Navigating evolving digital economy regulation requires a sophisticated and proactive approach from dealmakers.

By Tom D. Evans, Deborah Kirk, David J. Walker, Alice Drayton, Catherine Campbell, and Amy Smyth

Amid the ongoing global proliferation of regulation governing the digital economy, EU and UK legislators are taking significant strides toward creating a fairer and safer digital trading environment for consumer and business users. Much of this incoming regulation is applicable to a wide range of actors, impacting the tech sector and beyond, with a particular focus on large platform providers. From the giant-tech focused EU Digital Markets Act to the far-reaching UK Online Safety Bill, the European regulatory landscape is maturing, and regulatory expectations on businesses operating in the digital space are increasing. As a result, sponsors and portfolio companies should begin their assessments of the legal, regulatory, and commercial implications of this changing landscape.

Immediate Impact

Intended to bring about a more even playing field and better police content shared in the digital environment, the swathe of EU and UK regulation includes the EU Digital Markets Act, EU Digital Services Act, EU Data Act, EU Platform to Business Regulations, EU AI regulation, EU Digital Copyright Directive, the UK’s Online Safety Bill, and more. While legislative status varies — some legislation already being in force, some remaining in process — the direction of travel is clear and for some target and portfolio company business models, the impact may be severe. Direct impacts of the new and forthcoming regulations will include increased responsibility and liability for content; enhanced protections for users and service recipients; reduced safe harbours for intermediary providers; obligations to open up access to data; and enhanced data and technology supply chain obligations.

Assessments Needed

Businesses will need to build strategies ensure technologies and procedures (including take-down procedures and monitoring activities) navigate the line between user experience and compliance. Compliance could mean significant improvement costs, may include amendment of terms and conditions, or even technological adjustments to ensure timely action is taken where infringing or otherwise harmful content is found to fall foul of the applicable standards.

Failure to do so could lead to turnover-based fines, in addition to significant reputational damage. The compliance assessment and improvement exercise involved (and the consequences of failing to do so) is reminiscent of the coming into force of the GDPR in May 2018, with a further level of complexity in that no two pieces of this new legislative matrix share the same scope of application. Portfolio companies and targets will therefore need to conduct a nuanced analysis of relevance and impact, a task made more challenging due to multiple sources, non-alignment following Brexit, and varying adoption timelines.

Trickle-Down Implications

Wider trickle-down impacts across businesses, industries, and markets are expected, including more open and expansive markets for certain types of data (particularly in the ESG, life sciences, and fintech industries). Conversely, markets for other types of data assets may shrink or change (e.g., potentially ad data and ad revenue streams), and new business models and opportunities may develop around technology, content moderation, digital assets, and data revenue streams. For example, recent deals have demonstrated significant interest in compliance and monitoring tools, including those that screen for copyright infringement and content suitability (measured against various restrictions).

Further Change

The global pace of change in regulation is increasing and dealmakers need to monitor developments on an ongoing basis — not only in Europe but elsewhere, with Singapore, Australia, India and Hong Kong among the many jurisdictions taking action.

Hand-in-hand with this significant shift in digital economy regulations are further implications in the intellectual property and data arenas. Emerging innovation and new types of digital assets will require PE firms to take a closer look at target and portfolio company IP portfolios and data assets, particularly in the context of the metaverse, Web3, AI, and NFTs.

Those firms and portfolio companies best able to navigate the changes may benefit from the opportunities for investment presented by a more regulated, and therefore potentially more robust, investment environment in the digital economy.

See European Scrutiny of Foreign Subsidies to Impact PE Deals.