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Challenges to Silicon Valley wont just come from Brussels

Fine of 2.4bn levied on Google is a sign of the continued erosion of US tech firms domination of the internet

The whopping 2.4bn fine levied by the European commission on Google for abusing its dominance as a search engine has taken Silicon Valley aback. It has also reignited American paranoia about the motives of European regulators, whom many Valley types seem to regard as stooges of Mathias Dpfner, the chief executive of German media group Axel Springer, president of the Federation of German Newspaper Publishers and a fierce critic of Google.

US paranoia is expressed in various registers. They range from President Obamas observation in 2015 that all the Silicon Valley companies that are doing business there [Europe] find themselves challenged, in some cases not completely sincerely. Because some of those countries have their own companies who want to displace ours, to the furious off-the-record outbursts from senior tech executives after some EU agency or other has dared to challenge the supremacy of a US-based tech giant.

The overall tenor of these rants (based on personal experience of being on the receiving end) runs as follows. First, you Europeans dont get tech; second, you dont like or understand innovation; and third, youre maddened by envy because none of you schmucks has been able to come up with a world-beating tech company.

The charge sheet underpinning American paranoia says that the EU has always had it in for US companies. Microsoft, for example, has been done over no fewer than three times for various infringements of competition rules: 500m in 2004, 600m in 2008 and 561m in 2013. Intel was fined 1.6bn in 2009. Now Google has been socked for 2.4bn; and Facebook has already been fined 110m for providing the European commission with misleading information about its acquisition of WhatsApp. And then of course there is the commissions insistence that Apple should repay the 13bn in back taxes that it owes the Irish government because of overgenerous tax breaks provided to the company. (Ireland is vigorously contesting that ruling, making it the first government in history to turn down a windfall that would fund its health service for an entire year.)

This allegedly biased record needs to be seen in a wider context, however. Its hardly surprising that the tech companies in the frame are American given that all the global tech giants are US-based. But in fact the European commission has also come down hard on local infringers of competition rules. In July 2016, for example, European truck manufacturers were fined 2.93bn for colluding on prices for 14 years. In 2008 several European car glass manufacturers were fined 1.35bn for illegal market sharing and exchanging commercially sensitive information. In 2007 the Spanish telco Telefnica was fined 151m for setting unfair prices in its domestic broadband market. And so on, so that if you include all years since 1990, the total amount of fines imposed by the European commissions competition regulator comes to 26.75bn.

Given that record, you could say that the commission is actually a rather good regulator. But its also clear that there are significant differences between the European and American approach to competition law and antitrust. Some years ago, for example, the Federal Trade Commission (FTC) in the US investigated Google for the same behaviour that has landed it with the current huge fine. But in the end the FTC decided not to press charges. The European commission, provided with much the same evidence, reached the opposite conclusion.

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An Amazon warehouse in Germany. Photograph: Christoph Schmidt/EPA

How come? Basically there is a different regulatory culture in the US. There, the prevailing concern is with consumer welfare which, in the end, is about prices. As long as industrial power doesnt lead to increased prices, then its deemed OK which is why Amazon has thrived despite becoming a colossus. The European commission, in contrast, is focused on competition: monopolistic behaviour is considered illegal if it restricts competitors.

As the commissions statement explains: Market dominance is, as such, not illegal under EU antitrust rules. However, dominant companies have a special responsibility not to abuse their powerful market position by restricting competition, either in the market where they are dominant or in separate markets. Otherwise, there would be a risk that a company once dominant in one market (even if this resulted from competition on the merits) would be able to use this market power to cement/further expand its dominance, or leverage it into separate markets.

Google was found to have abused its dominance as a search engine by giving illegal advantage to its own comparison shopping service. Way back in 2002, the company had launched a price-comparison service called Froogle, later renamed Google Shopping. In 2008 it changed how it worked by systematically giving prominence to its own shopping-comparison results (for which it received payment from advertisers) and thereby in effect downgrading other shopping-comparison sites that might otherwise have figured highly in search results. This the commission deemed illegal.

And so it is. But to lay observers theres something quaint about the actual nub of the dispute shopping-comparison sites. I mean to say, theyre soooo yesterday. Nowadays, half of all shopping-related queries begin not on Google, but on Amazon. So the complaints about anti-competitive behaviour that resulted in last weeks ruling started in 2008 nine years (about 63 internet years) ago. What this episode highlights is the growing time lag between the detection of illegal behaviour on the part of tech companies and its eventual punishment a lag determined by the inevitably slow pace of detailed legal investigation (often slowed further by intensive political lobbying) and the pace of tech-industry change. If societies are to be able to bring companies such as Google under effective democratic control, then we have to speed up this regulatory process. Otherwise we will continually be locking the door long after the horse has bolted.

Which of course is exactly the way Silicon Valley likes it. This is a culture, remember, whose motto is move fast and break things (the Facebook chief executive Mark Zuckerbergs original exhortation to his developers, withdrawn only when he discovered that one of the things that might get broken is democracy). In the tech industry, corporate leaders are hooked on the virtues of disruption, creative destruction and the belief that it is easier to beg forgiveness than to ask for permission. Most of them subscribe to the famous dictum of Scott McNealy, made when he was chief executive of Sun Microsystems: You have zero privacy get over it.

Given that mindset, its not surprising that the industry is not just irritated but baffled by European scepticism and regulatory pushback. Although most Silicon Valley moguls see themselves as progressives they dont seem to understand cultural differences. (They dont understand politics, either.) Witness the Facebook bosss touching belief that the worlds problems could be solved if everyone were part of the Facebook community. Or the view of Googles former executive chairman, Eric Schmidt, that the presence of communication technologies will chip away at most autocratic governments, since the odds against a restrictive, information-shy regime dealing with an empowered citizenry armed with personal fact-checking devices get progressively worse with each embarrassing incident. When he tried that on Cambridge students a few years ago, some of them wondered what he had been smoking.

Eric

Eric Schmidt, Googles former executive chairman. Photograph: Getty

Silicon Valley is a reality distortion field whose inhabitants think of it as the Florence of Renaissance 2.0. (Rapidly acquired wealth has powerful hallucinatory effects on people.) In a strange way, they share the former US defence secretary Donald Rumsfelds view of our continent as old Europe, a civilisation whose time has come and gone. So when German citizens object vigorously to having their homes photographed by Google Street View, or the Bundestag considers a law that would impose swingeing fines on social media companies that do not promptly remove hate speech from their services, or the European commission imposes a fine equivalent to 3% of Googles global revenue, they fume into their almond-coconut Frappuccinos and vow revenge.

If thats how they see things, then its time they recalibrated. They are all children of a hegemony thats begun to erode. The era when Europeans and their governments quailed before American corporate power may be ending. The French were always a bit resistant to it (but then, being French, they would be, wouldnt they?) but now even the Germans have concluded that Europe can no longer rely on the US (or the UK) and must fight for its own destiny. In a way, the US-based digital giants should thank their lucky stars that Europe, for the most part, still consists of societies where the rule of law counts for something. Even when the companies dont like the outcome of our legal processes, they should be grateful that at least we follow them.

The same cannot be said for other parts of the world that Google & co hope to dominate. China and Russia do things their own way, for example, and are entirely untroubled by legal niceties. As far as China is concerned, in 2010 Google was given the choice of obeying government demands or shutting down its Chinese search engine; it chose the latter option and is having to agree to government controls if it is to be allowed back. In Russia, Google reached a settlement with the local regulator to loosen restrictions on search engines built into its Android mobile operating system, to allow Russian competitors a share of the pie. Similar concessions will be required to operate in Iran and other Middle Eastern states. These regimes are the real enemies that US paranoids should fear. So while the 2.4bn fine may be unpalatable (though easily affordable) for Google, it should thank its lucky stars. At least it got a hearing.

John Naughton is professor of the public understanding of technology at the Open University. He writes a weekly column in The New Review.

Read more: https://www.theguardian.com/technology/2017/jul/01/google-fine-challenges-to-silicon-valley

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