Meelis Kitsing: Regulation of digital platforms in Europe: A stumbling block or a building block?

It is an ironic twist of fate. Ten years ago content providers such as Google and Facebook were behind regulatory efforts aiming to establish network neutrality regulations in Europe which tried to curb the market power of network operators. As network neutrality was never seen just about technical issues in data management, but concerned human rights and freedoms, then digital platforms often had the moral high ground. Some European politicians did not hesitate to support business interests of digital platforms and demanded tougher network neutrality regulations while others were reluctant.

It is much easier for European politicians to make a stand now. Ten years ago content providers, or today’s dominant digital platforms, pushing for tougher European network neutrality regulations were American while network operators were European telecom companies. Even Skype, a leading European activist in network neutrality debates, was acquired by Microsoft in 2008 making it an American actor. Now the bad guys are American.

These American platforms are seen as dominant, if not abusive, gatekeepers in multi-sided markets which benefit from extraterritoriality, network effects and information asymmetries. Policy-makers are concerned about the digital platforms’ questionable content management policies, algorithmic discrimination, abuse of personal data, conflict of interest in managing different business relations, lack of transparency in its operations and, last but not least, tax optimization schemes.

Whatever new regulations are implemented as a result of current push to constrain the dominant platforms, they cannot keep up with digital cycles. This is well demonstrated by the EU Commission’s actions against Microsoft as well as Google. As financial regulators always tend to regulate the last financial crisis, then regulators of digital companies tend regulate foregone business models which is likely to be defunct once regulations have been implemented.

Even more importantly, new rules targeting US platforms may have unintended consequences. The expansion of Chinese platforms into Europe may become easier. Chinese platforms have different growth model by focusing on horizontal expansion into different business fields while US platforms have grown by vertical integration.

Finnish game developer Supercell, Estonian ride-sharing company Taxify and Swedish music streaming platform Spotify have recently attracted investments from Chinese digital platform groups such as Tencent. According to McKinsey & Company, the share of China in global e-commerce has reached 42 percent while it was below one percent ten years ago.While the future is uncertain, we cannot rule out that a different debate focusing on risks of technology transfer and security will emerge as a result of expansion by Chinese platforms.

The regulatory overreach may also end up by throwing baby out with bathwater. Dominant US platforms may stop offering certain services or abandon altogether some small markets. As many digital companies may need platforms for growth, then European businesses and platforms may find it harder to grow as a result of constraints imposed on the US platforms. Larger companies have more resources available for regulatory compliance than smaller companies. This, in turn, may encourage monopolization of digital ecosystems. As European platforms such as Spotify become more successful, then new regulatory rulebook may also impose limits on realization of their potential.

At the same time, heavy reliance on self-regulation of digital platforms in Europe is not a feasible option anymore. But top-down regulation by enforcing existing and creating new rules may lead to significant barriers in developing the EU Digital Single Market.

Policy-makers have to explore alternatives such as co-regulation, which incentivizes cooperation between governments and digital platforms. For instance, Airbnb already helps Portuguese government and French municipalities to collect taxes. In game theoretic terms, battle of the sexes game with coordinated multiple equilibria should be played out in the EU regulatory game rather than the prisoner’s dilemma with suboptimal outcomes. Regulation should serve as a building block in digitalization of Europe and not to become a stumbling block.

Meelis Kitsing
Head of Research Foresight Centre

The article was published in Baltic Rim Economies Review.