Commercial Awareness Update – W/C 18th March 2024

THE EU’S DIGITAL MARKETS ACT: A FAIRER COMPETITION LANDSCAPE IN THE TECH SECTOR

The Digital Markets Act (DMA), which came into full force in the European Union on 7 March, will undoubtedly increase competition in the tech sector by breaking the monopoly of ‘gatekeepers’.

It was submitted in December 2020 alongside the Digital Services Act, which aimed to increase transparency between online platforms and their users and reduce the distribution of illegal content.

The DMA’s framework

Both Acts aim to create a safer digital space for online platform users and enhance competitiveness and innovation across Europe and globally by establishing a regulatory framework focusing on fairness among online platform actors. The DMA benefits smaller tech businesses and users by increasing the regulatory burden on the world’s biggest tech companies. These new rules are specific to qualifying online platforms with ‘considerable economic power’ defined as gatekeepers.

Gatekeepers are a limited number of tech companies which exert control over entire ‘platform ecosystems in the digital economy’ and monopolise data, namely Google’s Alphabet, Amazon, Apple, TikTok owner ByteDance, Meta, and Microsoft.

Additionally, the DMA sets the threshold of 45 million individual users in the European Union, or with a large intermediation position for a company to qualify as a gatekeeper.

Some gatekeeping practices, deemed unfair by the DMA, hinder the development and thriving of innovative and efficient undertakings in the tech market. For instance, following Article 6(4) of the DMA, each gatekeeper must enable and facilitate the installation and use of third-party applications and application stores. They are prohibited from preventing users from setting competitor software as their default.

These measures will have practical implications, such as the ability of users of messaging apps other than those provided by Meta, like Telegram and Signal, to communicate with users of WhatsApp and Facebook Messenger. Users of Google’s Android phones can also choose their default search engine, allowing other platforms, such as DuckDuckGo and Ecosia, to grow.

The DMA’s goal, by focusing only on tech giants instead of enforcing uniform rules on all tech companies, is to hamper damaging behaviour in the tech sector while allowing innovative companies to develop and grow.

Impact on businesses and users

Smaller tech firms and startups

As a result of this big-tech-focused regulatory framework, digital giants can no longer exert their power market-wide to gain an undue advantage. They will be subject to stricter competition rules.

The DMA renders the tech market more contestable for new and smaller entrants, thus favouring a fairer business environment, innovation, and growth.

Technology start-ups will inevitably benefit from these rules by being afforded increased visibility and being free from unfair terms and conditions which hinder their development.

Users

The DMA will make more affordable options available to users. Users will have diversified options regarding available services, allowing for a tailored approach to their wants and needs.

The projected growth and greater visibility of platforms such as DuckDuckGo or Ecosia will enable users to prioritise privacy-focused or environmentally friendly options in their daily use of online platforms.

The DMA will make using gatekeepers’ services more practical and efficient by requiring interoperability between messaging systems, for instance. Users will also benefit from stricter privacy rules on targeted ads, following tech companies’ new obligation to ask for consent before sharing data between different services owned by the same operator.

Gatekeepers

The enhanced regulatory framework calls for higher scrutiny of compliance with the DMA’s rules, as the stakes are high: infringements of said rules will be sanctioned by fines of up to 10% of the company’s total annual turnover or up to 20% in cases of repeated infringements, periodic penalty payments of up to 5% of the average daily turnover, and potentially additional financial remedies proportionate to the infringement.

In extreme cases, non-financial remedies, including structural remedies, may be imposed, and gatekeepers must prove compliance with the DMA’s rules by keeping track of the measures they implement in reports.

The DMA’s framework will also keep up with the tech market’s evolving nature by enabling the European Commission to carry out market investigations, continue qualifying companies as gatekeepers when they meet the relevant size threshold, and update both gatekeepers’ obligations and remedies in cases of infringements, if necessary.

The article was written by Mahault Dignet

UNRAVELLING THE DEAL: 777 PARTNERS AND EVERTON FC

In September 2023, 777 Partners, a Miami-based investment fund, announced its intention to acquire Everton Football Club. The deal involved acquiring Farhad Moshiri’s majority stake, totalling 94.1% of the club. Initially, both parties anticipated closing the deal by the end of the year.

However, the agreement has yet to be finalised due to heightened scrutiny from the Premier League, which has been closely assessing 777 Partners since the previous September.

This article delves into the reasons behind the regulatory scrutiny, highlights potential challenges for this specific deal, and explores the broader commercial significance of this unfolding story.

Why is there regulatory scrutiny over investors?

In recent years, football’s financial landscape has been under intense scrutiny. Big-name clubs like Chelsea, Manchester City, Leicester, and Everton have all felt the heat, especially regarding their spending habits under Financial Fair Play rules. But it’s not just about how much they spend; regulators are just as interested in where the money’s coming from.

Regulatory bodies, like the Financial Conduct Authority (FCA), are on a mission to ensure that club investors have the financial muscle to keep operations running smoothly. They’re looking into the financial health of these investors, checking if they can foot the bill for player salaries, stadium upkeep, and all the other expenses that come with running a club.

What has happened with this particular deal?

Let’s zoom in on Everton.

Potential buyers need to jump through a series of hoops to clear the Premier League’s Owners’ and Directors’ Test. Fail to meet the requirements, and they risk being labelled as unable to provide proper funding or accused of giving out ‘false, misleading, or inaccurate information.’

In November, credit rating agency AM Best decided to downgrade the financial strength of 777 Re, the Bermudan reinsurance arm, from ‘Excellent’ to ‘Fair.’

Why? Because 777 Partners LLC hadn’t provided audited financial statements for the past two years.

Naturally, this got the regulators’ attention. They’re keen to know: how is 777 planning to finance this deal?

What is the broader commercial relevance of this deal?

1. Navigating Regulatory Scrutiny: Regulatory scrutiny can wield considerable influence over deals and investments. For entities like 777 Partners eyeing acquisitions, clearing regulatory hurdles, including ownership tests, is paramount for smooth proceedings. This scrutiny extends beyond the realm of football; regulatory bodies like the Competition and Markets Authority (CMA) have intervened in various sectors when proposed acquisitions fail to meet their standards. Falling short of regulatory compliance can result in delays, tarnished reputations, and legal entanglements.
2. Funding Considerations: When Company X sets its sights on acquiring Company Y, it’s not just the price tag that’s crucial; the source of funding plays a pivotal role too. Whether through equity, debt, or a joint venture, how the capital is sourced can make or break the deal. It’s a vital aspect for all potential targets to weigh before consenting to an acquisition.
3. Commercialisation of Football: The involvement of private equity firms, specialist sports investors, and state-backed entities in football club ownership reflects a broader trend of commercialisation within the sport. This shift towards corporate ownership structures raises questions about the impact on club culture, fan engagement, and the long-term sustainability of football as a community-focused sport.

What happens next?

As 777 Partners’ acquisition of Everton Football Club continues to unfold amid regulatory scrutiny and financial intricacies, what will happen next remains a compelling question.

Beyond the immediate challenges of regulatory compliance and funding strategies, the broader implications of this deal loom large over the club’s and the football industry’s future. Will the deal proceed smoothly, paving the way for a new era for Everton? Or will further hurdles emerge, casting doubt on the viability of the acquisition?

As stakeholders eagerly await the next chapter in this unfolding saga, one thing is certain: the fate of Everton and the broader landscape of football ownership hang in the balance, awaiting the resolution of these complex and intertwined factors.

The article was written by Avishai Marcus