Recommendation 25

HM Government Acknowledged

1. The proposed new pro-competition regime for digital markets to be operated by an independent Digital Markets Unit (DMU) within the CMA has not yet been finalised. It is currently the subject of a consultation which ends on 1 October 2021.2 Under these proposals, SMS designation would involve three main components: a code of conduct that sets out clearly how an SMS firm is expected to behave in relation to the activity motivating its SMS designation; the ability of the DMU to impose pro-competitive interventions (PCIs) to address the source of that market power and open up greater competition (such as through data access remedies),3 and a distinct set of merger rules to ensure closer scrutiny of transactions. 2. The consultation currently underway seeks views on a number of aspects of how the proposed regime will operate, including the powers of the DMU and the criteria and mechanisms that will identify which firms have SMS and in relation to which activities. It is envisaged that SMS designation may apply to a firm which has substantial and entrenched market power in at least one activity which provides it with a ‘strategic position’, namely one where the effects of that market power are particularly widespread or significant.4 The assessment mechanism for SMS designation is being consulted on, including whether it should be activities-focused without a formal market definition (which is the government’s preferred approach) or whether a formal market definition should be undertaken. 3. Under the proposals, the SMS designation will apply to the whole firm but the code of conduct will apply only in connection with particular designated activities (for example Facebook’s social media platforms). That is to ensure that the regime is proportionate and targeted at the activities which may cause most harm. PCIs will also generally relate to the designated activity but may also be implemented in relation to a non-designated activity, provided the intervention is made in relation to a concern in a designated activity.5 4. In the case of Google, which owns YouTube, the CMA’s market study into online platforms and digital advertising, which reported in July 2020,6 considered that Google 1 Final report of the House of Commons Digital, Culture, Media and Sport Committee on the Economics of music streaming published 15 July 20. 2 A new pro-competition regime for digital markets - GOV.UK (www.gov.uk). 3 Appendix D: The SMS regime: the pro competition interventions (publishing.service.gov.uk). 4 Paragraph 66 of the consultation. The existence of substantial and entrenched market power on their own are not sufficient to justify the imposition of an ex-ante regime. Competition problems which derive from such market power which is not ‘strategic’ is more proportionately addressed through competition law. 5 DMU consultation, Figure 2, paragraph 54. 6 Online platforms and digital advertising market study - GOV.UK (www.gov.uk) 14 Government and Competition and Markets Authority Responses would be likely to be designated with SMS status in relation to its activity in open display advertising.7 If Google were so designated in relation to this activity, an SMS code would govern Google’s conduct relating to that activity (the SMS designated activity). If the DMU were minded to explore whether Google may have SMS in relation to a separate activity, it would need to carry out a separate assessment and apply the SMS test to that activity. Our understanding of the evidence presented to the Committee is that the concerns relating to the advantages which YouTube may derive from the ‘safe harbour’ regime are not primarily market power concerns but relate to market distortions and the music streaming ‘value gap’ under the current copyright regime. These may potentially be better addressed by revising the copyright obligations which apply to user-generated content, something which the Committee itself has recommended. 5. The SMS regime, as proposed, may also enable the DMU to impose PCIs in activities outside the SMS designated activity in certain circumstances but only where it is intended to address concerns in the SMS designated activity. For example, if Google’s activities in music streaming (a non SMS designated activity) were, on further investigation, found to be one of the root causes of its substantial and entrenched market power in an SMS designated activity (such as open display advertising), the DMU might be able to impose PCIs but with a view to opening up more competition in digital advertising. This would need careful examination. 6. In the consultation, the government has set out its proposals for how SMS designation assessments might operate. It is consulting on an appropriate length of assessments which would balance a robust designation process with efficiency and speed. It is seeking views on the merits of a designation process of nine or 12 months. The government is also seeking views on how designation assessments sh