First SMS designations issued under the new Digital Markets Regime: Breaking down the CMA's assessment

For businesses that use these platforms, whether as app developers, advertisers, or service providers, the SMS designations signal a shift toward greater regulatory scrutiny.

However, designation is a starting point, not an endpoint. The CMA will now consult on conduct requirements for the designated platforms, and may find itself in a difficult position devising the "right" obligations. Requirements considered to be too onerous are likely to generate criticisms that the CMA is stifling the innovation by tech platforms that the DMCC was meant to foster, as well as legal challenges similar to the challenges brought by designated "gatekeepers" to the European Commission's activities under the Digital Markets Act. Conversely, if the CMA takes a conservative or limited approach, there may be questions as to the efficacy of the requirements and cost-benefits of the DMCC regime as a whole.

This blog post explains some of the key takeaways of these first decisions.

The DMCC framework

The DMCC was introduced to tackle the unique challenges posed by digital markets, particularly those characterised by strong network effects, high barriers to entry, and limited consumer switching. It empowers the CMA to designate firms with SMS in respect of specific digital activities, rather than entire corporate entities. In theory, this activity-based approach was intended to allow for targeted, proportionate regulation that reflects the real-world functioning of digital ecosystems.

To be designated with SMS, a firm must meet two key conditions:

1. Substantial and entrenched market power in a digital activity linked to the UK; and
2. A position of strategic significance meaning the activity is widely used by other businesses or consumers, or enables the firm to influence other markets.

Digital activities are the new "market definition"

In all three decisions the CMA grouped related digital components or services into a single digital activity. This reflects the CMA's view that the nature of these services are integrated and that digital ecosystems benefit from cross-market leveraging.

The CMA's stated approach under the DMCC is to move away from traditional market definition, instead taking a functional approach to digital activities, considering how these activities are offered and consumed in practise.

The forward-looking assessment – impact of AI and regulatory changes

As noted above, the SMS designation applies for a period of five years. This requires the CMA to consider not only the current position, but whether competitive constraints could affect market power going forward. In all three decisions, the CMA considered whether developments in AI or regulation in other jurisdictions would impact SMS designation.

Artificial intelligence

While the CMA recognised that AI is a major technological development, it found no evidence that AI developments would be sufficient in scope, timeliness or impact to eliminate market power by 2030. In fact, in the CMA's view, AI could enhance or complement existing features and reinforce existing barriers.

Regulatory developments

Across all three decisions, the CMA considered whether legislative changes, regulatory action and litigation could impact market power over the next five years. This included:

• Collective proceedings brought by businesses or consumers
• Similar designations in other jurisdictions
• Investigations or proceedings brought by competition authorities
• Potential remedies or obligations

The CMA was again sceptical that these changes would eliminate entrenched market power in the next five years, noting that regulatory changes affected in other jurisdictions may not apply in the UK, and remedies may be limited in scope, subject to appeal or again, not applicable in the UK. It remains to be seen whether and how regulatory authorities will overlap when investigating similar issues. Differing remedies or requirements between jurisdictions could result in a patchwork of obligations for SMS firms in respect of the same services.

What this means for firms

SMS designation is not a finding of wrongdoing. Rather, it is a gateway to potential regulatory interventions. The CMA now has the power to impose:

• Conduct requirements to ensure fair dealing, open choices, and transparency;
• Pro-competition interventions to address structural issues or remove barriers to entry.

See our previous article The Digital Markets, Competition and Consumers Act becomes law – what is it and what steps does your business need to take? for further information on what these can entail.

Designated firms must also self-assess which of their products fall within the scope of the SMS activity and engage with the CMA on compliance. Importantly, any future interventions will be subject to further consultation and must be proportionate and evidence-based.

This article was co-authored by Rachael Machado, Associate in Fieldfisher's Regulatory team.