The European commission has just released a report discussing how to limit the power of the global tech behemoths in Europe – and we all know who they’re talking about. Companies like Amazon, Google and Facebook have been busy gobbling up promising startups for years, successfully expanding their reach, skills and data pool, while snuffing out the competition at the same time.
With such scale and influence, to what extent, if at all have these companies become monopolies and should they be more closely regulated? Could stricter regulation in Europe have unintended effects on the pace of innovation? The answer is more complex than it was for past industries that became the target of antitrust action, like telecommunications, oil and railroads.
The rise of platform-based megafirms like Google and Facebook has seen digital markets shift more and more towards a winner-take-all dynamic, where the platform that attains dominance first tends to only need a slight edge over its competitors to harness powerful network effects and tip the market significantly in its favor.
For example, people search a lot on Google, so Google gets more information and that improves their algorithms. Then, even more people use it, and that kind of snowballs. And Google, like numerous other tech companies have faced a lot of scrutiny over the past decade by Europe’s regulators, which have been heralded as the world’s leading tech industry watchdogs
Margrethe Vestager, the European Commissioner for Competition spent the past five years developing a well-earned reputation in this sense. From her perch overseeing Europe’s competition rules, she fined Google more than €7 billion for breaking antitrust laws, and forced Apple to pay about €12 billion for dodging taxes.
She has outlined an agenda that quarterly targets the tech giants. She is, for example, working on policies to make these companies pay more taxes in Europe and investigating how they use data to box out competitors. Furthermore, Vestager has pledges to create the world’s first regulations around artificial intelligence.
This comes at a time when, in Europe, a broader debate is underway about a lack of homegrown tech giants. Europe lags behind in terms of technology innovation and has not produced that many big tech firms. Ursula von der Leyen, the new head of the European Commission, who appointed Vestager, has even called for Europe to achieve “technological sovereignty”.
According to Vestager, “(…) competition is beneficial rather than detrimental to society and over the last ten years Europe has developed a vibrant, dynamic startup community with scale-up potential, but European companies must compete on their merits (…). One of the main reasons that U.S. tech companies are popular in Europe is that their products are good”. Her job, she added, has been to step in when companies” cut corners.” “Market forces are more than welcome, but we do not leave it to market forces to have the final say.” she said. “Markets are not perfect”.
Having this in mind, last year the continent put in place the General Data Protection Regulation (GDPR), a set of data protection rules for all companies that have operations in the region. But regulation is a double-edged sword that could end up doing more harm to Europe’s startups than good.
Tech development cannot be stopped and it is only natural for the biggest and most well-funded companies to want to keep growing and innovating by buying market share, products and talent. And this ultimately has its benefits for emerging European businesses too, providing them with platforms for expression and a route to markets, via ready-made distribution.
The European Commission is right to shine a spotlight on the issue of digital competition and its recommendations are a step in the right direction. But regulation may dampen the EU’s tech sector by cutting off a valuable source of funding and support. Instead the whole ecosystem should work together to encourage EU startups to go at it alone, rather than favoring acquisitions by big US tech firms.
The contrast between Europe’s resistance to Uber and America’s warmer reception for the ridesharing service is a good example how European regulatory structures, in principles designed to protect consumers, end up stifling innovation. This contrast can also point us to the ways Europe should amend its rules, encouraging entrepreneurs to develop cutting-edge business models at home rather than being forced to accept innovations only after they have become best practices abroad.
In the US, innovative market entrants are seldom blocked, and only if they are overwhelmingly justified by the public interest. That is why Uber (like many other platforms in other sectors) could grow there and achieve the optimal scale to expand further.
If Europe is to prosper, it must ease market entry for innovators, so that platforms will begin to develop indigenously, rather that moving in after they have been perfected elsewhere. Innovation brought by new market entrants should be valued more than the protection of existing market participants. Though in some cases this may mean simply changing the way existing rules are applied, very often the regulations themselves will have to be changed.
Article published in our January Newsletter
João Pontes, BSc in Finance