22 July 2021

Friendly fire on Big Tech could mean start-ups are the collateral damage

By Camilla de Coverly Veale

Start-ups thrive on fair competition. You can see that in the meteoric rise of Britain’s tech sector. It is growing twice as fast as the rest of the economy, securing the UK’s position as a global capital for tech. In Europe our track record scaling iconic global tech brands is second to none: 72 of Europe’s 162 unicorns were created in the UK. Start-ups have done it by beating incumbents across our economy at their own game – in financial services, energy, retail and beyond – traditional firms are being upturned as customers find a better service from British start-up competitors.

But all that could change if the jewel in the crown of the Government’s new digital regulatory roadmap, the Digital Markets Unit (DMU), is allowed to create a regime that burdens rather than accelerates start-ups. Erected in shadow form this April and housed within the Competition and Markets Authority (CMA), the DMU is meant to level the playing field and give the tech start-up Davids a few extra stones against the GAFAM Goliaths.

All worthy stuff, and this week the Government announced a formal consultation on the DMU’s proposed powers. There is a lot here for start-ups to be excited about. But for the DMU to avoid paying lip service to encouraging competition it needs to work from a start-up’s perspective. Too much of what the DMU thinks drives innovation relies on a sclerotic academic framework that is just no longer relevant for digital markets. Of particular concern is the DMU’s current approach to mergers and acquisitions and its blindness to B2B markets.

On M&A, we see a real muddle. Put simply, the ability to be acquired, merged with or generally exit is a critical part of what recycles both talent and capital in the start-up ecosystem. Yet we consistently have regulators – who have never built a business – telling entrepreneurs that it’s not only something that they shouldn’t want, but something they can’t have. There’s more of the same in the Government’s approach – which states that the ability to be acquired by a bigger tech company creates “perverse incentives by deterring firms from developing disruptive innovations”. This is patently false and should be treated as such.

Even worse, the CMA’s current view on the market actually goes beyond restricting acquisitions by Big Tech, to consistently stopping mergers and company building via acquisition to compete in big markets. So Taboola and Outbrain were prevented from merging to compete in the ad market, and Gumtree were made to sell their classifieds business to be acquired by eBay – all while the CMA scratches its head and wonders how we can create a more competitive online advertising market with Google and Facebook.

A pro-competitive, start-up-centred, system would stop uniformly treating M&A as a problem to be tackled and start acknowledging the true benefits and the trade offs – something that we are yet to see in practice from competition regulators and will have to see when this regime comes into force.

And when, as happens now, regulators don’t begin with a start-up’s perspective, we also find issues such as rampant anti-competitive behaviour in the B2B market become cocooned away out of sight, out of mind and – crucially for start-ups – out of the way of help.

It’s helpful to remind people that the average tech start-up isn’t a consumer facing app, it’s a B2B software-as-a-service (SaaS) company. The acceleration of the cloud and Covid-19 has driven phenomenal growth in SaaS start-ups building incredible innovative products across our economy. Yet we see painfully little on the challenges in these markets, and lots more where there are visible (and frankly sexier) policy issues.

It’s great that the CMA is deploying lots of resources into competition, but do we really need another five reports on how the online ad market is broken and publishers are upset – something we’ve been debating ad nauseum for 15 years. Instead, start-ups need the CMA to look at the issues that impact how they grow and scale and exit.

SaaS start-ups, helping businesses utilise cloud technologies, are especially vulnerable. Legacy providers in the B2B space are wielding their power as gatekeepers, cutting customers off from innovation and start-ups off from customers. At Coadec, we’ve launched a new stream of work focused on the needs of this ecosystem, tackling unfair bundling and software licensing practices in B2B markets. There are lessons to be learned from elsewhere. In France progress has already been made with the launch of the Ten Principles to End Unfair Practices of Software Gatekeepers, sections of which have already been incorporated into the draft European Digital Markets Act. The CMA should take a leaf out of their book.

A DMU that places the needs of start-ups at its core would make Britain a powerful force to be reckoned with. But to get there we need the DMU to start with start-ups.

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Camilla de Coverly Veale is Head of Regulation at Coadec.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.