On paper, the Digital Markets Act (DMA) in the European Union aims to promote more competition. However, in practice, the DMA design aimed at large tech companies actually disadvantages small tech companies by threatening their marketplace management.

To discuss this, Shane Tews is joined by Graham Dufault, general counsel of the App Association. His experience in representing small and medium-sized mobile software development and connected device companies provides him with invaluable insights for unpacking this topic.

Below is a lightly edited and abridged transcript of our discussion. You can listen to this and other episodes of Explain to Shane on AEI.org and subscribe via your preferred listening platform. If you enjoyed this episode, leave us a review and tell your friends and colleagues to tune in.

Shane Tews: How is the Digital Markets Act affecting your membership?

Graham Dufault: At a high level, our member companies want three basic things from online marketplaces. The ability to offload overhead costs is number one. These are the boring costs of doing business, which aren’t directly connected to the expertise or the central purpose of a small business. This would include something like shipping fulfillment for physical goods and dealing with tax laws in other countries or security updates for software developers.

The second thing developers demand from online marketplaces is the ability to tap into a global market instantly. Even the smallest developers can access the global markets of hundreds of millions of consumers with smart devices just by hitting “publish.” This capability has greatly democratized entrepreneurship in tech markets.

And lastly, probably most importantly, small businesses want online marketplaces to cultivate consumer trust. If you’re a small business and software trust is the most important input, it’s the hardest to create on your own. Consumers generally don’t have the time to look closely at how software works and determine on their own whether it’s going to do what it says it’s going to do, and so having a layer of vetting at the abstract level in order to provide consumers with assurance that the app is what it purports to be is incredibly important. It creates an environment where a consumer is willing to download an app made by a company they’ve never heard of.

The Digital Markets Act is a problem because it either prohibits or presumptively prohibits or seriously interferes with small business innovators’ ability to get what they want from online marketplaces. Treating the offering of complimentary services that defray overhead costs as illegal self-preferencing, mandating that developers build apps for multiple stores in order to reach the same number of consumers, and presumptively prohibiting the removal of apps, even bad actors, requiring that all comers have access to smart devices features and personal data—those all make it really hard for online marketplaces to provide the three basic things our member companies want.

The Digital Markets Act is a major threat to small companies that make apps to small businesses in what we call the app economy. The stated purpose of the Act is to try and increase competition. The Europeans have approached the digital space and digital markets in a way that sort of tries to solve problems by regulating more. And so, you see our old friend GDPR, General Data Protection Regulation, all the way up into the AI Act, the Digital Markets Act is a feature of a regulatory landscape that is really heavy on digital markets. When you’re going to introduce something new in Europe, or if you have a new company and you’re trying to scale up, you are looking at a wide range of regulations that are not necessarily in place in the United States and they’re not necessarily based on risk. And the Digital Markets Act is really interesting because it is designed to address specific large companies and large online marketplaces in particular.

It was designed in a way so that those marketplaces would have to be restricted in the kinds of marketplace management functions that small companies tend to rely on, but bigger companies don’t need as much. The other purpose of the Digital Markets Act is born of frustration that some of the multi-billion dollar companies have had in distributing software. When they look at distribution and they try to negotiate deals with the big online marketplaces, the app stores, they don’t always get exactly what they want, right? So, your recourse is then to the law to ask, can I force the other side of the table, can I force the app stores to give me what I want?

The problem is that they have, with the Digital Markets Act, rewritten the rules for everybody who’s distributing through the stores. And again, because it’s written in a way that really advantages these big companies that have big brands, that have name recognition globally, they’re definitely not written in a way that advantages small companies. In fact, smaller companies will necessarily have to pay more for distribution in a direct sense. So, they’ll pay more for distribution itself and they’re also going to have to pay more in terms of having to deal with less trust in the ecosystem.

Has the Digital Markets Act been enforced so far?

There have been some threatened fines. This is another one of the issues for small companies: They will issue a set of proposed findings to what’s called a designated gatekeeper, one of the owners of one of the core platform services. The App Store is one of them. The Google Play Store is another core platform service. In implementing the articles, they will issue the proposed findings and they’ll say, here’s how we think you’re violating the law. And then the designated gatekeeper will come back and say, what would you like us to do? And the European Commission will say, I don’t know. Why don’t you tell us? And they’re hiding the ball just a little bit.

When you say that your members are adhering to the fee structure, who are they actually paying?

They would pay the app stores. The app stores would propose a compliance regime, and the European Commission would review it and say, that’s a good compliance plan. The companies will ask if it’s compliant, and the response might be, I don’t know, we might find you. Why don’t you try it? This creates a lot of uncertainty for my member companies. It causes uncertainty for everyone in the ecosystem because they don’t know what’s ultimately going to be declared legal. 

I have heard rumors that one of the recent proposed compliance plans for the fee structure is getting good reviews among the staff at the European Commission, but that’s unconfirmed and we don’t know and it certainly doesn’t count as a letter saying that this is a compliant fee structure.

What about the challenge that we’re seeing in other countries, which want to mimic the Digital Markets Act?

We are seeing a small version of it being adopted in Japan. It’s a proposal that applies specifically to smartphones, it’s the operating system and the app store. So that’s one of the first dominoes to fall. Korea is pretty close to moving forward with a proposal that isn’t exactly the Digital Markets Act, but is a lot like the American version of DMA; it creates presumptions and then has some affirmative defenses that you can use. For example, if you remove an app for cybersecurity purposes, you can offer an affirmative defense that allows you to poke through the presumption that removing an app is illegal under ACOA. So, it’s different from the DMA in that it takes that approach rather than ex ante regulation. But we liken it to ACOA because the effect is going to be pretty similar in the app store space. You will still see major restrictions on what stores can do to manage themselves.

It still will have the effect of forcing the stores to carry content that they don’t want to carry and putting not so good apps on the same shelf space as legitimate businesses. Korea is another example. Brazil is considering kind of a copy and paste version of the Digital Markets Act. And so, it’s very attractive to jurisdictions around the world.

What do you recommend to your member companies other than stay a member of the app association?

That’s number one. Work with the App Association in order to ensure that you’re represented in these venues, but also to make sure you have the latest updates on how this order is supposed to be carried out. And think about all of the detailed rules that have to be put into place in order to carry it out. So, all of those things have to be forthcoming from the court and then from Android, I guess. And so just you have to kind of stay tuned.

Yeah, at some point you may need to hire a law firm to make sure that you are monitoring for everything and making sure that nobody’s stealing your content. Trade groups are one way to get access to the most up-to-date information there is. And hiring attorneys and hiring other outside firms, they can help you protect your brand. so that is, again, I know that those options cost money and they’re not great but that is a little bit of a sense of where we are.

Learn more: The Digital Markets Act Is Undermining the App Economy by Weakening Security and Opening Data Doors (with Graham Dufault) | Europe’s Data Strategy Is Built on Wishful Thinking | The Open App Markets Act: How “Competition” Reform Would Open America’s Digital Doors to Hackers and Foreign Adversaries | The Digital Markets Act: A Security Risk for Encrypted Communications