Tom Everill | 16 July 2024

Summary

The European Commission is intensifying its scrutiny of big tech companies, particularly in the realms of AI and digital markets. Recent actions include investigating Microsoft's investment in OpenAI, enforcing the Digital Markets Act, and issuing antitrust charges against major players like Microsoft, Apple, and Meta. The EU's approach aims to ensure fair competition and protect consumer rights, but may have both positive and negative implications for innovation and market dynamics.

In January, the EU Commission (EC) launched two calls for ‘contributions on competition in virtual worlds and generative AI,’ probing stakeholders and industry experts for feedback on how to ensure relevant markets remain competitive. The 9th of January press release also mentions the Commission’s interest in ‘whether Microsoft’s investment in OpenAI might be reviewable under the EU Merger Regulation.’ 

This relates to Microsoft’s (MSFT) 2023 $10 billion investment in generative AI industry leader OpenAI, which facilitates technology-sharing agreements, product integration (such as into GitHub Copilot and Microsoft 365) and certain exclusive rights to use OpenAI’s models. The deal provides OpenAI with access to the tech giant’s resources and infrastructure and provides Microsoft with access to the smaller developer’s cutting edge generative AI technology. 

In April, sources told Reuters that EU competition enforcers had started to build an antitrust case against Microsoft for alleged distortions and restrictions to market competition as a result of the deal. On Friday 28th June, EU Competition Chief Margrethe Vestager announced that Brussels antitrust regulators will seek further third-party opinion on the deal’s legality and ramifications, following questionnaires sent by the bloc to big tech companies including Microsoft, Meta Platforms, Google (Alphabet) and TikTok owner ByteDance, among others in March, relating to AI partnerships. In addition to understanding ‘whether certain exclusivity clauses [of MSFT and OpenAI’s agreement] could have a negative effect on competitors,’ the EC also appears interested in the potential consequences of planned pre-installations of Google’s Gemini Nano models on some Samsung Galaxy smartphones.

The EC is concerned that large tech companies’ implementation of AI tools at an operating system level may hinder the ability of smaller developers to reach end users, especially pertinent to smartphone developers like Apple and Samsung who already hold effective monopolies. Citing the nascent nature of AI, now widely viewed as an inevitably transformative force in global business, economics and politics, Vestager stated, ‘Now is the time to act. Strong competition enforcement is always needed at times of big industrial and tech changes.’ She added that this is chiefly important given the ‘vast amounts of data, computing power, cloud infrastructure, and [rare] talent’ required to develop foundational AI models. Vestager also referenced a need for caution over “acqui-hires” where large companies acquire smaller ones to absorb highly-demanded talent. These steps point to a future of strict EU regulatory regimes on AI, an industry whose venture capital investment in the EU has been estimated at over €7.2 billion for 2023.

The Digital Markets Act 

Big tech’s recent challenges from the EC come amid a flurry of antitrust-related activity within the bloc. On the tech side, much of this activity relates to the EU Digital Markets Act (DMA). Made law in late 2022 and requiring businesses to comply by March 2024, the DMA targets what the EC refers to as ‘gatekeeper’ companies. In September 2023, the EU designated its first 6 ‘gatekeepers’: Alphabet, Amazon, Apple, ByteDance, Meta and Microsoft. In November, Meta and ByteDance appealed their new ‘gatekeeper’ status with ByteDance losing its appeal in February. The Commission lists three qualities required for a digital platform to be designated as a ‘gatekeeper’:

1. ‘A strong economic position, significant impact on the internal market and are active in multiple EU countries.

2. A strong intermediation position, meaning that they link a large user base to a large number of businesses.

3. An entrenched and durable position in the market, meaning that their position has been stable over time’.

Furthermore, the EC has developed a list of examples of “do’s” and “don’ts” in establishing obligations for ‘gatekeeper’ companies to comply with, as laid out in the Digital Markets Act Overview on the E.U.’s official website:

Examples of “do’s”:

• ‘Allow third parties to inter-operate with the gatekeeper’s own services in certain specific 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.

• Allow their business users to promote their offer and conclude contracts with their customers outside the gatekeeper’s platform.’

Examples of “don'ts”:

• ‘Treat services and products offered by the gatekeeper itself more favourably in ranking than similar services or products offered by third parties on the gatekeeper's platform.

• Prevent consumers from linking up to businesses outside their platforms.

• Prevent users from uninstalling any pre-installed software or app if they wish so.

• Track end users outside of the gatekeepers' core platform service for the purpose of targeted advertising, without effective consent having been granted.’

Notable Enforcement Examples 

Microsoft:

In late June, Microsoft was charged with its first EU antitrust violations in over a decade as a result of its bundling of its Teams video conference platform with other subscription services such as Office 360 and Microsoft 360. Despite the company unbundling Teams from its Office service in Europe last year, it was unable to avoid charges. 

These charges follow a 2020 anti-competition complaint by Teams competitor Slack and parent company Salesforce who claimed Microsoft’s automatic installation of Teams for 360 users, a subsequent difficulty for users to uninstall the software and the hiding of Teams’ true cost within its Office package provided it an unfair advantage. If found guilty, Microsoft may face fines representing as much as 10% of global annual turnover under DMA rules. The company claims to be working with the EU to find solutions.

Apple:

In March, the EU fined Apple EUR 1.8 billion for breaching antitrust rules by allegedly preventing app developers from informing consumers about cheaper, alternative music streaming platforms on its App Store. The ruling represents the third largest antitrust fine in EU history after those placed on Google Android in 2018 (EUR 4.34 billion) and Google Shopping in 2017 (EUR 2.42 billion). In May, Apple launched its appeal against the decision citing what it describes as the EC’s ‘failure to uncover any credible evidence of consumer harm,’ stating that it will ‘vigorously’ challenge the decision.

The launch of Apple’s appeal on May 22 came a day after it announced its plan to seek a dismissal in another antitrust lawsuit, this time from the U.S. Department of Justice as the company faces unprecedented pressure from U.S. regulators. The DoJ, along with 15 U.S. states allege that the company has abused its market dominance and holds an illegal monopoly on smartphones and digital wallets. 

Furthermore, Apple’s newly announced native AI features package known as Apple Intelligence, has been ruled out from launching in the EU in 2024 due to privacy and security concerns and a failure to meet DMA requirements on interoperability. This represents a blow to Apple which is seeking to catch up with competitors on the implementation of AI tools and may prove similarly challenging to other hardware and software developers seeking to deploy their own proprietary, closed-source AI tools.

Meta Platforms:

On Monday 1st July, the EC announced new charges it is bringing against Facebook owner Meta Platforms for failing to comply with DMA regulations. The charges stem from the launch of Meta’s new ‘pay or consent’ advertising model and “no-ads” subscription service for its Instagram and Facebook platforms which was introduced in Europe last November. The service was launched prior to the European Court of Justice’s (ECJ) ruling that the company must first receive consent from users before showing ads, in accordance with DMA rules. 

The Commission argues that Meta’s new ad model of binary choice does not provide scope for users to ‘freely consent’ to allowing personal data from across various Meta platforms to be combined and then used to target them with personalised ads. The EU Commissioner tasked with overseeing EU digital policy, Thierry Breton, claims that the DMA exists to return, to users, the power to decide how their data is used as well as preventing anti-competitive practices. Like Microsoft, Meta faces fines of up to 10% of annual global turnover if found guilty. In a statement, a Meta spokesperson rebutted that the company’s EU advertising model ‘follows the direction of the highest court in Europe and complies with the DMA.’

Moreover, in May, the EC opened formal proceedings against Meta over claims that it may have breached the Digital Services Act (DSA) relating to the protection of minors on its platforms. It claims that Meta’s social media interfaces may exploit the ‘weaknesses and inexperience of minors’ causing addictive behaviour, that its age verification tools may not be ‘reasonable, proportionate and effective,’ and that default settings are not sufficient to ‘ensure a high level of privacy, safety and security for minors.’ The Commission will conduct a formal investigation into these areas, providing scope to ‘take further enforcement steps.’ While not directly related to the DMA, this further underscores Brussels regulators’ zero-tolerance approach to perceived big tech misconduct.

Implications

• E.U. Competitiveness 

  • Potential Positive Impact: Fostering innovation and competition among smaller tech companies within the bloc

  • Potential Negative Impact: Slowing down big tech innovation and deployment in the EU market

• Unintended Consequences

  • Fragmentation of digital services between EU and non-EU markets

  • Increased compliance costs potentially passed on to consumers

  • Big tech companies might reduce investments or services in the EU

• Brussel’s Stance Moving Forward

  • Likely to maintain strict regulatory approach given recent actions

  • May expand focus to emerging technologies (e.g., quantum computing, blockchain)