The UK's new digital competition regime, with the CMA's Will Hayter
Welcome back to The Form Playbook, our newsletter supporting founders building the future of regulated markets.
This month:
🎙️Interview with Will Hayter, the UK’s leading regulator on digital competition, on startups, exits, and innovation
📰 News & Views: How new competition rules will affect startups and VC
⏰ Form Updates: Sylvera’s Series B, Thymia’s seed, and Mayowa’s a rising star 💁♀️
Will Hayter, competition regulator, on how the CMA thinks about digital markets, exits, and innovation
The CMA, the UK’s competition regulator, is due to get some new powers. Will Hayter, a senior UK official with experience across No 10, Cabinet Office, Ofcom and the CMA, is now a key figure in this regime as Senior Director of the CMA’s new Digital Markets Unit—earning him a mention in POLITICO’s 2023 Power 40 list.
The new unit will be able to designate a few major tech companies with ‘Strategic Market Status’ and intervene in markets where it judges these firms to be acting unfairly, with knock-on effects for startups. Naturally, the CMA hopes that the net effect of all this will be to help companies scale and compete with large incumbents. But the jury is still out.
We caught up with Will to hear more about their plans. Read on for our view below.
Will’s insight on the CMA’s plans:
The CMA is setting up a new Digital Markets Unit to address concerns about excessive market power among the largest tech companies. It will set out binding codes of conducts for these largest firms, with further interventions possibly including blocking mergers that limit innovation and undermine competition, removing restrictions on third-party services, or making it easier for consumers to switch services
The aim is to retain competitive markets that help startups to grow — including preventing Big Tech from ‘insulating themselves from the entry and growth of would-be competitors’ and keeping markets contestable — while recognising that acquisitions are not necessarily problematic and can be benign or even beneficial
The CMA is also looking into AI foundation models, aiming to build an early understanding of a market that’s rapidly evolving and what the implications may be for competition and consumer protection
Scroll down for the full interview transcript.
News & Views: How new competition rules will affect startups and VC
Will the new competition regime help startups? The CMA’s new toolkit will include powers that could help markets work more fairly, like encouraging third-party app stores or requiring big companies to give smaller businesses more notice about product changes. But the hypothesis that tighter merger control will make markets more contestable has not yet been tested — it’s at least as possible that this could break the cycle of capital that underpins the wider ecosystem, weakening innovation and competition in the long run.
These new rules don’t exist in isolation — tighter M&A scrutiny will add further complexity to late stage companies preparing for an exit: At some point, as startups scale, they come to a 3-way junction: i) keep fundraising privately, ii) exit by going public, or iii) exit via M&A. To make the first two options more viable, the UK is looking to reform public markets and unlock more late-stage capital. But we are a long way from material improvements for either route, particularly after the contraction of the last 18 months. That leaves the acquisition route, which may get harder not only due to increasing competition scrutiny but also tighter screening around national security risks.
Although this new CMA regime has much in common with new EU rules, schisms are still possible. In theory, the new DMU is philosophically similar to Europe’s Digital Markets Act, which now enforces new rules on ‘very large online platforms’. Both jurisdictions approved Broadcom’s takeover of VMware, while they’re both reviewing Adobe’s acquisition of Figma. But as the recent Microsoft/Activision case demonstrated — where the CMA blocked the takeover, only for the EU and (ultimately) US to then approve it — even common philosophies can lead to divergent decisions.
What does it mean for early-stage investors and founders? In some senses, there is already a natural experiment at play: with so much capital tied up in a few major companies who didn’t exit in recent years, a generational liquidity cycle never quite completed just as public markets fell too, with the effects for both VC and startup fundraising now playing out. But however this regime shakes out, it certainly places a renewed emphasis on founders who have the drive to build large, successful companies and are undeterred if early exit routes become less likely.
How important is the CMA’s work on AI? As we discussed last time, one of the most interesting aspects of the CMA’s work on AI is how it highlights the policy contradictions in open source. The CMA is keen to see ‘open, competitive markets’ in AI foundation models, which the open source ecosystem enables. But open source AI tooling is also subject to enormous political pressure — as well as from some of the largest AI companies, who have formed a new Frontier Models Forum to coordinate on AI safety — due to the risk it decentralises the ability to generate harmful content at scale. Expect this feedback loop between open source, frontier advances and regulatory scrutiny to shorten — shaping both companies’ defensibility and influencing where VCs should invest.
Form Updates
Sylvera raised a $57m Series B, led by Balderton, to expand further into the US and catalyse investment into global, effective climate action
Thymia announced their $2.7m seed round, accelerating their mission to empower mental health clinicians and make mental illness more visible, trackable and monitorable
Mayowa was named a 2023 rising star in European VC by Business Insider (alongside many of our other favourite people!)
And Stitch launched a new partnership with Langland to improve patient recruitment and retention in clinical trials, while KareHero launched their Employers Guide to the Carer’s Leave Act
As always, if you’re building in the future of regulated markets, get in touch.
Full Interview with Will Hayter, Competition & Markets Authority:
FORM: You’re leading a new unit within the UK’s competition and consumer protection department, the CMA, called the Digital Markets Unit (DMU). Can you give us a quick sketch of what the DMU will do?
WILL HAYTER: Digital markets bring enormous benefits to people, businesses, and the economy as a whole. For businesses, these markets provide access to more customers and new tools to help them run more effectively. However, the same features that drive many of these benefits also create the potential for significant harm to customers and competitors as market power builds.
The DMU will seek to address these issues through a new regulatory regime aimed at the most powerful digital firms. This new framework is part of the Digital Markets, Competition and Consumers Bill, which is going through Parliament at the moment. The bespoke, targeted, and flexible regime will promote greater competition and innovation in digital markets while protecting consumers and businesses from unfair practices.
For startups which interact with Big Tech firms — whether as suppliers, customers, competitors, or partners — what are the kind of things that might be different once the DMU is active?
The new regime will target only the most powerful digital firms, which are designated as having ‘Strategic Market Status’ (SMS). The new regime is designed to protect innovation and open up new paths for startups that may have previously struggled to grow and compete in digital markets. Entrepreneurs will see the benefits of more competitive markets and better access to consumers without additional rules falling on their shoulders.
Binding ‘conduct requirements’ will clearly set out how SMS firms are expected to behave, creating a level playing field for the smallest firms to compete with the largest, or to build on their platforms. This could include, for example:
· requiring SMS firms to give explanations and longer notice periods before making changes that will affect business users,
· removing restrictions on businesses’ use of third-party solutions when releasing products on SMS platforms, or
· making it easier for consumers to switch away from SMS services or change default settings.
The design and implementation of the regime will be achieved through an inclusive and collaborative approach involving a range of stakeholders, including both small and large firms.
Some in the venture community have expressed concern that making Big Tech acquisitions harder might stifle exit options for startups, with knock-on implications for the startup ecosystem in the UK — are they right to be worried?
One of the aims of merger control is to prevent anti-competitive mergers from limiting innovation and to retain competitive market structures to help start-up growth, including by ensuring that Big Tech does not use mergers to insulate themselves from the entry and growth of would-be competitors. Open, competitive markets are the best environment for tech firms of all sizes — innovation is in everyone’s interests. It should be possible for startups to challenge larger incumbents, because keeping markets contestable and ensuring vigorous competition brings the best results for the UK.
While the new merger reporting requirements — which will apply only to the small number of SMS firms — should increase the visibility of some larger transactions, they will not affect the threshold for approving a merger. It is worth pointing out that, of the thousands of mergers that take place each year, only a small number are subject to in-depth Phase 2 reviews or remedies. Acquisitions of startups by Big Tech are not necessarily problematic and many such mergers may be benign or beneficial.
For startups expanding across Europe, how will the DMU’s approach relate to the new approach in the EU under the Digital Markets Act?
The UK isn’t alone in bringing forward a new regime which supports competition in digital markets — but the UK is taking forward a unique approach which sets bespoke rules for the most powerful firms.
There are some similarities to other approaches including the EU’s. For example, the goals of the proposals are broadly the same: to open up digital markets to competition, allow new players to challenge incumbents, and drive innovation. The proposals could target similar firms and could impose some similar obligations. But the UK’s approach will allow for requirements that are tailored to specific problems in particular markets and can be amended over time, rather than being written into the law upfront.
We are watching international developments carefully and we will take account of them where we can — but we will work independently and in a way that helps businesses, people and the UK economy.
The CMA has taken a novel step by opening an early, exploratory review into AI foundation models. How will this factor into the CMA’s work and what will it mean for companies building in this space?
Generative AI has huge potential to create value and potentially disrupt markets as they operate today. Various aspects of AI have been on our radar for a few years now, and we identified large language models as a priority area of interest in early 2022.
This initial piece of work is intended to help create an early understanding of the market for foundation models and how their use could evolve; what opportunities and risks these scenarios could bring for competition and consumer protection; and what competition and consumer protection principles could best guide the development of these markets.
The goal is to help this rapidly scaling technology develop in ways that result in open, competitive markets that will continue to bring benefits for people, businesses and the economy in the UK.
This fits with the government’s White Paper of March 2023, in which it asked regulators including the CMA to consider how to support the government’s pro-innovation, agile and principles-based approach to AI regulation.
What is the best way for those in the early stage tech ecosystem to keep up to date with the DMU’s work, and to contribute where helpful?
We would be delighted to hear from anyone in the ecosystem who might want to share views on how a particular market is working in, or who has questions on the DMU or other CMA work. Once Parliament has approved the legislation, we will hit the ground running, ensuring the new regime is in place and work starts immediately on the new conduct requirements for the largest digital firms — this will involve extensive consultation with stakeholders of all types and sizes, including readers of this newsletter.
We regularly post updates about the CMA’s work on Twitter and LinkedIn as well as our website, and if you’d like to get directly in touch with the team, please email dmu@cma.gov.uk.