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As the EU Targets Tech, Will the U.S. Follow?

(Illustration: Emmanuel Polanco for Techonomy)

With fears growing over Google’s economic and cultural might, the European Parliament decided in 2014 it needed to send a strong signal that the tech giant should watch its back. Lawmakers voted overwhelmingly for a resolution that encouraged EU regulators to consider breaking up the search giant. In Silicon Valley it was seen as an idealistic gesture, provoking chuckles and eye-rolling. Oh, those kooky Europeans and their fear of the future!

Four years later, Silicon Valley has stopped laughing. The largest U.S. tech companies find themselves facing a tidal wave of regulatory scrutiny in Europe across a dizzying range of topics. Privacy. Antitrust. Taxes. Fake News. Dominance of e-commerce. The list of proposals and investigations by the European Union and its member countries seems to grow by the day. The Cambridge Analytica scandal faced by Facebook early in 2018 only heightened worries in Europe and worldwide about the power and misuse of data by global net companies.

Behind this regulatory assault lies what has historically been fundamentally different views in Europe and the United States on the relationship between government and business. Europeans see regulation as essential for fair and free markets. The government’s job, they say, is to be the referee who makes sure everyone follows the rules. But in the U.S., there are far more people, including in government, who believe that if you are for regulation then you must be a protectionist who is afraid of competition and the future. The Cambridge Analytica scandal may have begun to bridge the disparate regulatory cultures, since the data may have been used both in political campaigns to elect Donald Trump and in support of the Brexit vote in the United Kingdom.

Nonetheless, the two regions remain distinctly different. Margrethe Vestager, the European Commissioner for Competition, summarizes the European view: “We don’t see regulation as an obstacle to innovation or to businesses.” The EU under Vestager also takes a relatively aggressive view of antitrust enforcement: “If you have a situation where a company can use their dominant situation to win in another market, that can be a barrier to other companies to invest or be innovative. What we are trying to do is get the right balance.”

Worry in the U.S.

But now concerns about the power of the internet giants has dramatically risen in the United States. The worries span a range of issues — electoral manipulation, a seeming disregard for consumer privacy, putting traditional media in jeopardy, and concerns about the sheer scale of three companies in particular: Amazon, Google, and especially Facebook. Could Europe’s hardball approach become a model for American action?

In Europe, regulators are steadily becoming more aggressive, despite a vast campaign of lobbying and economic investments by American big tech designed to soften its image. This culminated in the record €2.4 billion antitrust fine announced by Vestager against Google last summer.

That decision was a regulatory shot heard ‘round the world for company critics who hope it will inspire U.S. regulators to investigate antitrust violations by Amazon, Apple, Facebook, and Google. Yelp is a company which has complained for years about its mistreatment in Google search. Luther Lowe, its vice president of public policy, had been pressing the EU to take action, and now calls Vestager’s ruling “a reset button [for] the entire zeitgeist around big tech.”

The Talk Turns to Regulation

A more suspicious and punitive mood is now developing in the United States too. Editorials calling for restraint or regulation of the net giants are becoming common in major newspapers. Senators including Mark Warner of Virginia and Amy Klobuchar of Minnesota have called for new laws to regulate online political advertising in response to electoral manipulation on Facebook, Twitter, and YouTube. Conservative commentators like Tucker Carlson, too, are angry. “Google should be regulated like the public utility it is,” he said on Fox News. And it’s now acceptable even to advocate more radical action. NYU professor Scott Galloway, speaking in Munich at January 2018’s DLD conference, said bluntly: “It’s time to break these companies up.” The sentiment was all the more remarkable since Galloway has long admired and advocated for these companies. Galloway said he came to this conclusion because of sins including tax dodges, privacy abuses, and trafficking in fake news.

More recently, all three recent Republican nominees for the U.S. Federal Trade Commission, an agency that under President Obama investigated Google and then rejected recommendations to take action, indicated they were open to cracking down on big tech. “Companies that are big and influential can use inappropriate means to stay big,” said Joe Simons, Trump’s nominee to be FTC chair. “No company is above the law.”

Is there a connection between the European crackdown and changing American attitudes? If not already, then soon, said Robert Atkinson, president of the Information Technology and Innovation Foundation, which has fought against the European regulators. “There is going to be this contagion coming to the U.S.,” he said.

Europe’s Culture of Privacy

If the U.S. is indeed heading towards a regulatory course correction, then it’s worth understanding what’s happening in Europe. For one thing, support for the approach is not unanimous there. Plenty of economists, entrepreneurs, and investors fear that the pursuit of big tech by both the EU and its member states is running counter to the growing efforts in the region to encourage more startups and innovation. “I don’t see it as a positive, to be honest,” said Martin Mignot of London-based Index Ventures, one of Europe’s biggest VC firms. “If you look at history, going after companies at their peak, [regulators are] always one generation behind what is happening. I think the market is much faster at disrupting. The time frame of regulation is so much slower.”

But cultural norms really are different. Control over privacy has traditionally had greater currency among average citizens in Europe. As early as 1995, the EU began to establish what later became known as the “Right to be Forgotten,” a right formalized by a European court in 2014. Americans may instinctively react against the notion that newspaper articles about things like divorce proceedings or lawbreaking should be removed from search results if the person written about asks for it. But in February, Google announced that it has already complied with 800,000 such requests in Europe.

This concern about data and privacy, meanwhile, evolved into the General Data Protection Regulation, passed by the EU in 2016 and going into effect May 2018. Tech companies everywhere are scrambling to understand and comply with these new rules, which define how personal data should be used and secured. If they don’t they risk massive fines.

The GDPR is the kind of extraordinary, landscape-shifting decision that would be hotly debated in the U.S. And yet in Europe, it’s just one corner of a massive regulatory march. EU tax haven investigations have resulted in a demand for Apple to pay €13 billion to Ireland, and for Amazon to pay €250 million to Luxembourg (the two countries are appealing, in effect on behalf of the companies). U.S. chipmaker Qualcomm was fined €997 million in January for abusing its market power and colluding with Apple to limit competition.

There is a formal EU proposal introduce a new tax of 3 percent of revenues on tech giants, an almost completely unprecedented approach, which underscores the frustration European governments feel about foreign companies reaping vast profits from activities inside their borders on which they pay few taxes. There is an ongoing e-commerce competition investigation. And this spring, the EU is expected to introduce broad rules around digital platforms, including e-commerce sites, search, and app stores.

The goal is to level the balance of power between tech giants and small businesses by, most likely, requiring more disclosure about how algorithms operate and creating a mechanism to file complaints if a service is demoted, delisted, or removed from an online store.

“Today, platforms have more influence and market power than anyone could have imagined,” said Andrus Ansip, the European Commission’s vice president of its Digital Single Market initiative, in a February speech. “It is only natural that in this position they will need to become more transparent in their dealings.”

Similar or even more aggressive efforts are being undertaken by individual European countries. While Vestager insists there is no anti-American bias, for U.S. tech giants, it sure can feel that way. Companies such as Apple, Amazon, Facebook, and Google seldom comment on the record about such issues. But Google Executive Chairman Eric Schmidt has long argued that European governments should instead focus on reforming their own markets to make them more competitive.

And one inescapable fact is that Europe has mostly failed to create its own internet giants. That has led to a tangible fear there that the continent’s digital destiny is out of its hands. The feeling of powerlessness is exacerbated when companies like Netflix or Uber arrive, threatening to disrupt and dominate other European economic strongholds such as entertainment or transportation. (Uber is banned from many European cities.)

And Europe’s own failures lead critics to see the EU’s regulatory reflexes as protectionism, a big basket of politico-economic sour grapes. “They can’t compete, so let’s regulate,” said Roslyn Layton, a researcher at Denmark’s Aalborg University Center for Communication, Media, and Information Technologies. “I don’t see any evidence that those regulations are going to create new European firms and new European jobs.”

Layton said European regulators tend to ignore the unintended consequences of their actions. In telecommunication, for instance, national and EU regulations created low consumer prices in some countries for wireless and broadband services. However, they also diminished the incentive for investment in networks. The result: while 87 percent of the U.S. had access to 4G LTE networks in 2017, according to OpenSignal, such networks only reached 66 percent of the U.K., 58 percent of France, and 57 percent of Germany.

Likewise, with the looming GDPR. The Googles and Amazons of the world can easily afford the large expense of compliance. However, the data-sharing rules could blunt the growth of Europe’s own promising AI ecosystem. “The GDPR ticks the box to tell Europeans that, hey, we’re protecting you,” said Jakob Kucharczyk, vice president for competition & EU regulatory policy in the Brussels office of the Computer & Communications Industry Association, which mostly represents U.S. companies. “But the more regulation you create for the market, the more barriers to entry and costs you make for these young companies.”

Fines don’t seem to deter U.S. tech giants. Google’s stock actually went up the day after the ruling it should pay €2.4 billion. But what may make more of a difference is the very fact of ongoing investigation. When the U.S. government went after IBM in the 1970s for antitrust violations, and later for Microsoft in the 1990s, the investigations, rulings, and appeals dragged on for years. Meanwhile, both companies lost their dominant position as they failed to adapt to new tech trends. In some sense, being under a microscope was a kind of restraint. It was in the middle of Microsoft’s epic antitrust trial against the Department of Justice when Google launched in September 1998.

Now, it’s Google’s turn. The antitrust case that led to the fine last summer actually began in 2010 and continues as Google appeals. And the search giant must simultaneously deal with another EU antitrust case involving its Android mobile operating system, along with hints that another investigation could be launched around its local search services. In addition, Google settled a Russian antitrust case last year for $7.8 million but was just slapped by a $21 million antitrust fine by the government of India in February.“In these fast-moving markets, when the product managers are insecure, and all these micro-decisions are being checked by the lawyers, that’s when oxygen is brought into the market place,” Lowe of Yelp said. “And that’s when you can have real competition. Sometimes the trial is the remedy.”

Chris O’Brien is the European correspondent for VentureBeat.

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