25 January 2023

The Government needs to think again about its damaging digital policies

By Fred de Frossard

After a brief hiatus in November and December, the Government appears to be focusing on economic growth and how to achieve it. Sadly, with any fiscal measures off the table, regulatory policy will have to suffice. I hope this will force some ambitious thinking on supply-side reform, and how best to play to Britain’s strengths.

One such strength is our tech and digital industries. The Prime Minister is well aware of this, and has long presented himself as a strong advocate for British startups. The UK boasts a world-leading ecosystem of companies, universities and investors, supported by a talent pool and a sensible, broadly pro-innovation regulatory regime, which has created a superb tech sector in the 21st century. Money continues to flow into British tech, even while the French president does his very best to wrest the European crown from London and give it to Paris.

However, Britain is in danger of turning in the wrong direction by introducing sweeping new regulations which will deter investment and hobble the tech sector. Not only are we falling down the OECD’s rankings for competitiveness thanks to the tax hikes kicking in this April, but two headline pieces of legislation threaten to shackle the tech sector: the Online Safety Bill and the forthcoming Digital Competition Bill.

Much has been written about the Online Safety Bill and how MPs have insisted on inserting criminal sanctions for tech executives if they do not protect children from harm online, and how this will deter investment in the UK, but the Digital Competition Bill has garnered rather less attention.

The main aim of this bill is to give statutory powers to the Digital Markets Unit (DMU) to regulate big tech. This follows various reviews into the digital economy and an international push against the likes of Google and Meta.

The DMU, which sits within the Competition and Markets Authority (CMA), is touted by supporters as an essential tool to protect competition, consumer rights and innovation in the tech sector. After nearly two years of uncertainty, the Government has pledged to introduce the bill in this session of Parliament for legislation straight away, rather than in draft form for pre-legislative scrutiny, as originally planned.

This would be a mistake. There are significant problems with the policy, and many of the assumptions on which it is based have already been proven wrong by events.

It is important to note how broad the powers are that the Government wishes to give the DMU and the CMA. The Unit would be able to designate certain tech firms as having ‘strategic market status’ owing to their dominance in certain sectors – such as search, e-commerce and social media – and impose ‘pro-competitive interventions’ such as stopping mergers, imposing fines and making senior executives personally responsible, not just in an area where a company is found to have ‘strategic market status’, but across their operations.

This is a huge power grab from a government that has already become much more aggressive and interventionist in the last few years. It is also unnecessary. The CMA has already intervened to block tech mergers, such as Facebook’s purchase of Giphy and Amazon’s investment in Deliveroo (though the latter has thankfully now been overturned). It’s also worth noting that the Government took even more powers over mergers following the National Security and Investment Act in 2021.

The Digital Competition Bill aims to tilt the scales in favour of the regulator even more heavily, so that firms prosecuted under the act can only appeal on process grounds, rather than on the merits of the case. This removes any semblance of natural justice from the policy, allowing the regulator to essentially mark its own homework. Though the house will always win, Britain and her economy will soon start to lose.

As well as the powers themselves being problematic, the reasons why they are being introduced are also built on shaky foundations. Three in particular deserve scrutiny and show that the Government – as it so often does – is still fighting the last war with this bill.

First, many have said it is essential that Britain legislates because other countries, notably the US, are about to do the same. As astute observers like Sam Bowman have longed noted, the chances of the US actually introducing a new wave of antitrust laws were always very slim. Following last year’s mid-term elections, the anti-trust policies advocated by Amy Klobuchar are dead and buried, and the Republican-controlled Congress has shown no interest in reviving them. Indeed, the Republicans have a very different fight with big tech than the Democrats, one that centres on content moderation rather than market concentration. Now the Americans are not going ahead with this policy, it is the EU and its damaging and burdensome Digital Markets Act that will be the international outlier. Britain should not feel under pressure to follow suit.

Second, policymakers had long claimed that regulators need to break Google and Meta’s online advertising duopoly. The CMA even claimed the two firms’ grip on this market was unassailable. However, last year saw early signs that this duopoly is beginning to fade, with a much larger proportion of online advertising revenue coming from e-commerce. It was changing consumer preferences, rather than any regulatory intervention, that caused this shift. Ministers and policymakers should reconsider trying to regulate for something that is happening of its own accord.

Third, Google’s historic dominance in search engines is considered a reason in itself for regulatory action. According to this logica, its competitors’ failures are down not to an inferior product, but to Google’s ability to leverage its market dominance by doing things like making its own search engine the default browser on Android phones, therefore reducing consumer choice and welfare.

However, just like the changes to the advertising market, it seems that Google’s dominance in search is threatened like never before, and not from the direction anyone predicted. The explosion of excitement around OpenAI’s ChatGPT has brought a new challenge to Google, with many people using the iterative, AI-powered chatbot like they would a search engine, but with far more satisfying and productive results. This, coupled with the growing trend of youngsters actually using TikTok as a search engine, suggests that market dominance in tech – as in other parts of the economy – is never as entrenched as some think. If the DMU was being proposed 20 years ago, it is likely that it would be trying to regulate Myspace out of its dominance in social media, just before Facebook emerged as a competitor.

These changes mean the Government should take a step back and reconsider it’s digital policies. It should focus on its commendable pro-consumer policies, such as ending online subscription traps or tackling pernicious rip-offs in funeral homes, both of which are much more salient to voters and do not risk deterring investment in the British tech sector. The last year has shown that headline-chasing regulators really don’t need to make a point of breaking up big tech.

Rather than striking a pose against the Googles and Amazons of the world, ministers would be far wiser to cut back the regulatory burden of the Digital Competition Bill. The Government should instead focus on a principles-based, common law approach to promoting economic growth, innovation and consumer welfare, and publish a new Strategic Steer to the CMA to embed these priorities.

Combined with liberalisations to the EU’s overbearing GDPR regime and a light-touch regulatory approach to artificial intelligence, this would make for a compelling set of tech policies which would increase investment into the UK, improving both growth and productivity. Implementing a full-fat Digital Markets Unit, however, would leave Britain uncompetitive, unattractive and moribund, trying to fight the battles of the past instead of embracing the opportunities of the future.

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Fred de Fossard is a policy and strategy consultant. He served as Special Adviser to Jacob Rees-Mogg from 2020 to 2022, covering Brexit Opportunities, regulatory reform, and legislation.

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