The sharp teeth of the European Union’s new competition rules under the Digital Markets Act and Digital Services Act are drawing blood from two of America’s greatest innovators. Such mandates undermine U.S. tech leaders’ basic business models and threaten to turn them into public utilities. They also trash privacy by handing consumer data and American trade secrets to China, while putting in jeopardy the very innovation and user experiences that consumers value.
If European leaders won’t recognize this, perhaps President Trump can help them see the light.
The teeth in both of these cases are rules on “interoperability” and “self-preferencing.” These provisions demand that American “gatekeepers” like Apple and Google open their digital ecosystems and treat competitors’ services equally. Failure to comply with these complicated instructions subjects these companies to 10-20 percent fines of their global revenues. If these are not death-penalty fines for even the largest companies, they are at best “hobbling,” reminiscent of what Kathy Bates did to James Caan in Misery: “Trust me, it’s for the best.”
Apple’s objections to the interoperability rules center around its unique risks to user privacy and security. The company has built its ecosystem with a focus on seamless integration between its hardware, software, and services. This integration allows Apple to deliver a high-quality user experience that is notably secure for the insecure digital realm.
Forcing Apple to make its services more compatible with third-party products would open the door to gaping security vulnerabilities for user data. The EU rules allow apps connected to a device to send the contents of a users’ notifications in an unencrypted form straight to that app’s servers. The EU also requires Apple to share with third parties the identity of any Wi-Fi network that connects to a user’s iPhone. Imagine if the network the user is accessing is at a political party, or a mental health or sexual health clinic, or a business meeting, the exposure of which tips off competitors.
Regulations would also stifle future innovation. If forced to make its platform more open to third-party services, Apple would lose the flexibility needed to explore quantum-leap improvements in features and capabilities. Instead, capital within Apple would be diverted to adjust to ever-tightening regulatory requirements. Executive attention would be focused more on not bumping into the electric fence of the EU’s crippling fines, rather channel their creativity to exceed customer desires.
The EU puts privacy at risk in other ways. If Google is forced to share search data, the most intimate secrets of users would almost certainly circulate in the digital wild. This data will inevitably wind up in the hands of China through cut-outs and bad actors. If Google is forced to provide access to its search index and content from any Google-owned website, its IP and trade secrets – the result of years of toil and billions of dollars of investment – will also go to China.
If forced to treat competitors’ services equally, Google would have to dilute its search results, potentially lowering the relevance of the content users receive. This would result in a poorer user experience, where the most useful results are buried in favor of less relevant alternatives.
Ironically, these rules would boomerang on the European Union, degrading valuable services that enable small businesses to compete on a larger stage. Many small outfits rely on Google’s advertising platform to reach their target audience effectively. If Google is restricted from prioritizing its own services or tailoring ads to the specific needs of users, it would make it harder for these businesses to connect with potential customers. This could hurt the very businesses that the regulations are intended to protect.
Above all, the EU’s rules aim a below-the-waterline torpedo at American innovation. After huge declines in public R&D budgets in the United States, these two companies provide much of America’s competitiveness. The EU rules would reorient big chunks of American R&D from innovation to rule adherence.
As the Atlantic rift between Europe and the United States widens, perhaps knee-capping American competitiveness is the whole point of these laws. But Europe is not poised to compete if American tech companies are degraded. Why create more space for Chinese companies to soar?
In the looming trade dispute between the United States and the European Union, perhaps both sides will cool off and get serious about negotiations before real damage is done. The current tit-for-tat over American bourbon and French wine should lead to a tête-à-tête to scale back the most damaging parts of the Digital Markets and Digital Services acts. That way consumers on both sides of the Atlantic could have their gateaux and eat it too.