Google and Facebook's Next Big Fight

For many people, it probably sounds a little rich to hear the European Union accuse Silicon Valley of being a graveyard of innovation. But that's where we are in 2019. Regulators are hitting the likes of Alphabet's Google and Facebook with a flurry of antitrust fines and data-privacy probes, implying that they regard tech billionaires as more John D. Rockefeller than Nikola Tesla.

The end-game, according to Brussels' top data watchdog, is to make sure new startups aren't blown out of the water by Big Tech (or gobbled up), which should ultimately benefit consumers by allowing them more choice.

Tackling this so-called "kill zone," where fledgeling tech companies are acquired or copied out of existence by deep-pocketed incumbents, is a prime ambition for European Data Protection Supervisor Giovanni Buttarelli, nicknamed "Mr GDPR" after the data-privacy law. When I met him in Brussels recently, Buttarelli checked off the barriers to entry for a startup: It needs to first outbid the likes of Amazon.com, Facebook and others for engineering talent; then sell its product through an app store probably run by Google or Apple; and finally compete against big players with established networks and huge cash piles. And even it clears all these hurdles, it's still vulnerable to being taken out.

There's a connection between this dominance of Big Tech - which is proven by the decline in venture-capital financing for upstarts, as my colleague Noah Smith has written - and harm to consumers. The EU view is that the "free" price tag of social media and apps is not a public good if it's underpinned by a business model that hoovers up data from users without consent. And if the profits from that are spent on blocking competition, there's less chance of a market-based alternative. Google and Facebook rebut this view, insisting that a disruptive rival could unseat them anytime. But regulators have given up waiting for one.

The recipe for fixing things, according to Buttarelli, is threefold. He wants more competition through antitrust enforcement, more data protection through GDPR, and more fairness and transparency for customers from the tech giants themselves.

None of this would destroy Facebook or Google. GDPR is estimated to have inflicted a negative impact of 2 to 3 percent on the two companies' total ad revenues, according to Bank of America analyst Justin Post. The running total of EU antitrust fines against Google is about EUR 6.7 billion ($7.5 billion), while the company's yearly sales are more than $100 billion (roughly Rs. 7,10,000 crores). Still, Eric Leandri, co-founder of French search engine Qwant, says he's confident that recent fines against Google on competition and data-privacy grounds - which the US firm is appealing - will have had a chilling impact.

Defenders of the Silicon Valley faith will grumble about mission creep in Brussels. It's certainly true that regulators need to be careful not to muddy the waters with inconsistent or unclear regulation. The recent German competition ruling against Facebook uses data privacy as its main argument, but without a prior ruling on GDPR infringement. That's a potential problem because it's hard to separate the need to enforce user privacy with the need to safeguard competition. Indeed, both things might be in conflict one day, says Ariel Ezrachi, a competition specialist at Oxford University. Imagine the right to keep your data private under one law alongside the need to share your data in a competitive market under another.

Another thing not covered in Buttarelli's plan is where investment comes from. It was no surprise when Sweden's music-streaming giant Spotify Technology SA decided to list its shares on the New York Stock Exchange last year. If Europe fails to unify its fragmented capital markets, especially after Brexit, the fruits of Buttarelli's labour will end up in America regardless.

© 2019 Bloomberg LP