AI Foundation Models: UK CMA’s Initial Report

The CMA has set out its emerging thinking on the functioning of competition and consumer protection in the market for foundation models.

On September 18, 2023, the CMA published its initial report (the Report) on AI Foundation Models (FMs) which it describes as “large, machine learning models trained on vast amounts of data.” The publication of this report constitutes the next step in the CMA’s AI Foundation Models initial review – designed to foster an early understanding of the FM market – first launched on May 4, 2023 [CMA Website].

The Report notes the current significant levels of competition and innovation in the FM space, and goes on to evaluate possible consumer benefits and risks associated with the rapid development of FMs, from which the CMA derives a list of proposed competition and consumer protection guiding principles. These principles are intended to guide the development of the FM market in a manner which ensures open and competitive markets and emphasizes consumer protection (see Table from CMA Report Summary, page 2).

1. Access – Entry and competitive participation in FM markets should not be unduly restricted.
2. Accountability – Businesses developing and deploying FM are accountable for outputs provided to consumers.
3. Choice – Consumers relying on FMs should have choices regarding FM-use within the business.
4. Diversity – FM markets should be diverse; comprising both open and closed-source models.
5. Fair dealing – There should be no anti-competitive conduct including self-preferencing, tying or bundling, particularly stemming from vertical integration.
6. Flexibility – Interoperability should be encouraged so that that consumers can use multiple FMs and are not limited to a single FM “ecosystem.”
7. Transparency – End-users should be well-informed as to FM capabilities and limitations.

The contents of the Report provide some indications of likely areas for future CMA scrutiny. For example:

1. Vertical Integration – As alluded to in its “Fair Dealing” principle, the CMA notes “significant vertical integration” across the FM value chain, with many firms exhibiting strong market presence in both production and distribution of FMs. Where this market presence results from partnerships and strategic investments between firms, the CMA has stated that it “will closely monitor the impact of these investment, partnership and vertical integration links on competition.”
2. Infrastructure Services – Supporting technology, such as cloud infrastructure services, is increasingly important to the development of technological innovations. The UK Office of Communications is currently conducting a market study of these services, and has proposed that the CMA investigate public cloud infrastructure services further. In the Report, the CMA concludes that if recommended in the final market report, “the CMA will carry out an independent investigation in relation to public cloud infrastructure services in the UK,” including possible “issues related to FM requirements and CSPs.”
3. “Early Movers” and “Large Technology Companies” – Citing lower input costs, brand recognition and large customer base, the CMA comments that early market entrants may have an advantage over new innovators. Along the same vein, the Report notes that ample funding and technical experience, economies of scale and customer feedback loops favour larger tech companies.

It is not yet clear whether this increased scrutiny will lead to increased enforcement. The CMA has stated that it will “not hesitate” to intervene should competition and consumer issues emerge, noting that it has existing competition and consumer powers; and that these existing powers will be enhanced once the Digital Markets, Competition and Consumers (DMCC) Bill comes into force, including through setting targeted conduct requirements on firms found to have strategic market status in respect of a digital activity.

However, it seems that the UK Government hopes that its effort will not stifle AI or digital innovation. This is exemplified by the launch of a pilot advisory service for businesses to receive tailored advice on digital technology regulation on September 19, only one day after the Report’s publication, to help “new products and innovations reach the market quickly, safely and responsibly” [Government Press Release].

Additionally, the Report itself contains encouraging statements as to the possible benefits of partnerships and vertical integration, noting: “efficiencies, enhanced capabilities, and the ability for users to access a wider range of services that work well together.” Further, the CMA notes that it will work closely with the government and other regulators, including as part of the Digital Regulation Cooperation Forum (DRCF), to help ensure that the regulation of FMs strikes the right balance between policy objectives, is pro-innovation and delivers the best outcomes for consumers and the UK economy.

As a next step, the CMA plans to undertake a significant programme of engagement with consumer groups, FM developers and academics across (amongst others) the UK and the U.S. Following this consultation, a proposed update is expected to be published in early 2024 [CMA website]. For further discussion of competition law and digital markets, please see our Sidley Updates here and here.

Businesses interested in participating in the shaping of policy in this space can engage with the CMA, and now is the time to do so. Further, as business models are developed, businesses in this space will need to be mindful of the CMA’s developing guardrails. Failure to take due consideration of these guardrails as FM (and related) markets develop is likely to lead to enforcement and increase the prospects of FM providers being designated as having strategic market status under the DMCC Bill (once enacted and in force), with all the associated, additional regulatory burden this entails.

Thank you to Bronwyn Tonelli, trainee for Sidley's Antitrust and Competition practice group, for her significant contribution to this Update.