[Big Tech Regulation: How] ① Referees Playing as Players... The Core Issue is Self-Preferential Regulation

'Kakao Outage' Trigger, Discussion on 'Big Tech Regulation'
Widespread Awareness of Big Tech's 'Self-Preferential Treatment' Issue

Editor's NoteSince last year's 'Kakao blackout' incident, the debate over regulating big tech platforms has reignited in South Korea. Europe has enacted the Digital Markets Act (DMA), a strong ex-ante regulation aimed at curbing the dominance of global big tech platform companies, which will take effect this May. In the United States, heated debates have continued for some time, including calls to prohibit platforms acting as 'referees' from also playing as 'players.' Attention is focused on the direction in which legislative trends regulating big tech platform companies will develop in South Korea.

One of the core issues in platform regulation is how to govern conflicts of interest within platforms. The primary business strategy employed by big tech platform companies is self-preferencing. This refers to operating a platform where consumers and merchants can transact, while designing the market to favor the sale of their own products. It means that the platform, acting as both referee and player, or like a test setter taking the exam themselves, leverages its dual role power to favor its own services and restrict market competition.

A representative case of self-preferencing overseas is the 'Google Shopping case' regulated by the European Commission in 2017. According to the European Commission, Google changed its algorithm to display its own comparison shopping service prominently in search results along with photos and other additional information, while reducing the exposure of competitors' services. After the algorithm change, competing comparison shopping sites were pushed back to around the fourth page in search rankings. Naturally, the traffic to 'competing comparison shopping operators' decreased.

The world's largest e-commerce platform, Amazon, also enhanced its brand competitiveness through self-preferencing. Amazon sells its own brand products called 'AmazonBasics' alongside other merchants' products on its platform. According to the U.S. House Antitrust Subcommittee's digital market investigation report, although Amazon's direct sales products constitute only a small fraction, their sales accounted for 25% to 75% of total sales. This is presumed to be the result of algorithms incentivizing better exposure of its own brand products. Internal Amazon documents even referred to merchants as 'competitors.' Amazon also strengthened recommendations for its brand products by utilizing customer information collected through its AI speaker, Alexa.

South Korea's Leading Big Tech 'Nakao' Both Penalized by Fair Trade Commission for 'Self-Preferencing'

A representative case of 'self-preferencing' in South Korea occurred at Naver and Kakao. Naver is accused of favoring its own services in shopping, and Kakao in mobility services, by leveraging their platforms' dual role power to restrict market competition.

Kakao Mobility, which operates a ride-hailing intermediary service through 'KakaoT,' is accused of designing its algorithm to intentionally concentrate calls (passenger requests) to drivers affiliated with its subsidiary taxi service, thereby favoring its own business and restricting market competition. The Fair Trade Commission (FTC) views that Kakao designed a 'discriminatory' algorithm that weakened the ability of non-affiliated taxi drivers, who rely on the 'KakaoT app' platform, to compete for calls.

Specifically, since April 2020, Kakao has operated an algorithm where drivers with a higher 'acceptance rate' (number of taxi calls accepted by the driver) receive more calls. The problem is that Kakao's affiliated taxi drivers structurally receive more calls. This is because Kakao Mobility operates a 'forced dispatch system' for affiliated drivers to ensure a taxi service without call refusals. In contrast, non-affiliated drivers decide whether to accept a call within 5 seconds after the destination is displayed. This structural difference causes acceptance rate disparities, so the algorithm designed around acceptance rates strongly indicates an intention of 'self-preferencing.' The FTC imposed corrective orders and a fine of 25.7 billion KRW in February this year.

Naver also used the competitiveness of its search service platform to favor its own business, 'Naver Shopping.' According to the FTC, since 2012, Naver has adjusted its algorithm at least six times to display products from its open market, Smart Store, at the top of shopping product search results. Self-preferencing practices were found, such as giving a 1.5 times weight to products from Smart Store merchants to appear higher or ensuring that a certain percentage (15-25%) of all products displayed on a page were from its own service. The FTC ordered corrective measures and imposed a fine of approximately 26.6 billion KRW. Naver filed a cancellation lawsuit in March 2021 against this decision, but last year the Seoul High Court ruled that the FTC's judgment was justified.

[Image source=Yonhap News]

Regulatory Intensity on Big Tech's Representative Competition-Restricting Act 'Self-Preferencing' Varies... Europe, Without Domestic Big Tech, Is the Strongest

As awareness of the problem of 'self-preferencing' as a representative competition-restricting act by big tech platform companies has risen, competition authorities worldwide have attempted to curb it. The strongest regulatory will is seen in Europe, where domestic big tech platforms have lost competitiveness.

The European competition authority, the EU Commission, defines self-preferencing by big tech platforms as an 'unfair practice' and will enforce the Digital Markets Act (DMA) from May. The ex-ante regulation requires core platform service providers of a certain scale to refrain from favoring themselves or affiliated corporate groups in all forms of content arrangement?display, ranking, linking?legally, commercially, and technically. Violations can result in fines up to 10% of global turnover. Professor Jeong In-seok of Hankuk University of Foreign Studies explained, "Europe has recognized that ex-post regulation alone cannot control big tech companies and has pushed for strong ex-ante regulation. This represents a paradigm shift in existing competition policy."

In the United States, the debate over domestic platform regulation methods passed through the House Judiciary Committee in June 2021 with the 'Antitrust 5-Pack' bills. Two of these bills regulate self-preferencing. The 'American Choice and Innovation Online Act' makes it illegal for big tech companies above a certain size to design markets favoring their own services and distort search results. Competition authorities can impose emergency injunctions with court approval for violations.

The 'Ending Platform Monopolies Act' goes further with a strong structural approach to cut off conflicts of interest by prohibiting platforms from competing with merchants in ways that cause conflicts. This bill could even force Amazon to cease its 'AmazonBasics' brand business. However, both bills failed to pass the Senate in December last year. Although the antitrust package was promoted by the Democratic Party and the White House, the Republican Party became the majority in the midterm elections last November for the first time in four years, effectively putting these bills on hold.

Fair Trade Commission Specifies 'Self-Preferencing' in Review Guidelines... "Legislation Necessity Under Discussion"

South Korea's competition authority, the Fair Trade Commission (FTC), implemented the 'Review Guidelines on Abuse of Market Dominance by Online Platform Operators' in January, defining 'self-preferencing' as one of the representative competition-restricting acts by big tech. The review guidelines differ from the ex-ante regulatory approaches pursued in Europe and the U.S. The FTC recognizes that with the rise of the 'platform economy,' applying and enforcing the Fair Trade Act has become more complex. The guidelines specify criteria to consider when determining 'market dominance' of platform companies and identify platform-specific competition-restricting acts to facilitate ex-post regulation.

An FTC official explained, "The European-style DMA is a strong ex-ante regulation that prohibits competition-restricting acts like self-preferencing by big tech companies from the outset, which differs from the review guidelines. The guidelines serve as a 'reference book' organizing factors for the FTC to judge and regulate such acts ex-post." This means that the guidelines clarify considerations when applying existing Fair Trade Act provisions to regulate competition-restricting acts by platform companies, differing from the strong ex-ante regulations in the U.S. and Europe. The guidelines are internal to the FTC and have no legal effect. Yang Yong-hyun, head of the Regulatory Research Center at KDI (Korea Development Institute), said, "Although they have no official legal effect, these guidelines are important references in the FTC's review process, so courts are unlikely to completely disregard them."

In South Korea, the possibility of legislating regulations on self-preferencing is not entirely closed. In January, the FTC's Online Platform Policy Division launched the 'Expert Task Force on Improving Online Platform Regulation,' consisting of 17 experts in economics and law, and has held three meetings so far. The FTC is discussing the need to amend the current Fair Trade Act to regulate competition-restricting acts arising from the abuse of monopoly power by platform companies. Various opinions have been exchanged on whether to codify the competition-restricting acts of the platform economy defined in the FTC's January 'Online Platform Monopoly Review Guidelines' (self-preferencing, multi-homing restrictions, tying, most-favored-nation treatment, etc.) and the criteria for determining market dominance of online platform operators (cross-network effects, economies of scale, gatekeeper roles, etc.) into law.

Discussions on the legislative format are also ongoing. Opinions are sharply divided between amending the Fair Trade Act and introducing a separate law such as the Online Platform Fairness Act. On the 24th, FTC Chairman Han Ki-jung cited the 'monopoly problem' in the digital economy as a key task for the FTC this year at a breakfast meeting hosted by Seoul National University's Competition Law Center, stating, "We will review the results of the expert task force discussions on the necessity and specific direction of amending the Fair Trade Act to improve monopoly issues and then decide on the legislative matters and direction."