In Europe, A Sense Of Fear And Helplessness About The Impact Of U.S. Tech

Europe is taking on U.S. technology companies on an unprecedented scale, and formally accused Google of illegal activity this week. While fines of billions of dollars are likely at some point, Google is just a conduit for a far more serious problem.


On Tuesday 14 April the Wall Street Journal published a story about comments made by the EU's digital commissioner Günther Oettinger, during a speech at a trade show in Germany.

Mr. Oettinger said:

  • The EU needed to "replace today's Web search engines, operating systems and social networks" [with equivalent offerings developed within the EU]
     
  • Europe's online businesses were "[too] dependent on a few non-EU players world-wide"
     
  • The EU region had "missed many opportunities" in the development of online platforms and "this must not be the case again in the future"
     
  • "The 'data economy' should not develop in locked environments and platforms."

A few weeks before making these statements, Mr. Oettinger accused Google and Facebook of exploiting legal loopholes in Europe to gather and sell personal data on EU citizens.

The day after Mr. Oettinger made his speech the European Commission issued a charge sheet (formally a 'Statement of Objections') accusing Google of a number of illegal activities, such as displaying results on its search page to the unfair disadvantage of rivals.

If the years-long saga between the EU Competition Commission and Microsoft is anything to go by, the EU vs. Google case is likely to drag on for years before eventually resulting in a large but not materially significant fine (Microsoft eventually paid €2.2 billion).

In a related development, on 9 April, 25,000 Facebook users filed a lawsuit in a Vienna court accusing Facebook of a range of privacy violations. This unprecedented action is being spearheaded by a 27-year old Austrian law graduate, Max Schrems.

Business leaders are getting stuck in as well:

Last year, in April 2014, Mathias Döpfner, the CEO of the German publishing group Axel Springer SE, wrote a stinging riposte in response to Eric E. Schmidt’s spirited defence of Google's business practices. In his lengthy discourse, which was titled "Why we fear Google" Mr. Döpfner explained why he is worried about Google's power and the world's growing dependence on its services. While politely giving Google credit for its entrepreneurial success Mr. Döpfner then declared:

  • "[News] publishers have no alternative to Google"
     
  • "Google doesn't need us. But we need Google"
     
  • "When Google changed an algorithm, one of our subsidiaries [a competitor to Google] lost 70 percent of its traffic within a few days."
     
  • "Competition [may not be able to] function in the digital age if data are so extensively concentrated in the hands of one party."

And there are plenty of additional examples of similar developments.

Where is all this European negativity coming from?

These developments - and many others - suggest the existence of deep-seated feelings of suspicion and mistrust about the role and motivations of companies like Apple, Amazon, Facebook and Google - plus others, like Uber and Airbnb.

For those who harbour these defensive emotions, what Google is doing with its search result page - where it is being accused of illegally disadvantaging competitors - is just one part of a large canvas that also includes privacy abuse, copyright infringement and tax avoidance.

Regardless of whether these concerns are justified - either in fact, in law or in terms of the prevailing public sentiment - what cannot be denied is that many EU leaders are pretty pissed off right now.

Across Europe, prominent business leaders, EU officials, elected politicians and consumer advocacy groups are feeling a growing level of desperation and helplessness about the changes that are taking place as the digital economy develops.

Careless comments made by the senior officers of some large U.S. technology companies have poured petrol on the flames:

For example, according to a report in the Guardian in May 2013, Eric Schmidt, Chairman of Google suggested at a public event that it "might be fun to have a (floating) island where Google could dabble in new ideas without all the silly meddling of governments". He also suggested that laws older than 50 years or so shouldn't apply to internet companies.

The source of the problem is not Google

With both sides dug in on opposite sides of what currently seems to be an ideological chasm, what can we say that will make sense of what is happening?

The first thing to be clear about is the source of the problem. It is clear that European angst is being directed towards a relatively small number of very powerful U.S. companies. But these companies are not, actually, the source of the problem.

To get closer to the source, we should go back one step. If we do so then we see that the EU is really targeting the way the U.S. venture capital industry works - because it is this industry that was the source of the companies that the EU is attacking.

But Silicon Valley (and the Boston crew) are not the source, either. One could say that the U.S. venture capital industry is the natural result of an economic game which where agent-agent interactions are based on a very unique set of rules. We can identify some obvious consequences of these rules:

  • U.S. entrepreneurs tend to think on bigger scale than their European counterparts
  • U.S. entrepreneurs are willing to take on a higher level of risk
  • Investors are willing to share in the risk of new ventures on a scale not seen elsewhere
  • The U.S. economy is regulated to a lesser extent than the EU, which allows more innovation
  • The entrepreneurial path and the dream of being a self-made person is deeply burned into the U.S. culture and is widely celebrated
  • U.S. citizens are united by a single constitution with shared values
  • U.S. businesses have access to a massive domestic market which has one currency, one set of laws (state laws excepted), one regulatory framework, etc.

I'm not listing these characteristics because I think the U.S. is the best country in the world (I'm very happy to be a New Zealander, thanks very much). But these are the facts as I seem them.

It is at this point that we can see the first problem with the EU's case against Google, as well as Mr. Oettinger's bizarre idea of setting up an EU-wide 'protected zone' where a new generation of fledgling EU-based technology companies can be nurtured before being unleashed onto the world to become Google-beaters.

The first problem is that companies like Apple, Google, Facebook, Airbnb, Uber, Amazon etc. did not magically appear from nowhere: they are the result of a very clear set of market enablers (above) which have been fiercely protected for 30 or more years.

This is how long it takes to produce a generation of world-leading technology companies - and remember that this assumes you have the right enablers in place to begin with. Europe does not.

Even if there was a pan-European political and societal consensus to change the 'European way' to the 'U.S. way' (and there is no such consensus... but that's another story) then it would plainly take at least 30 years before we would see a range of Google and Facebook look-a-likes coming out of the process.

If cultural factors are taken into account - France, for instance, is a fundamentally socialist nation, Germany retains an extreme level of sensitivity about its wartime past and the UK seems increasingly estranged from the rest of Europe - then the timescale might be closer to a generation or more.

This massive timescale brings us to the second reason why the EU's plan to protect Europe from U.S. based tech giants will fail.

The pace of technological change will overtake events, possibly including Google

It is clear to me that technology is developing at an accelerating rate. As a professional analyst I certainly have a sense that the market is more complex and moving at a faster pace than was the case just 10 years ago. Developments are coming thick and fast, there is more information to process and the complexity of what we have to deal with is increasing. Even our own research business has become far more complex than was the case 10 years ago. You might think that producing and selling technology research is a pretty easy job. Well, you'd be wrong.

Everyone and every business is being affected - and that includes Google. 

Ironically, while the EU is presently aiming its guns at Google, based on its massive dominance of the European search market, where the company's market share is north of 90%, I think that Google's core search business is actually moving at a glacial pace: in many ways search is still as broken today as it was 10 years ago.

I think that Google has a big problem brewing and that Larry Page and Eric Schmidt should spend less time  on 'moon shots' and more time on their core business, which is search.

The future of search will involve:

  • artificial intelligence that 'understands' what information a document or content item contains - rather than just being able to crudely match keywords while outsourcing all the hard work to the user.
     
  • a conversational style of search where the user interacts with a personalised AI that acts as an intermediary between the user and the raw information. 
     
  • a new way of displaying search results: we will not be looking at pages of search results as we do today. 
     
  • more generally, the entire way we interact with our computers will change - there will reduced focus on a keyboard and mouse and more on a conversational, highly interactive interface that will be increasingly accessed by wearable technologies.

So far, Google is lagging behind in this new field: yes, it is true that Google working on all of the above, but nowhere near aggressively enough.

Bill Gates admits that he was too late to realise the importance of the Internet. Steve Ballmer missed mobile. In 20 years we might look back at this phase of the market's development and say that Larry Page missed AI. Epitaph: spent too much time looking at space travel and asteroid mining.

Instead, IBM is making significant progress with its so-called ‘cognitive computing’ cloud platform which is based on leveraging the AI technologies developed for Watson. The company is initially targeting healthcare and financial services as its first two domains, but when the system is opened up to developers then we expect to see a lot of innovation in the search market.

Google will face major threats from a new generation of start-ups who will be able to leverage the huge power that will come from delivering AI functions over a commercial API - at global scale.

By the time the EU's case against Google nears a conclusion - in several years - the underlying rationale will no longer make sense, just as the EU's case against Microsoft no longer made sense towards the end.

But there's more.

Sharp right-hand turn coming up

The technology industry is approaching a 'critical mass' point where major societal change will start occurring. This will mean that the European Commission will have a real problem to deal, and will have no time for a bit of antitrust mischief.

The advent of network AIs and, eventually, a 'web of AIs' will represent a technological watershed: our vision for the 'AI web' is a global infrastructure where many different AIs, each having deep expertise within its own knowledge domain, will be connected together so they can inter-work, like routers do today.

In May last year we projected that, if left unchecked, these developments will result in 30-50% of the global workforce being displaced by machines. While the initial phase will be one where humans and AIs work together to accelerate and magnify human capabilities, there is little doubt that as these 'collaborative AIs' become more advanced, we will start to see 'replacement' taking place.

Nobody knows how policy makers will react to these changes when they begin taking hold: it is not clear whether the displaced workers will find other jobs - as they have done with prior technology-led revolutions, and as Silicon Valley is assuring us.

Summary

When it comes to U.S. tech, a growing sense of helplessness and fear of the unknown is sweeping across Europe. Business leaders, policy makers, politicians, consumer groups, privacy advocates and others, are becoming very worried that companies like Apple, Google, Facebook, Amazon, Uber, Aribnb and others are taking over.

So they are turning to regulation to stop the onslaught.

Regulation is an essential function, but its success in preventing undesirable market behavior is very sector dependent, and internet-based markets are the hardest of all.

It is obvious that we need regulation to ensure that airline pilots have a certain level of competence before they fly passengers. It is also obvious that we need to have a government-approved certification process before new drugs are launched. But it is less clear whether it is right for the government to start meddling in the inner workings of tech markets that the regulators do not understand, which are moving at warp speed and where the entire playbook is changing every few years.

In the specific case of the unfolding battle between the EU and Google, regulatory intervention is at best a short-term tactical measure but it will be utterly ineffective in altering the overall direction of the market. 

Apart from the mild annoyance of future fines - which although likely to be in the billions - will not seriously slow down the offenders, the best that can be expected is that some U.S. tech executives might think a bit more about 'not upsetting the Europeans' in the future. I suppose that's a good thing.

To all Europeans out there who feel they are in the firing line, I say that now is the time to 'man up' and get involved, or get out - because the government won't be able to help you in the long run: if the current market situation gives cause for fear then what's coming next will warrant a scream.