DMA and DSA: Reclaiming European Digital Sovereignty

The EU Comission has put out two new laws, the Digital Markets Act and Digital Services Act, with the potential to reclaim Digital Sovereignty. This is a critical step to accelerate productivity growth, allow European tech companies a level playing field to compete, and ensure citizens and institutions in Europe stay in control of their own destinies.

After the events of Jan 7th 2021, the most powerful country in the world has had to convince private company CEOs to stop a threat to their institutional order. The US Congress didn’t turn to the CIA or the FBI or the US Army, it rather asked the CEO of Twitter, Facebook, and AWS to ban Donald Trump and friendly apps from its platforms. While it is difficult to wish they had done otherwise, this represents the clearest call-to-arms for digital sovereignty. Power was not in the hand of the citizens, it was in the hands of company CEOs.

COVID has shown that the world is digital to a large extent and it is only getting more so. Countries need to exercise sovereignty over their digital space, much like it is exercised over physical space. If not countries will be digital colonies of the private companies that exercise that sovereignty or the foreign powers that control them. Europe today is mostly a digital colony of the US-based Big Tech companies.

As with the colonies of old, being a digital colony will hurt your citizens in a variety of ways. Digital colonialism hurts innovation and productivity, as the digital overlords allow only what is in their own interest. It also precludes local companies from accessing opportunities in the digital space, opportunity is for the colonialists only. Finally, it limits individuals’ digital freedoms and rights, it is the colonialists to decide. The EU needs to act to address it. At the same time, regulation is always tricky. Heavy-handed regulation can hurt consumers and investment at the same time.

The EU Commission has put out two bold new regulations to reclaim European Digital Sovereignty. Digital Markets Act, focused on platforms, and Digital Services Act focused on services. On paper they both strike a great balance that could free European citizens to access productivity, opportunity, and freedom.

Digital Markets Act (DMA)

The DMA targets large digital platforms in most arenas (ad marketplaces, search engines, social networks, app stores, online intermediation, mobile messaging, video sharing, operating systems, cloud computing, etc…), and the natural monopolies they constitute. It forces these platforms to be interoperable through APIs without discriminating against third parties. It also sets out ground rules for how to manage data, including workable access to data and ensuring customer data portability. Finally, it protects customers’ and users’ freedoms, forbidding limits to the ability to choose or avoid any services and to contract outside the platform. Enforcement has teeth with fines of up to 10% of revenues and structural remedies if needed.

The devil will be in the details of regulation and enforcement, but the DMA looks promising. It resembles telco regulation, focusing on non-discriminatory access and portability that converted telcos into “neutral rails”. It achieved great service, strong customer choice, low cost, and an opening to build on top. Of course, telco regulation also hobbled the telco service provider and equipment sectors, some of the most promising tech European champions. It also gave the tech field to the US OTT players, as the European digital market was still fragmented.

An effective DMA would turn the platforms into “neutral APIs” and ensure data portability across services. This could create a new “tech boom” of local startups and innovative large companies building on top of the “neutral APIs”. Comparable to the alternative carrier boom of the 1990s/2000s and the recent Fintech boom accelerated by PSD2 regulation. The need to shift to a more protocol-like open tech ecosystem has been pointed out even by US technologists like Fred Wilson and Ben Thompson.

Digital Services Act (DSA)

The DSA targets digital services and products to ensure the legality, traceability, transparency, and effective safeguards for online transactions. The DSA extends the eCommerce act to all types of digital services and to create a Europe-wide regulation.

The DSA will create a more level playing field between digital and physical services and products. Subjecting both to the same customer protection and transparency requirements. It also discriminates based on size. Making sure that the largest digital service and product sellers don’t use their scale to overpower smaller rivals.

Most importantly, the DSA aspires to armonize regulation across Europe. Striking at the heart of the fragmentation that has made it difficult for European companies to scale, and has made the European market much less attractive than what it size warrants.

Europe-wide Open Market for Digital Platforms and Services

If the DMA and the DSA work out as intended, Europe will reclaim Digital Sovereignity through a Europe-wide and open market for digital platforms and services.

Europe-wide. The DMA and DSA preclude countries from regulating further, creating an effective European-wide market. Given the EU is one of the three largest economies in the world, the EU digital market would be one of the important global pools. Participating in the EU market would be a must for any player, and EU rules would be adopted as the de-facto standard. At the same time, European companies will not start with their individual country as a market, but rather be able to access a global scale market from the start. This will eliminate the current gap vs. US and Chinese companies.

Open. The DMA will force the unbundling of the current monopolistic “walled gardens” that have emerged. An unbundled market focused on protocols and APIs will create a new wave of opportunity for startups. Faster innovation and practicable niches will be enabled, opening up the current “winner-take-all” markets to a broader range of actors.

The combination of a Europe-wide and Open market for Digital Platforms and Services could be transformational for Europe. On the one hand, the opening up of the innovation floodgates should trigger a wave of productivity growth. On the other, the European digital companies will be allowed to grow and become global leaders. Most importantly European citizens and institutions will recover control over their destiny. Moving from digital colonies to digital sovereign again.

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