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The Digital Markets Act, The DMA and Advertising, Messaging Interoperability (Stratechery Update 3-30-2022)

Wednesday, March 30, 2022

Good morning,

Last week there was a major update to Passport, Stratechery and Dithering’s back-end. While this has brought some massive performance improvements, we did encounter a few bugs this week once I started publishing again, particularly with regards to podcasts not updating properly. Those should be rectified going forward, but please feel free to email us at support@stratechery.com if you have any issues.

On to the update:

The Digital Markets Act

From a European Parliament press release:

On Thursday evening, Parliament and Council negotiators agreed new EU rules to limit the market power of big online platforms. The Digital Markets Act (DMA) will blacklist certain practices used by large platforms acting as “gatekeepers” and enable the Commission to carry out market investigations and sanction non-compliant behaviour.

The text provisionally agreed by Parliament and Council negotiators targets large companies providing so-called “core platform services” most prone to unfair business practices, such as social networks or search engines, with a market capitalisation of at least 75 billion euro or an annual turnover of 7.5 billion. To be designated as “gatekeepers”, these companies must also provide certain services such as browsers, messengers or social media, which have at least 45 million monthly end users in the EU.and 10 000 annual business users.

During a close to 8-hour long trilogue (three-way talks between Parliament, Council and Commission), EU lawmakers agreed that the largest messaging services (such as Whatsapp, Facebook Messenger or iMessage) will have to open up and interoperate with smaller messaging platforms, if they so request. Users of small or big platforms would then be able to exchange messages, send files or make video calls across messaging apps, thus giving them more choice. As regards interoperability obligation for social networks, co-legislators agreed that such interoperability provisions will be assessed in the future.

Parliament also ensured that combining personal data for targeted advertising will only be allowed with explicit consent to the gatekeeper. They also managed to include a requirement to allow users to freely choose their browser, virtual assistants or search engines.

If a gatekeeper does not comply with the rules, the Commission can impose fines of up to 10% of its total worldwide turnover in the preceding financial year, and 20% in case of repeated infringements. In case of systematic infringements, the Commission may ban them from acquiring other companies for a certain time.

There are some good ideas in the DMA that I have previously supported, including banning most-favored nation clauses in gatekeeper contracts and preventing tying. I have also become much more amenable to breaking open App Store monopolies, and a bit more reticent about restricting acquisitions; both are in the DMA.

The DMA and Advertising

Unfortunately, there are some concepts in the DMA that I think are actively bad, particularly when it comes to advertising. Consider this section:

The conditions under which gatekeepers provide online advertising services to business users including both advertisers and publishers are often non-transparent and opaque. This opacity is partly linked to the practices of a few platforms, but is also due to the sheer complexity of modern day programmatic advertising. The sector is considered to have become more non-transparent after the introduction of new privacy legislation, and is expected to become even more opaque with the announced removal of third-party cookies. This often leads to a lack of information and knowledge for advertisers and publishers about the conditions of the advertising services they purchased and undermines their ability to switch to alternative providers of online advertising services. Furthermore, the costs of online advertising are likely to be higher than they would be in a fairer, more transparent and contestable platform environment. These higher costs are likely to be reflected in the prices that end users pay for many daily products and services relying on the use of online advertising. Transparency obligations should therefore require gatekeepers to provide advertisers and publishers to whom they supply online advertising services, with free of charge, effective, high-quality, continuous and real-time when requested and to the extent possible, with information that allows both sides to understand the price paid for each of the different advertising services provided as part of the relevant advertising value chain and the availability and visibility of advertisement.

First off, credit I guess for admitting that previous E.U. initiatives like GDPR have made everything worse; what is striking about this paragraph, though, are all of the assumptions — note the use of the word “likely” in sentences like “the costs of online advertising are likely to be higher than they would be in a fairer, more transparent and contestable platform environment.” For starters, it certainly seems like it would be helpful to actually ascertain if causal statements are actually true before making major laws attempting to change those causal outcomes; this is particularly relevant for online advertising, given that most digital advertising is based on outcome-based auction formats, where the price is set by buyers, not sellers, and for explicit outcomes. In other words, there is a lot of evidence to suggest that the causality assumed is completely wrong.

Given this, it’s not a surprise that other proposals around advertising will end up having the opposite effect: they will make advertising harder to measure and thus more expensive. For example, the DMA restricts platforms from incorporating business data — like whether or not a user bought something — into its advertising. This is, broadly speaking, similar to ATT, and we already know the results of that: less transparency and higher prices for advertisers, with no meaningful reduction in data collection.

There are plenty of other things I disagree with as well, including restrictions on bundling (i.e. Google has to be ten blue links forever, or create some sort of convoluted system for, you know, answering user queries quickly and effectively). This will also hit Apple in ways that I wrote about last year. In nearly every case there is very little imagination or thought given to the importance of innovation or the benefits of integration; that customers might like these services isn’t at all a consideration.

Messaging Interoperability

It is the proposal around messaging interoperability, though, that to my mind really highlights where the E.U. has gone wrong with this stuff, on both a micro and also macro level. From the DMA:

The lack of interconnection features among the gatekeeper services may substantially affect users choice and ability to switch due to the incapacity for end user to reconstruct social connections and networks provided by the gatekeeper even if multi-homing is possible. Therefore, it should be allowed for any providers of equivalent core platform services to interconnect with the gatekeepers number independent interpersonal communication services or social network services upon their request and free of charge. Interconnection should be provided under the conditions and quality that are available or used by the gatekeeper, while ensuring a high level of security and personal data protection. In the particular case of number-dependant intercommunication services, interconnection requirements should mean giving the possibility for third-party providers to request access and interconnection for features such as text, video, voice and picture, while it should provide access and interconnection on basic features such as posts, likes and comments for social networking services.

Network-based lock-in is certainly a real thing, but proposing interoperability as a solution, particularly in the way this proposal does, is fundamentally flawed.

The first objection is a practical one: interoperability will make it exceptionally difficult if not impossible to maintain end-to-end encryption across services, and reduce features to lowest-common-denominator status. It’s telling that even defenses of this measure mostly hand-wave over these concerns or blithely insist they are worth the trade-off.

The second issue is that the DMA fails to understand that modern apps and services are integrated wholes: WhatsApp or Messages or Snapchat is the app is the service is the integrated whole, whereas this proposal assumes that the service component and the app component are distinct (this is specifically where the end-to-end encryption and namespace questions arise; fully integrated services overcomes these issues by controlling everything).

It’s useful to consider email and SMS, two truly open messaging standards, as contrast. Email is based on the Simple Mail Transfer Protocol (SMTP) protocol, which was first defined in 1971, and extended with the Extended Simple Mail Transfer Protocol (ESMTP) in 1995. SMS, meanwhile, is based on GMS standards defined in 1986 (the first message wasn’t sent until 1992). Notice the commonality in both cases: the standard was designed first, and the proliferation of clients came later.

This order of operations is the key to interoperability: first protocol, then apps. The E.U.’s proposal, though, completely ignores this: there is the expectation that self-contained services, having already innovated and acquired customers, make themselves interoperable after the fact, never mind the fact this will break their offerings. The truth is that we already have interoperable messaging — it’s called SMS and email — and they are both extremely valuable and, to the extent they are limited, evidence that interoperability comes with certain inescapable costs in terms of innovation and security.

Indeed, you can make the case that these requirements for interoperability are themselves an analogy for the E.U.’s overall position vis-à-vis tech: the proper approach would be to first define a protocol and thus attract innovation; the mistake is to try and leach off of innovation after the fact, breaking what works in the process. That, though, is exactly what the E.U. is doing broadly: the DMA doesn’t apply to any European companies, and it doesn’t contain any sort of affirmative pro-innovation view of technology; it’s simply a tax on American companies that, like every other E.U. tech law, will make things worse for everyone.

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The Digital Markets Act, The DMA and Advertising, Messaging Interoperability (Stratechery Update 3-30-2022)

Ben Thompson<email@stratechery.com>Mar 30, 2022, 1:25 PM