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Margrethe Vestager

Regulatory reform must redress existing distortions in a practicable and progressive way

The conclusion recently reached by European Union (EU) Competition Commissioner Margrethe Vestager that Apple was the recipient of illegal state aid from the Irish government between 1991 and 2007 was not unexpected, but the scale of the order to repay €13bn in back taxes from 2003 and 2013 took many by surprise.

It is a powerful signal of intent from the Commission with regard to state aid and competition, and should be viewed not in isolation, but within the wider context of the EU’s agenda for the Digital Single Market (DSM) and legislative initiatives such as the General Data Protection Regulation (GDPR).

So what do this mean for future relations between digital technology companies across Europe with the EU?

While it isn’t clear whether Commissioner Vestager’s finding will stand, it is clear is that the EU is engaged in a drive to redress the distortive effects of how the digital technology sector (and others) has been regulated thus far, and the “economic reality” of that distortion. At the same time, the Commission is trying to maintain a healthy balance between competition and protection of the interests of consumers of digital technologies.

In April 2016, the European Parliament approved the General Data Protection Regulation (GDPR), which created a statutory right to be forgotten, and the power to fine companies 4% of global annual turnover for failure to comply with data security requirements. That month the Commission also revealed proposals that would allow member states to request that video-on-demand providers such as Netflix “contribute financially” to European film and television production, as well as “reserve at least 20% share for European works in their catalogues”. And in August, as part of the Commission’s effort to reform and harmonise EU copyright law, it announced that it was considering issuing ‘neighbouring rights’ to Europe’s publishers, allowing them to impose charges on news aggregators for unauthorised use of content.

Reaction to some of these changes has been extremely negative in certain quarters. Julia Reda, Pirate Party MEP and member of the Steering Committee of the Digital Agenda Intergroup, described the consideration of neighbouring rights as “an attempt to protect old business models from progress”. EuroISPA, one of the world’s largest representative associations of internet service providers, noted “with concern” what it called a “regressive proposal”. And in a blogpost, Caroline Atkinson, Vice President, Global Policy at Google described them as “a first step towards a better functioning marketplace…but the appropriate balance has not yet been struck.”

Disappointment has also been expressed over proposed restrictions on the ability of both research institutions and commercial entities to engage in text and data mining (TDM), and the consequent implications of this for the EU’s startups sector, and the wider economy.

One group that has responded positively is news publishing. With even the most digitally adept publishers unable to make a meaningful dent in the dominance of digital advertising revenues by Google, Facebook and other large internet search companies, the prospect of journalists securing a right to be remunerated for their work has been largely welcomed by the industry. There have been notable exceptions. In its editorial on the matter, the Financial Times, while acknowledging the status quo as a “misuse” of content, called the proposals “unrealistic and unlikely to stick”. Nevertheless, in Ireland it is estimated internet search companies accounted for around 65% of total digital advertising spend in 2015, while in the US it is estimated that Google and Facebook alone accounted for more than 76% of internet advertising growth in 2015. Consequently, news outlets are cutting revenue forecasts, jobs or both yet again.

With the EU home to less than 8% of the world’s ‘unicorns, and a level of venture capital activity a fifth of that of the United States, it is clear there is a great need for increased innovation and entrepreneurialism across the bloc. This has been implicitly acknowledged by the Commission in the creation of the Digital Single Market agenda itself, and also in the recent statements of EU policymakers. In June Commissioners El?bieta Bie?kowska and Jyrki Katainen issued a joint communication calling for a “flexible” approach to regulation of the collaborative economy, while a month earlier, Roberto Viola, Director General, DG CONNECT and Lowri Evans, Director General, DG GROW wrote of the need to plug the investment and skills gap in Europe, proffering a number of solutions in the process. And in a few months time the revised Payment and Services Directive (PSD2) will oblige banks to open their application programming interfaces if requested, giving companies and consumers the opportunity to offer and benefit from a range of new financial products and services.

But the key strengths of the digital technology sector, including iteration, scale and the network, can be forces for both good and ill, and concentrations of power in whatever form are a legitimate cause for concern amongst governments around the world. A digital first company like Airbnb can scale to become the world’s largest accommodation provider in a few years and own no accommodation. A change to the terms and conditions of an internet communications platform, such as Whatsapp, can mean an increase in hundreds of millions of dollars in advertising revenue accruing to Facebook in a matter of months. And alliances between telecoms network providers and hardware manufacturers can result in a company like Apple accruing reserves comparable to that of Norway.

The European Commission published its timetable for the Digital Single Market in May 2015. Work remains to be done in the areas of copyright, telecoms, audiovisual services and others. In an August blogpost Digital Single Market Commissioner Andrus Ansip reaffirmed his commitment to “finalise all remaining DSM initiatives by the end of 2016”. There is now a short window of time for the digital technology sector and regulators to work together to achieve an outcome that strikes a sustainable, equitable balance for all.