Electronic Commerce

EU tries to reshape the rules of the Internet

In the coming months and years we will become familiar with two new acronyms coming from the Brussels bubble: DSA (which stands for Digital Service Act) and DMA (which stands for Digital Market Act). These are two legislative proposals that the European Commission presented today 15 December 2020 and the content of which was largely proceeded by public consultations, discussions at all levels and the inevitable leaks.

DSA and DMA constitute the overall response that Europe seeks to give to the growth of the Internet and the systematic digitization of everyday life in the last 20 years: the preponderance of social media in communications and in the dissemination of information; the systematic and prevalent intermediation of economic and social activities by online platforms; the birth of new paradigms, in particular that on the value of data; and, last but not least, the presence of some global operators which, because of their size and economic power, appear to have a preponderant position vis-à-vis market, users and competitors , the so-called “gate-keepers”. With respect to the latter, the message of the European Commission is the following: “The bigger you are, the more responsibility you have“.

What is the DSA for

The DSA has the task of adapting European Internet legislation, which basically dates back to 2000 with Directive 2000/31, to this new economic and technological context. In 2000, the Internet seemed like an open field that offered opportunities to anyone wanting to invest in and develop innovative ideas; therefore the rules were established mostly to facilitate the growth and expansion of services, rather than to prevent abuse. Users seemed able to regulate themselves, while the growing tensions of new Internet services with traditional sectors, from retail to content, at the end resulted in new business models such as, for example, e-commerce, IPTV and music streaming.

But after 20 years this situation has become more complex: Internet is certainly a spectacular story, which has developed enormous wealth and innovation, but the overall picture is less idyllic than it seems, because the exponential development of the sector has concerned both the optimum and the rubbish, a bit like happened, mutatis mutandis, with television. With the difference, however, that while for traditional television and media the abuses of third parties can be prevented thanks to the filter of editorial responsibility, in the case of the Internet and platforms, a similar mechanism cannot operate, sic et simpliciter, otherwise the system would not work: in fact it is not conceivable for online platforms to check in advance stuff uploaded by users, from sharing online content to personal comments.

With this in mind, the DSA therefore has the task of adapting the 2000 legislation, but without distorting it: in fact, according to the Commission’s proposal, the fundamental regime of Directive 2000/31 is maintained and still recognizes an exemption system for traditional Internet operators, i.e. Internet access, as well as hosting and caching. But further rules are then established, for example to protect operators who spontaneously take action to prevent users’ abuses (as already provided for by American legislation with the so-called Good Samaritan clause). The Commission also intends to clarify the obligations of Internet operators when receiving reports of illegal actions (although details will need to be clarified).

Remarkably, the principle passes that large platforms can be subject to specific and additional obligations, including greater requirements for transparency, due process and compliance. The platforms that will be object to such specific obligations are the ones that reach more than 10% of the EU’s population (45 million users).

Indeed, the liability regime stemming from the DSA looks quite complex and it could be seen as a kind of “regulatory ladder” for platforms:

There will be a discussion, inter alia, about the obligation for all foreign operators, whose services are accessible from the European Union, to appoint a legal representative within the EU. This provision provision may affect non-EU services providers and could therefore make it difficult for EU citizens to access a very large number of Internet services from outside of the EU. However, should the scope of provision  function to provide a point of contact for notifications by public authorities, the obligation is understandable, also considering that the same legal requirement already exists for taxation and for GDPR. Remarkably, after Brexit’s completion such provision will apply also to UK companies.

What is DMA for

The DMA instead aims at adapting competition rules in the digital sector. As we have already mentioned, in 2000 there were no dominant operators who could, thanks to their size and economic power, distort the basic essence of the Internet as an open environment. However, something has happened, since the emergence of large online platforms (the so-called GAFAs, for instance) has super-imposed on and fragemented the Internet with closed online environments which cannot be replicated by others because of network externalities constraints. The European Commission has tried to combat the phenomenon by imposing antitrust sanctions in cases of abuses, as for the famous ones against Google; however, European authorities finally reckoned that the antitrust initiatives risk to be blunt weapons, due to long procedural times and the inefficiency of attacking structural market problems with simple (albeit high) sanctions, or with specific measures targeting each individual abuse.

Instead, it is necessary to intervene with tools that make it possible to intervene on dominant platforms even before they commit an abuse, imposing ex-ante rules to protect market and consumers. Some liberalists have already turned against the idea, saying that it would be a sort of fines to intentions, but they are opinion leaders with short memories. In fact, the system proposed by the Commission is essentially that of telecommunications, where for 20 years there have been ex-ante rules imposed on dominant operators. This is a model that exists all over the world, even in the United States (for basic telephony, and for broadband only at certain times), so there is no room to be unreasonable against the Commission’s proposal.

However, this ex-ante system will not  easy-going. Complexity starts with the identification of the dominant platforms (the GAFA seem predestined, but not only) and the list of obligations to be imposed. Telecommunications regulation is essentially based on the architecture of traditional telephone networks, while for online platforms the finding of dominance and the imposition of remedies require more complex analyzes: composite infrastructures (networks and data centers); net effects; use of big-data; complex market shares to define.

DMA lays down the following cumulative criteria to identify large online platform to be subject to this new and special competition regime:

  1. A size that impacts the internal market: this is presumed to be the case if the company achieves 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 control of an important gateway for business users towards final consumers: this is presumed to be the case if 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. An (expected) entrenched and durable position: this is presumed to be the case if the company met the other two criteria in each of the last three financial years.

How will it go on?

DSA and DMA are now awaited in Brussels by a barrage, because the interests to be composed are varied and complex. On the one hand, the GAFAs and the large technological industry, especially the American one, will press for a watering down of the package, while on the other hand, many traditional industries, especially commercial television, will ask for a tightening. In the middle there are various interest groups that will try to find a mediation: firstly consumers and users, who claim greater responsibility on the part of large platforms but, at the same time, oppose the idea that the Internet can be regulated like television. Likewise, SMEs and start-ups will applaud more rules for GAFA but without wanting to damage the ecosystems that allow them to operate on a global basis. However, it will not be a US vs EU match, although this simplification could be useful for many: in fact, among the major supporters of greater rules for GAFA there are many American operators, the same ones for example that have introduced antitrust lawsuits against Google .

An epoch-making season is foreseen for politics: the European Parliament, in its role of co-decision maker, will divide itself into various blocks according to the interests at stake, and without necessarily reflecting the respective political families, thereby adding fragmentation to fragmentation. The Council (the other co-decision maker) will also start in no particular order, divided between some countries that are at the forefront of the fight against GAFA (France and Spain) and others that do not want to change Internet regulation too much (Nordic and Eastern countries). Germany and Italy could play a mediating role.

In the background, there are the relations with the new American administration which, unlike the outgoing presidency, could take a constructive role in agreeing homogeneous rules between the two sides of the Atlantic, possibly with an anti-Chinese function. Whatever happens, we expect at least two years of negotiations, if we are optimist.

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