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Harsh and Subah Tagotra*
I. INTRODUCTION
Earlier this year, the Committee on Digital Competition Law (CDCL) published its report on the need for an “ex-ante” anti-trust framework for digital markets in India. The report recommended the adoption of a separate “Digital Competition Act” in light of the expanding online markets catering to sectors including Retail, Finance, Healthcare, etc. To this end, the CDCL also annexed a Draft Digital Competition Bill (Draft Bill) to its report.
If the bill is implemented, the move would not be unprecedented. Countries like the UK and Japan have already implemented separate digital competition frameworks, while numerous countries are in the process of formulating and implementing such laws. Most notably, the EUs “Digital Markets Act” introduced in 2022 has been one of the most studied cases of an ex-ante framework. While it could be argued that big tech platforms play a particularly significant role in developing countries, as these nascent economies depend on investment from such companies to drive growth, the author still believes that a relatively less sophisticated state of the industry should not prevent us from looking forward.
Firstly, the challenges posed by the digital economy are universal, and India can leverage insights from the international frameworks to build a regulatory environment that supports its growth while fostering fair competition. Secondly, while the Indian economy in general, and the Indian digital markets in particular, are already witnessing healthy growth, it is important to emphasize the fairness of the distribution of this growth, as it has become increasingly concentrated. The digital sector is also one of the key contributors to India’s GDP, representing around 7.5% of the economy.
Simply put, an ex-ante approach would translate to the Competition Commission (the Commission) taking a more proactive stance in remedying anti-trust concerns as against the existing ex-post style of regulation where the Commission acts to remedy anti-competitive conduct after it has already taken place. An ex-ante regime implies a preventative model, ensuring timely intervention before the market “irremediably tips”, i.e., a firm establishes irreversible dominance in the relevant market.
For the sake of clarity, the ex-ante approach is meant only to supplant, and not replace the existing anti-trust framework. The preventative model would apply to “large digital enterprises” having “significant presence” in India, providing certain “core digital services.” The committee was of the view that digital markets are specifically dynamic and time-sensitive, justifying special treatment. For all other kinds of enterprises, the existing model of ex-post redressal would continue.
Although the proposed ex-ante framework is limited in scope and widely accepted, or under consideration across diverse jurisdictions, the CDCL’s recommendations have faced significant backlash. There have been calls for a more restrained “wait-and-watch” approach to regulating digital anti-trust concerns.
One of the persistent grounds of criticisms has been the supposed impact on micro, small, and medium enterprises (MSMEs). The argument is that since MSMEs have limited resources, they need access to more streamlined and effective channels for advertising and accessing consumers. Such tools are very often provided by big tech companies – that is, the enterprise that are most likely to be hit by the proposed Digital Competition Act.
For example, consider the case of Google's AdSense program, which is used by both small and large enterprises. It is argued that disturbing the dominance of any such service provider would impact the ability of the small firms to reach consumers, thus they would be left to depend on traditional modes of advertisements, which are costlier. The extra cost burden on MSMEs puts additional pressure on the already constrained resources that might have otherwise been used for value creation.
A surface-level enquiry might deem this conclusion to be justified. The author realises that such apprehensions certainly make some degree of intuitive sense. However, a deeper, claim-by-claim analysis reveals that some of the worries might be the result of uncorroborated extrapolations. It needs to be understood that the interactions between SSDEs and MSMEs are not always synergistic, but can also be adversarial in some instances.
In the sections that follow, the article first discusses the origins and prominence of the synergy argument, focusing on the Esya Centre study and its impact on the broader discourse. We will, then, examine the underlying premises of the synergy argument. Subsequently, the article will evaluate the specific provisions of the Draft Bill, particularly their impact on advertising expenditure and market dynamics for small businesses. Finally, the discussion will move to a holistic assessment of the Bill’s potential to financially benefit or burden MSMEs.
II. PROVENANCE OF THE SYNERGY ARGUMENT – THE ESYA CENTRE STUDY AND BEYOND
A large portion of the articles that present a critique of the Draft Digital Competition Bill make reference to a study entitled – “A Survey-Based Assessment of the Impact of the Draft Digital Competition Bill, 2024 on MSMEs in India” published by the Esya Centre. The study has been cited by a wide spectrum of news outlets, including The Hindu Businessline and Business Standard.
Esya centre seems to be a technology-law-centric research organization advocating for an off-handed approach to the corporate and commercial regulatory space. The body has, inter alia, called for the withdrawal of the Digital Competition Bill, recommended that algorithmic self-preferencing remain unrestricted, and that cryptocurrency be deregulated.
Going through the thirty-two-page document, one quickly comes to identify the primary issue raised in the report against the Digital Competition Bill – i.e., the claim that the Digital Competition Bill would increase the advertising and consumer-outreach expenditure, thereby stressing the limited capital available with MSMEs. For the sake of brevity, this line of reasoning would be referred to as the “Synergy Argument” in the forthcoming sections.
It should be noted that the Esya study is just one popular and widely cited instance of the synergy argument. There are several other academic and opinion pieces that make base their claims regarding the detrimental impact of the Draft Bill on MSMEs. For instance, Vivan Sharan, a partner at Koan Advisory and a Fellow at the Observer Research Foundation, writing for The Print, raises the same concerns as seen in the Esya Study.
III. THE SYNERGY ARGUMENT
The synergy argument is based on the assumption that Big-tech companies and MSMEs share a mutually beneficial relationship. More concretely, the argument can be presented as follows:
Major Premise: Big tech companies and MSMEs have a symbiotic relationship, where MSMEs rely on big tech companies for an efficient channel of advertisement.
Minor Premise: The Digital Competition Bill will make this channel of advertisement less efficient.
Conclusion: Therefore, the Digital Competition Bill will: (i) Reduce the reach of MSMEs; (ii) Impose an undue additional cost burden on small businesses by forcing them to resort to more expensive traditional advertisement.
The major premise seems to be a reasonable assumption based on the realities of the commercial world. As the study confirms, most MSMEs regard Digital Advertisement to be of great value and rate such services positively. A similar study conducted by Primus Partners in 2023 established a clear correlation between digital advertising adoption and performance indicators for MSMEs in India, including revenue growth, profitability, customer acquisition, and brand visibility.
The veracity of the minor premise, however, is less clear. The Esya study does not provide reasoning behind the assumption that the implementation of the bill would necessarily make Digital Advertisement less efficient. In this light, the examining the assumption becomes the key to verifying the conclusions of the said study. For this purpose, it would be beneficial to discuss the aspects of the Draft Bill having likely implications for MSMEs. The Draft Bill prohibits Significant Social Digital Enterprises (SSDEs) from engaging in certain practices. These prohibited practices include:
Favouring their own products and services or those of related parties (Section 11).
Using non-public data of business users on their core digital services to compete with those users (Section 12).
Restricting users from using third-party applications on their core digital services (Section 13, 14).
Requiring or incentivizing users of a core digital service to use other products or services offered by the SSDE (Section 15).
IV. THE DIGITAL COMPETITION BILL AND MSME ADVERTISEMENT EXPENDITURE
In order for the synergy argument to stand, the overall impact of these changes taken together on digital advertisement in respect to MSMEs should be negative, and should lead to increased advertisement-expenditure. In the following sections, the author seeks to evaluate the impact of an ex-ante framework and assess whether the resulting changes will lead to a net positive or negative outcome. The analysis will primarily focus on the consumer outreach costs associated with these changes.
One of the most important changes that the Draft Bill has introduced is the prohibition of algorithmic self-preferencing by SSDEs. This means that SSDEs cannot favour their own products, services, or lines of business, or those of related parties, for instance, by manipulating the order of search results and rankings. This restriction is found under section 11 of the said bill. It then becomes pertinent to analyse how this restriction impacts MSMEs.
There exist a host of studies that discuss the detrimental impact of self-preferencing restrictions on both consumer welfare and competing businesses including small enterprises. The former is beyond the scope of this article.
As previously discussed, the Draft Bill draws heavily from the European Digital Markets Act. On the aspect of the digital markets regulation in Europe, an impact assessment study by the European Council has documented how big digital platforms can take advantage of information to self-prefer their products over those of small business competitors, limit the reach of competitors through the manipulation of algorithms that control their rankings, or end traders' service contracts without giving any justification.
If the threat of algorithmic tampering was eliminated, it follows that small businesses would have better access to users, as their products and services would no longer be artificially supressed. An expanded and fairer access to users would mean that small businesses need to spend less on advertisement in order to inorganically attract consumers.
When studying the extent of power wielded by Gatekeepers or SSDEs, one also needs to cognizant of the fact that most online product searches are made generic key terms and by specifying a brand name. This means that consumer behaviour has changed to a need-driven approach rather than brand-driven. Around 80% of all Amazon searches are generic—not for any brand in particular, like Nike or Cadbury, but for “shoes” or “chocolate.” This provides immense leeway to SSDEs regarding their ability to tamper with the algorithmic, and ultimately dictate which enterprise or product gets more visibility.
A particularly problematic manner of algorithmic self-preferencing ties in neatly with the second prohibition laid out in the Draft Bill, i.e., SSDEs exploiting non-public data to undercut competition (section 12). There now exists undeniable evidence of SSDEs like Amazon copying existing products, often those created by startups or small businesses, based on the data they collect around product popularity and user preference. These SSDEs then prioritise their in-house brand of knock-off products in their search algorithm, thereby artificially boosting productivity, and ultimately, sales. Project Solimo is an extremely fitting example of this prevalent practice.
Needless to say, MSMEs are often at the receiving end of such practices. While such anti-competitive conduct might not have any direct bearing on digital advertising, it definitely impacts the ability of MSMEs to reach consumers as, their ideas and products are copied and replaced by e-commerce platforms, which then tweak the algorithm to direct visibility from the original to the bootleg version. Ultimately, continuance of such practices would force MSMEs to spend more on consumer outreach through advertisement, in the vein hope of regaining lost consumers. This practice not only undermines free competition but also stifles innovation.
The third restriction relates to the practice of big tech platforms limiting or disallowing their users from using third party applications. Arguably, this practice has the most well documented impact on small businesses’ ability to reach consumers. For instance, Apple imposes a myriad of restrictions when it comes to users trying to use third party on its proprietary IOS operating system. Firstly, Apple does not allow sideloading, i.e., users can only install applications from the official Appstore. Apple does not allow alternative app stores, or installing apps directly from the developers website. In effect, only those applications are allowed that comply with the Apple Developer Conditions and Guidelines.
In addition to this, they are required to pay Apple hefty commissions for all in-app purchases. As of date, Apple takes 30% of the purchase value for each In-App transaction. To be fair, Apple runs a “Small Businesses Programme” where businesses earning under $1 Million only have to pay a 15% commission. Regardless, allowing sideloading could potentially cut down the number to zero. As the Esya Study acknowledges, MSMEs have limited capital, and therefore taking a cut impact the ability of small businesses to attempt value creation.
Interestingly, Apple has, in a limited sense, started allowing sideloading in European markets to comply with the DMA rules and is potentially facing a $30 billion fine for violating competition laws. As of now, only one alternate app store, called AltStore Pal, is allowed by Apple. However, even this small step can be expected to be significantly beneficial to small businesses. This is because AltStore distributes paid applications through Patreon. As a result, interested consumers can directly pay developers by making a donation to their Patreon account to access the paywalled application. AltStore has a policy of taking no commission on these transactions. Ultimately, this would result in considerable cost savings for small businesses. There is little reason to doubt that similar cost-savings would be observed in India once the Digital Competition Law takes effect. It then follows that any argument against the Draft Bill based on the probability of additional cost burden of consumer outreach, must also take into account the savings that would be accrued by elimination of such hefty commissions, a factor left underappreciated by the Esya study.
Finally, we arrive at the last restriction that the Draft Bill imposes on SSDEs. Big Digital Service Providers often require or incentivize their users to use their other services. For instance, Apple requires app developers to use its payment processing system for in-app purchases on iOS devices. This means that app developers cannot offer alternative payment methods and must pay a commission to Apple for each transaction.
In 2020 Google mandated the use of its Google Play billing system (GPBS) for in-app purchases, charging commissions of 15% to 30%. The Competition Commission of India (CCI) investigated and fined Google INR 936.44 crore for anti-competitive practices, ordering the removal of restrictive provisions like anti-steering.
In response, Google launched the “Google Choice Billing Pilot,” which slightly reduces commissions (by 4%) when third-party payment options are used. However, app developers still face nearly unchanged combined charges when factoring in the commission charged by third-party payment aggregators. As things stand, google claims a hefty 11% to 26% commission on each in-app transaction. Third party payment aggregators chip in to take around 2-3% of the transaction value.
This practice was challenged by a host of Indian start-ups, as it was hurting their commercial interests before the Madras High Court. To the plight of small app developers, the matter was rejected on jurisdictional grounds. The Start-ups have now appealed this order, and the matter is pending before the Supreme Court.
Once again, there is potential for cost saving on part of MSMEs if such anti-competitive practices are eliminated. As argued above, even if additional cost burden were to occur, which so far remains as an unsubstantiated claim, would have to be analysed using a cost-benefit calculus to arrive at a conclusion regarding the net effect of the Draft Bill on the financial burden faced by MSMEs.
V. WOULD THE BILL BURDEN MSMEs WITH UNCERTAINTY?
Mr. Viswanath Pingali, Associate Professor at IIM Ahmedabad, raised a novel argument regarding the Bill’s impact on MSMEs. While Mr. Pingali expressed similar concerns about the dependence of MSMEs on digital advertisements—a concern discussed in previous sections—he emphasized that the Bill does not adopt a one-size-fits-all solution but rather approaches matters on a case-by-case basis. He further argued that this approach would lead to uncertainty, which would be burdensome for MSMEs to manage.
The author believes that most of the arguments raised by the professor have already been addressed. However, here is why we think the uncertainty argument does not hold much weight. Mr. Pingali equates “case-by-case basis” with “policy uncertainty” and concludes that this would harm MSMEs, who are not equipped to navigate or predict the implications of such changes.
Firstly, the committee’s report does not mention a “case-by-case basis.” One can reasonably assume that he is referring to the fact that the report emphasizes both quantitative (numerical parameters and thresholds) and qualitative (subjective factors indicating an entity’s ability to influence the market) factors in identifying SSDEs. However, one cannot overlook the report's and the draft bill's heavy emphasis on objective parameters. Under Section 4 of the Act, the following parameters are laid out for determining SSDEs.
Criterion | Threshold (India) | Threshold (Global) |
Financial | ||
Turnover | INR 4000 crore | USD 30 billion |
Gross Merchandise Value | INR 16000 crore | N/A |
Market Capitalization | N/A | USD 75 billion (or equivalent) |
User (India) | ||
End Users | 1 crore | N/A |
Business Users | 10 thousand | N/A |
The only place where subjective analysis comes in is where the report affirms that the CCI should be empowered to intervene when an enterprise does not meet the quantitative thresholds, but the CCI has reason to believe the enterprise enjoys significant presence in a Core Digital Service. It should be noted that this “rule of reason” is not new to competition law.
Moreover, the report does not leave policymakers unguided in deciding what criteria should determine whether an entity is an SSDE. It lays down concrete metrics, such as the enterprise’s resources, the volume of data aggregated, direct and indirect network effects, and the entity’s bargaining position vis-à-vis its business users and consumers.
An analogy can be drawn to Section 5 of the Competition Act, which sets out objective thresholds for recognizing mergers that require CCI approval. The CCI is similarly given discretion to decide what transactions have the potential to cause an Appreciable Adverse Effect on Competition. The commission has processed over a thousand such transactions, yet blocked none till date. If this analogy holds, we can assume that the CCI will not be hyper-aggressive in using its power to treat entities falling below the threshold as SSDEs.
In summary, the committee report does not represent policy uncertainty. It lays down objective standards for the most part and provides guidance for exercising judgment where discretion is allowed. Additionally, the scope of subjectivity is not unique. The report studies several jurisdictions, including Japan, China, Germany, and Australia, which also employ qualitative criteria to complement objective thresholds. This, coupled with the fact that the CCI has typically not been aggressive in exercising discretionary power, lends credence to the conclusion that supplemental qualitative criteria might not create significant uncertainty after all.
VI. THE BOTTOM LINE
From the preceding analysis, it follows that the ESYA Study’s claim that the Draft Digital Competition Bill will result in increased costs for MSMEs due to the reduced efficiency of digital advertising is not well-supported. In fact, the Bill might actually benefit the MSMEs and even reduce their cost of advertising, as demonstrated by the EU’s experience with the Digital Markets Act, and the developments in the Indian app-development sector.
First, the Bill may guarantee more equitable access to customers for MSMEs by prohibiting Significant Social Digital Enterprises (SSDEs) from algorithmically modifying search results to favour their own offerings. Consequently, MSMEs would likely need to spend less on advertising in order to gain visibility.
Second, the proposed Bill aims to prevent unfair competition for small businesses by prohibiting SSDEs from using consumer preference and product popularity data to create knockoffs, copy MSME products, and prioritize their own versions of successful products in search algorithms. This would lessen the need for costly advertising campaigns to win back lost business.
Thirdly, the Bill's proposal to permit sideloading on platforms like Apple’s iOS may assist MSMEs in avoiding the hefty commission costs that are now associated with in-app purchases. Considerable cost reductions could come from this, offsetting any possible rise in advertising costs.
Lastly, the Bill’s ban on mandating or encouraging the use of additional SSDE services, like required proprietary payment systems, may help MSMEs cut expenses even more. For example, there may be relief from the significant financial strain caused by the multitude of commissions discussed above.
Put another way, these advantages—such as more level playing fields, less reliance on costly advertising, and reduced operating expenses—may offset any higher advertising expenditure, eventually working in MSMEs’ favour. Once more, this would guarantee that value creation, research, and development be funded with the rather limited capital available to MSMEs.
VII. WAY FORWARD
If the Digital Competition Bill is signed into law, it will have a significant impact on Indian enterprises. In this regard, the government is demonstrating a positive attitude by consulting the relevant stakeholders. According to a study of MSMEs, 22% of these organizations claim to have already taken part in the consultation process, and 78% of these entities were aware of the ongoing consultations regarding the Digital Competition Law. Additionally, the Ministry of Electronics and Information Technology met with executives from a few enterprises, nine industry associations, and government authorities in June of this year.
It is important to realize that SSDEs and MSMEs can occasionally have an adversarial relationship in addition to synergistic one. An outright rejection of the Draft bill based on uncorroborated apprehensions would be unwise, especially when, as discussed above, MSMEs can actually stand to gain from the proposed ex-ante framework. Therefore, the author believes that appropriate discussions and consultations should go on in order to identify real problems and filter out red herrings.
It cannot be overstated that SSDEs unquestionably have some degree of collaborative relations with MSMEs. The objective of policy should be to maximize the potential synergistic relationships while minimizing the abuse of market dominance by 'gatekeepers.' One way to promote transparency and collaboration between MSMEs and SSDEs would be through well-defined, mandatory data-sharing standards, which have so far been extremely underdiscussed in Indian scholarship and policy. Prüfer has written extensively about the benefits and possible mechanisms for such data-sharing standards. A deeper dive into the application of this idea in the Indian context and its potential in extracting maximum utility from the relationship between MSMEs and SSDEs can greatly benefit the digital competition law regime.
*Harsh and Subah Tagotra are 4th Year Law Students at HNLU, Raipur.
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