Governing emergent centers of transnational power: lex digitalis intermedia
The rise of the global internet in the 1990s transformed our societal background settings. Suddenly, the World Wide Web permitted unforeseen means for acquiring information and facilitating new forms of social interactions. Internet intermediaries took up the task of developing tools for navigating these emergent digital spaces. In fact, for each particular sector of the internet, an incumbent intermediary arose. This produced a practical yet normative question: How do we maintain and foster competitive forces within the field of internet intermediation?
Just to name two: Google Search has become the incumbent intermediary for information acquisition, Facebook the incumbent intermediary for social networking on the internet. They are “intermediaries” in the sense that they – for the most part – do not directly supply products as part of a one-sided market, i. e. the way in which shoemakers would sell shoes to their customers. Instead, intermediaries facilitate multi-sided markets. They supply a platform on which a particular demand on one side is matched with respective content on the other side.
The success of intermediation platforms, therefore, hinges in large part on whether they achieve a meaningful evaluation, i. e. ranking, of content. A search engine is successful if its search results pages rank those websites the highest whose content is most relevant to one’s search query. A subscription-based social networking platform such as Instagram (for the time being) is successful if its so-called main feed (i. e. a stream of frequently updated content) ranks highest the content of those users one has subscribed to. A discovery-and-entertainment-based social networking platform such as TikTok (and – as of Jul. 21, 2022 – also Facebook) will be successful if its main feed list content that each individual user happens to find most entertaining.
For each sector of the internet, one internet intermediary quickly rose to the top. Moreover, many of these incumbent intermediaries belong to the same corporation. Facebook, Instagram, and WhatsApp, for instance, are all services offered by Meta Platforms, Inc. (formerly Facebook, Inc.), while Google Search and YouTube, for instance, are services offered by Google LLC, a subsidiary wholly owned by Alphabet Inc. (formerly Google Inc.). As a result, the corporations behind incumbent internet intermediaries constitute transnational centers of economic and political power. To give just a rough and somewhat flawed orientation: The market capitalization of these corporations (i. e. the total value of outstanding shares) exceeds the Gross Domestic Product (i. e. the value of all goods and services produced in one year) of some developed countries. Denmark went so far as to post a dedicated tech ambassador to Silicon Valley.
The rise of monopoly intermediaries, while not a logical necessity, is practically inevitable given the nature of multi-sided markets. Most internet users will have a strong preference to use one – and only one – intermediary for each sector of the internet, in other words: one search engine, one comparison shopping platform, one entertainment-based social networking platform, etc. The reason being: Users employ an internet intermediary when they want the intermediary to do a specific aggregation and evaluation task for them. In other words, it would be implausible to imagine that the typical internet user is the kind of user who regularly consults multiple intermediaries of the same kind (e. g. multiple search engines) to verify which intermediary best ranks the relevant source content. If users were already accessing and ranking source content to verify various intermediaries’ performance, then they could also skip the intermediary entirely and continue to access and evaluate the relevant source content directly. The very reason to employ an intermediary in the first place is to delegate the evaluation task to it. Users, moreover, benefit from higher user numbers on their preferred platform because, the higher the numbers, the better the potential performance of the ranking algorithm.
Thus, it is no surprise that, when the European Commission investigated anti-competitive practices of various Google services and compiled various surveys that studied how many internet users regularly use a second intermediary in addition to an incumbent intermediary (so-called multi-homing users), the Commission concluded that no significant number of users multi-homes at best only occasionally.
Importantly, the rise of incumbent internet intermediaries has decidedly normative implications over and above mere technological ones. Incumbent intermediaries are sector-specific gatekeepers in the sense that they have the power to stipulate access standards. They can determine the rules that content providers have to observe to pass onto intermediation platform and which qualitative standards content has to fulfill to rank higher than other content. In other words, incumbent intermediaries control internet-sector-specific gateways.
At the junction of emergent transnational power and the need for normative standards, the requisite governance framework is created, on the one hand, by the intermediaries themselves and, on the other hand, by (supra-)national institutions. The resulting normative space is deeply fragment and it will remain fragmented for the foreseeable future (at least for as long as we lack a truly global legislator). Despite its fragmentation, however, we witness the emergence of an ever-evolving, transnational lex digitalis intermedia (the law of internet intermediation), which consists of a complex web of recommendation, policies, standards, contractual obligations, and (supra-)national laws. This network frames the normative landscape of internet intermediation.
Google, for instance, has produced the Google Search documentation containing various suggestions, recommendations, and guidelines, in particular the SEO (search engine optimization) Starter Guide and the Webmaster guidelines. When webmaster want to monetize their websites by displaying advertisements as part of the Google Display Network, they have to ensure that their websites adhere to the Google AdSense Program policies. Advertisers who want to advertise on the Google Display Network have to ensure that their advertisements adhere to the Google Ads policies. Google has the competency to enforce its own policies by removing prohibited content, down-ranking websites or even removing them from the index entirely. Facebook, to give a second example, has produced the Facebook Community Standards that govern the conduct of users on its platform. When users are suspected of violating the Community Standards, Facebook moderators can remove posts or even ban users from the platform. Users can appeal such moderation decision to the Oversight Board, an adjudicatory body that can uphold or reverse moderation decision in a binding manner. The Oversight Board is institutionally independent to the extent that its funding is irrevocable and expected to cover operational expenses for at least six years. This is a positive development. Facebook has externalized parts of its quasi-judiciary powers to a separate institution, thereby potentially triggering the rise of checks and balances within the emergent lex digitalis intermedia.
However, public actors have now also entered the playfield. The European Commission has taken the initiative in December of 2020 and proposed supranational legislation aimed at governing the behavior of incumbent internet intermediaries. This European Digital Strategy contains, amongst others, the Digital Markets Act (DMA), which has been approved by the Council on Jul. 18, 2022 and now awaits to be signed by the President of the European Parliament. The DMA takes multiple reasonable steps in the right direction, namely toward primarily governing rather than breaking up incumbent intermediaries. It requires incumbent intermediaries to observe a catalogue of behavioral rules, which includes, amongst others, refraining from collecting personal data across two or more services provided by the same gatekeeper, allowing business users to control pricing on third-party platforms, and refraining from requiring business users to subscribe to any other incumbent platforms. It also stipulates prohibitions to be “further specified”, for instance: the gatekeeper must refrain from using non-public data aggregated through activities of users on its platform, allow end users to uninstall any preinstalled software applications, refrain from treating more favorably its own products in its own ranking services, and provide effective portability of data.
This piece of legislation is an important fragment within the steadily evolving lex digitalis intermedia. The DMA in its current version appears to properly recognize that internet intermediaries are subject to an inherent economic drive toward sector-specific monopolies. The proper question is not how to artificially induce competition against monopolies but how to properly govern existing monopolies. Fostering a competitor via state subsidies is unlikely to introduce effective competition because intermediaries do not compete in a one-sided market. In a multi-sided market, if the competing platform is successful, then it will simply become the new incumbent monopoly intermediary.
Yet, it remains to be seen whether the DMA will achieve its goal of establishing a level playing field that fosters innovation, growth, and competitiveness, both in the European Single Market and globally. If the European Commission interprets the governance tools provided by the DMA merely as new rules that will make it easier for smaller businesses and new entrants to grow and expand, and compete with gatekeeper platforms, then failure is likely.
The governance tools provided by the DMA must be understood as proper mechanisms for the protection of paradigm-changing ideas, instead. That is because competitiveness is not induced by new entrants that merely compete “with” the incumbent intermediary. Such mere-competitive undertakings are likely to fail, and incumbent intermediaries will have no reason to innovate. Because of the so-called first-mover advantage of incumbent intermediaries, users will not switch to a competitor even if the competitor provides an incrementally better service. And, if no significant number of users is prepared to switch, then a competitor will never gain traction against the incumbent. Users will switch, however, if the competitor provides a service that renders the incumbent intermediary obsolete, which is the case if the competitor provides a paradigm-changing service. TikTok, for example, introduced such a paradigm-changing service by developing an immersive discovery-based social networking platform that has the potential to render obsolete a merely subscription-based social networking platform such as Instagram, thereby forcing Instagram to question its strategy and introduce new discovery-based formats such as Instagram Reels. In that sense, paradigm-changing ideas are capable of inducing competition because they force the incumbent intermediary to radically innovate in order to stay relevant. However, paradigm-changing ideas are typically articulated in (public) research institutions first and, once a corresponding undertaking enters the market, are quickly acquired by the incumbent intermediary (for example, Facebook buying Instagram in 2012), who will then either adopt the idea or terminate the undertaking quietly.
If the goal is to truly foster innovation, growth, and competitiveness globally, then paradigm-changing research needs to be publicly subsidized and then protected from early acquisition by incumbent intermediaries. While the DMA itself does not regulate the former, the DMA (in conjunction with the EC Merger Regulation) enables the European Commission to do the latter. The DMA obligates gatekeepers to inform the Commission of intended concentrations via mergers of previously independent undertakings. Once the Commission has knowledge of these intentions, it can track them. In cases where intermediaries unlawfully implement concentrations, the EC Merger Regulation empowers the Commission to dissolve them and impose fines in cases of noncompliance.
Nonetheless, it remains to be seen how the Commission interprets its newly granted powers once the DMA enters into force. If the Commission keeps with the spirit of the DMA, then it will focus not exclusively on enforcing those new norms that regulate a gatekeeper’s behavior on its own platforms, but the Commission will also watch and inhibit foreseeable concentrations that run the risk of suppressing paradigm-changing ideas.