Online Platforms and the Digital Single Market (EUC Report)

Lord Ashton of Hyde Excerpts

Wednesday 9th November 2016 Grand Committee

[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.