Opinion on Japan’s Smartphone Law Cabinet Order and Rules
The Japanese-language version of these comments is available here.
I. Introduction
We appreciate the opportunity to provide comments on the Draft Cabinet Order and Draft Enforcement Rules prepared by the Japan Fair Trade Commission (“JFTC”) under the Act on the Promotion of Competition Regarding Specific Software Used on Smartphones (“Smartphone Act” or “Act”). The International Center for Law & Economics (ICLE) is a nonprofit, nonpartisan global research and policy center founded with the goal of building the intellectual foundations for sensible, economically grounded policy. ICLE promotes the use of law & economics methodologies to inform public-policy debates and has longstanding expertise in the evaluation of competition law and policy. ICLE’s interest is to ensure that competition law remains grounded in clear rules, established precedent, a record of evidence, and sound economic analysis.
Our comments focus on three critical areas: (1) the fundamental differences among the covered services, (2) the arbitrary nature of the 40 million user threshold, and (3) the disproportionate focus on online markets compared to traditional sectors.
While the regulation intends to enhance competition, the JFTC should be cautious about how the rigid designation criteria in the Smartphone Act might stifle it. For example, the decision to set a hard threshold for gatekeeper designation may appear straightforward, but risks capturing entities without significant market power or excluding those with substantial influence in different markets. Though this risk is likely lower with the thresholds being contemplated in Japan than with those applied in many other jurisdictions, including the EU, there is still a risk that a new product or service — such as e.g., a new browser or search engine — might be caught by the rules, especially given the broad definition of “active user” provided in the Smartphone Act. Similarly, applying uniform obligations across diverse services, such as basic operating software, app stores, browsers and search engines, overlooks critical differences and competitive dynamics specific to each product or service. Subjecting such variegated products and services to the same regulatory framework could lead to unintended consequences. Again, these risks appear lower in the case of Japan given the Smartphone Act’s comparative openness to justifications and its relatively narrow scope.
Still, the law seems to have been designed to catch two companies: Google and Apple. The fact that these two companies appear to have been deliberately singled out for regulation raises concerns about the rule of law, but also about the Smartphone Act’s economic rationale. By focusing on a portion of the economy that is generally outperforming the rest, the regulation disproportionately targets successful sectors without substantial evidence to suggest that competition problems are more severe in this sector than in others. In fact, evidence suggests that online markets are at least as competitive, if not more so, than many traditional industries.[1] Amongst other things, this is because “the internet makes available a variety of choices that traditional markets cannot match,” and consumers are able to switch between these sellers with minimal effort.[2] It is also not clear why, if the JFTC wants to address anticompetitive conduct in app stores (rather than hold certain predetermined companies to a different standard) it has excluded other stores, such as app stores on video consoles, from the scope of the law. This lack of consistency frustrates the Act’s integrity.
This is not to say the Smartphone Act narrower scope—relative to comparable regulations in the EU and UK—is bad, quite the opposite. Indeed, if the smaller number of firms to which the regulation applies reflects and signals a desire to regulate only services that genuinely possess “entrenched” market power (assuming that this cannot be adequately addressed with existing competition laws — which is in our opinion far from certain), then this may be reasonable regulatory policy. If, on the other hand, the small number of target firms stems from a desire to single out the most politically expedient target, then it is a worrying sign of things to come. The upshot is that, taken in isolation, key decisions pertaining to the Smartphone Act are not inherently positive or negative. Instead, their true breadth and motivations will only become clear in light of subsequent enforcement.
Below, we provide more detailed comments on the designation criteria under the Smartphone Act.
II. Fundamental Differences Among Covered Services
The Draft Cabinet Order, issued under the Smartphone Act, establishes a uniform threshold of 40 million monthly active users to designate gatekeepers. Services that meet or exceed this threshold are subjected to the same regulatory obligations. However, if applied too mechanically, this uniform approach may overlook the distinct competitive dynamics between these services. Indeed, as we have written elsewhere, “even when two ‘gatekeepers’ are active in the same core platform service (“CPS”), they often have markedly different business models and practices. Thus, despite both selling mobile-phone operating systems, Android (Google) and Apple employ nearly opposite product-design philosophies.”[3] Furthermore, “while Google (Alphabet) and Facebook (Meta) are information-technology firms that specialize in online advertising, Apple remains primarily an electronics company.”[4] These differences highlight that treating differentiated services as homogenous and applying uniform obligations to them could result in unintended consequences.
Similar usage numbers may, indeed, conceal heterogeneous market realities. Some of these markets have market leaders with a significant market share and few competitors; some are more fragmented and have more competitors with more evenly distributed market shares. Some of them have strong network effects, and some have milder network effects. Some of them rely on extremely specific user data in order to deliver a valuable service (targeted advertising), while others can work with more general data. Some are open (Android), and some are relatively closed (Apple). In other words, the number of users on a platform may provide a useful first screen for market power—and 40 million users out of Japan’s roughly 124 million population is certainly not a small number—but it is not dispositive.
Because of these differences, applying the same regulatory obligations across operating systems, app stores, browsers, and search engines risks (i) overregulating competitive sectors and (ii) fostering unintended consequences. To cite one example, preventing platforms from banning competing browsers presents both these risks. To our knowledge, no provider of operating systems or app stores currently bans competing browsers on their platforms. On Apple’s iOS, for instance, it is easy to download Chrome, Bing or Opera to use in addition to the native Safari browser. Still, under the Smartphone Act, Apple would have to send compliance reports in connection with this conduct. Worse, the regulation may open the door to malicious players that are currently kept out of the market because of the fear of being excluded from today’s leading platforms. In other cases, the rules could have unintended consequences, because they are overly broad, even where more surgical competition may have been warranted. As Lazar Radic has pointed out:
There are a range of risks and possible unintended consequences associated with the DMA, such as the privacy dangers of sideloading and interoperability mandates; worsening product quality as a result of blanket bans on self-preferencing; decreased innovation; obstruction of the rule of law; and double and even triple jeopardy because of the overlaps between the DMA and EU competition rules.[5]
All of these risks underscore the need for a more nuanced approach to gatekeeper regulation. And while Japan has clearly made the choice to replace or, at least, supplement competition intervention in certain digital markets, this does not mean that evidence-based principles from the field of competition enforcement should not influence how digital competition regulations are applied.
III. User Thresholds Versus Market Power Filter
The Smartphone Act relies on a 40 million user threshold that is something of a double-edged sword. On the one hand, the simplicity and predictability of the numerical threshold may simplify administration of the law. The significant number of users (relative to other digital competition regulations) required to cross the threshold also ensures that it will not be extremely overinclusive and essentially make all smartphone-adjacent services fall under the Smartphone Act. On the other hand, however, even high user thresholds are anything but a perfect proxy for actual market power. Absent careful and evidence-based enforcement, the threshold thus risks misidentifying firms that face significant competition as “gatekeepers.”
The first issue is that the threshold does not account for the context in which firms operate. Firms with 40 million users might not possess significant market power, particularly in fragmented markets like browsers, where consumers can easily switch between alternatives and multi-home. On the other hand, dominant players in smaller, niche markets might evade scrutiny despite having substantial control over their respective markets. These dynamics highlight that the number of users alone is not a reliable indicator of market power.
A second problem is that the threshold appears to have been crafted to specifically target two dominant firms: Google and Apple. While these companies undoubtedly hold significant positions in global markets, applied mechanically, the threshold may create a negative precedent for Japan’s competition regulation as it disproportionately burdens firms based on size rather than market power and behavior. This shows that “empirically grounded analysis of barriers to entry and actual anticompetitive effects must remain the cornerstones of sound antitrust policy”, in this case digital competition regulation.[6] In other words, a 40 million user threshold may be an appropriate first step, but only if the presumption it sets can effectively be rebutted by firms in cases where they do not possess actual market power.
With this in mind, there are several important factors that are ignored by a strict application of user thresholds and, ideally, need to be considered by the JFTC when applying the Smartphone Act. The reliance on a fixed user threshold ignores essential factors such as dependency (the extent to which consumers or businesses rely on a service), barriers to entry (the difficulty for competitors to enter the market), and competitive harm (whether a firm’s behavior adversely affects consumer welfare). For instance, a platform with 40 million users in a market with low barriers to entry may not pose significant risks to competition, while a smaller platform operating in a concentrated market could wield outsized influence. Moreover, using an absolute number of users as a threshold for determining which platforms are designated ignores the fact that consumers of digital platforms engage in “multi-homing” (i.e., using more than one provider of the same service at the same time), which significantly reduces switching costs and in turn reduces incentives to act in an anti-competitive manner[7].
In practice, this means that a 40 million user threshold will be a relatively good or poor proxy, depending on the market to which it is applied. For example, 40 million users on web search services might mean something entirely different than 40 million users on app stores, given switching costs, “stickiness,” and other factors. Additionally, defining an “active user” as someone who uses the basic operating software at least once a month during each month of the fiscal year is flawed as it does not analyze the economic significance of their activity. This less common frequency may instead indicate a casual or incidental use rather than regular reliance on the service, which undermines the justification for regulation based on user activity.
All of this explains why market shares, rather than firm size, have traditionally been used as a proxy for market power. Market shares accompanied by careful market definition simply offer more nuance than the sheer number of users. Of course, we understand that Japan’s legislature has made a choice to prioritize expediency over accuracy in the designation of gatekeeper. But this does not mean that the economic underpinnings of market definition must be entirely discarded. Giving firms a genuine opportunity to rebut the Act’s market share thresholds would bring a significant increase in precision at little expense to the predictability and expediency that the Act seeks to provide.
IV. Focus on Online Markets Is Misaligned
By design, the Smartphone Act disproportionately focuses on online markets and subjects them to stricter regulatory scrutiny, despite their record of economic dynamism and competitive vibrancy. Whether this will be for better or for worse, is not yet clear. But the JFTC can at least put chances on its side by embracing an evidence-based approach to digital competition enforcement. Failing to do so would risk not only stifling innovation but neglecting pressing competition concerns in traditional industries that may exhibit far more entrenched monopolistic behaviors.
To begin, online markets are among the most innovative and high-performing sectors of the economy.[8] They serve as engines of growth, continually introducing new technologies, products, and services that enhance consumer welfare. In contrast, traditional industries such as energy, transportation, and utilities often suffer from high barriers to entry and limited competition. This distinction underscores that focusing regulatory attention on thriving digital markets may divert resources away from areas where intervention is more urgently needed.
Moreover, the assumption that competition problems are more severe online lacks empirical support. Traditional sectors frequently exhibit stagnation, oligopolistic behaviors, and resistance to innovation, which result in inflated prices and limited consumer choices. By contrast, digital markets continually face challenges from new entrants and evolving consumer demands. The decision to disproportionately target online markets risks misallocating regulatory resources and undermining industries that are critical to economic growth, “whenever enforcement resources are limited, as they always are, it is important that they be spent in the right place. For antitrust policy, that would be markets and products that exhibit stagnant growth, stable market shares, lack of new entry, signs of oligopoly or widespread price fixing, or lack of innovation.”[9]
Additionally, the regulatory framework risks producing unintended consequences, as evidenced by the impact of similar laws in other jurisdictions. For instance, the Digital Markets Act (DMA) in Europe has delayed technological advancements, particularly in the rollout of innovative products, “in fact, there are indications that, where DMA-style regulations have been introduced, it has delayed the advance of technology. For example, Google’s Bard artificial intelligence (AI) was rolled out later in Europe due to the EU’s uncertain and strict AI and privacy regulations. Similarly, Meta’s Threads was not initially available in the EU, because of the constraints imposed by both the DMA and the EU’s data-privacy regulation (GDPR).”[10] Such delays harm consumers by depriving them of access and choice. Japan risks similar outcomes, particularly if compliance burdens deter local firms from scaling up or entering global markets. These risks may not be entirely eliminated by applying the Smartphone Act in an evidence-based manner, but they can at least be mitigated. The JFTC’s upcoming guidelines have their work cut out if they are to achieve this delicate balancing act.
V. Conclusion
We commend the JFTC’s efforts to address competition concerns in digital markets and to ensure fair practices in this rapidly evolving sector. However, the current proposals risk creating unintended consequences, including over-regulation, reduced innovation, and legal uncertainty. Without a more tailored approach, these measures may inadvertently harm the very markets they aim to improve.
First, we strongly encourage the JFTC to differentiate regulatory obligations based on the unique dynamics of each service type. Operating systems, app stores, browsers, and search engines operate within distinct competitive environments. A case-by-case analysis, rather than applying a uniform set of obligations, would better address anti-competitive behaviors while avoiding unnecessary burdens on services that are already competitive. The Japanese Fair Trade Act allows for sufficient flexibility to address these differences.
Second, the 40 million user threshold should be carefully applied in order to better capture the nuances of market power and competitive harm. A case-by-case analysis that considers dependency, barriers to entry, and consumer harm would provide a more accurate method for identifying gatekeepers, ensuring that regulatory efforts are proportionate and effective.
Finally, we urge the JFTC to carefully consider the implications and potential unintended consequences that may stem from its exclusive focus on the digital sector of the economy. Singling out online markets for stricter regulation assumes that competition issues are more severe in these markets, despite evidence to the contrary. Online markets are among the most dynamic and innovative parts of the economy, with relatively low barriers to entry and strong competition. Focusing regulation solely on these sectors risks stifling innovation, imposing unnecessary costs, and taking attention from traditional industries where entrenched monopolies and stagnant growth often require more urgent intervention. While these risks are inherent to the Smartphone Act (and to some extent accepted by its framers), they can be minimized by giving firms under investigation ample scope to provide economic evidence that rebuts the presumptions baked into the Smartphone Act.
[1] Robert Armstrong & Ethan Wu, What Big Tech Antitrust Gets Wrong: An Interview with Herbert Hovenkamp, Financial Times (Jan. 19, 2024), https://www.ft.com/content/4eec8bc3-c892-4704-ae66-a4432c6d4fd7.
[2] Herbert Hovenkamp, Gatekeeper Competition Policy, 30 Mich. L. Rev. 1, 6 (2024).
[3] Lazar Radic, Gatekeeping, the DMA, and the Future of Competition Regulation, Truth on the Market (Nov. 8, 2023), https://truthonthemarket.com/2023/11/08/gatekeeping-the-dma-and-the-future-of-competition-regulation.
[4] Id.
[5] Lazar Radic, Digital-Market Regulation: One Size Does Not Fit All, Truth on the Market (April 17, 2023), https://truthonthemarket.com/2023/04/17/digital-market-regulation-one-size-does-not-fit-all.
[6] Geoffrey A. Manne, Dirk Auer, Brian Albrecht, Eric Fruits, Daniel J. Gilman, & Lazar Radic, Comments of the International Center for Law and Economics on the FTC & DOJ Draft Merger Guidelines, ICLE (Sep. 18, 2023), https://laweconcenter.org/resources/comments-of-the-international-center-for-law-and-economics-on-the-ftc-doj-draft-merger-guidelines.
[7] Herbert Hovenkamp, Antitrust and Platform Monopoly, 130 Yale L. J. 1952, 1978 (2021).
[8] Lazar Radic, Gatekeeping, the DMA, and the Future of Competition Regulation, Truth on the Market (Nov. 8, 2023), https://truthonthemarket.com/2023/11/08/gatekeeping-the-dma-and-the-future-of-competition-regulation.
[9] Hovenkamp, supra note 2.
[10] Lazar Radic & Mario A. Zúñiga, ICLE Comments to the Brazilian Ministry of Finance on Competition in Digital Markets, ICLE (May 2, 2024), https://laweconcenter.org/resources/icle-comments-to-the-brazilian-ministry-of-finance-on-competition-in-digital-markets.