Online Platforms and the Digital Single Market (EUC Report)
Lord Whitty
That this House takes note of the Report from the European Union Committee Online Platforms and the Digital Single Market (10th Report, Session 2015–16, HL Paper 129).
Lord Whitty (Lab)
My Lords, this is an important and complex subject and I will get out of the way the obvious elephant in the room immediately: it was produced two months before the Brexit vote and clearly a lot of the recommendations, as with many of our reports, are directed at a situation that no longer is likely to exist. Indeed, the report was obviously triggered by a proposition from the Commission, which was looking at the digital single market as a whole and in particular at the issue of large platforms from the point of view of their effect on business and social life within Europe as a whole, in both the protection side of it and the issue of industrial policy, if I can put it that way. Nevertheless, the same conclusions apply to British authorities as those that are directed at the Commission. Issues there have already been taken on board in the responses from the Government and, in particular, the Competition and Markets Authority.
I suppose it is the timing of this debate just before we all go off on a brief holiday that limits the number of people here—which I regret—but it could also be that it takes some time to get your head round this rather complex subject. It certainly did for my committee and its chairman. Some of the committee, including the chairman, did not initially think that they used platforms but of course we all do. We use Google every day as a sort of public service to access information. We do our shopping via Amazon and we book our holidays through Booking.com or one of the other platforms. They have hugely improved the quality of life in many respects, in their rapidity and range of access for doing business and organising our lives.
Of course, they are—in the best as well as in the negative sense—hugely disruptive technologies. Digital technology as a whole is the biggest disruptive technology of my lifetime. The operation and dominance of digital platforms in our lives disrupts not only the way we do business—in particular the relations between producers and consumers, which is at times quite blurred now—but also issues such as intellectual property and employment. It has changed how contract law and other aspects of life operate.
One reason we looked at the Commission’s proposals in detail was that there was a proposition—an option from the Commission—that there should be a particular regulatory framework to govern platforms. As the report shows in a little table at the beginning, platforms vary from the massive dominance in our lives of Google to one that operates to organise your dog walks in Battersea Park. A single regulatory framework seemed a bit ambitious. Nevertheless, the development of platforms has been disruptive not only to the way we do business and organise our lives but also to various regulatory frameworks. Those regulatory frameworks vary from the European level in aspects of competition policy right down to the local level—for example, in the effect of Uber on the municipal regulation of taxi cabs in various European cities. They are hugely disruptive and if we look at the various frameworks, they hit contract law, competition and merger law, employment law, consumer law, data protection, copyright and taxation.
Some of those we decided we would not take on. We took the early decision that overall, for all platforms, a comprehensive, omniscient, regulatory framework was not an acceptable proposition in this respect. However, we said that many of these regulatory frameworks need updating. They need to improve their speed and to catch up with technology in quite a heavy way. Just to make it clear, the aspects we did not cover are issues such as intellectual property, employment rights, taxation and so forth. That is for another day because there are important implications in those areas, as we have seen in recent court cases. Therefore, we concentrated on competition law, mergers, consumer protection and data protection. We also looked at the issue of what I call industrial policy—it is probably an old-fashioned term—to answer the question of why there is not a European or a British Google.
I shall say just a word on defining platforms. Broadly speaking, we found that all platforms shared one thing in common—they used the internet to connect consumers and businesses and drastically reduce transaction costs in the process. That aspect means that they are also subject to what the economists call the network effect. The more consumers and businesses that they connect, the more useful they become and the bigger they get. We concluded that, while defining online platforms is an insufficient basis on which to build a case for specific regulation, it helps us to highlight the importance of scale and the ability to achieve scale quite rapidly, the control of data, and the informal traditional relationships between consumers and businesses. They are all significant factors when considering the effectiveness of existing regulations.
The issue of scale takes me on to the first area of the regulatory framework for competition and merger law. It raises important questions. Overall, we found that while competition law was flexible enough to identify different forms of abuse of a dominant position, it was too slow to respond to our extremely fast-moving markets. We recommended that competition authorities increase their use of interim measures so as to require a firm to amend its alleged anti-competitive practices before an investigation has concluded, and that time limits can be imposed on the process through which the accused business can table commitments to change its behaviour. The exemplar of this in a negative sense is the ongoing problem between the Commission and Google, which has been covered in the press again this very week.
We also recommended that the EU merger regulation should be modified to take into account the acquisition of small digital firms whose revenues fall below current thresholds. This is an important aspect of this market. The scale of the largest online platforms means that they can rapidly become the main provider in a specific sector or, indeed, a wide range of sectors, so that they become an unavoidable trading partner for businesses and consumers. If you are a small bookseller, for a long time it has been inevitable that you have to use Amazon, which covers a huge range of products for businesses and consumers. Small hoteliers are almost bound to use Booking.com or TripAdvisor, or one of the other dominant platforms. We therefore also recommended that codes of practice should be developed by the competition authorities where asymmetries of bargaining power between the platform and those who use it could result in unfair terms and conditions being imposed on the trading partners. This was not the only example, but we had the most evidence on the area of online travel agents, which force hotels to offer them their best price through price parity clauses and were alleged to have dropped hoteliers up and down their ranking approval ratings if their results did not comply.
A key recommendation of our report was that the CMA in Britain, at national level, should investigate those practices. We are delighted that the Government and the CMA have picked up the recommendation in that area, and that the CMA is currently investigating the practices of online travel agents. Can the Minister provide us with an update on that investigation, in terms of its timescale, and so on?
On the question of mergers and takeovers, our inquiry found that the largest dominant online platforms were able to acquire smaller technology business without the oversight of competition regulators at the European level. We found that the UK was very far advanced and the best country in Europe for small technology companies growing up—particularly in the fintech area—but that once they had reached a certain level of presence in the market, because their assets were pretty small, they were rapidly taken over by large, dominant platforms, either in the fintech area or more generally. There are a lot of examples of European companies being taken over in that way. Beyond changes in the law, I wonder whether the Minister might provide some assurance that the CMA and, for the moment, the Commission are able to investigate mergers that run the risk of reducing competitive pressure on larger firms and dominant platforms over the long run.
Another aspect is the collection and use of data by these large platforms. Many of us think that Google is free. It is not; none of these platforms is free. We give them our data and they use those data in various ways, some of which are completely sealed from consumers and others which are pretty evident because of the adverts they get in return. Through advertising, selling on the data and the reuse of the data we manage to provide them, through complex and completely incomprehensible algorithms, with the basis of their operation through our data, as individuals or as small businesses.
Since data protection is the life-blood of these platforms, and it provides the connection between them and the multisided relationship with consumers and businesses, we find that data protection regulation is also an important regulatory area. We were concerned to find that consumers’ knowledge of how their data were being used was pretty low. Consumers’ trust in how they were being used, even if they knew it, was also pretty low.
It is true that online platforms have developed some codes of practice under the existing data protection directive, which is 20 years old now and therefore not fit for purpose. However, our inquiry recognised that we are about to move into, or have just moved into, the area where the forthcoming general data protection regulation will apply. It will make all businesses, including online platforms, liable for ensuring that users are informed about how their data are collected and used. The regulation also provides room for businesses to innovate through the use of, for example, privacy seals.
There was a recommendation from the Science and Technology Committee in another place for a traffic light system to inform consumers of the efficacy of platforms’ and other organisations’ data policy. We hope that is being pursued. However, we also have to recognise that, following 23 June, the way the implementation of the general data protection regulation will play in this country is in question. It would be helpful if the Minister would confirm that the Government plan to implement the GDPR in full or, if we are outside the European Union or the EEA, that they will seek to gain a certificate of equivalence for the UK’s data protection policies so that data can continue to flow freely between the UK and the EU.
There is overlap between data protection issues and general consumer protection issues, so while online platforms provide great benefit for consumers—there are some pretty positive stories in some areas of the collaborative economy relating to protecting consumers —we felt that online platforms could be more transparent about how they operate, for example, their ranking system and how they present their search results when you look for a holiday, an airline or a Christmas gift, and then how they undertake personalised pricing and price discrimination, which is a very dark art and one on which there is little detailed information. As quite a lot of this becomes consumer-to-consumer transactions, are they protected under existing consumer law?
All these questions are an indication that the consumer protection regulatory framework also needs updating to keep pace with modern technology. There is an update from the Commission on the application of the unfair commercial practices directive, but we need to take that further. Again, on the hotels example, it is not only in Britain and Europe that this is an issue; we have had some discussions with Mr Pascal Lamy, who these days is the chair of the UN World Tourism Organization, who has picked out that this is an issue globally in the way the tourism industry operates. I wonder whether the Minister can give us some general insight on how the Government see these issues and on what steps they are taking to address these concerns, whether through best practice or information as well as through direct regulation.
Finally, I turn to developing this technology faster within the UK. We have felt for a long time that in terms of completing the single market within Europe, the digital single market is a very important prospect. That is now receding as far as the UK is concerned but nevertheless it is important that the Government put in their negotiating portfolio—I do not expect them to say a lot about it today—the importance of ensuring that Britain continues to be in some way a member of the digital single market. That has an implication for the development of companies because a company’s success in this area is dependent on an ability to develop scale, and you will operate at scale only if, like the American or the Chinese, you are in a very large market. Europe is a big enough market for that to develop. There are reasons why it has not developed, one of which is the fragmentation of previous regulatory structures. We were hoping that the digital single market provisions would take us away from that so that we would have a genuine single market in this area, but with the absence of Britain’s participation in that, we clearly have a problem. There is a real issue about start-up companies. If they get off the ground here and begin to operate, they are taken over by large, usually American-owned, concerns. Part of that is also a question of access to finance for such companies here.
There is a wide range of questions here. This was a fascinating new area for me and some other members of the committee, although my colleagues here have greater expertise than me and will no doubt add questions. We have had a response from the Commission and the Government, and I thank the Government for their response, but we need to take these things further in the new context. I beg to move.
Lord Aberdare (CB)
My Lords, I am a member of your Lordships’ European Union internal market sub-committee, ably and affably chaired by the noble Lord, Lord Whitty, with outstanding support from our clerks. It is a great pleasure to follow the noble Lord, although I fear that I am going to reiterate many of the points he has made much more tellingly and elegantly than I shall be able to do.
I shall address two questions: should we be concerned about platforms from a regulatory point of view and what sorts of regulatory action might be needed? No single definition can cover the huge variety of digital online platforms, extending to search engines, such as Google, online marketplaces, such as Amazon and Booking.com, music and video platforms, such as Spotify and YouTube, payment systems, such as PayPal, social networks, such as Facebook, LinkedIn and Twitter, shared economy platforms, such as Airbnb and Uber, and a vast range of more specialist platforms.
Generally accepted features of platforms is that they are multi-sided, enabling two or more different groups to come together and interact, such as advertisers and consumers, buyers and sellers and drivers and passengers, and they often exhibit network effects, whereby the more users they have, the more useful they become, thereby attracting yet more users.
Online platforms play an increasingly important part in commercial activity and people’s daily lives. There can be no question that they provide services that people want by giving consumers access to a wide range of new or improved services and products easily accessible online and by giving providers, including smaller business providers, much wider scope to reach potential markets, including by creating new forms of provision, as Airbnb and Uber do, with disruptive effects on existing services.
Online platforms represent an enormous opportunity to develop new and better ways of doing things to create new marketplaces and forms of commerce and to generate economic and social benefit. A key regulatory requirement is not to close off those opportunities but to ensure that platforms can continue to be developed, to grow and flourish. In any case, because of their huge variety in scale, type, nature of services, target users and so on, as we have heard, it would be virtually impossible to come up with any “one size fits all” regulatory approach. We shared the conclusion of the European Commission that it would be inappropriate to try to devise a specific overarching regulatory system aimed at platforms in general.
However, there are some platforms which, because of those network effects, have grown to a point where they have a dominant position in their own fields and wield substantial market power—a winner-takes-all situation. Examples include Google in search, Booking.com in travel and leisure and Amazon in online retail. It is these that any regulatory approach should focus on to ensure that they are not abusing their strength to disadvantage their users or competitors, many of whom may be their users as well.
The report focuses on three main areas of potential concern: competition issues, whereby platforms may use their market power to reduce competition via unfair pricing or preventing market access; data protection issues, arising if platforms use the vast quantities of personal and other data that they collect in inappropriate or illegal ways; and consumer protection issues, relating to the transparency and completeness of information given to users and to the remedies available when problems occur.
I will briefly outline—reiterate is probably a better word—some of our conclusions in relation to these three areas before suggesting some general principles for regulation and oversight of platforms. Not all of these were addressed in the Government’s four-page response to our report, and I hope that the Minister may be able to expand on that response today.
We felt that the existing framework of competition law is generally flexible and robust enough to address issues that may arise in relation to online platforms. However, some enhancements would be desirable to improve its agility and efficacy in tackling this very fast-moving sector. Our recommendations included more frequent use of interim measures and time limits to speed up competition cases; the development of codes of practice to discourage unfair trading activities; and amendments to merger regulation thresholds to address the problem of innovative new entrants being acquired by large online platforms for their own competitive advantage—what the Economist calls “shoot-out” acquisitions.
We were particularly concerned about some pricing practices, notably the use of price parity clauses which require sellers on a given platform always to offer their lowest available price on that platform, therefore taking away the opportunity to offer better deals to, for example, people who come into a hotel off the street. There was evidence that this could act as an obstacle to competition—for example, in the online travel agents’ sector, which is dominated by two major platform suppliers. As the noble Lord has told us, one of our specific recommendations was for the Competition and Markets Authority to look into that sector. Another concern is the possibility of personalised pricing, when different prices may be charged based on data held about an individual’s habits, interests or past activities.
Platforms gather large quantities of data about their users, including much personal data. Users may not be fully aware of, or happy with, how those data may be used. Consumers clearly tend to value the convenience of using platform services over the privacy of their personal information, which makes it still more important that there should be clear guidelines about what data are held and how privacy and security are assured. We were attracted by the idea of a privacy seal—a sort of kite mark but with gradings or traffic lights—to encourage competition between platforms on the basis of their privacy features.
The EU general data protection regulation, which comes into force in May 2018, should address many of these data-related issues—for example, through its provisions on making data portable between platforms, as long as they are clear, practical and properly enforced. However, there is of course the question of whether the UK will sign up to them.
Consumer trust in platforms is low. Consumer protection law may need updating to require platforms to be more transparent about their obligations to their users, which may be less than in normal business-to-consumer transactions, and how they present information such as search results or reviews and ratings.
In the report, we emphasise the need for a consistent and concerted approach at European level, to avoid regulatory fragmentation between member states, which could undermine the goal of creating a digital single market. This may present a challenge to the UK in its Brexit negotiations, not least because the UK is seen by many as having most to gain from the digital single market and as one of the most promising breeding grounds outside the United States for future large-scale online platforms—the European Google that the noble Lord, Lord Whitty, mentioned.
In summary, I suggest three key principles for government in considering platform regulation. The primary aim should be to encourage and support innovation in the development of platforms, and to prevent obstacles to their growth: avoid over-regulation; promote access to markets; find ways of stimulating investment and access to capital; and recognise the strategic importance of innovation.
Secondly, government should ensure that existing laws and regulations are properly applied and enforced in relation to platforms and that, when they fall short, appropriate adjustments are made to address specific issues arising from the nature of online platforms. Regulatory activity should be strongly focused on platforms whose size and market power make them particularly likely to distort markets and competition. And we should support bodies such as the Competition and Markets Authority and the Information Commissioner’s Office, which are already doing a good job of ensuring that platforms operate fairly—not forgetting the courts, as in current cases involving Uber and Deliveroo.
Thirdly, government should be vigilant for new issues arising from the fast-moving world of online platforms. We suggested that the Commission set up an independent panel of expert advisers to serve as a channel for emerging concerns, to assess their significance, and make policy recommendations.
I end with some specific questions to the Minister arising from the points I have covered. What plans do the Government have to look at changes to the competition regime to make it faster and more effective in relation to platform-related concerns? Will the Government look into the merits of developing codes of practice for platforms, perhaps based on the experience of the groceries code? Will the Government look at the idea of a graded privacy seal to increase public focus on how platforms protect the personal data they amass? What is their response to the suggestion of an independent expert panel to advise on platform-related issues requiring possible action, which might be relevant for the UK as well as, or instead of, the Commission? Finally, what specific support will they offer, not least to SMEs and start-ups, to encourage the development of new and ambitious UK-based platforms?
Digital platforms can be a force for good for our economy and society, provided that Governments are vigilant in ensuring that they remain open to competition and fair, transparent and secure for their users and consumers.
Baroness Donaghy (Lab)
My Lords, I am grateful for the opportunity to contribute to the consideration of this report, which was published seven months ago. It is fair to say that the committee was aware that it was taking on a huge task. For me, at least, it was a very steep learning curve. My noble friend Lord Whitty steered us through the depths and shallows of multisided platforms and the internet of things. He deserves credit for the quality and balance of the report. We were privileged to have an excellent secretariat in Alicia Cunningham and Kilian Bourke—I still do not know how they managed to crystallise the definitions and analyse the benefits and challenges of the digital economy in the way they did. I mention also those who gave confidential or publicly available evidence in writing or as witnesses. The submissions were from tiny organisations and global ones; I thank them for contributing to a weighty and important subject and helping us to build this foundation of knowledge.
My comments on the report and the Government’s response are personal and an attempt to be forward-looking and positive. First, it is clear that the UK is ahead of the pack in relation to other European countries. We identify more easily with the dynamism and creativity of the American market, and less so with protectionist approaches.
We need to do two things to maintain and accelerate our progress. We need to invest in the industries and to solve the conundrum that the minute a UK company develops an idea, brand or new area, it is immediately snapped up by the American giants. Our report states:
“In 2010 early stage investment in the US was valued at $20 billion, whereas Europe in the same period saw investment of approximately €3.8 billion”.
United States venture capital funds were behind more than 50% of London start-ups; 70% of global venture capital heads to the United States. Our report drew attention to the lack of investment being,
“a major obstacle to generating economic growth across the Union”.
We urged the Government to look at the United States’ Jumpstart Our Business Startups Act, or JOBS Act, as an example of scaling up. I have to say that the Government’s response was disappointing. On that recommendation, they recognised the value of learning from best practice, which,
“cannot necessarily be imported wholesale into the UK”.
That is going through the motions, and gives no reassurance that active consideration is being given or that action will be taken—and I ask the Minister whether the Government have updated the consideration since their letter of 20 July.
Again going back to the letter of 20 July, on investment, the Government were,
“helping facilitate and build a market”,
for equity finance, and mentioned the figure of £219 million to be contributed to,
“UK high growth SMEs at the end of December 2015”.
High-growth SMEs presumably cover a wide range of companies and skills, and we must assume that the share of the £219 million for UK digital start-ups is much smaller. This is simply not good enough and shows that the Government are relying on individual initiative to build a digital economy. The danger is that this will enrich the individual and the United States of America, but not the UK. Lack of start-up investment opportunities and ongoing support may well explain the pattern of selling UK talent to USA global companies. The Government must scale up their scale-up.
One feature that we encountered was how fast-moving this area is, where last year’s winner can quickly become this year’s nobody. The Competition and Markets Authority called it a “disruptive cycle of innovation”. As a former trade unionist, to me the word “disruptive” meant either a go-slow or a strike, so I found it quite a re-education to be involved in this report, because to be disruptive in this sense was used by a lot of witnesses as an entirely positive thing. So re-education has taken place.
Professor David Evans reminded us that only eight years ago,
“MySpace was the dominant social network; it was not Facebook at all”.
Trying to cope with that fast-changing scene made it extremely difficult to deal with subjects such a monopoly and regulation, which I believe our report dealt with very well.
One slight niggle is that the CMA—and this applied to all the equivalent European competition bodies that we met—was of the view that any inquiry on allegations of abuse of power would take as long as it takes. So it recognises disruptive cycles of innovation but seems not to have any sense of urgency about dealing with allegations of abuse. I think that that leaves consumers in a vulnerable position, and I ask the Minister whether he agrees.
The report makes an important contribution to such areas as transparency, restrictive pricing practices and bargaining power, but data protection is a subject where consumers are potentially most vulnerable. As our report says, the complex ways in which online platforms collect and use personal data mean that the full extent is not sufficiently understood by consumers. We pointed out the lack of trust in how online platforms collect and use consumers’ data. Trust was worryingly low, which is a barrier to future growth.
As the noble Lord, Lord Aberdare, said, the irony is that that lack of trust goes side by side with many consumers sharing more personal data with online platforms than they share with their own spouse. The majority of consumers have no idea of the value of their personal data—how they are and will be used in future. It is vitally important that the Government ensure that data protection is as strong as reasonably practical, public awareness is raised and we aim to have the same or higher standards as the rest of Europe, particularly after we leave the EU.
Finally, as a former chair of ACAS, it is not surprising that I should mention the issue of dispute resolution. The report refers to the Commission’s launch three years ago of a dispute resolution platform to enable consumers and traders to settle disputes over both domestic and cross-border online purchases. It was hailed as easy, fast and inexpensive. The concern is that it has not been properly implemented, which makes the prospect of a business-to-business dispute resolution platform appear a long way off. I identify strongly with the report’s recommendation that the Commission’s first priority should be to ensure the effective implementation of the online dispute resolution in its current form.
This is an exhilarating field that offers our economy huge benefits and the consumer great potential. It is our job to ensure that, alongside that, there are the protections and transparency that the individual deserves.
Viscount Waverley (CB)
My Lords, I have been developing for the past three years an online platform, so really wish to congratulate the committee for all that I have learned. One message that applies to what I have now heard is about consumer education. I find in the site we developed that some consumers put their personal passwords as part of their data into the site. This is their own personal email information, which I happen to know from friends is their personal protection. The committee might care to take note of that point.
Lord Stevenson of Balmacara (Lab)
My Lords, I thank my noble friend Lord Whitty for a very interesting report and for introducing it so well this afternoon. Other members of the committee reflected on his style, which I can understand would translate into a very effective and interesting committee. I am glad we were able to get an insight into how it worked.
As I have said before and am sure I will say again, the committee system is the jewel in our crown. It is good that we have yet again a fine example of its work. It may seem a little odd to noble Lords that I was so taken by the report that I took it to bed with me last night and read it while waiting for the result sequence to start on the American election. I will not say which I enjoyed more, but I was still reading it at two o’clock so it obviously weighed heavily.
Like my noble friend Lady Donaghy, I was a bit disappointed by the response from the Minister. It may be that she was deflated by the recent referendum result and felt that she could not therefore rise to the full exercise of responding to such a fine report because it dealt so well with the UK dimension and also a presumed continuing European Union relationship. Obviously that was not the case. As my noble friend Lord Whitty said, the report was published before the referendum. I do not think the response did justice to the report. I hope the Minister, who is standing in for the noble Baroness, Lady Neville-Rolfe, who is on other duties—I left her at it in the Select Committee upstairs—will be able to extend a little bit some of the points that were made. On reflection, as I am sure has come through in the speeches we have heard so far, much of what was said in the report, although it may have been focused on systems that will not be in operation after 2019, is still relevant to the way we will deal with online platforms in future. It is worth spending a bit more time on this issue than has been the case.
The main point that comes out of the report, which does not need to be said too often but is rather important, is that these new disruptive technologies are a good thing and are to be supported wherever we can, but they will cause really big problems for our competition area, data protection and for our broader legislative task of seeing how they affect how we operate as a society and therefore how and when they need to be regulated. They will also bite deep into some of the current regulatory structures. I will refer a couple of times to a recent experience I have been having, which is well known to your Lordships’ House and will come back in the Digital Economy Bill. Secondary ticketing arrangements, which are often made relating to big sporting and recreation events, are a very good example of the dangers that can happen if we do not have the right regulatory framework. If we do not have even the right definitions for some of the things that have been happening relating to this part of the consumer space, we will end up in trouble.
The noble Lord, Lord Aberdare, in his well-shaped presentation, gave us four main points under which he wanted to address the issues. I have a couple more that I want to add, but I will broadly follow him in what he said, which is not too difficult. The first point is whether we have the right competition law in place for the new technologies and the online platforms and the way they operate. On this, I disagree with the committee, which was broadly of the view that competition law as it presently stands will be sufficient to take us into the new world. I do not think it is because of the speed of transactions and the way new technologies will eat away at our basic understanding of what we judge to be imperfect competition. As the committee report says, there will not be the same sort of price signals and information about operating. That will not be present.
As the report goes on to explain, although not in these words, we will not be talking about perfect markets. Economists will have to come up with a better understanding of the way markets such as these operate. We will accept, in plain light, the fact that certain of these platforms will effectively be monopolies. We are not saying that that is wrong. If it was a traditional market, we would be attacking anybody who had market dominance of the proportion that Google has. I do not pick on Google particularly, but it is an example of a commercial operation, which, as my noble friend Lord Whitty said, is apparently free and provides a route for many consumers to get information and then subsequently engage in market operations. We know about Amazon and others. Effectively, if these were traditional operations, we would be talking about monopolistic situations, and we would want to attack them with the sort of regulatory practices we have had. That will not work because that will destroy the very impact these operations are having.
The second point is that the speed of operation is so quick and so different that it would be difficult for a traditional approach of notification, asking for undertakings and moving forward in a way that has been the case in the past for the OFT and now the CMA. I go back to my example of ticket touting arrangements. The situation there was that those bodies decided that there was a possibility that unfair practices were taking place in respect of the law as it stood in 2014. They asked the four major contractors—there are now only three because a merger has taken place since then—to give undertakings and said that they would measure them a year on from the point at which the undertakings were given to see whether they happen. I simplify to make the point that we are talking about probably another year before we get the results from that. That is two years, working on a system that has changed so much in that time in the use of computer technologies to access tickets that have been on sale and reselling them in ways that are innovative and different. All this stuff will have moved on way beyond where the Competition Commission was at the time that it was starting this process. I give that as an example, and I think that there are much wider issues arising from that.
The committee’s report is good on issues to do with merger thresholds and valuations, and all the issues that would have been applicable in a traditional economy with a sense of a perfect market. They cannot operate when we are talking about start-up companies providing issues that will immediately go wide inside the space in a way which would not be followed.
Thirdly, on pricing, the committee rightly raises issues about personalised pricing and the way in which market access will be affected by that pricing. Again, with the secondary ticket arrangement, the ability to buy all available tickets and then resell them immediately at a much higher price is a completely novel view of the way in which markets operate. This is something that needs to be addressed.
Fourthly, on data protection, the issues raised were about the lunacy that most consumers—I include myself in this—are happy to surrender all their personal information to these online platforms, in which they trust, while at the same time expressing considerable disquiet and unhappiness about the way in which they operate. We have got to get ourselves right. The noble Lord, Lord Aberdare, was right to make the point about consumer education because it is crucial. We need to think much harder both as a Government and more widely in society about how we are going to get people to realise the risks they run if they do not operate sensibly in this space.
Transparency is an issue that I want to add. Points were made about the need for companies to be more open about their algorithms and about how they deal with individuals in the process. It is fine to call for that, but unless we have a regulatory approach or there is the threat of legislation, it will not happen. They are the private IP of the companies concerned and obviously they will not give it up, but it is completely wrong for consumers to be operating in a knowledge vacuum. That point was well made by the committee, but we need to be able to back that up, possibly through revisiting the Consumer Rights Act.
For the future, the report tries to bring us up to date to what the situation was in early 2016, and we are grateful for that. Things are moving on now, obviously, with Brexit and other things. My noble friend Lord Whitty made the plea that we consider, within our UK dimension—and, I presume, within the post-Brexit scenario—how we would regulate, because the digital single market, on which a lot of this is based, is a good idea, even though we will be outside the EU. It is very hard to see how we will operate. Indeed, the figures reflected in the excellent Library report, showing the proportion of online sites that operate within Europe, based in Europe and based in America, show that there is a huge imbalance already away from Europe. That needs to be addressed. It is not 50-50. When we are outside, how will we manage an arrangement under which we can trade effectively with those new corporations in Europe, but also create and develop our own unicorns—that is their technical term—which are going to be able to operate across Europe and indeed worldwide, because that is what the digital market can do?
This really is an excellent report. It allows us to think very carefully about what this new world will look like, and it will send some very good signposts of where we want to go. As I said, much of what has been discussed and recommended will be applicable post-Brexit, although the circumstances will be very different. We will not get a commentary, I am sure, from the Minister about whether these points will be taken forward, but we all assume that they will be. I hope that it will be done in a way which is a bit better than the initial response from the Government, and I hope that on reflection they will realise that some of the issues raised here need to be dealt with. It will not be sufficient to bat off some of the bullet points made to the CMA or to the data protection area because they are important. They will be the key to regulatory action in the future, and we need to deal with them.
The noble Lord is standing in for the IP Minister, and I know that it is a bit of a stretch for him. I am sure that he enjoyed the report as much as I did and that he will be able to respond in exactly the same way.
The Parliamentary Under-Secretary of State, Department for Culture, Media and Sport (Lord Ashton of Hyde) (Con)
My Lords, I shall start at the end of noble Lords’ contributions with the point made by the noble Lord, Lord Stevenson, which is that this is a bit of a stretch. I was glad to note the point made by the noble Lord, Lord Whitty, at the beginning of the debate when he said that he felt that the weeks and months that he spent on this report were an education for him. I have had slightly less time than him, so I will start by saying that there will be some questions that I will have to write to noble Lords on. I hope to address some of the points in my speech and to answer some of the questions.
I am very grateful to all noble Lords for their contributions. I take on board the point made by the noble Lord, Lord Stevenson, that these are very important issues that we must not back away from or try to kick into the long grass. Issues of the digital economy and the digital single market are critical, and they are things that we will have to address post-Brexit. I hope to give some reassurance on that in a minute. I am very grateful to the committee, and especially to the noble Lord, Lord Whitty, for his work chairing the committee and for leading today’s debate.
As well as considering how government should cultivate this new and burgeoning sector, the report makes a number of helpful recommendations. Some of those recommendations have been raised in the debate, and I will address them in my response. As the noble Lord, Lord Stevenson, said, some of these points have been addressed in my noble friend’s reply, which was not completely to the noble Lord’s satisfaction. I ran through it and noticed that there were many points of agreement with the committee’s report. The tone of the response overall was that we agree on many of the points that the committee made and accept that there are points that we can expand on.
Today I shall specifically talk about the benefits of online platforms, the impact these businesses are having on the UK economy and how we should consider issues of regulation, competition and market power for platforms. While we must make sure that consumer protection remains high, online platforms are often subject to existing regulatory rules in areas such as competition, consumer protection and data protection, so we should not rush to overregulate the sector.
First, I shall address the broader picture of the EU’s competitiveness and growth agenda and, in particular, the digital single market. As noble Lords will know, this package of measures, outlined in the Commission’s DSM strategy in May 2015, aims to bring new opportunities to businesses and consumers through increased digitisation of the economy and to create a regulatory framework fit for the digital age in areas such as consumer protection and e-commerce, data flows, copyright protection and electronic communications.
This agenda matters and will continue to matter greatly to the UK. While we remain a member of the EU, we will continue to play a role and represent the interests of the British people. This includes taking an active part in and influencing negotiations regarding the DSM and ensuring that British views are heard in the debates. We have received messages from the Commissioner’s cabinet outlining its desire to continue a close working relationship with the UK on the digital agenda.
Platforms are at the heart of the digital economy. The report rightly recognises the huge benefits that platforms can bring to consumers and businesses. These benefits extend beyond increased convenience and greater choice to include reduction in geographic barriers to services which allow products and services to be accessed by wider markets at reduced costs. The huge variety of benefits arises because platforms provide a broad range of services to consumers. Platforms include everything from search engines and social media to sharing economy platforms that encourage the use of underutilised assets.
We also need to be clear of the specific benefits that online platforms bring to the UK economy. The Government’s ambition is for the UK to be one of the world’s leading digital nations. When you walk around Parliament Square, you see people absorbed in the content of their smartphone. They may be playing games such as Candy Crush Saga, shopping online on ASoS or finding their way around with Citymapper. All these are home-grown platforms. British platforms are also driving innovation in cutting-edge technologies, such as augmented reality firm Blippar. This is an area where the UK has a lot to offer not just in Europe but to the rest of the world.
As the Committee’s report notes, the UK leads the way in Europe on producing unicorns—$l billion-valued tech companies. According to a report from June 2016 by the tech investment bank GP Bullhound, the UK leads the way in Europe, with 18 out of 47 European unicorns. The Government are committed to maintaining the right environment to ensure that these businesses can thrive in the UK and across the world.
The UK has one of the leading tech sectors in Europe and our citizens are among the most avid online shoppers. The UK therefore stands to gain more than most from the development of the digital single market and a competitive framework for online platforms, and stands to lose the most from a fragmented and disjointed regulatory picture. The UK is inextricably linked to a global market, which should not be fragmented.
Platforms are notoriously difficult to define, as the report outlines, although we can identify a number of characteristics that they share. These include the ability to create and shape new markets, the use of the internet to foster interactions between different groups of users and, in many cases, the use of network effects, which the noble Lord, Lord Aberdare mentioned, whereby the value of a service to both business and consumers increases with the number of users.
For a sector so broad, and so difficult to define, we should not seek to apply a “one size fits all” approach to regulation. Platforms are the engine room for innovation and digital growth. One-size regulation could stifle the innovation that makes platforms unique and hinder the UK’s ability to support and grow the digital economy.
The debate around platforms has a tendency to revolve around problems, but let me highlight some of the issues that platforms have sought to answer. Through networks, platforms are offering new solutions to many issues that Governments have previously looked to regulation to resolve. The Government want to empower consumers to find the best deals. Platform-based services like peer-to-peer reviews or price comparison websites have helped to achieve this without the need for regulation.
These new models may challenge existing ways of doing business, and we of course must make sure that we maintain appropriate rules. However, we should also remember that online platforms are often subject to existing or forthcoming regulation. The general data protection regulation, for example, which comes into force in May 2018, will give consumers more control over how their data are to be used. I should make it clear that the UK will implement the regulation; that was announced by the Secretary of State in the other place, and we are currently working on how best to implement it.
Industry-led alternatives to regulation are also helping to set standards for platforms. Sharing Economy UK, the representative body for the collaborative economy, has developed a trustmark to promote best practice for platforms and their users, as well as identifying where vital features such as insurance policies are in place when using collaborative economy platforms. The noble Lord, Lord Aberdare, and the noble Baroness, Lady Donaghy, referred to the issue of trust in platforms and websites. Such innovative solutions present a challenge to government to consider whether regulation is the proportionate response and whether existing regulation remains fit for the modern age. While we must be careful to make sure that consumers are adequately protected, our starting point should see the development of online platforms as an opportunity to be embraced and not a threat to be regulated.
One area that the committee’s report looks at is the issue of competition and market power. Accelerated network effects, resulting from increased connectivity and very low marginal costs for rolling out services to additional consumers, mean that platforms can often obtain a dominant market position more quickly than in traditional markets.
Nevertheless, we must acknowledge the different dynamics in play. It is important to note that the disruptive innovation, which the noble Lord, Lord Whitty, clearly explained, is more likely in online platform markets due to the low barriers to market entry, such as the low upfront infrastructure investment typically required for an online platform, which tends to be lower than with traditional business models. As a result, high market share in online platform markets is not necessarily an indicator of market power. It is easy to think of online platforms that appear to hold a dominant market position that did not even exist a few years ago. We must therefore think carefully before regulating in this area. Regulation could raise fixed costs and necessitate a larger minimum scale to be viable, increasing barriers to market entry and potentially decreasing competition, resulting in exactly the opposite effect of what we hope to achieve.
In the time available I shall try to answer some specific questions asked by noble Lords. The noble Baroness, Lady Donaghy, mentioned exclusive access to data which may confer competitive advantage, and the fact that people are paying using data. We agree that issues relating to data are of concern, and that robust enforcement of competition, consumer protection and data protection law is important in addressing this, and I accept that there need to be adequate resources to do that.
The noble Lord, Lord Whitty, talked about codes of practice which should be introduced in the online travel and other sectors. The CMA will continue to use its range of market powers where there are risks to consumers in markets, including creating codes of practice if appropriate in the circumstances. We encourage consumers and businesses, if they have concerns, to contact the CMA to make sure it can address them, albeit independently of government.
The noble Lord, Lord Whitty, also asked whether the Competition and Markets Authority should make greater use of interim measures. We agree that interim measures are a powerful and effective means of avoiding significant harm while the CMA investigates underlying concerns, so we support greater use of them where appropriate, although, as I say, that is up to the CMA, which is independent.
The noble Lord also asked whether EU merger regulations should take account of low turnover being acquired by large firms in vertical integration. In this context, the UK’s voluntary merger regime has a share of supply test that allows the CMA to investigate such cases, but this should not necessarily be transposed to the EU or other jurisdictions with different legal systems and, typically, compulsory merger regimes.
On consumer protection, several noble Lords raised issues about whether consumers are properly protected in dealing with platforms under current law. There are several methods of legal protection in place for UK consumers in their dealings with online platforms which, together, we think are adequate. Many existing legal protections apply to platforms as well as other business models. For example, under the consumer rights directive platforms have a legal obligation to provide transparent information about the identity and locality of traders. The unfair commercial practices directive requires them to provide truthful and accurate information about issues such as payment procedures. Platforms have to act in accordance with professional diligence in relation to unfair commercial practices engaged in by traders on the platform, as long as they are not a mere hosting provider: this might include removal or notification of content and placing transparency requirements on third-party sales. I do, however, acknowledge that there may be some cases where we need to ensure that the legal toolkit is correctly applied. The point has been made by several noble Lords that this is a very fast-moving market and we cannot just sit and wait and do nothing, because things move very fast indeed.
Overall, we are very conscious of the fact that following the 23 June decision on Brexit there is a very different outlook, but we are concerned that in the two years—or whatever it is—until we leave, we will continue, as I said before, to engage strongly. Thereafter we are aware of the need for adequacy within Europe and we understand the implications of leaving, but we hope that when we come to that we will be absolutely up to date with current EU standards, and that should help.
The noble Baroness, Lady Donaghy, also asked about helping these digital businesses and start-ups. We are obviously keen to make sure that we continue to be a leading nation for tech start-ups. We are a world leader in this. The digital single market proposals to update copyright law and to ensure data flow will help address this. It is also about infrastructure, including superfast broadband, to ensure start-ups are connected to global markets. As my noble friend Lady Neville-Rolfe said in her reply, through the British Business Bank’s angel and venture capital programme, £219 million in equity funding was contributed to UK high-growth SMEs at the end of December 2015.
The noble Lord, Lord Whitty, asked about the timescales of the CMA’s market study. The CMA opened the market study into digital comparison tools on 29 September and the final report will be published before 28 September next year. The study focuses on the following sectors in particular: broadband, home insurance, credit cards and flights. It will also take evidence from other sectors, including online travel.
As I said, there were several other questions on which I will write to noble Lords. In conclusion, the committee’s report and this debate provide valuable insights into online platforms and the digital single market. We will continue to carefully examine the evidence on the development of this new market. I look forward to working with noble Lords to make sure we support online businesses to grow and harness the potential of the UK digital economy. I certainly look forward to engaging with many noble Lords in the Digital Economy Bill later this year.
Lord Whitty
My Lords, I thank the Minister and everybody who took part in the debate. I thank the Minister for a very full reply, particularly since he has come off the substitutes’ bench today to do this. He clearly had a rapid learning curve, not having had the several months that we in the committee had with very expert evidence provided.
I thank my fellow members of the committee who participated this afternoon, and indeed those who were unable to do so. My noble friend Lady Donaghy mentioned something I had clearly written in my notes but failed to say: my thanks also to the staff of the committee for making sense of a lot of stuff which frankly, when we first looked at it, left us all fairly glazed—even though some of us were more experienced in this field than others, including my colleague the noble Lord, Lord Aberdare.
I thank the Minister for updating us on the situation with the CMA and other aspects of government policy, and giving us a fair degree of reassurance on the Government’s intention post-Brexit for the digital single market. Frankly, without something like the digital single market, we will not be able to maximise either the benefit to the users of the technology and platforms or the huge potential there is for developing British-based talent and companies in this whole field.
A number of important points were made and I will not respond to all of them. I must respond to my noble friend Lord Stevenson’s remark that perhaps we were too soft about competition law. Maybe he is right about the way that was expressed. The Minister and my noble friend Lord Stevenson are quite right that competition law needs to be seriously updated to take account of moving technology and the definitions of abuse of dominance. It is quite easy, even in this field, to prove at least a threat of dominance; it is quite difficult to use traditional measures but dominance is pretty clear to most of us. Yet, in looking for remedies, you must also prove abuse of dominance. If there is abuse of dominance, it is quite difficult to find out without a prior signal. That is something where competition policy and the procedures and metrics whereby the competition authorities have historically worked need some serious updating.
There is the question of speed. The Google issue with the Commission has gone on for at least 15 years and is still ongoing. It covers only a small part of what could be the problem in that area. We need to speed it up; we need new measures; and we need to recognise the necessity for an update of the remedies and the definitions involved.
Another issue I wish to pick up on is the use of personal data. People are aware of this, but not sufficiently aware to complain about it. As I have said, we all notice that the adverts directed to us are closer to our buying habits than we would like; nevertheless, we do not know the totality of how our data are being used. To some extent, neither do the companies themselves, or at least their broad management. When ranking orders and search priorities are determined by extraordinarily complicated algorithms, probably no one in the company knows how that works, let alone any regulatory authority or poor, humble small business trying to work out why it has suddenly slipped down the rankings. It is important that there is a measure for doing that and it is important, as the noble Viscount said, in relation to consumer and small business education in these areas.
In certain sections of law we look at the outcome even if we do not know the reason. In equality law, for example, if the outcome is hugely and irrationally discriminatory, there is a problem without necessarily knowing the reason for it. Sometimes in this area the outcome of algorithms and the interplay of different people’s algorithms can lead to discrimination against certain companies or certain classes of consumers in terms of price or ranking. If there is that degree of discrimination as an outcome, the regulatory authorities ought to do something about it.
The noble Lord, Lord Aberdare, mentioned a point which I did not mention and which would need transferring into British terms post-Brexit—that, because this is an esoteric and rapidly moving area, we needed to provide to the Commission, in a pre-June context, an independent panel or some kind of arm’s-length body which would keep government, policymakers and regulators up to date with what is happening in this market technologically, practice-wise and consumer-wise. The traditional bureaucracies would not be able to keep up with that and we felt that something new was needed in that context at Brussels. It is also needed at a UK national level generally.
I thank everyone who has participated—particularly the Minister for taking this on. I underline that, since the formation of the new Administration, the department on whose behalf he is speaking today includes within its title “industrial strategy”. To some of us that sounds a bit rust belt but the need for a strategy in this area, in order to bring on what are undoubtedly a skilled workforce and dynamic, innovative companies, requires a framework of industrial policy from the new department. I hope its list of priorities includes this area as one to which the new positive approach to intervention and industrial strategy will address itself.
Again I thank everyone who has participated in both the production of the report and this afternoon’s debate.