U.S. Tech Giants Face Tough New Rules in Europe

Targets include Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), and Meta (FB)

Tough new rules being adopted by the European Union (EU) may force giant U.S.-based tech companies to alter their business practices. EU industry chief Thierry Breton indicated that the deal, reached on March 24, 2022, would ensure fair and open digital markets.

The most prominent companies that will be affected include Google parent Alphabet Inc. (GOOG, GOOGL), Amazon.com, Inc. (AMZN), Apple Inc. (AAPL), and Facebook parent Meta Platforms, Inc. (FB). EU antitrust chief Margrethe Vestager proposed the rules just over a year ago. She said in a statement: "What we want is simple: fair markets also in digital. Large gatekeeper platforms have prevented businesses and consumers from the benefit of competitive digital markets."

Key Takeaways

  • The Digital Markets Act (DMA) being considered for adoption by the European Union (EU) would restrict the business practices of large U.S. tech companies.
  • Companies deemed to be online gatekeepers would be barred from favoring their own services or applications over those offered by competitors.
  • Fines for violations can be massive, as high as 20% of a company's total global revenue for repeat offenses.
  • Apple worries that the rules may infringe on its intellectual property rights, and Google sees the rules limiting choice and innovation.

EU Digital Markets Act (DMA)

The new EU rules, as embodied in a Digital Markets Act (DMA), apply to online gatekeepers, companies that control access to data and platforms. They apply to companies with market capitalizations of 75 billion euros, or annual revenues in the EU of 7.5 billion euros in the past three years. Companies covered by the act also must have at least 45 million total monthly users in the EU or at least 10,000 business users in the EU.

On March 25, 2022, the euro was equivalent to $1.10 in U.S. currency. The DMA still awaits passage by the European Parliament and its 27 member countries, and there may be changes. If passed in timely fashion, the DMA is expected to take effect in October 2022.

The DMA covers gatekeepers in online intermediation services, social networks, search engines, operating systems, online advertising services, cloud computing, video-sharing services, web browsers, and virtual assistants.

Tech giants must make their messaging services interoperable and give business users access to their data. Business users can promote competing products and services on a platform. They also can make deals with customers outside the platforms. Tech companies cannot favor their own services over those of competitors or block users from removing pre-installed software or apps.

Fines for violations can be up to 10% of a company's annual global revenue. Repeat offenses can trigger fines of up to 20%.

Rationale

A key aim of the DMA is to prevent tech giants from harming smaller rivals by operating "walled gardens," or closed systems that make it harder for a user to switch to another provider. Firms deemed to be gatekeepers must not set their most important software (e.g., Google's Chrome web browser) as the default option when a user sets up a device. They will also be prohibited from giving preference to their own services over those offered by competitors.

Reaction From Tech Giants

Apple issued a statement that asserted: "We remain concerned that some provisions of the DMA will create unnecessary privacy and security vulnerabilities for our users while others will prohibit us from charging for intellectual property in which we invest a great deal."

The Google division of Alphabet issued a similar statement: "While we support many of the DMA's ambitions around consumer choice and interoperability, we're worried that some of these rules could reduce innovation and the choice available to Europeans."

Article Sources

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  1. Reuters. "U.S Tech Giants Face Tough New Rules as EU Countries, Lawmakers Clinch Deal."

  2. European Commission. "Digital Markets Act: Commission Welcomes Political Agreement on Rules to Ensure Fair and Open Digital Markets."

  3. CNBC. "EU Targets U.S. Tech Giants With a New Rulebook Aimed at Curbing Their Dominance."