Sunday, April 30, 2023

CMA issued schizophrenic statement on digital markets shortly after announcing to block Microsoft's purchase of Activision Blizzard: UK regulator contradicts own ruling

Were the CMA a person, one would really have to worry about it. As I'll show in this post, the CMA even contradicted itself on a fundamental question--competition among mobile app stores--on the very same day it tried, by means of a decision that won't stand, to block Microsoft's purchase of Activision Blizzard. Institutional schizophrenia.

I'll explain the reasons for this diagnosis first before talking about what's wrong with the CMA and the irresponsible approach taken by its current leadership, an approach that does damage without achieving anything good for UK consumers or companies in the end. Much to the contrary, the CMA's actions are counterproductive.

To be very clear, I'm not saying that any particular person is schizophrenic: there's no indication for that. It's an institutional problem. The biggest part of it is a lack of understanding of the tech industry, especially on the part of the Inquiry Group, whose members have an impressive background in other areas (mostly financial services) but are incompetent with respect to technology markets. Coupled with Mrs. Cardell's ambitions appearing stronger than her sense of responsibility, the results can be terrible, nonsensical, and in this case even schizophrenic.

In my two previous posts, I discussed why and how Microsoft can/will still close this deal (#UnblockABK) and the fact that Microsoft is not the first company to consider the CMA's actions a liability to the British economy: the CMA even tyrannizes startups and grown-ups, which a few years ago killed 30% of Deliveroo's jobs for no reason. Today's CEO was the agency's General Counsel at the time.

The CMA issued an unbelievably self-contradictory statement on Wednesday, only shortly after the merger-blocking decision:

Ensuring effective competition in digital markets, for people, businesses and the economy

A statement on mergers and digital markets from Marcus Bokkerink, Chair, and Sarah Cardell, CEO, CMA.

The one-pager argues that a legislative initiative that was introduced into the British Parliament the previous day--named Digital Markets, Competition and Consumers (DMCC) Bill--and largely crafted by Mrs. Cardell herself and the Microsoft-ABK decision "are distinct," but "[the CMA's] existing merger control regime and the new digital markets regime can work in complementary ways to maintain effective competition in digital markets."

The opposite is true with respect to ABK:

While the DMCC as the UK's equivalent of the EU's Digital Markets Act is indeed designed to open up mobile ecosystems and free them from the Apple-Google strangehold, the insanity that is the ABK decision would (if surprisingly allowed to stand) prevent the most promising challenger--also in financial analysts' opinion--to Apple's App Store and the Google Play Store from emerging.

That fact alone would make the statement self-contradictory, but the contradiction is far more specific than that and that's why this amounts to institutional schizophrenia:

  1. The DMCC Bill as introduced into Parliament on Tuesday (April 25) will indeed--as the Cardell-Bokkerink statement says--"give the CMA the ability to work in a faster and more targeted way to improve competition and foster opportunities for innovation in digital markets where a firm is found to already have strategic market status." And yes, if the CMA uses its powers wisely (after carefully building the tech industry expertise the ABK Inquiry Group lacks), the DMCC Bill "will allow [the CMA] to set targeted and proportionate conduct requirements to ensure other businesses aren’t at risk of being exploited and excluded, and to safeguard users against unfair terms and constrained choices." (emphases added)

  2. But this means that the CMA will impose conduct requirements on Apple and Google so they cannot exclude (Apple) or hobble (Google) rival app stores. App makers are being exploited; rival app stores are being excluded; and user choices are constrained.

  3. Here's the key passage of the DMCC Bill:

    Chapter 3

    Conduct Requirements

    19 Power to impose conduct requirements


    (7) The open choices objective is that users or potential users of the relevant digital activity are able to choose freely and easily between the services or digital content provided by the undertaking and services or digital content provided by other undertakings.

  4. Apple and Google will undoubtedly be found to have "strategic market status" (SMS). That term is also found in the Cardell-Bokkerink statement. No restriction in digital markets is strategically more important than mobile app stores monopolies: two gatekeepers controlling what apps we get, what the apps can do, and how app makers can promote their products, as well as taxing every purchase we make there (directly through the app tax, and indirectly through self-preferencing of advertising systems etc.)

  5. But here's what the crazy merger ruling says:

    "83. In relation to Microsoft expanding into mobile gaming, the chances of Microsoft succeeding seemed low in circumstances where the two largest mobile OS—Google’s Android and Apple’s iOS—either currently prohibit rival mobile gaming app stores or impose strict limits on their ability to monetise content."

  6. So the CMA's chairman and CEO--in the same April 26 statement--celebrate the DMCC Bill and the benefits it will bring to consumers and companies, but they incredibly say that the Microsoft-ABK decision is part of the same master plan, when that one flatly rejected the Relevant Customer Benefit that a universal app store run by Microsoft would bring.

  7. Here's the second sentence of that paragraph 83:

    "In any event, there seemed to be other, less anti-competitive ways, through which Microsoft could reasonably attempt to enter this market, such as by licensing mobile gaming content from publishers."

    No, there are not.

  8. The problem with the second sentence is that the Inquiry Group is (as I mentioned before) simply incompetent when it comes to technology markets. Financial analysts know that the most serious threat to the Apple-Google app store duopoly is Microsoft. That's because it takes two ingredients for a rival app store to get traction: you need to be able to compete at all (Apple) and on a level playing field (that's the current problem on Android), but also need a very attractive offering that is exclusive to your store and will drive users there. Only then will users not only rely on the default app stores (an incredibly high hurdle to overcome, especially if one understands what the Power of Default means) but also go there to discover third-party apps--from app makers large and small, including app makers from the UK.

    It's simply attributable to the Inquiry Group's incompetence with respect to tech markets that they believes there "seemed" (which should not be the legal standard for rejecting a Relevant Customer Benefit anyway) to be alternatives such as licensing: there is no way that Microsoft could solve the problem through commercial agreements with game makers like ABK, simply because those will always go not only for maximum revenues but also (for strategic reasons) maximum reach. It's not realistic that Microsoft would make those companies a sufficiently attractive offer that they would forgo the maximum reach that the default app stores will offer them. Smaller companies may do that, or even larger companies but only for low-priority titles. That, however, would not overcome the Power of Default.

    But what can you expect from an Inquiry Group that is incompetent enough to count all Game Pass Ultimate users as xCloud users--when xCloud is unavailable in numerous countries and even where it's available, only the fewest people play games via xCloud instead of locally--and that doesn't even get basic math right (comparing five years of profits to one year of costs)? They were obviously way out of their depth, which didn't prevent them from feeling like they collectively had dictatorial powers (like the Central Committee of the Communist Party of the Soviet Union).

  9. It will take time to make mobile app distribution competitive, but the CMA's sole remaining theory of harm is about cloud gaming and alternative app stores can succeed years before cloud gaming would even just hypothetically become as big as the technologically incompetent Inquiry Group asserts.

As I just referenced the Cold War days, let me adapt a famous speech by President Reagan:

Mr. Bokkerink and Mrs. Cardell:

If you want customer choice in mobile ecosystems, open the app stores.

Mr. Bokkerink and Mrs. Cardell:

If you want to create opportunities for UK companies of all sizes by giving them an alternative app store where end users will go to discover apps, allow the most promising challenger to emerge.

It's fairly likely that the CMA's CEO, Sarah Cardell, genuinely believes she's defending consumer interests even though she is not. Despite good intentions, she might be tempted to abuse her powers--powers she wouldn't have if not for Brexit (prior to which the CMA didn't get to decide major cases) and a rule-of-law deficit in the UK: regulators that have to defend their decisions in court on an a reasonably level playing field either have to act more reasonably (which usually happens) or at least they couldn't do much harm in the other event. The rule-of-law deficit could be addressed not only be changing the standard of review but simply by the government using its powers from time to time--as does the German government--to override regulator decisions when it's in the public interest.

If there's nothing that disciplines the CMA's institutionalized excess, a regulator that's out of control will additionally complicate the United Kingdom's efforts to strengthen--or at least maintain the strength of--its economy post-Brexit. Venture capital investment in the UK has recently been hit harder than in any comparable economy, and the CMA complicates investors' exits and in the Deliveroo case even complicated fundraising and killed jobs. Opening up mobile app stores would help many venture-funded startups; blocking Microsoft's purchase of ABK helps no one but Sony, Apple, and Google. More and more companies are considering delisting their stock from the London Stock Exchange (LSE)--which by the way has a partnership with Microsoft that is unrelated to whether publicly-traded companies believe they can get better valuations in New York. The crown jewel of the UK's tech sector, Arm, is going public on the U.S. Stock market. The CMA was not the only regulator to have concerns over the sale of Arm to Nvidia, but its institutional excess and its irrational decisions do nothing to advance the UK's interests.

Should the CMA consider itself--as a person interviewed by the Financial Times suggested--"the world's policeman" for competition in digital markets, then there would be an additional diagnosis of megalomania, and not necessarily just institutional megalomania. Even the European Commission--which has far more power than the CMA and especially a lot more experience with major cases--wouldn't look at itself that way.

In a matter of weeks, the European Commission will show the difference between the Champions League of intelligent, competent, and reasonable antitrust enforcement on the one hand and a second-division team that overestimated itself after it was thrust into a higher league by historical accident. The EC will also show the difference between decades of experience in dealing with high-stakes global-player cases in the technology industry and a regulatory startup. The EC's specialized tech merger review unit is here the CMA's DMU hopes to get--and where it has the potential to get, prudent leadership provided.