The FM Report highlighted the interplay of the FM market with other areas of consumer impact, such as privacy and intellectual property, and cited the wide scope of sectors that deploy FM technology, which, amongst others, includes social media, productivity software, search functions, legal, healthcare and robotics.
Initial views on the FM market
The overarching themes of the FM Report are: (1) the risk of existing FM developers becoming dominant; and (2) the corresponding need for access to key market resources (e.g., data required to operate FMs, computing power, technical expertise and capital access) to ensure that new competitors can enter the market.
The FM Report identified positive possible outcomes for consumers and businesses as AI technology develops and is used to enhance a variety of business-to-consumer and business-to-business services. At the same time, the FM Report noted that new and smaller competitors could be disadvantaged if larger market players entrenched their strong market positions due to economies of scope and scale, enhanced computational and funding resources, or by creating barriers to market entry (e.g., by limiting new entrants’ access to key resources that are required to implement and develop FMs).
Considerations for FM market development
The FM Report discussed whether the FM market is likely to develop with a positive or negative impact on competition and consumers. According to the report, this will largely depend on:
- The strength of existing market players: If strong existing market positions become entrenched, innovation may be ultimately disincentivised. Market entry and the availability of a variety of FMs to downstream businesses could also be impacted.
- Whether proprietary data will become necessary to compete: The FM Report noted that the potential future training of FMs on data beyond what is ‘freely available’ to improve model performance, i.e. ‘proprietary data’, may force FM developers to find ways to access new data beyond currently freely available sources. Increased deployment of proprietary data could place smaller firms seeking to enter or expand on the market at a disadvantage if those firms do not have access to such data.
- The potential scale of FMs: The FM Report noted the correlation between scale and performance of FMs and emphasized the importance of access to computing power in this space. Whether larger market players could cut off access to computing power for other developers presents a risk to competition on this market.
- Whether first and early mover market advantages are present: A first-mover or early-mover advantage could stunt the development of the FM market if funding, technical expertise, resources, economies of scope and scale, and user feedback data be available in sufficient quantities only to those largest and first on the market.
- The existence of open-source FMs: Open-source FMs can be publicly accessed and implemented at no cost, subject to potential commercial use limitations. Closed-source FMs, on the other hand, are accessible for a fee and on certain terms. The FM Report flagged that open-source FMs promote market development, whereas restricting access to key market resources could lead to a rise of closed-source FMs. This could create a market dominated by larger players and that ultimately impacts open-source availability and stunts innovation.
- Consumer protection and the user experience: The FM Report outlined various harms to consumers that FM development may exacerbate such as misinformation, consumer exploitation, and cybersecurity issues. The accuracy of FM outputs is therefore crucial to protecting consumers. The FM Report also cited user experience and ability to switch from the use of one FM to another as an important way to ensure positive market outcomes. Data protection concerns (in particular, portability and transparency) have been flagged as two core considerations to ensure that switching for end users can be carried out with ease.
Proposed principles for FM market development
To overcome the above risks, the FM Report proposed several principles to serve as guidelines for FM market development. These principles span accountability for output, access to key inputs, diversity of business models, consumer choice, user flexibility regarding switching, fair dealing, and user transparency.
The FM Report stated that the proposed principles are non-exhaustive and will be re-visited as the CMA’s research into this sector continues. However, several issues were cited that could undermine the proposed principles, namely: FM M&A activity that may harm competition; restrictions to user choice and the ability to switch FM models; and the perpetuation of consumer misinformation.
Key takeaways
Digital regulation and the promotion of competition on technology markets remains high on the list of priorities for UK policy development. The FM Report forms part of this wider initiative and follows a plan unveiled by Prime Minister Rishi Sunak in early 2023, citing the goal of making the UK a ‘science and technology superpower’ by 2030 as a core focus.
The FM Report made it clear that businesses should be aware of likely CMA interest in M&A activity in the FM space. Given a recent shift of CMA focus to cloud technology, a continued interest in what the CMA has deemed to be another ‘nascent’ market is a logical development.
Enforcing traditional competition concerns, such as abuses of dominance, will also remain high on the CMA’s radar in the FM space as the FM Report frequently referred to the possibility of large tech firms ‘entrenching’ their positions.
To conclude, the CMA intends to continue its ‘significant programme of engagement’ regarding the FM sector and will publish an update, developing the proposed principles, if necessary, in early 2024. The CMA recognised that over-regulation can stifle innovation, ultimately harming consumers. However, targeted regulation was cited as a necessary end as the FM market develops, to ensure that consumers are protected and that businesses are mindful about issues arising with FM development from a competition, privacy, intellectual property and human rights perspective.
