Not cleared from scrutiny; further information requested
Proposal for a Regulation of the European Parliament and of the Council on promoting fairness and transparency for business users of online intermediation services
Article 114; OLP; QMV
Business, Energy and Industrial Strategy
(39665), 8413/18 + ADDs 1–3, COM(18) 238 final
2.1One of the more contentious strands of the European Commission’s Digital Single Market Strategy, first outlined in a communication in May 2015, was the proposal to develop “a fit for purpose regulatory environment for platforms and intermediaries” in response to concerns about the “growing market power of some platforms”. The communication suggested that this market power, and “their strong bargaining power compared to that of their clients … may be reflected in their terms and conditions (particularly for SMEs), promotion of their own services to the disadvantage of competitors, and non-transparent pricing policies, or restrictions on pricing and sale conditions”.
2.2Following a lengthy process of consultation and development, on 26 April 2018 the European Commission brought forward draft Regulation 8413/18 (hereafter, “the Regulation”) which seeks to promote fairness and transparency for business users of online intermediation services by establishing a range of regulatory requirements applicable, among other things, to multi-sided e-commerce market places, app stores, social media, and search engines. The proposal also includes provisions to facilitate out-of-court dispute resolution, and would establish an EU Observatory to monitor the implementation of the regulation and emerging currents in the digital economy.
2.3In the text which precedes the content of the Regulation, the Commission states that online platforms are key enablers of online trade, and that, at present, more than a million EU enterprises trade through online platforms in order to reach their customers, and it is estimated that around 60% of private consumption and 30% of public consumption of goods and services related to the total digital economy are transacted via online intermediaries.
2.4A central strand of the rationale for the proposal are the dynamics of the online markets in question. Due to their networked nature, online platforms, which typically operate in multisided or “platform” markets, benefit from “network effects”—an economic phenomenon which means that the value of the network to its users grows as it increases in size. These network effects may be direct (direct network effects refer to the way in which a social network becomes more valuable to its users the more users of the same kind there are) or indirect (indirect network effects refer to the increase in the value of the service to one group of users that results from an increase in the number of users of a different kind: for example, a marketplace platform becomes more valuable to buyers the more sellers there are on a platform; a search engine becomes more valuable to its advertisers the more users it has). Because network effects mean that the businesses which benefit from them become more valuable to their users the more users they have, this creates a tendency to high levels of market concentration, with one or a small number of operations often developing a high market share in particular sectors of the digital economy.
2.5Although network effects are not inherently problematic—indeed, they are constitutive of the markets in which multi-sided businesses operate, and generate increased value and efficiency for users of the network—the market dynamics they foster, in which one or a small number of platforms tend to gain a high market share in a specific sector or sub-sector of the digital economy, may have a harmful effect on competition, as the presence of a strong network effect is likely to increase switching costs and raise entry barriers for a platforms’ business users, making it harder for rival platforms to effectively compete.
2.6These dynamics may also have effects on businesses that become dependent on a particular platform to reach the market, as they may have little scope to switch platform if they wish to reach the market—for example, if a business wishes to reach UK consumers using general search platforms, Google Search has 85% of the UK market. In consequence, businesses which depend on a particular platform to reach their target market may have limited bargaining power vis-à-vis the platform, which may in some cases result in them having little choice but to accept onerous terms and conditions. The Commission states that this relationship of dependency is exacerbated by the fact that the supply-side of multi-sided platforms is inherently fragmented and consists of “thousands of small merchants”.
2.7The Commission’s consultation identified the following harmful trading practices as recurrent, across a wide range of platforms:
2.8It is not within the scope of the present report to discuss each of these concerns in detail. However a particularly clear example of the issues which may arise as a result of the dynamics of online platform markets is provided by the online travel agent (OTA) sector’s practice of including MFN clauses in its contracts with dependent businesses. A wide range of OTAs are known to have imposed MFN clauses on suppliers using their platforms, which effectively prohibited hotels and B&Bs from offering lower prices to consumers both to other rival OTA platforms as well as directly to consumers via their own websites—in some cases these clauses also prohibited hotels and B&Bs from offering consumers lower prices offline. The proliferation of such clauses in the OTA sector had a range of harmful effects, which included reducing the ability of hotels and B&Bs to compete on price with the OTAs (as they could not offer consumers a lower price, online or, in some cases, offline) as well as reducing the incentives for OTAs to compete with each other on levels of commission charged (as, if one OTA charged a higher commission, and a B&B increased its prices in order to offset this increase, the higher price would be passed on to all of the OTAs on which the B&B advertised, as different OTA’s MFN clauses effectively required operators to offer them their best price). Although a significant number of competition authorities have taken action to address these concerns in the case of OTAs, they have done so in a fragmented manner over a long period of time, and there is evidence to suggest that, even when these clauses have been prohibited, their effects have persisted in practice, as OTAs can still remove businesses from their platforms if they do not offer them their lowest price even in the absence of an MFN clause in a contract.
2.9In response to the Commission’s plans to develop proposals in this area, the House of Lords EU Internal Market Sub-Committee produced an extensive analysis of the competitive dynamics of these markets in a titled “Online Platforms and the Digital Single Market” in April 2016. The report identified a wide range of ways in which existing regulatory frameworks (competition law, data protection, consumer protection) struggled to address the issues in these markets, and advocated a number of specific adaptations to these frameworks. The report expressed support, among other things, for the development of codes of practice, akin to the Groceries Supply Code of Practice (GSCP) that exists for the food supply chain in the UK, and recommended that increased transparency of search results should be mandated.
2.10Under the Regulation, online intermediaries within scope of the definition, including multi-sided e-commerce marketplaces, app stores, social networks and search engines, would be regulated to ensure their relationships with their business users are open, fair and transparent. The Government’s , submitted by the Parliamentary Under-Secretary of State for the Department for Business, Energy and Industrial Strategy (Lord Henley) on 5 June 2018, states that the proposal applies to online intermediation services provided to business users and corporate website users that have their place of establishment or residence in the European Union and that, through online intermediation services or online search engines, offer goods or services to consumers located in the Union, irrespective of the place of establishment or residence of the providers of those services.
2.11The proposal has three main strands: transparency, redress, and monitoring.
2.12Regarding transparency, the Regulation would require online platforms to ensure that terms and conditions are accessible and that any changes to terms and conditions are announced with at least 15 days’ notice. Additionally, these terms and conditions should clarify:
2.13Regarding redress, under this Regulation, online platforms would be required to:
2.14The Commission would be obliged to encourage industry to set up specialised mediation bodies. The Commission would also be obliged to encourage online intermediation service providers to draw up codes of conduct. Organisations and associations that have certain defined interests in representing relevant users of online intermediation services will be empowered to take court action on behalf of businesses in relation to breaches of the regulation.
2.15Regarding monitoring, the Regulation is accompanied by a Commission Decision to establish an EU Observatory (Annex C) to monitor emerging issues in the platform economy. The observatory would provide advice and analysis on the evolution of the online platform economy and the evolution of policy measures in this area. The Commission proposes that the Observatory will be formed of a group of independent experts and a dedicated team of Commission officials.
2.16A fuller account of the provisions of the Regulation is provided in the Background section of this report.
2.17In terms of policy analysis, the Government’s is exceptionally brief and non-committal, given the wide-ranging nature of the proposal. The ‘policy implications’ section of the document merely notes that the Government recognises the benefits and opportunities that platforms can bring to both consumers and businesses, and states that the Government is committed to maintaining “the right environment to ensure both platforms and the businesses that use them can thrive”, without specifying whether the proposal represents the right environment or not. The Minister also indicates that the Government is “keen that any action reflects the voice of businesses”, including both business users of platforms as well as online platforms themselves.
2.18The Government has not provided a subsidiarity assessment, merely repeating the Commission’s view that the proposal cannot be sufficiently achieved by the Member States and that regulation at European Union level would avoid the negative effects of regulatory fragmentation caused by national level initiatives.
2.19In terms of timescales, the Minister noted that, depending on the progress of negotiations, the file could be agreed by early 2019, and that, if the proposed six-month timescale for application were kept, the regulation’s provisions would then be applicable during 2019. As such, it would apply to the Government during the transitional period contained within the draft Withdrawal Agreement, if it were agreed.
2.20The European Commission’s proposal for a regulation regarding online intermediaries has proven to be one of the more contentious strands of the Digital Single Market Strategy from its inception, and is the result of an unusually protracted process of consultation and development. We consider the high level of scrutiny to which the proposal has been subjected to be appropriate given the challenges inherent in making effective regulatory interventions in the digital economy.
2.21The final proposal, which was modified following an opinion of the Regulatory Scrutiny Board, is more targeted and excludes B2B (business-to-business) and P2P (peer-to-peer) platforms, on the basis that asymmetries of bargaining power are less pronounced in these markets. The principal intermediaries captured by the proposed definition are social networks, app stores, and multi-sided e-commerce marketplaces, including online travel agents. Specific provisions also are made for search engines.
2.22The rationale for targeting these categories of intermediary is provided by the features of these markets, which display strong network effects, which in turn tend to lead to high levels of market concentration and to successful platforms becoming almost unavoidable trading partners for businesses seeking to reach consumers. As the supply-side on these platforms are often highly fragmented, consisting of large numbers of small businesses, these markets also display significant asymmetries of bargaining power. The Commission notes that business users’ dependency may lead to them having little choice but to accept unfair terms and conditions, and being reluctant to bring complaints forward for fear of retaliation. A 2016 House of Lords report on this issue identified widespread evidence of these concerns among dependent businesses in the UK, and called for a wide range of regulatory interventions.
2.23The level of intervention proposed is, for the most part, light-touch, with the focus being on improving transparency in these markets. Search engines would have to identify the main parameters determining their ranking of business users in search results and their relative importance, and to explain where ranking is influenced by remuneration, without having to divulge trade secrets. The proposal does not prohibit the use of Most Favoured Nation clauses by platforms, but would require them to provide a justification and description of their use. Platforms would have to specify when they discriminated in favour of their own services. Platforms would be required to provide clear explanations as to why businesses were de-listed, and to provide 15 days’ notice in advance of changes to terms and conditions. Our initial assessment is that these transparency provisions are pro-competitive as they would facilitate increased differentiation and competition between rival platforms; they would also modestly strengthen smaller businesses in their dealings with online platforms.
2.24The second strand of the proposal seeks to provide more effective redress mechanisms, as the asymmetries of scale between platforms and the smaller businesses depend on them can make it difficult for dependent businesses to challenge unfair practices. The Commission proposes that platforms be required to establish internal complaint-handling systems and specify mediators with which they are willing to cooperate to facilitate out-of-court dispute resolution, with platforms obliged to cover at least half of the costs of mediation. Associations representing businesses would be granted the right to bring court proceedings on behalf of businesses to enforce the new transparency and dispute settlement rules. We note that there is strong evidence that smaller businesses in the UK may find it difficult to challenge the unfair trading practices of platforms they depend on and that there is support among these businesses for binding dispute resolution mechanisms.
2.25We are concerned that the Government’s Explanatory Memorandum provides no serious analysis of the proposal’s implications, and merely repeats the Commission’s subsidiarity assessment without indicating whether it accepts this assessment or not. Our initial assessment is that subsidiarity concerns do not arise, as uncoordinated Member State approaches to these practices would result in a significant increase in market fragmentation, which would inhibit market scale, which is of paramount importance to the digital economy.
2.26To assist us in reaching a view on the proposal we ask the Government to answer the following questions:
2.27We ask the Government to provide answers to these questions, and an update on the anticipated progress of the file, by 17 August 2018. We retain the proposal under scrutiny.
2.28The proposal applies to online e-commerce market places (i.e. multi-sided marketplaces which permit buyers and third-party sellers to transact, as opposed to conventional linear e-commerce suppliers), app stores, social media, and search engines. The effects of the principal provisions are summarised below:
Terms and conditions which do not comply with these requirements will not be binding on the business user concerned where such non-compliance is established by a competent court.
Providers are also required to give business users at least 15 days notification of any envisaged modification to their terms and conditions. Modifications will be null and void where this does not happen.
Proposal for a Regulation of the European Parliament and of the Council on promoting fairness and transparency for business users of online intermediation services: (39665), , + ADDs 1–3, COM(18) 238 final.
15 A Digital Single Market Strategy for Europe .
16 Proposal for a Regulation on promoting fairness and transparency for business users of online intermediation services .
17 Statista, Market share held by the leading search engines in the United Kingdom (UK) as of January 2018 (.
18 House of Lords EU Committee, Online Platforms and the Digital Single Market, paras 117–122 ().
19 House of Lords EU Committee, Online Platforms and the Digital Single Market, paras 129–134 ().
20 House of Lords EU Committee, Online Platforms and the Digital Single Market, paras 276–286 ().
21 This process, its findings, and the opinion of the Regulatory Scrutiny Board referenced below are summarised in the Impact Assessment which accompanies the proposal: Commission Staff Working Document Impact Assessment Annexes accompanying the document Proposal for a Regulation of the European Parliament and of the Council on promoting fairness and transparency for business users of online intermediation services
22 House of Lords EU Committee, Online Platforms and the Digital Single Market ().
23 See House of Lords EU Committee, Online Platforms and the Digital Single Market, paras 126–141 () and evidence given by industry stakeholders to the same inquiry ().
24 “On digital, the UK will not be part of the EU’s Digital Single Market, which will continue to develop after our withdrawal from the EU,” in “PM speech on our future economic partnership with the European Union” ().
Published: 24 July 2018