When we think about Big Tech, five companies come immediately to mind: Alphabet (more commonly known as Google), Amazon, Apple, Meta (Facebook in its pre-virtual reality days) and Microsoft.
Investors sometimes talk about FAANG, an ugly acronym that is almost identical to that group but substitutes Netflix for Microsoft. (The rebranding of some of those companies prompted Jim Cramer, the person who coined FAANG, to start talking about MAMAA.) Alibaba, Baidu, Samsung and Tencent make the cut as well.
One characteristic of that list is quickly apparent: None of them are European. Yet, Europe plays an increasingly important, if not defining, role in the future of big tech. Credit “the Brussels Effect” — the process by which the European Union sets global standards. Recent EU legislation to regulate Big Tech will have profound implications for the future of technology, but it’s also a lesson in the ways that power can be exercised in an interconnected world.
Columbia University professor Anu Bradford first identified the Brussels Effect in 2012, arguing that the EU had outsize influence over commerce because companies adopt European standards for their businesses even if they don’t operate in that market. She reasoned that it made more sense to internalize those rules for global operations than to differentiate between regulatory jurisdictions, even if EU standards were more stringent. In a world in which compliance has a reputational effect, that logic makes sense: Solutions scale and maintaining higher standards is a net plus for a company.
We got a taste of the EU’s power in 2016, following passage of the General Data Protection Regulation (GDPR), which conditions the use of EU-origin personal data on the maintenance of privacy protections that are essentially equivalent to those of the GDPR. That’s why every website you visit now has a warning about cookie settings.
This year, the EU has again taken the lead in the digital domain, passing the Digital Markets Act (DMA) a few weeks ago and the Digital Services Act (DSA) last week. That one-two regulatory punch is being heralded as transforming the digital economy by limiting the power of Big Tech, ending their anti-competitive behaviors and forcing them to give greater scrutiny to online content and practices.
The DMA applies to so-called gatekeepers: companies with a market capitalization of at least €75 billion or an annual turnover of €7.5 billion that provide core platform services, such as browsers, messaging or social media, with at least 45 million monthly end users in the EU and 10,000 annual business users. This list includes the companies already mentioned and others, such as Oracle, AirBnB, Salesforce, PayPal and Zoom, to name a few.
It prohibits companies from combining personal data from different sources — Google can’t amalgamate (without permission) the data from, say, a Google search and Youtube, both of which it owns — as well as the bundling of services. It also promotes interoperability and increased access to third party platforms. Apple can’t restrict purchases to its app store and messaging services have to be interoperable. In short, it bans many of the anti-competitive practices that Big Tech uses to squelch smaller rivals.
The DSA tackles online content, forcing Big Tech companies to be more aggressive in protecting their users. It bans targeted advertising aimed at children or based on sensitive personal data such as religion, gender, race and political opinion. It outlaws the use of manipulative techniques to get users to click on content. Companies will be required to set up policies and procedures to remove flagged hate speech, terrorist propaganda and other material defined as illegal by EU governments.
The EU plays a defining role in regulating big tech
globally as many companies adopt European
standards for their businesses, even
if they don’t operate in that market
Significantly, they will be forced to show their work. Platform providers will have to be transparent in how they recommend content and will have to disclose to regulators strategies and efforts to deal with disinformation and propaganda. Margrethe Vestager, the EU executive vice president in charge of digital policy, summarized the new obligations: “Platforms should be transparent about their content moderation decisions, prevent dangerous disinformation from going viral and avoid unsafe products being offered on market places.”
Violators could face hefty penalties. DMA violators risk fines of up to 10% of total worldwide turnover in the preceding financial year, 20% if there are repeated violations — and systematic infringements can earn a ban on future acquisitions. Sanctions in the DSA can reach 6% of global turnover or a ban on EU operations in case of repeated serious breaches.
That assumes enforcement is possible. The record isn’t encouraging. The chief criticism of the GDPR is that companies merely put up those irritating consent windows instead of actually protecting privacy. The DSA imposes a yearly fee up to 0.1% of annual net income of major online platforms to cover the costs of monitoring compliance with the rules. That should provide for far more than the 230 people — a figure everyone says is insufficient — estimated that will be hired to enforce the new law.
European governments have concluded that Big Tech is either unable or unwilling to curb their abusive behavior and are stepping in to stop it. That activism is a sharp contrast to the U.S. model, which takes a laissez-faire approach and relies on self-policing. It’s hard to tell if that is an actual mindset or a default position borne of political paralysis and energetic lobbying.
According to European legislators, Japanese counterparts have expressed interest in the DSA. For now, Japan has the Act on Improving Transparency and Fairness on Digital Platforms, which went into effect Feb. 1, 2021. The name makes clear its purpose. It’s a hybrid approach that creates a regulatory framework and leaves details to the voluntary efforts of business; that looseness aligns with Japanese tradition and practice, giving the bureaucracy substantial discretion.
The act empowers the METI minister to review the current situation of platform operation and convene discussions among various stakeholders. If there are suspicions of violations of the Antimonopoly Act, the minister can request that the Japan Fair Trade Commission take appropriate measures.
Tech companies continue to hope to shape the final details of the EU legislation. They insist that the rules target U.S. companies — the nationalist card is always a way to mobilize U.S. legislators to fight on their behalf — and that it will stifle innovation. According to their logic, the forced integration of systems and demands for interoperability discourage research and development. One economic analysis sponsored by Google concluded that “basic economics” suggests that the DMA will “encourage free riding on the investments of others, and this discourages parties from making those investments.”
The first argument may gain some traction in Washington, although many observers believe that the U.S. and the EU share the basic outlook toward — and skepticism of — Big Tech. The second claim hasn’t proved convincing to EU legislators. European officials and politicians counter that they are ensuring that the playing field is level and that consumer rights are protected.
If DMA and DSA succeed in defining the rules of the digital space, they will again confirm Europe’s influence and the need to think more expansively about power. Bradford argues that the EU “has the unique ability” to set standards that shape the business environment and lead “to a notable Europeanization of many important aspects of global commerce.”
Europe has its challenges, but “market forces alone are often sufficient to convert the EU standard into the global standard. In this way, the EU wields significant, unique and highly penetrating power to unilaterally transform global markets … .”
We should do all we can to ensure that our countries retain additional means to shape the world and that we don’t create an order that relies on or rewards naked and dangerous exercises of power.
Brad Glosserman is deputy director of and visiting professor at the Center for Rule-Making Strategies at Tama University as well as senior adviser (nonresident) at Pacific Forum. He is the author of “Peak Japan: The End of Great Ambitions” (Georgetown University Press, 2019).
Source: Japan Times
