The CMA's approach to digital markets regulation
Remarks by Sarah Cardell, CEO of the CMA, delivered during the January 2024 Concurrences Tech Antitrust Conference, Palo Alto, USA.
Format
Fireside chat with Sharis Pozen, Regional Managing Partner, Americas, Chair Emeritus Global Antitrust Group at Clifford Chance.
Introduction
Q1: For anyone who’s less familiar with the UK’s Competition and Markets Authority, could we begin with an overview of what the CMA is and how you approach your work?
The CMA is the UK’s principal competition and consumer protection authority. We have a range of legal powers and responsibilities that include merger control, enforcing against breaches of competition law and consumer protection law, and conducting wider ranging market studies and investigations. In many respects our remit is similar to that of the US Federal Trade Commission and the Antitrust Division of the US Department of Justice; although there are some differences in our powers and how they are executed.
Since the UK left the European Union, the international profile of our antitrust and merger casework has increased. This reflects the fact that we now have direct responsibility for reviewing the UK impact of many global deals and anti-competitive conduct cases where that UK element would previously have been reviewed by the European Commission. As a result, we’ve become a more significant agency for US companies doing business in the UK. Likewise close working with other agencies internationally has become more important than ever for the CMA.
An increasingly important part of our portfolio of work relates to digital markets – and that includes for merger control, antitrust cases and the new digital markets competition powers we’re expecting to be given. Draft legislation for those powers is currently going through the UK parliament. So it’s particularly timely for us to be here in the US West Coast this week to deepen our engagement with many of the tech firms that have an interest in our work. This direct engagement has already proven immensely constructive, offering opportunities to connect with emerging firms and key industry players. We’re also here to engage with events like this, which provide us with an invaluable platform to share insights about our work and our current perspectives, exchange ideas, and expand our understanding of the digital markets landscape.
The UK’s new competition regime for digital markets
Q2: The UK is setting up a new competition regime for digital markets. What is the reason for that, and what will it look like?
The pace and scale of digital transformation has been incredible, bringing enormous benefits for people, businesses and economies across the globe. In the UK, the digital sector is growing rapidly, attracting substantial investment, contributing billions of pounds to the economy, and creating millions of jobs.
At the same time, we’ve seen the concentration of market power in the hands of a small number of tech firms across a number of digital markets. There have been widely aired concerns, in many jurisdictions globally, that existing competition law regimes may not be sufficient to address the impact of that concentration of power in a timely and effective way. That’s led several jurisdictions to introduce new powers to tackle competition concerns in digital markets – for example in the EU and Germany. In the UK, back in 2018, the government commissioned a Digital Competition Expert Panel, chaired by Professor Jason Furman, to make recommendations for changes to the UK’s competition framework to address the economic challenges posed by digital markets. That review recommended updating the rules governing merger and antitrust enforcement, as well as proposing a new set of pro-competition measures to open up digital markets.
In response to that recommendation, and recognising the many benefits digital markets bring to people and businesses, the UK government is introducing a new pro-competition digital markets regime to address the market power of a small number of technology firms. The legislation to deliver this new regime is set out in the Digital Markets, Competition and Consumers Bill (the DMCC Bill) which is currently being considered by the UK Parliament. It will enable the CMA to prevent harmful practices that hold back innovation and growth. The new regime is specifically designed to keep pace with developments in fast-moving digital markets, complementing our existing competition and consumer protection powers.
The DMCC Bill will establish a very targeted approach to address the substantial and entrenched market power of a small number of firms. This will ensure that challenger firms can bring forward genuinely disruptive and exciting new innovations that will create great new products for consumers.
The new regime will be focused on firms we designate as having Strategic Market Status (SMS) in relation to one or more digital activities. We expect to designate a very small number of firms as having SMS. As currently drafted, the DMCC Bill stipulates that a firm must have substantial and entrenched market power in a digital activity which is linked to the UK, a position of strategic significance, and a global turnover of more than £25 billion or UK turnover of more than £1 billion.
Once we designate a firm with SMS, we will then have two key tools: Conduct Requirements and Pro-Competition Interventions. Through Conduct Requirements we will be able to guide the behaviour of SMS firms and through Pro-Competition Interventions we will be able to address factors underpinning these firms’ market power in a particular activity.
Some examples of what we could do to tackle market power in digital markets and associated harms under the new regime include:
- ensuring markets stay open. For example, by (where appropriate and proportionate) preventing SMS firms from engaging in anti-competitive tying, bundling or self-preferencing of products and services, or by mandating SMS firms to provide competitors with greater access to data or functionality controlled by SMS firms
- seeking ways to increase competition in the core platform markets where this is feasible. For example, by (where appropriate and proportionate) requiring SMS firms to allow the products and services of other firms to interoperate with their own, or ensuring SMS firms provide their users with effective choice screens
- tackling misuse of market power more directly where competition does not provide an adequate constraint. For example, by (where appropriate and proportionate) requiring SMS firms to trade on fairer terms or requiring them to increase transparency with respect to aspects of their algorithms
CMA’s approach to digital markets regulation
Q3: Can you tell us a bit more about how the new regime will operate in practice?
Competitive digital markets are a key driver for investment and innovation, supporting the growth of the UK economy, and bringing huge benefits to UK businesses and consumers. The new Digital Markets competition regime will help ensure that tech challenger firms can bring forward genuinely disruptive and exciting new innovations that will create great new products for consumers. The new powers it will grant the CMA are substantial and we are committed to taking a targeted, evidence-based and proportionate approach to implementing them.
This morning we published a document setting out an overview of how we will operate the new regime. The full document is available on the CMA website so, do please take a look for more details.
Whilst our thinking on how best to carry out the new functions will continue to develop; we have set out 11 proposed principles to inform our approach and these can be grouped under the following four broad themes:
First, the CMA is committed to taking a targeted, evidence-based and proportionate approach to implementing the new digital markets regime. We will be responsive to market developments and prioritise where we can have the most impact.
Second, where possible, we will promote competition as the route to deliver better outcomes for users. Where improved competition alone won’t deliver the necessary changes – or won’t do so sufficiently quickly – we will take direct action to prevent the abuse of market power. We will ensure that we intervene in a way that is future-proofed to avoid creating dependencies on particular technologies or supply chains.
Third, to promote coherence, we will ensure that the new Digital Markets competition regime complements the CMA’s existing tools. We will coordinate with both domestic and international partners to maximise synergies and minimise duplication where possible.
Finally, to ensure the new regime operates as effectively as possible, it’s crucial that we continue to engage widely with a range of stakeholders, from the major tech players to challengers and users.
Today’s overview document not only provides clarity for UK parliamentarians, but also for tech firms and wider stakeholders about the approach the CMA intends to take.
Once Parliament passes the Digital Markets, Competition and Consumers Bill, we will release more detailed draft guidance for consultation. This will mean that everyone is clear about how we intend to operate the regime and has the opportunity to provide their views.
We anticipate launching the first Strategic Market Status, or SMS, investigations soon after we receive the powers to do so. We expect to initiate approximately 3-4 SMS investigations in the first year of the new regime.
Working with others
Q4: How will you approach working with these Strategic Market Status (SMS) and other firms?
We recognise that many stakeholders will have an interest in or be affected by the way we implement the legislation, and we take this responsibility very seriously.
The document we have published today sets out broad details on how we will work with others. For example:
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we know it is extremely important for regulators in such a complex, fast-moving space to really understand the technical and commercial features of these markets. That will help ensure the regime works best for all parties. So, we have spent several years building up strong expertise and understanding to ensure we are well-placed to act when the new regime comes into force. Productive relationships with the firms we designate as having SMS are a critical part of this. The greater our understanding of an SMS firm’s digital activities, the better able we will be to design effective and proportionate interventions. It will be for the SMS firms to ensure they comply with any requirements we place on them. Working together to ensure our understanding is as strong as possible will strengthen the CMA’s ability to scrutinise such actions to ensure they deliver the intended outcomes
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input from consumers, businesses, investors and wider third parties will also be crucial in helping us to deliver in our role. We want to ensure we understand the concerns businesses and consumers have about (potential) SMS firms. We will need insight from other stakeholders as we design our interventions, monitor SMS firms’ compliance, and assess whether our interventions are leading to the outcomes we want
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equally, we will need input from a range of parties at different points in time. Many of the parties we want to speak to will have limited time and resources. We will consider ways we can make interacting with us as easy and practical as possible
Some stakeholders may have concerns about sharing information or experiences with us. The CMA is subject to various legal obligations to protect both the confidentiality of information we receive and the identity of whistleblowers. We have established processes for handling such information and maintaining the anonymity of those providing us with evidence, which we will follow for our new functions. We’ve also seen cases in the past where some firms have imposed non-disclosure agreements seeking to prevent their business partners or customers from engaging with antitrust agencies. We’d advise against that as we enter this new regime in the spirit of openness and transparency on both sides.
We intend to operate the Digital Markets competition regime adopting a participative approach, engaging constructively with both SMS firms and other stakeholders, to resolve concerns quickly and effectively where possible. Although formal enforcement action, including fines, will be available where needed, we hope that in many cases we will be able to secure timely and beneficial changes without resorting to formal action.
The CMA’s work on AI foundation models
Q5: How is the CMA approaching AI and what work are you doing in this space?
In May last year, we launched an initial review of AI foundation models (FMs). FMs, and the way they are used, are rapidly developing and there is huge potential for enormous benefits – to people, businesses and the wider economy, but also risks and uncertainties. Of course, much of the wider policy debate around AI extends beyond competition and consumer protection issues so although we are focused on those issues (reflecting our mandate) we’re also mindful to connect into that wider policy debate. The work we are doing on FMs reflects a new approach by the CMA of prioritising emerging markets, working constructively with stakeholders to ensure that they develop with strong and positive foundations for competition and consumer protection from the start, rather than us having to intervene down the track. And this is especially the case with FMs where we simply can’t afford to wait for things to go wrong before we step in, but neither do we want heavy-handed intervention to stifle innovation at an early stage.
In that context, the purpose of our initial review was to:
- examine how the competitive markets for AI foundation models and their use could evolve
- explore what opportunities and risks these scenarios could bring for competition and consumer protection
- consider which guiding principles would best support competition and protect consumers as AI foundation models develop
Our initial report was published in September last year and it focused on three levels of the value chain.
- first, the development of FMs at the infrastructure level
- second, how FMs are used in other markets and user applications
- third, the experience consumers have when using these new AI tools, in particular whether they can make informed choices and are treated fairly
We highlighted the potential benefits from AI FMs, for example, from new and better products and services, but we also identified a number of uncertainties at each level of the value chain which could negatively impact competition and consumers and we proposed a set of principles to guide the ongoing development of foundation models and their deployment to more positive outcomes so that consumers, businesses and the wider economy can gain the full benefits of innovation. Those proposed guiding principles are: access, diversity, choice, flexibility, fair dealing, transparency and accountability.
We are now engaging with a wide range of stakeholders to seek feedback on our proposed principles and to discuss key market developments. It is critical that we work together with a range of stakeholders including consumer groups, leading FM developers, possible innovators, challengers and new entrants, businesses that use FMs, academics, governments, and fellow regulators to discuss how best to achieve the positive market outcomes we have outlined in our report. As part of this wider programme of engagement, we are holding a series of meetings with key stakeholders in the US this week. And we plan to produce an updated report in March this year.
AI partnerships and investments
Q6: How has your work on AI foundation models contributed to your thinking on partnerships involving large technology companies and firms developing foundation models?
In the report we published in September last year, one subject we covered was the role of partnerships and investment relationships between FM developers and large technology companies.
First, we understand that these sorts of investments and partnerships are an important and common feature of technology markets, especially fast-paced, nascent technology markets where partnerships can be a key strategy for competing and scaling. We certainly have that in front of mind when considering them.
In terms of AI FMs specifically, we have observed many different partnership structures and a wide range of rationales for them. While the picture is complex, it is clear to us that these deals often involve firms active in the provision of key FM inputs, FM development, FM deployment, and FM developer tools. We also see that there is a trend of overlapping partnerships (i.e. multiple firms either investing or partnering with the same firm).
These sorts of partnerships can bring significant benefits to those involved and lead to increased innovation and efficiencies in the market. In particular, we were clear in our report that partnerships between firms at the AI infrastructure and upstream and downstream levels could be efficiency enhancing and allow smaller firms in the upstream or downstream markets to compete. For instance, FM development requires significant compute resource, and partnerships can help developers secure access to compute that is otherwise scarce. Their partners meanwhile can make FM developers’ innovations more quickly and broadly available, making models accessible to other businesses through their cloud platforms or integrating AI functionality into their own products.
However, some of these partnerships could pose risks to competition and that is where we have a role to play. We would be concerned if the same few companies who have accumulated entrenched positions of market power based on today’s most important technologies could use partnerships with FM developers to steer tomorrow’s technological developments to insulate themselves from competition. In particular, companies that hold the critical inputs that foundation model developers need to compete also often hold powerful and profitable positions in markets that foundation models have the potential to disrupt. So while we acknowledge the benefits these partnerships may bring, we want to make sure we properly consider their potential for negative impacts on markets. And that’s not only impacts on competition in AI foundation models, but also in related markets upstream and downstream. In our report, we also noted that some stakeholders had expressed concerns that smaller organisations such as startups were struggling to make the sort of deals with large technology companies that would allow them to access the large compute clusters needed to develop and deploy FMs.
As part of the update report we are planning for March 2024, we expect to update on how FM developers are accessing key inputs, such as expertise, data and computing power, including through investments, mergers, acquisitions and partnerships.
The CMA’s proposed AI principles
Q7: Can you tell us more about your proposed AI principles?
We recognised in our report that many factors will combine to influence whether markets for the development and deployment of FMs are competitive ones. In that context, we proposed seven overarching principles that I mentioned earlier.
At the level of FM development, we have proposed two principles:
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access – firms should be able to access the key inputs they need to build competitive FMs, including data, computing power, capital and expertise
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diversity – we want to see a range of different types of FMs continuing to thrive in this market, including both open and closed source models
For the use of FMs in downstream or adjacent markets, we have proposed three principles:
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choice – for businesses that are incorporating FMs into their products and services, there should be sufficient choice between models and options so they can choose options that best suit their needs, whether that be developing an FM themselves, entering into a partnership, or using APIs or plug-ins
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flexibility – businesses and consumers should be able to easily switch between FMs as their needs change or use multiple FMs
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fair-dealing – it’s critical that firms are not subject to anti-competitive conduct, especially arising from vertical integration
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we then have the transparency principle covering the consumer use of FMs. Both downstream businesses customers and end consumers need to have the right information about the risks and limitations of FMs so they are able to consider for themselves how to use FM tools and make informed choices
Finally, we have the principle of accountability sitting above all of the other principles. Both developers and deployers of FMs must be accountable for the outputs provided to consumers
Our report noted that several factors could undermine our proposed principles. We included the following examples: mergers or acquisitions which could lead to a substantial lessening of competition in markets for the development or deployment of FMs; firms using their leading positions in key markets to block innovative challengers who develop and use FMs; undue restrictions on firms’ ability to switch between or use multiple FM providers; the development of ecosystems that unduly restrict choice and interoperability; firms with market power in FM development or deployment engaging in anti-competitive conduct such as the tying or bundling of products and services; and consumers receiving false and misleading content from FM services that impacts or is likely to impact their decision-making.
A number of the proposed principles also provide a helpful framework for considering investments and partnerships made by and between firms in this space. For instance, within our access principle, we proposed the following underpinning elements that would support that principle: access to data, compute, expertise and capital without undue restrictions; continuing effective challenge to early movers from new entrants; successful FM developers not gaining an entrenched and disproportionate advantage by being the first to develop an FM, having economies of scale or benefitting from feedback loops; and powerful partnerships and integrated firms not reducing others’ ability to compete.
As part of the update report we are planning for March 2024, we expect to update on our thinking on the proposed principles, including how they have been received by stakeholders and whether they have been reflected in companies’ actions – and the feedback we receive during the course of the meetings we are having this week will be an important input into that.
Participation at the Concurrences Tech Antitrust Conference was part of the CMA’s wider US engagement programme, taking place between 8 to 12 January 2024.