March 28, 2022

The EC Digital Markets Act’s Misguided Moves

The European Union’s Digital Markets Act is repeating all the mistakes made by telecom regulators 30-40 years ago in their attempt to promote competition by mandating interconnection and interoperability. They have decided to require certain forms of technical compatibility with no idea of how costly or difficult it is to achieve, and with no idea of how much real competition it will bring about. In this case, there is an entirely new problem: the interoperability requirements may undermine end-to-end encryption in messaging apps.

On March 24, negotiations among the EC Council and the EU Parliament agreed that the largest messaging services (such as Whatsapp or the iPhone’s iMessage) will have to interoperate with smaller messaging platforms, if they so request. As a response to the effects of network externalities, this parallels the interconnection agreements imposed on telecom companies during the liberalization process of the ‘80s and ‘90s. But the competitive impact of this will be negligible, because the cost of duplicating (or dual-homing) freely downloadable messaging apps is zero. Competing services cannot offer consumers lower prices. What kind of competition does the EC expect to happen when anyone who offers a messaging app can automatically gain access to all existing app’s users?

While the benefits are questionable, the costs will be substantial. According to experts in encrypted messaging, there is no way to feasibly maintain end to end encryption (E2EE) across different messaging platforms. Security expert Steve Bellovin tweeted “interoperable E2EE is somewhere between extraordinarily difficult and impossible. The easy part—and it’s hard—is managing a secure key exchange protocol across different platforms.” The different messaging apps all have different identity namespaces, which makes interoperability extremely difficult – and a potential security risk. Alex Stamos, Director of Stanford’s Internet Observatory, tweeted “A cynic might say that this is a way to effectively outlaw E2EE while framing it as an antitrust move against tech.”   

While the technical community has been attuned to the security risks of the DMA, few commentators have assessed the initiative from an economic and competition policy perspective. It is difficult to see any major competitive gain to go along with the costs. We have decades of experience with the unbundling of local telecommunication networks, and we have learned that there are limits. After successfully unbundling terminal equipment from the network (an easy and straightforward task) and a more complicated and somewhat successful attempt to separate local from long distance service, the 1996 Telecom Act decided it could unbundle everything in the local network and this would pave the way for robust competition in local access networks.

They were wrong. Unbundling every component of the network simply meant that the FCC had to regulate the price and technical features of every piece-part of the network (Unbundled Network Elements or UNEs). Instead of a competitive market one got a micro-regulated one. And in the end, UNEs did not create robust competition in local telecoms. (New infrastructures such as broadband cable and mobile wireless were the real competitive alternatives.) The competitive benefits of interoperable messaging services are going to be even more elusive, given their status as free downloads of software apps. Interoperability will give every messaging service access to the same users. Since the apps are free, competition currently consists of policy differences (e.g., Telegram, see below) or feature innovations around privacy or security that can attract customers. What kind of competition will emerge when one doesn’t have to compete for users? 

The European Commission is establishing a reputation as an entity that shoots out regulations first, and asks questions about what they accomplish later. 

Telegram gets banned, then unbanned in Brazil over misinformation 

Telegram has gained in popularity as other messaging platforms impose stricter content moderation policies, due to its more permissive approach. But now Telegram is being coerced into line. Last week, a Brazilian Supreme Court judge ordered the shutdown of the popular messaging application in the country. The judge cited Telegram’s failure to comply with orders from Brazilian authorities to remove messages found to contain misinformation as reason for the ban and gave Apple, Google, ISPs and phone providers five days to block the app. Pavel Durov blamed a “miscommunication” for missing the court’s emails over the disinformation allegations and apologized for the company’s “negligence”. According to The New York Times, Telegram complied with the court’s demands by taking down classified information posted on President Jair Bolsonaro’s channel and deleting the accounts of a Bolsonaro supporter who was allegedly spreading misinformation. The court then reversed the ban. Telegram is making changes to its policies  in Brazil to avoid another ban. It has committed to appointing a representative in Brazil, setting up a framework to promptly address requests promoting verified information and labeling posts containing falsehoods. Most significantly, Telegram has agreed to monitor the 100 most popular channels in the country that account for 95 percent of views of public posts.