Online Platforms and the Digital Single Market (EUC Report)

Lord Whitty Excerpts

Wednesday 9th November 2016 Grand Committee

Moved by

[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.

--- Later in debate ---

[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.

Motion agreed.