The EU’s misguided drive to turn America’s Big Tech companies into public utilities

European Union (EU) regulators have targeted America’s Big
Tech companies, aiming to make them some of the EU’s most heavily regulated
firms. Draft legislation called the Digital Services Act and the Digital
Markets Act would effectively make Google, Apple, Amazon, Facebook, Microsoft,
and others public utilities in Europe with all of the typical utility
obligations and constraints but none of the rights.

via Twenty20

If the proposals move forward, Europe will grab lots of cash
from the American companies. They might also diminish the effectiveness of Big
Tech services worldwide, push Europe further into the digital backwaters, or
cede more markets to China’s tech companies.

According to Politico, the Digital Services Act and the Digital Markets Act will designate Big Tech companies as gatekeepers, “meaning they are indispensable for other companies to reach consumers and get market access online.” Companies included are those offering online intermediation services such as online search engines, operating systems, cloud services, app stores, marketplaces, and social networks. (Read: Google, Apple, Microsoft, Amazon, and Facebook.)

These “gatekeepers” would be subject to a special blacklist
of banned behaviors and a special whitelist of obligations. The blacklist is
likely to include bans on self-preferencing (i.e., when a search engine
highlights its own services) and on exclusive preinstallation of companies’
apps on their own operating systems, such as how at least some Android phones
exclusively preinstall Google search. Platforms would also be prohibited from
using data they collect for their own commercial activities unless they also
share it with regulators and rivals. Regulators would also be empowered to ban
having different prices for similar services.

How is this like
utility regulation?

The regulations mirror traditional utility regulation in their motivation and substance. Companies are designated as public utilities if their services are essential for customers to function in society and if competition isn’t sustainable. Electricity distribution is a public utility because it fits both criteria. Grocery stores are not because even though food is essential, consumers have options for obtaining it.

The EU considers Big Tech companies to be monopolies. The impact assessment written for the draft rules states: “Due to the ‘winner-take-all’ dynamics of the platform economy, big online platforms have grown and gained gatekeeper power.” Add to that the perspective that Big Tech services are “indispensable,” and you have the definition of public utility.

The proposed regulations also align with public utility regulation.
Utilities are not allowed to differentiate prices for services without
regulatory approval, give preferential treatment to an affiliated service if
there is competition for that service, make their affiliated services default
selections by customers, or use data about customers for marketing purposes
except under tight regulatory controls. So if your ideal for innovation and
dynamic markets is electricity distribution, you will love what the EU has in
mind for Big Tech.

But there are two significant differences between utility
regulation and the EU’s proposed regulations: Utilities are given special
franchises and protected from competition. These protections are important
because the regulatory obligations force utilities to do things that are
unsustainable when customers have competitive alternatives. But the EU is
offering no such protections for Big Tech, so look for Big Tech companies to
begin losing out to rivals under these rules.

What will be the
results of the new EU regulations?

There is general agreement that Europe will continue its long practice
of tapping American companies for billions of euros. The proposed rules will
mean billions more in transfers from the US to Europe. Indeed, it
appears that Europe has planned these fines into its budget process, implying the
region’s regulators have already concluded Big Tech companies will be found
guilty and forced to pay up.

Other effects will depend on how the companies respond to the new regulations and how far around the world the regulations spread. If the companies revise their business practices worldwide, then they will eventually lose their positions as effective platforms and market leaders. Dynamic rough-and-tumble tech markets are not places where regulated utilities can succeed. This would be a great opportunity for Asia’s rising tech companies. As I wrote in an earlier piece:

Eight of Forbes’ 2019 top 10 tech companies (based on market value) were from the US. South Korea (Samsung) and China (Tencent) hosted the other two companies. In 2020, Investopedia listed its top 10 tech companies based on total revenue. Six US companies made that top 10. The others were from South Korea (Samsung), Taiwan (Foxconn), and Japan (Sony and Panasonic). Shrinking the US companies would expand the leadership of companies from South Korea, China, Taiwan, and Japan.

If the US companies maintain their quality services outside
of Europe, Europeans will fall behind people in other parts of the world.

The US must challenge Europe’s targeting of US companies, which damages US consumers, investors, and entrepreneurs. The targeted companies should demonstrate the negative impact the rules will have on Europeans. It will be interesting to see if Europe extends this attack beyond US companies. TikTok is now one-fourth the size of Facebook in Europe and growing fast. This demonstrates that Facebook isn’t a monopoly. Given TikTok’s soon-to-be 40 percent market share in Europe and the EU’s preoccupation with market share when examining whether market power exists, TikTok should be brought under European regulation soon.

(Disclosure statement: Mark Jamison provided consulting for Google in 2012 regarding whether Google should be considered a public utility.)