Thursday 3 June 2021 11:57 am

New tech regulation mustn't be allowed to stifle innovation

Sam Dumitriu is Research Director at The Entrepreneurs' Network

There is scarcely any market that could not be described as digital in 2021. 

In ten years time, the phrase ‘digital market’ will be, effectively, redundant. We should be concerned, then, by the creation of a powerful new regulator with a remit to cover all ‘digital markets’.

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Set up with the aim of combatting the market power of tech giants, like Google and Facebook, the competition enforcer’s new Digital Markets Unit (DMU) has attracted little scrutiny even from the most vocal defenders of free and open markets. Yet, if we are not careful the DMU could backfire spectacularly.

Part of the problem is that the new tech regulator’s objectives are vague and broad. “Fair trading”, “open choices”, and “trust and transparency” may sound like reasonable goals in theory, but they create two problems in practice. 

First, they often come into conflict. A regulator aiming to increase ‘trust and transparency’ might push for tougher data standards, which may reduce ‘open choices’. This isn’t a  hypothetical fear. 

One study found the implementation of GDPR led to about a third of the apps on the Google Play Store disappearing. Or look at Apple’s recent privacy push, which has been criticised as anti-competitive by Facebook for making digital advertising harder. 

Second, without clear and consistent goals, defining success borders on the impossible. Competition authorities such as the Competition and Markets Authority (CMA) are often criticised for having a singular focus on consumer welfare, but at least we have a decent understanding of what that looks like. How can you hold a regulator accountable without a clear idea of what success and what failure is?

The DMU will regulate any business it says has Strategic Market Status (SMS) in a digital market, such as Google in online search. Significantly, elements of the designation cover all the business’s activities, and not just their behaviour in the market where they have monopoly power. In other words, Google’s small headphone business is not fully exempt, because Google Search has market power.

This could have chilling effects on innovation. The CMA proposed that SMS firms first prove consumer benefit before making changes to non-designated activities, if the changes could further entrench the firm’s position in its designated activities. This flips the ideal of permissionless innovation, where firms innovate first and ask questions later, on its head. Instead of platforms constantly testing, adding, and improving features, they would spend an increasing amount of their time on bureaucratic box-ticking.

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There’s a risk that, when faced with the DMU’s conflicting and unclear goals, companies could err on the side of caution and choose not to innovate. 

This is a major problem in markets where companies are constantly trying to game metrics at the expense of users. In the past, Facebook’s News Feed became overrun with clickbait articles where “you won’t believe what happened next”. Fighting this, as Facebook successfully did by tweaking its algorithms, would have been much harder if every change needed approval from an overworked civil servant before it could go ahead.

The DMU would also effectively ban acquisitions by SMS companies. Under the new regime, any deal involving a regulated company with a ‘greater than fanciful’ chance of reducing competition would be blocked, even if the CMA thought it would, on balance, increase competition. Entrepreneurs should be worried about this: attracting VC investment will be much harder if exit-by-acquisitions is taken off the table or made more difficult. 

The biggest threat to a tech giant’s market share is other tech giants. Amazon, Apple, Google and Facebook all compete with each other on multiple fronts. Yet if the DMU creates regulatory hurdles to these firms entering each other’s markets, monopolies could become more deeply entrenched.

It would also make it harder for tech giants to enter broken consumer markets. In the US, Amazon has just launched a healthcare wing. I can’t be the only one interested to see the CEO of Centrica’s face if Amazon launched an electricity business. But if acquisitions that would make this possible are banned, we’ll see less pressure on the rest of the economy to improve.

We are sleepwalking into a massive regulatory change, but it is not too late to change course. Ministers should insist the DMU scraps the anti-innovation mandate that all SMS companies seek approval for all product changes. They should also push for sunset clauses to be placed on all DMU interventions. But most importantly, they should replace the DMU’s vague objectives with a clear mission to increase competition in everything it does. As it stands, they appear more interested in managing monopoly.

Our best chance of success outside the EU will come from adopting radically pro-innovation and pro-competition policies. Unfortunately, we seem happy to follow the EU’s lead in putting regulation ahead of dynamism.

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