Economics of music streaming: Government and Competition and Markets Authority Responses to Committee’s Second Report

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Appendix 2: Competition and Markets Authority Response

The CMA notes the Committee’s recommendation to the government regarding a market study examining the dominance of the major music groups. The CMA is liaising with relevant Departments on this issue, and it is expected that this recommendation will be addressed in the government’s response. The remainder of this note responds to the recommendation that the Committee addressed directly to the CMA; namely, that “the CMA should consider exploring designating YouTube’s streaming services as having strategic market status to encourage competition with its products”.1

Current status of the proposed new pro-competition regime for digital markets

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 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 should be prioritised under the new regime to focus on digital activities where there is the highest risk of competition concerns and the strongest case for intervention. The government has proposed that the DMU have regard to the following factors when prioritising designation assessments:

• A firm’s revenue (whether UK or global) as an indicator of the scale of harm that could result from a firm’s market power and to provide clear demarcation for designation decisions.
• The characteristics of the activity. The government proposes that the DMU should prioritise designation assessments for activities where there are likely to be significant network effects, economies of scale and scope, and/or high fixed costs to entering the market. This is on the basis that these are the activities most likely to tend towards concentration and entrenched market power, and therefore where potential SMS firms could emerge, and which are most likely to require the tools of the new regime.
• Whether a sector regulator is better placed to address the issue of concern. The government proposes that the DMU should deprioritise designation assessments for activities where an existing regulatory regime is better placed to address the harm.

7.We await the outcome of that consultation which will affect how the DMU will prioritise these assessments in the new regime. After the consultation, the government has committed to putting forward legislation when Parliamentary time allows.

Immediate priorities for potential SMS designations

8.Pending legislation, there is no mechanism to designate firms with SMS status. Since April this year, the DMU has existed in shadow form within the CMA. Its role has been to help Government develop the legislation and ensure it can be brought into operation as quickly and effectively as possible once the legislation is in place. This has involved a range of activity such as working closely with Government to design the regime and establish the appropriate legislative framework,8 and engaging with regulators nationally and internationally.9 The CMA also proposes to use this time to gather evidence to inform any future possible SMS designation assessments, subject to prioritisation principles.

9.In this period while the legislation is under development, the DMU has no statutory powers of its own. It is reliant on the powers and tools of the CMA to gather evidence such as through general information-gathering projects,10 market studies, merger control and competition enforcement. An example of this approach is that, on 15 June 2021, the CMA launched a market study into Apple’s and Google’s mobile ecosystems over concerns they have market power which is harming users and other businesses.11 The Statement of Scope explains how evidence obtained should better enable consideration of whether Apple or Google should be designated with SMS in relation to any specific activities examined in the study, namely the supply of mobile devices and operating systems, the distribution of mobile apps, the supply of mobile browsers and browser engines and competition between app developers.12

Conclusion

10.The CMA cannot at this stage consider designating YouTube’s streaming services as having strategic market status, because the framework is subject to the government’s proposals following the current consultation, and to Parliament’s subsequent decision on those proposals. However, the CMA is grateful to the Committee for the evidence it has brought to bear on these important issues – evidence that it will be able to draw on at such point as the new digital markets framework comes into force.

September 2021