EU digital reform: Brussels seeks to regulate Big Tech and other digital services

Europe’s legal framework for digital services has been fundamentally unchanged since the adoption of the e-Commerce Directive¹ in 2000. Subsequent advances in technology, and the accompanying evolution of digital services, have resulted in more and more calls for updated regulations from market participants, governments and regulators.

The European Commission’s response is twofold: the Digital Services Act (DSA) and the Digital Markets Act (DMA), each of which aims to modernise the legal framework for digital services, albeit in a different manner.

Digital Services Act

The DSA aims to introduce EU-wide rules for online intermediary services, i.e. digital services which connect consumers to goods, services or content. It will be applicable, although to a varying degree, to four categories of businesses:

• intermediary services, i.e. businesses which offer network infrastructure, such as internet access providers;
• hosting services, e.g. cloud services;
• online platforms, i.e. businesses which bring together sellers and consumers, such as digital marketplaces, app stores and social media platforms; and
• (with a wider set of restrictions and obligations) “very large” online platforms, i.e. platforms reaching more than 10% of the EU’s consumers.

As noted, the rules and obligations which the DSA seeks to impose will apply on a sliding scale, based on the size of the service and its impact, and will include:

• obligations for very large platforms to take action to prevent the misuse of their systems, including through independent audits of their risk management systems;
• rules to counter illegal goods, services or content online;
• transparency measures, including in relation to online advertising and the algorithms used to recommend content to users;
• processes to enable cooperation between authorities across the EU; and
• an oversight structure which will enable the European Commission to sanction very large platforms directly.

In terms of penalties for non-compliance, each Member State will be required to specify penalties under national law. Further, in the case of very large platforms, the European Commission will have direct supervision powers and will be able to, in the most serious cases, impose fines of up to 6% of the infringer’s global turnover. That said, enforcement is not only limited to pecuniary penalties and authorities will have the power to require immediate action where necessary to address very serious harm.

Digital Markets Act

Of perhaps more headline impact, the DMA aims to address the negative consequences arising from certain behaviours by platforms acting as digital “gatekeepers”, i.e. large, systemic online platforms which have a strong economic position, a strong intermediation position with respect to their users and businesses and a stable position in the market.

Such gatekeeper platforms will be required to:

• allow third parties to interoperate with their services in a number of situations;
• allow their business users to access the data that they generate in their use of the gatekeeper’s platform;
• provide companies advertising on their platform with the tools and information necessary for advertisers and publishers to carry out their own independent verification of their advertisements hosted by the gatekeeper; and
• allow their business users to promote their offer and conclude contracts with their customers outside the gatekeeper’s platform,

and will be prevented from:

• treating their services/products more favourably in ranking than similar services/products offered by third parties on their platforms;
• preventing consumers from linking up to businesses outside their platforms; and
• preventing users from uninstalling any pre-installed software or apps.

Non-compliance could result in fines of up to 10% of global turnover, periodic penalty payments of up to 5% of daily turnover or, for systematic infringements, additional remedies (both behavioural and structural), to be imposed following market investigation.

Commentary

The DSA and DMA will clearly have significant implications for digital services businesses (in particular, gatekeeper platforms) and the businesses and users that rely on their services. While the full impact will not be clear until adoption, which will follow debate under the ordinary legislative procedure, it is apparent that significant change is on the way. Whether this change is positive or negative will depend on the identity of the market participant, and businesses should take steps to prepare for the biggest shake-up of digital regulation in the EU for twenty years.