Tech News : FM Market Dominance Concerns

Following an initial report on AI Foundation Models (FMs) last year, the Competition and Markets Authority (CMA) has expressed “real concerns” about it and is investigating the dominance of a small number of big tech firms at the centre of the FM market.

Foundation Models 

Foundation models (FMs) are AI systems / large-scale machine learning models that are pre-trained on large amounts of data and can be adapted to a range of different, more specific purposes. Examples include the GPT (Generative Pre-trained Transformer) models such as GPT-3 and GPT-4 (different versions of the model behind ChatGPT).

What’s The Issue? 

As highlighted by the original CMA report, fast-changing FMs have the potential to transform how we live and work, i.e. they possess significant potential to impact people, businesses, and the UK economy. The CMA wants to ensure this AI market develops in a way that doesn’t undermine consumer trust or is dominated by a few players who can exert market power that prevents the full benefits being felt across the economy.

The previous report on the FMA market led to a set of proposed guiding principles to help achieve this, including making FM developers and deployers accountable for outputs provided to consumers, asking for sufficient choice for businesses so they can decide how to use FMs, plus stressing the need for fair dealing, i.e. no anti-competitive conduct including anti-competitive self-preferencing, tying or bundling.

Move Away From “Winner Takes All Dynamics” 

Now, in the next step from its previous report and development of guiding principles around the FM market, the CMA has outlined growing concerns. The CMA’s Sarah Cardell, for example, has expressed the need to learn from history and move away from the kind of “winner takes all dynamics” that has led to the rise of a small number of powerful platforms.

3 Areas Of Focus 

The CMA identifies three (what it believes to be key) interlinked risks to fair, effective, and open competition in the FM market. These are:

1. Firms controlling critical inputs for developing FMs restricting access to shield themselves from competition.

2. Powerful incumbents possibly exploiting their positions in consumer (or business-facing) markets to distort choice in FM services and restrict competition in deployment.

3. Partnerships involving key players being able to exacerbate existing positions of market power through the value chain.

In an update paper, the CMA has, therefore, provided details on how each risk would be mitigated by its principles, and also by the actions it’s taking at the moment.

An Interconnected Web 

One point highlighted by the CMA that illustrates the complication of regulating the FM market effectively is the “interconnected web” of “over 90 partnerships and strategic investments involving the same firms: Google, Apple, Microsoft, Meta, Amazon, and Nvidia (which is the leading supplier of AI accelerator chips).” 

The CMA says that although it recognises the wealth of resources, expertise and innovation these large firms can bring to bear, the role they will likely have in FM markets, and that such partnerships can play a pro-competitive role in the technology ecosystem, it also recognises that powerful partnerships and integrated firms shouldn’t reduce rival firms’ ability to compete, or be used “to insulate powerful firms from competition”.

As the CMA CEO, said: “The essential challenge we face is how to harness this immensely exciting technology for the benefit of all, while safeguarding against potential exploitation of market power and unintended consequences.”

What Does This Mean For Your Business?  

Given the fast pace with which the FM market is growing and changing, plus the fact that there is an ever more complicated “interconnected web” of partnerships between the big tech companies at the heart of this market, it’s not surprising that regulator wants to stay involved to have any chance of understanding and regulating it effectively. As highlighted by the CMA’s CEO Sarah Cardell, the transformative promise of FMs as a potential “paradigm shift” for societies and economies is the prize. Although the big tech companies have been the big investors in the development of AI so far, it’s still a ‘market’ that needs fair, open, and effective competition where there’s plenty of choice for buyers, prices are kept low enough, and where innovation isn’t stifled.

We’re still at the stage where guidelines are being given and warnings are being issued but if other aspects of big tech company activities are anything to go by, this is going to be a very challenging market for the CMA to stay on top of and regulate. As the CMA has said, it’s going to be a difficult job to confront the “winner takes all dynamics” of the big tech companies and it remains to be seen how much trouble the CMA has regulating this incredible marketplace.

Tech Insight : Why Is There Only One Monopolies Commission?

In this insight, we take closer look at the subject of tech companies getting into trouble over antitrust issues, why it happens, what can be done, and what part organisations like the UK ‘Monopoly Commission’ plays.

The Monopoly Commission

The Monopoly Commission dates back to a previous incarnation of a regulator and is often used and accepted as a broad term to describe the regulatory body that is tasked with overseeing and controlling monopolistic and anti-competitive behaviour in markets. Each country has a different one, each with different titles and different powers. Technically, therefore, there’s only one in the UK, but many different ones of varying names around the world.

Role 

The role of such commissions is to enforce ‘antitrust’ laws to help ensure competition and regulate mergers and acquisitions to prevent any one company from having too much market power.

In The UK & US 

In the UK, for example, what was the Monopolies and Mergers Commission regulatory authority was replaced by the Competition Commission, which in turn was superseded by the Competition and Markets Authority (CMA) in 2014. These organisations have had the mandate to ensure that competition is fair, and consumers are protected.

In the United States, the role of regulating monopolistic behaviour is mostly undertaken by the Federal Trade Commission (FTC) and the Antitrust Division of the U.S. Department of Justice.

In Europe 

In Europe, as part of the European Commission, The Directorate-General for Competition (DG COMP) essentially does a similar job to the UK’s FTC.

What Powers Does The UK’s CMA Have? 

The UK’s CMA has the power to impose a range of penalties and take various actions against companies for antitrust violations. These include:

– Fines. The CMA can impose fines up to 10% of a company’s global turnover for breaches of competition law.

– Disqualification. Directors can be disqualified from holding company directorships for up to 15 years if they are found to have infringed competition law.

– Enforcement Orders. The CMA can issue orders to cease and desist from anti-competitive behaviour, as well as require companies to take specific actions to restore competition.

– Criminal Sanctions. In some cases, individuals can face criminal charges for cartel activity, including imprisonment.

– Market Investigations. The CMA has the authority to carry out market investigations and recommend or enforce changes to market structure or business practices.

– Mergers and Acquisitions. The CMA has the power to block or require modifications to mergers, acquisitions, and joint ventures that are likely to reduce competition.

Who And What Gets Hurt By Monopolies? 

If a company has too much market power and dominance, there are many entities and factors can be negatively impacted. For example:

– Consumers can suffer through reduced choice, higher prices, and potentially lower quality products or services.

– Competitors can be hurt, e.g. smaller firms may be driven out of business or prevented from entering the market, thereby stifling competition.

– Suppliers can find themselves squeezed on prices or terms, potentially causing smaller suppliers to go out of business.

– Innovation suffers because with less competition, the dominant firm has fewer incentives to innovate and improve.

– Market distortions can lead to resource allocation that is not optimal, wasting societal resources, i.e., economic efficiency can suffer.

– Reduced competition may result in fewer jobs and reduced salaries (the job market can be affected).

– The dominance of one company can lead to market complacency (a lack of urgency to prepare for risks), reduced consumer choice, and a lack of disruptive technologies.

– Fair trade can suffer because excessive market power can create imbalances in trade negotiations and economic partnerships, both domestically and internationally – leading to unfair/excessive pricing.

Trouble For Tech Companies 

With the tech market being essentially dominated by a relatively small number of very large and powerful tech companies, it’s not surprising that many of them have got on the wrong side of the antitrust regulators. Some high-profile examples involving some familiar tech names include:

Amazon

Back in November 2021, the European Commission fined Amazon approximately €2.42 billion for using non-public data from independent sellers on its platform to benefit its own retail business, which the Commission considered to be an abuse of a dominant market position.

Also, in the same year, Italy’s competition authority fined Amazon over €1 billion for abuse of market dominance related to its logistics platform, Fulfillment by Amazon (FBA). The authority argued that the terms and conditions for third-party sellers using FBA restricted competition.

Currently, but in a case dating back four years the EC is investigating Apple over so-called “anti-steering” practices, i.e. where developers are prevented from informing users about alternative payment options (which would constitute unfair trading practices).

Microsoft 

Famously, way back in 1998, the U.S. Department of Justice and 20 state attorneys general filed an antitrust lawsuit against Microsoft, alleging that the company had abused its market dominance to stifle competition, particularly by bundling its Internet Explorer web browser with its Windows operating system. The case led to a prolonged legal battle, and eventually, Microsoft was found to have violated antitrust laws. However, a proposed breakup of the company was rejected, and Microsoft instead settled the case by agreeing to make it easier for competitors’ software to operate with Windows.

This month, following a 2020 complaint made by Slack, an EC investigation over a possible breach of competition rules, has led to Microsoft announcing that it will begin unbundling Teams from Office 365 and Microsoft 365 in the European Economic Area and Switzerland. Microsoft was facing a potentially massive fine, e.g. 10 per cent of its turnover and opted to take the ‘proactive’ unbundling decision.

Apple

Apple is also no stranger to getting into hot water over antitrust issues. For example, back in March 2020, Apple was fined €1.1 billion by France’s competition authority for anti-competitive practices with its distribution and retail network. The authority alleged that Apple and two of its wholesale distribution partners had agreed not to compete against each other and also prevented premium resellers from lowering prices, which resulted in an unfair advantage for Apple’s own stores.

Dating from back in 2021, and still ongoing (the EC released a rare revision and clarification of the issues earlier this year), Apple has been under investigation by the European Commission regarding its App Store practices, specifically surrounding the 30 per cent commission it takes from in-app purchases. Spotify and other companies have claimed this is anti-competitive, as Apple’s own services don’t have to pay the commission. Apple could still face a hefty fine, e.g. up to 10 per cent of its global annual revenue if things don’t go its way.

Google  

Currently, in what is the biggest antitrust trial in 20 years, following a lawsuit (three years ago) by the US Justice Department and a group of states, Google is accused of having a monopoly in online search and related advertising markets and being the default search engine on most U.S. phones. The accusations relate to the fact that Google has around a 90 per cent share in search, aided by restrictive agreements with browser and phone partners (e.g. Apple, Mozilla, Samsung, and Verizon) that give it dominance. The trial will also focus on Google’s agreements with Android-based mobile-device manufacturers which forbid the pre-installing or promoting of rival search engines if they opt to take some of Google’s search revenue.

Back in 2019, the European Commission imposed a €1.49 billion fine on Google for abusing its market dominance in the online advertising sector. The Commission found that Google had imposed restrictive clauses in contracts with websites using its AdSense service, effectively stifling competition.

In 2018, Google was fined £3.8 billion for pre-installing its search engine and browser on Android devices, which was seen as an abuse of its dominant position

What Does This Mean For Your Business? 

In our digital society where tech companies have grown to occupy serious positions of power, the tech sector has become a focal point for recent antitrust scrutiny. This is perhaps not surprising due to issues like market dominance by a few big tech companies (Microsoft, Google, Amazon, Apple, Meta), and the network effects of technology platforms, e.g. the value of the services increasing as more people use them creating a tendency toward market concentration.

The control the big tech companies have over data (which market-newcomers find hard to match) and the whole product eco-systems created by big companies effectively making it hard for consumers to switch have increased the level of scrutiny. Arguably, companies of this size and dominance with their significant profits need outside regulation to ensure fair play for all.

That said, the tech sector is not the only one where antitrust issues regularly crop up. For example, dominant companies within the financial, energy, telecoms, and pharmaceutical industries also see their fair share of complaints and penalties. This article highlights why outside regulation is needed, what challenges companies and regulators face, and how each country has its own ‘monopoly commission’ authority with different powers and rules that are constantly changing as new issues arise.