Digital Markets Act (DMA)

The Digital Markets Act (DMA) is a landmark piece of legislation from the European Union designed to rein in the power of the biggest digital platforms, which it officially designates as 'gatekeepers'. Think of it as a new, proactive rulebook for the digital world's biggest players. Its goal isn't to punish success but to ensure the digital playground is fair for everyone. By imposing a list of specific 'dos and don'ts', the DMA aims to make digital markets more open and contestable, a term regulators use to mean 'easier to enter and compete in'. This means preventing giants like Google or Apple from using their dominant position to unfairly disadvantage smaller competitors. For consumers, this could mean more choice, better prices, and more control over their data. For businesses, it's a chance to compete on a more level playing field, and for investors, it represents a significant and permanent shift in the competitive landscape of the global tech industry.

Not every big tech company is a gatekeeper. To be designated as one by the European Commission, a company must meet a strict set of quantitative criteria related to its size, reach, and established position in the market. Essentially, a company is considered a gatekeeper if it:

• Has a significant impact on the European single market (e.g., annual turnover in the EU of at least €7.5 billion or a market capitalization of at least €75 billion).
• Operates a 'core platform service' (like a search engine, social network, or app store) that serves as an important gateway for business users to reach end users.
• Enjoys an entrenched and durable position in the market.

In 2023, the European Commission designated the first six gatekeepers: Alphabet (Google), Amazon, Apple, ByteDance (TikTok), Meta (Facebook, Instagram, WhatsApp), and Microsoft (LinkedIn, Windows). These companies are now required to comply with the DMA's rules for their specific core platform services.

The DMA's power lies in its clear, upfront list of obligations and prohibitions. It moves away from long, after-the-fact antitrust investigations and instead sets the rules of the game in advance.

• Interoperability: Gatekeepers must make their core services, like messaging apps, work with those of smaller competitors upon request.
• Data Access: They must provide their business users (e.g., a small seller on Amazon) with access to the data they generate on the platform.
• Freedom of Choice: They must allow users to easily uninstall pre-loaded applications and change default settings (like your default web browser or search engine).
• Open App Stores: They must allow third-party app stores on their operating systems and let developers offer alternative payment systems.

• Self-Preferencing: Gatekeepers can no longer rank their own products and services more favourably than those of their rivals. For example, Google cannot place Google Flights above a competing travel site in search results simply because it owns it.
• Data Siloing: They are banned from combining personal data across their different core services without explicit user consent.
• Anti-Steering: They cannot prevent developers from telling their customers about cheaper offers available outside the gatekeeper's app store.

For a value investing practitioner, the DMA is more than just a piece of European regulation; it's a fundamental change to the investment thesis for some of the world's largest companies.

A core tenet of value investing is finding companies with a durable competitive advantage, often called an economic moat. The DMA is like a bulldozer aimed squarely at the moats of Big Tech. Forcing a company like Apple to allow third-party app stores directly attacks its powerful and lucrative 'walled garden' ecosystem, potentially reducing high switching costs for consumers. As an investor, you must now rigorously question the durability of these moats. Is the company's competitive advantage based on genuine innovation and customer satisfaction, or was it propped up by the very anti-competitive behaviours the DMA now outlaws?

The DMA introduces significant regulatory risk. The penalties for non-compliance are severe, with fines of up to 10% of a company's total worldwide annual turnover, and up to 20% for repeated infringements. These fines can directly impact a company's bottom line and, therefore, its valuation. Beyond fines, the bigger risk is the forced change to core business models. This can squeeze profit margins and slow revenue growth. A stock that looked cheap based on past performance might be expensive if its future earnings power is permanently impaired by these new rules.

Where there are threats, there are also opportunities. By prying open these digital markets, the DMA could pave the way for smaller, nimbler companies to thrive. A savvy value investor might find an undervalued search engine, messaging app, or fintech company that now has a genuine shot at taking market share from a goliath. The regulation acts as a great equalizer, allowing the quality of a product, rather than the power of its distributor, to become a more decisive factor for success. The key is to look for the well-run, innovative challengers who stand to gain the most from the gatekeepers' new digital handcuffs.