sector will see investment and innovation suffer and user experience falter. The question is whether innovation is best fostered broadly through open competitive marketplaces or determined by a minority of platforms operating at significant scale. Consensus has undoubtedly shifted to the former.
So what’s likely to change given our expectation that the DMA will quickly change corporate behaviour beyond EU borders?
Search and shopping. Under the DMA, companies won’t be able to favour their own products over those of rivals in search results. For example, Amazon couldn’t list its own-branded products above competitors and Google wouldn’t be able to highlight its own shopping service in a Google search. We believe this will cease completely within two years because of the DMA.
Pre-installed smartphone apps. These will change within three years. The “self-preferencing” provision in the DMA means that smartphone-makers or platform providers can no longer pre-install their own apps where alternative solutions are available. We expect Apple, Google, Samsung and others to firmly resist the move initially but ultimately move toward offering a choice during device set-up, in a bid to minimize disruption to the current user experience and make it clear that other options exist.
Interoperability and linking of services. The same rationale applies here. For example, if Meta’s Facebook app links to WhatsApp or Messenger, it will have to offer the provision for third-party services to link just as seamlessly. This should see increased scope for service interoperability. Messaging is highlighted specifically, with “gatekeepers” required to ensure that messaging platforms are open and interoperable. This is another area that’s likely to see firm resistance, given the importance of closed messaging platforms to many large ecosystems. Subsequently, we expect a slow and gradual shift toward greater interoperability between messaging services over the coming years.
In-app payments. This area has drawn a lot of attention, with concessions made to provide more choice for developers and users. But these have been on an ad hoc basis. CCS Insight believes the DMA will deliver sweeping change, enabling developers to offer alternative payment mechanisms in apps. This is likely to be among the more immediate changes in the next 18 months.
“Sideloading” and third-party app stores. Sideloading allows users to install software through a distribution method that isn’t approved by the device-maker. It’s supported by the Android operating system but has been resisted by Apple on the grounds of security, and we believe the DMA will lead to a drawn-out battle on the issue. Despite claims that sideloading will open the door to alternative app stores, we expect it to have minimal impact, muted by security concerns as established providers fight this. Most people will continue to use established app stores, and other options are likely to come from a small number of alternative providers with comparable scale — the likes of Amazon, Meta and Microsoft.
The timing and significance of wholesale changes to the regulatory climate in any market is shrouded in uncertainty. But at a time of great economic uncertainty, mounting tension between the US and China and heightened focus on the domestic technology supply chain, the move toward regulation adds layers of complexity. Few governments will wish to jeopardize a tech industry that is vital to economic prosperity, long-term competitiveness and security on the global stage.
However, although these dynamics may slow regulatory change in the US, sentiment has shifted. The DMA stands to pave the way for enormous change reaching far beyond European borders. We’ll be studying the impact at our Predictions for 2023 and Beyond event.
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