This July, Japan regulated the most impactful piece of consumer electronics since the invention of the computer (or for some, since the lightbulb): the smartphone. Japan‘s new laser focused regulation tackles competitive issues related to mobile OS, browsers, app stores and search engines. So, is this Act a new marvel of Japanese inventiveness, the Japanese equivalent to the DMA, or something else entirely? We have asked Professor Masako Wakui to share her insights on the new Act, and the challenges it faces in opening up the smartphone ecosystems.
By Masako Wakui
I am pleased that Japan has enacted the Act on the Promotion of Competition in Relation to Specified Software Used in Smartphones (Smartphone Act). The Act was legislated to address competition issues relating to the ecosystems built around smartphone operating systems such as those constructed by Google and Apple. It is intended to complement Japan’s competition law, the Antimonopoly Act (AMA), and is enforced by its competition authority, the Japan Fair Trade Commission (JFTC).
The new law is expected to ease the burden of proving competitive effects on a case-by-case basis, enabling the JFTC to act promptly and effectively. Given Japan’s big-tech-friendly approaches to digital regulation, often dressed up with feel-good concepts such as ‘co-regulation’, I was worried that Japan might end up enacting yet another ineffective co-regulation law, similar to the Act on Improving Transparency and Fairness of Digital Platforms which lacks meaningful oversight and penalties.
To me, the Smartphone Act is a marvellous legislative achievement, even though it is limited in terms of scope and remedies compared to the EU Digital Markets Act (DMA). Of course, enacting a law is one thing; enforcing it is quite another. The Act will enter into force by the end of 2025, and it is expected that the JFTC will face numerous enforcement challenges.
Scope and Designation Process
The Act applies to businesses that provide smartphone operating systems (OS) and app stores, as well as browsers and search engines, that are capable of eliminating or controlling the business activities of other firms in light of the scale of their business. The scale of business will be defined by a Cabinet Order. While at the time of writing, no-one knows who will be subject to the Act, the fact-finding survey and public comment procedures that preceded the legislation expressly focused on Google and Apple. Further, Google and Apple hold duopolies in smartphone OS and app stores, while Google has a clear leading position with its browser, Chrome, and its search engine heavily dominates the market. Thus, I think it is clear that the Act will apply to Google and Apple only.
I anticipate that the Cabinet Order will set out the criteria to address these two companies specifically. Google and Apple could theoretically go to court to denounce such criteria by claiming that the Order is, for example, unconstitutional. However, in light of the great discretion the Japanese government has in setting rules to regulate businesses, it is unlikely such a lawsuit would be successful.
Provisions of the Act
The Act aims to promote fair and free competition amongst companies that offer smartphone OS and app stores, as well as browsers and search engine. It does so by prohibiting designated companies—as noted above, I believe these to be Google and Apple—from using their position to ‘gain a competitive advantage in the goods or services they provide themselves, as well as from putting operators who use specified software at a disadvantage in their business activities’ (translated by the author). Gaining a competitive advantage while disadvantaging others is often called ‘self-preferencing’ (in a broad sense). In a nutshell, the Act sets out a set of anti-self-preferencing rules.
The Act includes both a prohibition section and an obligation section, for which different enforcement systems are established. The prohibitions, set out under Articles 5-9, encompass: i) using acquired data through OS, app store and browser for the provision of competing services; ii) unfair discrimination and other biased methods involving app providers’ use of their OS and app stores; iii) preventing other operators from providing app stores; iv) hindering the use of competing billing systems and other particular services; and v) giving priority to a firm’s own services over that of their rivals in search results.
Meanwhile, the obligations set out under Articles 10-13 include: vi) disclosing details relating to acquisition and use of data and relevant management systems in relation to the OS, app stores and browsers; vii) providing data portability tools related to the OS, app stores and browsers; viii) taking measures to display selection screens offering alternative browsers and other measures to facilitate users’ abilities to switch browsers and OS; and ix) disclosing changes to specifications of the OS, app store and browser.
If a company violates one of the prohibited acts, the JFTC can issue cease and desist orders, while aggrieved private parties are entitled to sue for damages and injunctions. In contrast, if an entity fails to comply with a listed obligation, the JFTC must first issue a recommendation rather than an order; private suits are not an option. The details of the obligations are also to be specified further by JFTC regulations in advance.
The list of prohibitions and obligations will remind readers of the DMA. This is not surprising because the DMA and other international regulations, including Korea’s App Store legislation, were extensively referred to during the legislative process. Readers will find similarities between the Smartphone Act’s prohibition relating to app stores and DMA Articles 5(5), 6(4) and 6(12), while its attempts to prevent manipulation of search results resembles DMA Articles 6(5) and 6(11). Readers will also see the DMA’s influence in the Smartphone Act’s list of obligations. For instance, data portability is provided under DMA Article 6(9), and selection screen provision are similar to Articles 6(3) and 6(4) of the DMA.
Remarkable Features
One of the most important features of the Act is that it requires no showing of competitive effect before finding a violation. This is a clear departure from the AMA, for which the JFTC is required to establish that the practice at issue causes a substantial restriction of competition, lessens free competition or otherwise impedes fair competition. Substantial restraint of competition is interpreted as establishing, maintaining or enhancing market power, while lessening free competition is understood in much the same way, although to a lesser extent. The AMA incorporates neither a per-se nor a by-object concept; therefore, the JFTC must establish such effects even in the case of price-fixing cartels, although this could be presumed depending on the type of practices involved. This requirement substantially complicates the JFTC’s AMA enforcement activities. Indeed, there has been no case dealing with data-related abuse and self-preferencing in relation to visibility, and only one case related to the Apple App Store and billing system (Apple, JFTC press release, 2 September 2021), which holds minor significance.
The second notable point is that the Smartphone Act limits the scope of justification by outlining what may constitute justification should a company attempt to prevent other operators from providing app stores and billing systems, and not providing scope of justification regarding companies’ use of acquired data in providing competing services. Again, this has never been the case under the AMA, which always permits a practice to be justified as having a pro-competitive effect or being in the public interest. I consider leaving little or no scope for justification for certain types of practices to be a sound policy judgment, considering anticompetitive effects almost always outweigh any pro-competitive effect or claimed public interest in the long run.
The third remarkable feature is that the Act requires the designated company to take disclosure actions, providing data portability tools, selection screens and other technical measures. The AMA has long been extremely cautious toward refusal to deal and information provision; companies are generally free to choose their trading partners even if they hold dominant positions in the market. Failure to provide information does not generally constitute an AMA violation either; a company may be found liable only when it engages in libel or slander, or misrepresents itself to solicit trade. Traditionally, sector-specific regulators, such as those in the telecom, energy and transportation sectors, have been trusted to regulate these actions and impose positive obligations. In these sectors, the regulators set out very detailed rules in the forms of regulations and ordinances. With the Smartphone Act, the JFTC will step out from its traditional position to play a larger role in setting requirements.
Next steps and challenges
The Act will enter into force by the end of 2025, and soon the designation criteria will be announced. The JFTC are currently preparing regulations and guidelines outlining further details of prohibitions as well as positive obligations.
The JFTC’s new regulatory role must already be presenting huge challenges. Traditional sector-specific regulators have ample resources and influence in setting technical standards and specifying terms and conditions, but they still face various issues, including regulatory capture and political pressure. In Japan, the regulator is also in charge of industrial policy in the relevant sector, which facilitates cooperation from those being regulated. Additionally, the regulators were not always alone in setting rules; for example, foreign telecom operators and later new entrants helped the telecom regulator learn about technically feasible regulations and the calculation of access charges. In the energy sector, Japan was late in liberalising the market, allowing the regulator refer to cases abroad. In contrast, the JFTC has little access to these resources in implementing the Smartphone Act. Furthermore, the tactics used by Google and Apple have become more subtle and are based on vast amounts of data and experiments they can conduct daily. Unless the JFTC hire dozens (ideally hundreds) of experts who truly understand the sector, business and users, the provisions setting out positive obligations will bring little change.
The resource issue is also central to enforcing the prohibitions. Preventing rivals’ activities and self-preferencing are straightforward only in text; rather than engaging in outright prohibitions, dominant tech companies nowadays manipulate visibility, technical settings, interoperability and so forth to ensure users do not switch platforms. Without deep knowledge and access to internal information, enforcing these provisions may be very difficult. If the JFTC reverts to Japan’s typical consensual co-regulation approaches without including concrete consequences and timely rigorous interventions, the Smartphone Act will have little to no impact in restoring competition in smartphone ecosystems.
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