- Aaryaman Soumitra Pathare
Digital Market Regulation: The Indian Perspective
[Aaryaman is a student at ILS Law College, Pune.]
The Report of the Standing Committee on Finance (2022-23), presented on 22 December 2022, is a consequence of the growing need to regulate digital markets. The report follows the ethos of the Digital Markets Act (Regulation (EU) 2022/1925) (DMA), which has been enforced recently in the EU competition regime and which adopts a strong stance against big tech enterprises, seemingly based on the premise that dominance in a digital market is necessarily a threat to competition.
The report suggests mechanisms identical to those implemented via the DMA, such as the designation of sizeable online platforms as systemically important digital intermediaries (SIDI), similar to the classification of gatekeepers under the DMA, and a focus on the ex-ante regulation of such entities.
The report recommends a per se prohibition against practices such as bundling/tying, data usage, anti-steering clauses, self-preferencing and exclusive contracts by SIDIs. Some recommendations in the report, however, suffer from a lack of analysis and have been discussed in brief within this article.
Classification of SIDIs
The classification of digital intermediaries for ex-ante regulation is the focal point of the report. While the report does not detail how such entities will be classified in the Indian competition regime, it shall likely rely upon the EU system. In the DMA, companies that operate core platform services (CPS), while also crossing a threshold of a number of business users and consumers and financial size, are classified as gatekeepers. CPS consists of:
online intermediation services;
online search engines;
online social networking services;
video-sharing platform services;
number-independent interpersonal communication services;
cloud computing services;
Although there is a necessity to regulate major platform intermediaries primarily due to network effects, it must be kept in mind that network effects are not a justification for such regulations in the case of some digital markets. Consumer base is the primary qualitative factor of most zero-price markets, such as social networking services (Facebook, Instagram), video-sharing platforms (YouTube), and advertising services.
On the other hand, subscription-based services such as movie streaming platforms (Netflix, Amazon Prime) constitute a market with no single dominant entity. In markets that involve price considerations, users are not motivated by user base but by cost of use and quality of service. Consumers are therefore incentivized to switch services if the quality of one drops, or the other rises; a phenomenon absent in consumer-base reliant zero-price markets. Therefore, in this regard, such digital markets are similar to traditional markets and ought not to be bundled up with other digital markets.
Another aspect Indian lawmakers ought to consider while determining the thresholds for the designation of SIDIs is the existence of certain entities in multiple markets. For instance, YouTube competes in the music as well as movie streaming platform markets. However, it falls under the category of CPS, as a video-sharing platform as well as an advertising service.
The regulations to be imposed on the SIDIs participating in multiple markets therefore ought to be only to the extent that they fall within such CPS, and not beyond these markets. Therefore, for the purposes of equal treatment of competitors, YouTube, when assessed as a movie or music streaming platform, ought not to be subject to these regulations.
Advertising Policy and Search Ranking Preference
The committee recommended the introduction of provisions that mandate SIDIs to provide advertisers with information on a daily basis. SIDIs may also be compelled to share performance-measuring tools with advertisers availing their services. It also suggested compelling platforms to provide advertisers with high-quality search terms that may assist them in creating better advertisements.
The proposed notion is problematic for two reasons. Firstly, from a competition perspective, the imposition of such a rule would serve only to harm the position of weaker platforms. In the present scenario, dominant platforms are not incentivized to bear the additional cost needed to provide such benefits to advertisers due to the stronger negotiating power, generated through network effects. This, in turn, provides weaker platforms an opportunity to offer this feature to attract advertisers. This advantage will be lost if dominant platforms are mandated to offer such privileges to advertisers, reducing intra-platform competition.
Secondly, the regulation seeks to treat larger platforms as public utilities that exist only to facilitate entities in the downstream market. There is no legal justification provided in the report that warrants platforms bearing additional costs that may be incurred to develop and provide performance-measuring tools. Competition Law confers a negative right upon competitors. The object of antitrust legislation is to prevent stronger entities from eliminating competitors and consequently hurting consumer interest. It does not, however, entail a positive right to weaker firms against dominant entities. Competition law is premised on the notion that greater competition leads to greater efficiency in a market. It is an infringement upon the economic rights of enterprises, in particular, the freedom to contract, for the greater good. Therefore, it is a necessary evil to protect the interests of consumers. Consequently, antitrust laws are only restrictive in nature, with respect to inter-enterprise conduct, within a market. They do not, however, impose an obligation to actively do something for the benefit of another firm. It is antithetical to the object of the Competition Act 2002, that an obligation be imposed on an enterprise to involuntarily assist a competitor (since most SIDIs will be entities that will also be participating in the downstream market of advertising).
Self-preferencing is a practice whereby platforms favour their own services or subsidiaries when they are also competing on the same platform. The committee seeks to prevent SIDIs from engaging in self-preferencing, directly or indirectly, to prevent an unfair advantage to platform entities that are also competing on the same platform.
This regulation may, however, lead to SIDIs removing preferential search results (tags such as top-rated, bestseller, etc.) altogether, as they will not be able to do the same for their own products, without inviting the scrutiny of antitrust authorities. Conversely, they may start charging higher fees for such privileges.
The purpose of introducing this rule is to ensure greater visibility for weaker firms. However, in the aforementioned scenarios, new entrants may find it difficult to introduce their products to consumers. Simultaneously, established players in the market may benefit merely due to brand value and status quo bias (in cases of pre-installed apps on smartphones, or tied-in/recommended complementary service that improve the efficiency of the primary service.) . Weaker intermediaries in the present regime can offer such incentives to attract business users, but this will no longer be an advantage they possess against SIDIs.
The idea of banning self-preferencing only for SIDIs is also ineffective in both short-term as well as long term. Existing big tech companies like Google and Amazon have already reaped the benefits of self-preferencing, as seen by their share in the relevant market and a consequent restriction will not significantly affect the consumer base it has already accrued.
Furthermore, any digital intermediary in the future may engage in self-preferencing as long as they do not meet the threshold for the classification as a SIDI. Therefore, they may give preferential treatment, and use consumer data to improve such preferred services. In such a scenario, if the digital intermediary were to cross the threshold,(thereby possessing a sizeable user base and financial power) it shall have already benefited from this alleged anti-competitive practice, and a consequent restriction will not affect them significantly.
Mergers and Acquisitions
This is another recommendation in the report that suffers from ambiguity. The committee recommends that all mergers and acquisitions made by SIDIs in the digital sector ought to be notified to the CCI, on the grounds that certain mergers and acquisitions in digital markets escape the scrutiny of the CCI as they do not meet the threshold of assets or turnover.
This issue, however, was already addressed in the Competition Amendment Bill 2022 (CAB), where a deal value threshold (DVT) was introduced for the purpose of regulating such mergers and acquisitions that may not fall within the existing thresholds (assets and turnover) in Indian competition law. The phrasing of DVT in the bill implies that this new threshold is to apply to all markets, though the Standing Committee Report on the CAB specifically talks about its necessity in digital markets.
Consequently, the DVT has been criticized for having a wider application than the purpose for which it was drafted, as it imposes a regulatory burden on both enterprises and the CCI in most sectors where such a threshold is unnecessary. This burden is completely unjustified in light of the provision mentioned in this report and will render the DVT redundant.
The adoption of ex-ante regulation and excessive scrutiny must entail a thorough assessment of pro-competitive and anti-competitive effects. The object of competition law is not to protect competitors, but to protect consumer interests. Therefore, ex-ante regulation in competition law can only be justified when the legislature is able to show direct harm to consumers, of such a nature that outweighs any benefits that they may accrue. The present report suffers from an absence of such analysis and any subsequent attempt to introduce regulations must entail an examination of all possible effects that it may have.