In May 2023, the UK's Competition and Markets Authority ('CMA') launched a review into AI Foundation Models. In its initial findings, published on 18 September 2023, the CMA proposed principles to "guide the development and deployment of Foundation Models (FMs)" for the benefit of competition and consumer protection. We summarised these findings in our article Generative AI: CMA's initial report on AI Foundation Models ('Initial Report').
The CMA's update paper highlights the latest progress in the FM sector, pinpoints three significant competitive threats emerging from the sector's growth and establishes the definitive principles for directing the industry towards favourable competition and consumer protection outcomes. The update paper is supported by a more detailed technical report, which provides a comprehensive overview of the competitive landscape and key players' latest moves.
Key developments across the AI FM Ecosystem
Use is on the rise
The CMA has observed a growing trend in the adoption of generative AI among the UK population and businesses: approximately 31% of adults and 79% of teenagers between 13 and 17 years old have engaged with generative AI tools (principally for personal, educational or professional purposes). Driven by objectives to enhance operational efficiency, customise or improve products and services, or to innovate and venture into new markets, about 15% of businesses are integrating at least one type of AI into their operations (and 46% of companies with more than 250 employees).
This increase has led to significant increases in investment in the FM sector. In particular, technical expertise is in high demand, and the introduction of new AI teams at tech giants has seen offers to AI researchers of compensation worth up to $10 million. In response to high demand, the UK Government has announced £118 million to boost the AI skills base.
Not only is the public availability of FMs increasing, so too are their complexity and capabilities
Globally, there are now over 330 known FMs, with many capable of generating multimodal outputs and handling large data volumes. Whilst OpenAI's GPT-4 is still widely considered a frontrunner in the FM space, recent open-source FM releases include Mistral’s Mixtral 8x7B, Google’s Gemma, and Cohere’s Aya. Additionally, there has been increased integration by major tech companies of FMs into their platforms and widely used digital products; see, for example, Google's integration of Gemini into Google Workspace, and Microsoft's incorporation of Copilot into Microsoft 365 and Windows.
Increased interconnectivity
The FM value chain is witnessing increased interconnectivity, with the largest players GAMMA (Google, Amazon, Microsoft, Meta, and Apple) strengthening their presence across various segments. These firms, already influential in related domains, are expanding their activities to include the supply of essential inputs like data and computing resources, the development of models, and the delivery of products (such as applications and platforms) to end-users.
This expansion is facilitated by vertical integration, where companies operate at multiple levels of the value chain, and through a growing web of partnerships, strategic investments, and agreements that enhance collaboration between entities at different stages of the value chain. Such arrangements often involve financial investments, sharing of critical resources like data or computing power, and sometimes exclusive distribution rights, further entrenching the positions of these large firms in the FM ecosystem.
Key areas of risk
The CMA identifies three key risks to fair, open and effective competition:
The restriction of access to critical inputs
Wary of incumbents unfairly shaping FM markets by leveraging their market positions and limiting accessibility to critical inputs for FM development, the CMA is scrutinising the competitive conditions in cloud services, the influence of major cloud service providers, and the impact of FMs on market dynamics. This scrutiny forms part of a larger initiative to monitor digital markets under the anticipated new powers of the Digital Markets, Competition and Consumers Bill, with future investigations to be informed by the outcome of the Cloud Market Investigation.
In its technical update report, the CMA highlights the scarcity of AI accelerator chips as a key constraint in manufacturing capacity. However, it notes the recent and anticipated launches by Intel, AMD, Microsoft, Google and Amazon of their own AI chips, which will both increase competition in the AI chips market and overcome challenges of scarcity.
The exploitation of market positions to distort choice in FM services
The CMA is concerned that consumer/business choice as to the FMs they use may be influenced by the digital products they currently use, especially if FMs become increasingly integrated with incumbent firms' product ecosystems. While these integrations can offer benefits, it could also block entry to market for new players, in turn leading to less choice, diminished quality, stifled innovation, and higher prices for FM-powered products and services.
The reinforcement or extension of market power through strategic partnerships
The CMA has observed not only an increase in vertical integration within the FM value chain but also a surge in partnerships and strategic investments by the GAMMA firms and Nvidia, collectively referred to as "GAMMAN", who are strategically hiring key talent and leveraging their positions in essential inputs for FM development. While the CMA recognises the potential pro-competitive benefits and necessity of these partnerships (of which the CMA notes there are over 90 at present) for the success of independent developers, it remains cautious. The CMA is alert to the risk that these partnerships and investments could be used to stifle competition, noting that not all fall under merger control rules, with some possibly structured to avoid them. The CMA emphasises the need for competition authorities to have the appropriate tools to address any resulting competition concerns.
The CMA's AI Principles
With these risks in mind, the CMA urges firms to align their business practices with 6 key "principles" and seeks to promote:
- fair access to AI resources such as data, computing power, expertise, and funding, to maintain a competitive environment whereby new players can challenge established ones, first-mover firms do not gain an unfair advantage through initial development, scale economies, or feedback loops, and dominant alliances and integrated companies do not hinder the competitive opportunities of other firms;
- diversity in the range of both open and closed AI models available for different general and specialised need;
- choice of deployment options, including in-house FM development, collaborations, APIs and plug-ins, which provides freedom for consumers and businesses to switch between several services without being confined to a single provider or ecosystem, and seeks to promote service interoperability and the ease of data transfer between services;
- a market where superior products prevail, assured by fair dealing among firms, free from anticompetitive practices such as biased self-promotion, tying, or bundling, and where first-mover firms are not shielded from competitive pressures by vertical integration and partnerships;
- transparency, to ensure that deployers, and in turn consumers and businesses, are provided with adequate information to understand the applications and constraints of FMs; and
- accountability amongst all market participants (including developers and deployers), to create a competitive market that safeguards, protects and earns the trust of consumers and businesses.
Next steps
In the light of the risks and principles identified, the CMA is increasing its scrutiny of partnerships and investments within the FM sector, and in particular those involving dominant market players, to identify potential anticompetitive outcomes. It is actively using merger control rules to evaluate these arrangements for potential competition issues, including those that might not fit traditional regulatory frameworks. This approach also aims to provide clearer guidance for businesses engaged in these partnerships.
The CMA plans to continue its review of the FM sector throughout 2024 and a further update is expected in Autumn 2024.