Wealth of European Nations in the Age of the Internet

Based on draft article for Europe’s World Journal.

Europe seems unable to take a leading role in the digital economy. It did a fair share of innovation though: Alan Turing and John von Neumann contributed to the theoretical foundations of computing. Konrad Zuse built the first modern computer. World Wide Web was invented by Tim Berners Lee, a Brit working in Switzerland. Linux, which powers the majority machines that drive the Internet, was created by a Finn. MP3 digital music format that makes iTunes possible was invented in Germany. Skype was invented by a Swede and a Dane.

Europeans publish a lot of papers in scientific journals dealing with computer science and information technology. Information and communication technology are a priority in EU research and innovation programs.

And yet all major companies that shape the internet today — Google, Facebook, Amazon, Apple, Microsoft, IBM, Oracle etc. — are American. With SAP being the exception confirming the rule.

Also the platforms of the emerging sharing economy such as eBay, Paypal, Uber and Airbnb are American. Yes, it is an American company they helps a German in Poland find an automobile ride — a taxi, which is not a taxi.

There must be something that we are doing wrong; that we are not doing well enough in Europe.

Digital never lacked political support

Starting with the Bangemann report more than twenty years ago, digital polices had official support and were prominently represented in strategies such as the Lisbon Strategy, in the Digital Agenda, in the Felipe Gonzalez’s Reflection Group on the future of Europe and currently in the Europe 2020 strategy.

Europe works well as a union of coal and steel. It managed well the production of butter, but in spite of all the strategies it is a follower in the area of digital and communication. It had a moment of glory with the GSM mobile telephony standard and temporary global champions such as Nokia and Ericsson.

But as soon as mobile technology got digitized and the phone became nothing less nothing more than a device to connect to the Internet, the Americans took over the software and the Asians (with the exception of Apple) took over the hardware. With the GSM and early mobile telephony government strategies, standards and regulations helped. With the Internet they don’t.

European Commission proudly reduced roaming charges for voice calls and SMSs just when the talking and texting was becoming obsolete. It made moms and dads touristing in Spain happy, but did absolutely nothing to contribute to the then emerging app industry. Data roaming — using the internet on smartphones in a foreign EU country — remains expensive to date.

Behind the curve of a runaway train

This is a good example how European politicians are fighting the previous wars. The European policymaking has two problems:

• Firstly it cannot get ahead of the curve — making the legal and economic infrastructure ready and welcoming for future technologies.
• Secondly, it has a tendency to over-regulate.

In Europe, as if everything is prohibited that is not explicitly allowed. Or at least it is discouraged. The digital revolution is happening faster than the legislators are capable of allowing it. The American approach seems to be different — everything is allowed that is not prohibited. Which makes all innovation that the Silicon Valley cranks-up allowed.

The digital economy today is estimated at some 5–10% of the total GDP but contributes between one and two fifths of the growth. It is difficult to measure because the impact of digital goes well beyond the transactions of bits and bytes. Digital reduces friction, cuts costs, improves efficiency and enables paradigm shifts in every industry; and also in the public sector.

Platform for platforms

A smartphone app that matches people who would drive and people who would be driven, is disrupting an entirely non digital material business of taxis. And is globalizing a distinctively local service — urban transport.

A platform to do this is created by two competing American companies — Lyft and Uber — for the whole world. And passengers and drivers are selecting one of these platforms over the physical “platform” of the streets of Paris, Brussels and London. (Note: since writing this article, Uber was banned in Brussels).

This paradigm is called by some sharing economy, by others platform capitalism. After all the services are not free and Uber is a very capitalistic company worth some 50B dollars. But the point is that platforms are created without government intervention. This is an entirely new paradigm of doing business. Throughout the middle ages, for example, cities created a platform where buyers and sellers could meet. Governments established the rules and punished those that cheated. It was called a market and made many cities across Europe rich.

eBay is a market governed by a company not by a state. The platform maintains information about the reputation of buyers and sellers. Trust is established by the users of the platform, not by some authority.

European Union as a platform

Increasingly, the platforms for all kinds of transactions will be created by companies. But these companies — the eBays, PayPals, Ubers, PlayStore’s of the world — will also need a platform to operate on.

In the context of the internet’s platform economy, a state becomes a platform. On the Internet, geographic location is insignificant. Business are free to choose where from to operate. And the European problem is that the EU and most of its member states are not a good platform for such companies and neither for the meeting of people with knowledge and ideas to people with money to invest and help make those innovations a global success.

A failure of Europe as a platform for the births, growth and world domination of digital companies is apparent. Documents have been acknowledging that for more than twenty years. The last document with a promise is the Digital Single Market initiative.

Digital Single Market triage

The Digital Single market initiative by the European Commission published this May is another a good starting point to modernize Europe. It is not the first such document and it may follow the fate of many of its predecessors.

Previous strategies have failed because their execution lacked the sense of urgency. Like in urgent medical circumstances, a political triage of measures is needed — distinguishing among what is urgent, what can wait and what should be given up.

Urgent — One Europe

First, there is the dismantling of the barriers that exist in cross-border traffic of digital content and services. This should have been done yesterday with the full weight of powers of the European institutions behind it.

If Brussels was able to muscle countries into using a single currency it should be able to make the EU a single geographical area for intellectual property rights including music, videos and patents. The EU should become a single geo-area as far is IPR is concerned. This is much easier and has much smaller side effects than a currency union. Other single market measures such as cancelling of roaming or obstacles for the transportation of material goods are important as well.

Soon — Reforms of the not Digital

Secondly, there are measures that make Europe a friendlier location for commercializing innovation. They may take more time and even tedious social dialogue and must not slow the first batch down.

The current copyright and patent regime rewards existing innovators. But excessive protection of intellectual property makes entry for new innovators difficult. And opportunities for innovation given by the internet — literally to the masses — are orders of magnitude bigger than they were in the material world. Such reforms may take time, some may require new global agreements in the context of WIPO etc.

A general overhaul of legislation in Europe is needed that would give up the assumption of the material, paper based society and which is forcing the digital to mold itself into the old patterns. Like Uber having to employ drivers, for example.

Legislation should be rewritten from the current prescriptive approach— how things should be done — towards descriptive — what goals has regulation without defining the means how to do it. In this way the digital can freely invent the means by which it will satisfy the goals.

These reforms have little to do with the digital itself. They include the overhaul of the labor market, social security, education system, internal security, legal systems etc. Much of that is the competence of the member states. But if common digital market is in place first, they will be forced to compete with each other which will embrace digital first and reap the most benefits.

Never — Competitive by Anti-competitive Regulation

Thirdly, there are ideas in the DSM with an ambition that Europe uses regulation and state power to be more competitive in the digital — by imposing regulation that would make it more difficult for foreign companies to compete. This may be dressed up as concern for privacy, worker rights, need for localization etc.

While some of these concerns are legitimate it would be wrong to use them as a pretext to help the European digital industry. If, for example, this industry will be offered to develop the “European Cloud” it will be doing something that has been invented and works; while the competition will be working on the next generation technology that will someday replace the cloud.

If we in Europe feel so strongly about privacy this should create a market of apps and services that would differentiate themselves by offering privacy. If it is a good idea it will be a global success. However, some countries are taking just the opposite direction and would — by law — deprive their citizens from using encryption technology, so that the government will be able to spy, they say, on terrorists. This batch of measures should be abandoned.

Wealth of European nations

As Ambassador Bill Kennard said at his keynote during the Transatlantic Week this July, success of countries will depend on how they embrace technology. A triage of measures is needed in Europe:

• First single digital market needs to be put in place urgently so that all other measures will get the help of its invisible hand.
• Second, a structural overhaul of European society is needed to become future and digital proof.
• Ideas that Europe can become competitive in the digital world by legal actions and making life difficult for foreign businesses are dangerous on the long run and should be abandoned.