Digital services encompass a broad category of online services, ranging from simple websites to internet infrastructure services and online platforms.
Digital services—and intermediary services in particular—play an important role in our daily lives and in the EU economy. We use these services every day, for example, when shopping online, ordering meals, searching for information, communicating, watching movies, and listening to music.
The provisions set forth in the Digital Services Act primarily apply to intermediaries and online platforms. Examples include online marketplaces, social media platforms, content-sharing platforms, app stores, and online travel and accommodation platforms.
Digital services have made cross-border trade and access to new markets easier not only for individuals but also for businesses.
The DSA will have an impact on:
- online stores;
- app stores;
- social media and content-sharing platforms;
- cloud services and hosting;
- accommodation platforms;
- intermediary services, such as Internet service providers and domain registrars;
- online travel platforms;
- sharing economy platforms.
The regulations apply to all companies operating in the EU, large and small. It is worth noting, however, that the level of obligations and the type of enforcement are tailored to the role, size, and impact of the online service provider on the internet ecosystem and online services.
There are over 10,000 platforms operating in the EU, 90% of which are small and medium-sized enterprises. The Commission acknowledges that navigating the new DSA regulations and 27 different sets of national laws can be not only a daunting task for small businesses, but also prohibitively expensive. That is why the DSA aims to ensure that small online platforms are not disproportionately affected, while still holding them accountable.
To determine whether the DSA applies to a supplier (and thus whether it is “substantially connected to the EU”), it will be necessary to conduct an analysis of the extent of its connection to the EU. The DSA provides an illustrative list of factors to be considered when conducting such an analysis—these will include, among others:
- the supplier’s place of business—if it is located in the European Union;
- the number of service recipients—if, in at least one Member State, it is significant in relation to the population of that Member State or those Member States;
- directing its activities toward at least one Member State – if the provider uses a language or currency commonly used in that Member State, or if it offers the option to place orders for products or services, as well as when the provider’s app is available in that Member State’s national app store or its advertisements are present on the local market of that Member State.
Application to providers of intermediary services, in particular intermediary services consisting of the provision of services known as “plain-text transmission,” “caching,” and “hosting,” given that the exponential growth in the use of these services—primarily for all kinds of lawful and socially beneficial purposes—has also increased their role in facilitating and disseminating unlawful or otherwise harmful information and activities.
SMEs can be both providers and users of services covered by the DSA. As providers, some SMEs have local ambitions, such as local Internet service providers or web hosting providers serving a small number of customers. Some of them are startups with aspirations to grow and reach a large number of users in Europe and beyond. However, far more European SMEs are users of digital services—for example, 25% of all SMEs in the EU advertise online, and as many as 44–46% do so in Denmark, Malta, Norway, and Sweden (Eurostat, 2018). The debate on the DSA should therefore focus more on the impact of the regulation on smaller business users of online platforms, rather than solely on the platforms themselves.
The Impact of the DSA on the Operations of SMEs and Startups
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Changes to the rules may mean lower ad prices, but in some respects, they may also mean reduced effectiveness. Lower prices may encourage new companies to enter this promotional channel, while those already using online advertising may improve their competitive position relative to companies that do not use this promotional channel.
App Stores
New rules governing app stores (including, among other things, a ban on blocking access to alternative stores or installing apps from outside the store) may present an opportunity for developers to earn more. Greater competition in the app store market could lead to lower commission rates for intermediaries—and higher profits for developers or lower prices for consumers. It is estimated that, in a best-case scenario, commission reductions could reach 10–20 percent, and purchasing apps outside the store could mean no additional fees at all. In Poland, commission revenue amounts to a maximum of 558 mln PLN. The value of the mobile app market in Poland is approximately 752 mld PLN.
What do companies need to consider when preparing for the DSA?
When preparing for the DSA regulations to take effect, there are many factors to consider, including:
Content Removal
The DSA states that when “trusted flaggers” notify a platform of the existence of illegal content, the platform must remove it immediately. There is no specific timeline for removing content, but the DSA stipulates that companies must be prepared to remove it quickly. This means that platforms must have appropriate processes in place to ensure compliance.
In addition, platforms must inform consumers about the removal of content, while providing detailed information on the reasons for such removal. Consumers may object to the removal of content through dispute resolution mechanisms in their country.
Proactivity
As long as prompt action is taken to remove content flagged by trusted reporters and to detect any illegal content by the platforms, the platforms will not be liable under the DSA for any unlawful conduct or illegal content posted by users.
The aim is to remove barriers that discourage companies from taking voluntary measures to protect their users from illegal content, goods, or services. It also aims to encourage platforms to take proactive action when notified of reported content and to invest in robust content moderation practices.
Transparency and Due Diligence
Greater transparency is a recurring theme throughout the DSA. This includes how to report illegal content, why content is removed, how algorithms are used to recommend content, how ads are targeted, and much more.
In exercising due diligence, web hosting providers must be aware of their obligation to report certain illegal activities. Online marketplaces must do the same when illegal goods are sold.
The DSA will provide a framework for the liability of intermediaries across all online platforms, including e-commerce platforms, and establish simple due diligence requirements as the foundation for a thriving digital economy.
A robust framework for countries of origin allows startups to scale their operations once across the entire EU, rather than 27 times, by leveraging the strength of the internal market. Introducing measures specific to the country of destination would effectively limit the activities of large, well-established players.
The DSA will give startups the opportunity to challenge major digital and analog players through targeted advertising. Startups are the most consumer-focused companies, and their opportunity lies in their ability to present value propositions to consumers. A ban on targeted advertising would divert startups’ resources away from innovation and toward marketing budgets. These are startups that would be unable to compete and reach customers without using targeted advertising.
Meanwhile, the companion legislation—the Digital Markets Act—will require gatekeeper platforms to provide small businesses with access to certain data. Under the DSA, online platforms will be required to create ad libraries where anyone can find data about their advertising campaigns. For example, once the DSA takes effect, an advertiser will be able to search for campaigns run by brands such as Apple or Calvin Klein in specific regions or targeted at specific audiences; as a result, any search algorithms used by these brands will become public knowledge.
The DSA may aim to create a safer and more equitable online environment for everyone, but it remains to be seen whether it will actually support smaller companies and rein in the larger “gatekeepers.”
Updating regulations, avoiding bans on digital marketing practices, and ensuring proper enforcement will be key to making the DSA an effective piece of legislation for startup ecosystems across Europe.
- An opportunity for innovators at SMEs to create better platforms.
- Because Google, Facebook, and others have access to consumer data generated as a result of their online activities, SMEs and startups find themselves in direct competition with larger companies that use that data to further their own interests.
- The goal of the DSA is to promote equal opportunities by increasing the transparency of these guards’ internal operations.
By providing a uniform framework for the EU, the DSA makes it easier to operate within the single market, reducing compliance costs and ensuring a level playing field. The fragmentation of the single market disproportionately disadvantages SMEs and startups seeking to grow, due to the lack of a sufficiently large domestic market and the costs of complying with a multitude of different regulations. The costs of fragmentation are much easier to bear for companies that are already large.
A common, horizontal, and harmonized set of rules applicable throughout the digital single market will ensure that SMEs, smaller platforms, and startups have access to cross-border customers during their critical growth phase. These rules are accompanied by standardization measures and codes of conduct, which should support their smooth implementation by smaller businesses.
