‘Online platforms and the Digital Single Market’ report by the House of Lords EU Internal Market Sub-Committee

HoL_OnlinePlatformsThis week saw the publication of the report on ‘Online platforms and the Digital Single Market’ by the House of Lords EU Internal Market Sub-Committee. This reports presents the findings of the inquiry that was held from October 2015 till spring 2016, receiving 85 written responses and 20 oral evidence sessions. Included in the written responses were two from Horizon Digital Economy Research, one by Prof. Rodden and one by myself which we partially posted on this blog about in October 2015. The main driver for this inquiry was the publication in May 2015 by the European Commission (EC) of its ‘Digital Single Market Strategy for Europe’ (DSM), which drew attention to the growing role of online platforms as key players in social and economic interactions on the internet, and was followed on 24 September by the launch of an EC consultation ‘A fit for purpose regulatory environment for platforms and intermediaries’. For the purposes of both the EC consultation and the Lords’ inquiry online platforms were considered to ‘represent a broad category of digital businesses that provide a meeting place for two or more different groups of users over the Internet, examples of which include search engines, online marketplaces, the collaborative or sharing economy, and social networks’. What follows is an incomplete summary of the findings in the report, with a focus on the issues related to fundamental rights of platform users (e.g. privacy), the role of algorithms and user consent, which are most closely related to our work at CaSMa.

Support for the European Commission’s Digital Single Market strategy, reinforcing the point that the importance of network-effects for the growth of internet companies to become world leaders makes it vital for the EU to provide access to a unified market (consistent regulation across countries) of 500million potential users in order to be able to compete with the market of 300million potential users in the US. Under the current situation the EU, and the UK, is increasingly successful at launching internet startups and growing them to medium size, but once they reach the point of having potential as a world leader they move to the US, or are bought by US companies, to take advantage of the larger unified market size.

Network-effects refers to the property that an online platform becomes inherently more attractive if it has a large user base. For example an Online Travel Agent site, like Bookings.com, is interesting as platform for consumers only if there are many hotels listed on it at the same time it only become interesting for hotels if it attracts many consumers because it already as many other hotels on it. This gives rise to growth curves that are exponential, long slow run-up till it reaches a tipping point after which it growth very rapidly to potentially become market leader.
Network-effect can greatly strengthen the position of established businesses in a market sector and thus be of great advantage to ‘first-movers’. Facebook, not the very first but still an early mover, in social networks is a prime example where the threshold for Facebook users to move to an innovative new social network can be very high due to the loss of the existing network of ‘friends’. Network effects are therefore a potential source of generating ‘natural monopolies’ in online platforms (a natural monopoly is a situation where environment factors make it such that there is only room for one provider in the market, classic example is a shipping harbour on a small island). The report concludes however that the situation with online platforms is not the same as ‘natural monopolies’ since innovation/competition in this space is not just within existing market structure but takes the form of changing those structure, completely redefining products and relationships with customers (e.g. Snapchat can compete with messaging services that already existed before it was started, because Snapchat targets a different user need).

Competition protection: Online platforms represent a broad and diverse set of businesses that range from search engines (with revenue from advertising), online market places like eBay or Etsy, comparison/ratings sites like PriceCompare, Bookings.com, TripAdvisor to non-commercial services like the open source code repository GitHub. As such, most issues with online platforms are too complex to be solved by broad strokes legislation. Such legislation would cause too much harm to innovation and growth of the european digital economy, for the good it would do in competition protection. Better to handle on a case-by-case basis by a more pro-active Competition Authority.
Competition Authorities at both EU and national level need more support so that they can launch investigations more pro-actively, even bring forward challenges in cases where there is a chance that the Competition Authority might lose the case, as way a of better defining the practical scope of existing laws. The report therefore endorses the current EU antitrust investigation against Google, regardless of the future outcome of the case. Directly related to this, the report recommends the use of ‘Interim measures’, i.e. …, and time limits to speed up competition cases (the case against Google has been going for more than 5 years already).

As part of the closer scrutiny by competition authorities, the report advises that thresholds in the EU Merger Regulation should be changed so that small firms acquisitioned by large online platforms do not escape scrutiny. The necessity for this is especially important due to the rise of data as a core economic assest, currently not captured by merger and acquisitions rules. Large companies, like Google, increasing engage in corporate acquisitions in order to gain a ‘data advantage’ or rivals.

In response to the numerous submissions to the inquire that gave examples of abuse of power by online travel agency platforms the Competition and Markets Authority is instructed to urgently undertake a market investigation into the practices of Online Travel Agents (OTA). Two of the main issues that were raised were the lack of transparency about the default sorting of hotel search results being based on the commission they pay to the OTA and use of ‘price parity clauses’ that prohibit suppliers (e.g. hotels) from offering a good or service at a lower price through another sales channel (e.g. the Hotel’s own website).

On consumer protection the inquiry focused on the need for greater transparency in areas such as use of personal data, algorithms that personalize services and obligations under consumer protection law. Based on reports such as the finding from a study by Horizon Digital Economy Research (University of Nottingham) that typical Privacy Policies of online platforms are “as long as Othello” and “overly complex and difficult to read”, “written to be understood and used in [a] US court rather than by ordinary consumers”, the inquiry recommends implementation at the EU level of the use of Kite-marks for all websites and applications to indicate to consumers the quality of privacy policies. In order to foster competition and drive up privacy standards, this kite-mark should include a graded scale. In doing so, the Lords committee reinforced the fourth report from the House of Commons Science and Technology Committee on Responsible Use of Data that had come to the same conclusion.

A specific concern noted in the report regarding the use of personal data is that online platforms can and do engage in personalised pricing, using personal data about consumers to determine an individual price for a particular good or service. The Lords committee therefore recommends that DG Competition urgently investigate the prevalence and effects of personalised pricing in these markets.

With regards to the algorithms used by online platforms the report expresses concerns about the lack of transparency in how search and meta-search results are presented to consumers, a topic that our ‘UnBias’ project, starting this September, will also be looking at. The recommended remedy for this is that the EU’s Unfair Consumer Practices Directive should be amended so that online platforms that rank information and provide search and specialised results are required to be explicit on their website about the basis upon which they rank search results. Online platforms should also be required to provide a clear explanation of their business models and relationships with suppliers, prominently displayed on their websites.

Concluding recommendation:

“We recommend that the European Commission appoint an independent panel of experts tasked with identifying priority areas for policy action in the digital economy and making specific policy proposals. This panel would gather the concerns of policymakers and regulators about emerging issues in digital markets. This report demonstrates that businesses and citizens also have many concerns in these markets, and the panel would also collect and prioritise these concerns – potentially through an online portal.

  • While the panel would set its own agenda, on the basis of this report we suggest three initial subjects that it would consider:
  • Whether enforcement agencies have the necessary powers and resources to take effective action against abuse by the largest online platforms; and how enforcement could be better co-ordinated across national and EU enforcement authorities, and across different regulatory regimes;
  • How the lack of competition between platforms on privacy standards can be best remedied;
  • Beyond the Digital Single Market Strategy, how to smooth the way for emerging areas of disruptive innovation, such as the internet of things, driverless cars and the expansion of the collaborative economy.”

Report of the ‘Online Platforms and the Digital Single Market’ inquiry from the House of Lords European Union Internal Market Sub-Committee (abridged)

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