Ensuring effective competition in digital markets, for people, businesses and the economy

26 Apr 2023 01:41 PM

A statement on mergers and digital markets from Marcus Bokkerink, Chair, and Sarah Cardell, CEO, CMA.

The CMA’s purpose is to help people, businesses and the UK economy by promoting competitive markets and tackling unfair behaviour - driving lower prices, increased quality and choice, and enhanced opportunities for fair-dealing businesses, large and small, to compete freely. Open, competitive markets provide the foundations for a vibrant, innovative economy and are critical to attract investment and drive growth. This is true across the UK economy but is particularly relevant for the digital markets that are now systemic in our way of life and commerce.

This week has seen 2 important announcements relating to competition in digital markets: the introduction into Parliament of the Digital Markets, Competition and Consumers (DMCC) Bill; and the CMA’s decision to prohibit the Microsoft/Activision merger. Whilst these announcements are distinct, we are taking this opportunity to explain how our existing merger control regime and the new digital markets regime can work in complementary ways to maintain effective competition in digital markets.

What’s different about digital markets?

Digital markets bring many benefits to people and businesses. But they also have characteristics that make them particularly vulnerable to competition problems:

• The fact that people value being on the same network as each other makes digital markets prone to ‘winner-takes-most’ tipping points where one or 2 platforms come to dominate.
• The data gathered by large players gives them a powerful advantage over competitors – including in other related markets – meaning that market power can quickly spill over from one market to the next.
• The unprecedented scale, scope and development speed of digital markets means that, when competition problems do arise, harms can spread quickly across the economy and become locked in.

These characteristics partly explain why 4 of the 5 most valuable companies in the world are tech firms. Yesterday’s disrupters have become today’s entrenched incumbents. Even where new technologies emerge, it is increasingly existing market players that have the funding and technical capabilities to incorporate them, not innovative startups and challengers.

Effective competition in digital markets matters to people, who need to be protected from harms and be able to select the products and services best suited to their needs. It matters to businesses, which should have fair access to digital markets as both customers and competitors. And it is critical for the economy as a whole, because dynamic competition in digital markets creates an attractive ecosystem for investment, innovation and growth. Innovative UK challengers, from small start-ups to FinTech ‘unicorns’ have told us they are holding back on making further investments because large online platforms are blocking them from bringing their competing products and services to market.

Effective merger control is key to maintain effective competition in digital markets

Preventing the development of entrenched market power in the first place is the most effective way to safeguard competition. Merger control therefore has a critical role to play in driving productivity and growth in the UK, including in rapidly evolving digital markets, ensuring that these markets remain subject to open and effective competition and continue to attract and reward investment over the medium term.

In the UK, we have evolved our approach to assessing mergers in digital markets to take account of the particular features of competition in those markets. The UK’s system of merger control ensures that the vast majority of deals can proceed, whilst requiring the CMA to step in to prevent the handful of problematic deals that we identify. Our approach is proportionate: thousands of mergers take place each year, yet we typically consider around 750 deals and take only 12-14 to an in-depth investigation. Of those 12-14, many are cleared or resolved through remedies, and only a few are prohibited. Our approach is also evidence-based and forward-looking: we use in-depth analysis to assess how competition is likely to evolve over time – something that, given the characteristics outlined above, is particularly important with respect to digital markets.

The decision to prohibit the Microsoft/Activision merger should be viewed in that context. Gaming is the UK’s largest form of entertainment, and cloud gaming is the fastest growing gaming market. Microsoft already has important advantages in this market: it owns Windows, by far the leading PC operating system on which most PC games run; it has a global cloud infrastructure; and it has a strong gaming console and collection of games. No other cloud gaming operator has this combination of advantages, which partly explains Microsoft’s current UK market share of between 60-70%.

A CMA independent inquiry group found that Microsoft would have the incentive to withhold Activision’s portfolio of leading games from competitors after the merger, and that this would substantially weaken the competitive dynamics in cloud gaming. Whilst the inquiry group considered carefully a remedy proposed by Microsoft to constrain its behaviour, it found that the remedy would have been ineffective in remedying the loss of competition. Moreover, implementing the ineffective remedy would have replaced market forces with ongoing regulatory obligations overseen by the CMA, when competitive forces in a free market are much better placed to achieve the right outcome for competition and consumers. As such, they concluded that prohibiting the transaction was the only effective and proportionate way to protect competition. Other authorities have investigated similar concerns, and the US Federal Trade Commission (FTC) has issued an administrative complaint seeking to block this merger.

The new Digital Markets regime will be a targeted and measured way to support innovation, investment and growth.

Although merger control serves as an effective one-off mechanism to make sure that a particular acquisition doesn’t restrict competition, the challenges that we see to effective competition in digital markets merit additional on-going intervention, particularly where market power has already become entrenched.

Once the DMCC Bill is enacted, it will give the CMA the ability to work in a faster and more targeted way to improve competition and foster opportunities for innovation in digital markets where a firm is found to already have strategic market status. Our new powers will allow us to set targeted and proportionate conduct requirements to ensure other businesses aren’t at risk of being exploited and excluded, and to safeguard users against unfair terms and constrained choices. They will also allow us to go further, where necessary, through targeted interventions to address the root causes of market power in these markets by, for example, mandating firms to share certain kinds of data, or instructing firms to operate data silos.

Merger control and the new digital markets regime are complementary ways to ensure effective competition, supporting investment, innovation and growth

Whilst merger control and the new digital markets regime share the same objective, to ensure effective competition, they will operate in complementary ways for digital markets. Merger control is a one-off intervention to ensure that pre-existing conditions of effective competition continue to drive the evolution of dynamic markets. In contrast, the new digital markets regime recognises that, in circumstances where entrenched market power already exists, ongoing but targeted regulatory oversight is required. For both tools, the CMA’s findings and actions will always be led by an objective and transparent assessment of the evidence. And both regimes are critical to ensure that digital markets in the UK continue to flourish under conditions of open and effective competition, unlocking innovation, attracting investment and driving economic growth.

Additional information

1. The DMCC Bill was published by His Majesty’s Government on 25 April and is available on the UK Parliament website
2. More information about the Microsoft / Activision case, including an overview of the final decision is available on the Microsoft/Activision case page