EU Big Tech Regulation: Good Job On Trees, But What About The Forest? – Forbes

On 15 December, the EU unveiled the Digital Markets Act and the Digital Services Acts (DMA/DSA), the ... [+] most thorough reworking of the digital regulatory landscape to date.

By Michael G Jacobides, Sir Donald Gordon Professor of Entrepreneurship & Innovation and Professor of Strategy at London Business School, Martin Bruncko, deep tech investor and Senior Advisor for Evolution Ltd. and Rene Langen, a Senior Advisor for Evolution Ltd.

On 15 December, the EU unveiled the Digital Markets Act and the Digital Services Acts (DMA/DSA), the most thorough reworking of the digital regulatory landscape to date. Given that many tech players may comply with the highest common denominator of regulation, to avoid multiple offerings, and given the EUs leadership in regulating tech and the appetite of the US to follow suit, these rules may extend well beyond Europe.

Much of the DMA is focused on a stricter approach to so-called gatekeepers i.e., the dominant, Big Tech companies such as Facebook and Google. The Act is the EUs response to growing unease over our existing regulatory apparatus, which is ill-suited to address the exclusion of rivals and customer abuse in digital marketplaces. Moreover, Europe is concerned about losing out in the digital economy since Big Tech just so happens to be based in the US.

A gatekeeper is a particularly powerful player that may need to be held to higher standards. In deciding what constitutes a gatekeeper, the European Commission focused primarily on customer reach, total turnover and market capitalisation. It concentrated on firms that use their technology platforms to engage with partner firms through multi-party ecosystems, and identified practices that should be banned and controls that should be imposed. Although gatekeepers are open to competition in principle, the key offenders such as Google, Apple, Facebook and Amazon are entrenched, partly due to multi-product ecosystems that actively lock customers in. They have based their growth on expanding into an ever-increasing number of verticals. In Googles case, this journey began with search, before progressing to email and storage, followed by content via YouTube, then mobile interfaces with Android, and now health by acquiring FitBit. Facebook, meanwhile, is tightening the links between the parts of its own ecosystem comprising Instagram and WhatsApp, and is keen to expand into new areas-such as finally launching Libra, its own currency.

This multi-product ecosystem approach goes well beyond the conglomerate strategies deployed by the commercial titans of yesteryear. Todays Big Tech firms dont just want to cross-sell or benefit from common overheads. Rather, they harvest their power from users in a cycle that reinforces their strength: their scope enables a deep and detailed understanding of their customers activities and interests, which begets strength in the current services they provide and allows for entry into new onesall amplified by AI capabilities that allow them to build and test predictive models in real time. The sheer breadth and duration of customers engagement underpin the success of Big Tech firms, but each one leverages this access, and the information that it yields, in a different way. The business models of both Google and Facebook depend directly on data that customers generate simply by using digital platforms. Apple relies less directly on data, but still trades in it, receiving billions from Google in exchange for making it the default search engine on Apple devices. Furthermore, Apple may be headed in the direction of its Big Tech peers, as the share of its revenue from (data-driven) services including its App Store and apps within it increases.

By divvying up the pie this way, Big Tech firms conspire to lock customers into the walled gardens they have built. Alternatively, they can exploit the detailed knowledge they have gained, either by selling insight to advertisers or by taking part in the AdTech business themselves. For customers, there is a fine line between the convenience of customised offers and being locked in and Big Tech know exactly how to walk it.

So, what should we do about it? The best place to start is with Big Tech business models. With Chinese firms like Huawei, concern is often focused on how they could be gathering sensitive information about customers actions even though US-based Big Tech is already gathering far more, and monetizing it. So the real challenge, in our view, is to follow the money and look at what firms are actually able to do with the information they obtain. How do they gain power over customers or collaborators? How can they subvert the spirit of regulations, or even evade their scope?

As we assess the merits of proposed regulations, we also need to map their impact on both regulated firms and the collaborators within their ecosystems and ask the hard questions. Big Techs ability to collect information about customers, and their savviness in monetizing it, has obliterated much of the traditional media, undermining quality journalism and, ultimately, democracy. The fact that 70% of the digital ad spend in Europe goes to properties owned by Facebook and Google, as opposed to traditional media such as newspapers and magazines, has undermined the media sector. In the critical months ahead, large publishers such as SpringerVerlag will defend the regulations on these grounds. However, other, smaller publishers, ad agencies and developers will defend Big Tech, because they have formed symbiotic relationships with it. That is why we need to reach a firm yet nuanced view on what the regulation is intended to achieve.

We should also examine how regulations will actually affect Big Tech. Two crucial details could make a difference here: first, the asymmetric enforcement between gatekeepers and others, meaning that key players are held to a higher standard, and second, the fact that enforcement wont be devolved to national regulatory agencies. Yet, based on many interviews and detailed research, weve concluded that several of the remedies under consideration will add friction, but without necessarily changing the game like GDPR.

Barring the nuclear option of a breakup, we expect Google to be affected most, then Facebook, and finally Apple. However, the new rules may affect more than cash flow. First, Big Tech will have to put great effort into designing compliant IT systems. This will hold back their expansion and growth which regulators (understandably) want to slow down. It may hamper their innovation but can facilitate the innovation of other players by increasing competition, and reduce Big Techs control over their ecosystems. Furthermore, if expansion into new areas such as healthcare becomes more difficult for Big Tech, its hard to see how they will be able to sustain the growth rate implied in their current multiples. And if acquisitions are monitored more closely, with an eye to fostering competition, the firms may lose some of their allure for investors. Overall, the devil will be in the detail, and much depends on the vigour of implementation.

We expect significant pushback and debate in future months. Big Tech has geared up for the lobbying fight of its life. On the EU side, there is steely determination, partly for the right reasons. However, we believe there should be a far clearer separation between issues of regulation and customer dependency on one hand, and industrial policy on the other. Europe should set clear criteria that will apply to EU, US and Chinese firms alike, and consider how to regain its industrial might. It should not try, as the US did with China, to undermine its rivals firms to gain strength. Rather, it should cultivate its own tech ecosystem based on more democratic, open structures, and enact policies to boost EU tech.

EU regulations can help nudge the tech world onto a more competitive trajectory. While we may lose some of the seamlessness of a tightly run ecosystem, we will gain by ensuring competition really is a click away- which is far from being the case today. We expect 2021 to be a year of intense debate. We must ensure that we understand Big Tech business models and multi-product ecosystem lock-ins, so as not to lose the forest for the trees.

Michael G Jacobides is the Sir Donald Gordon Professor of Entrepreneurship & Innovation and Professor of Strategy at London Business School, Chief Expert Advisor on the Digital Economy at the Hellenic Competition Commission, and Lead Advisor at Evolution Ltd. Martin Bruncko is a former Innovation Minister of Slovakia & Head of Europe for the WEF, deep tech investor and Senior Advisor for Evolution Ltd. Rene Langen is a former Senior Partner at McKinsey a Senior Advisor for Evolution Ltd.

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EU Big Tech Regulation: Good Job On Trees, But What About The Forest? - Forbes