Consumers Will Lose Out If Big Tech Has to Seek Permission to Innovate

The bespoke regulator is up and running within the Competition and Markets Authority (CMA), but the government will soon outline legislative proposal for its powers. One idea it has consulted on would ban firms with “strategic market status” in one designated activity from introducing products in adjacent markets that “further entrench the firm’s position in its designated activity, unless the change can be shown to benefit users”.

Let me explain what that jargon means. Suppose Amazon were designated to have strategic market status for its online marketplace. Under this proposal, it would have been required to obtain government permission to launch Amazon Prime Video, which is separate to Amazon marketplace but bundled with Prime membership. Likewise, Google would have needed to have obtained a green light from the state before even launching Google Maps.

If this seems like regulatory overreach, that’s because it is. Whatever you think about big technology platforms’ competitive impacts, making it more difficult for any company to operate in new markets is not pro-competition but anti-competition. Requiring government permission creates another entry barrier to launching new products to compete with incumbents or to introduce transformative innovations.

Indeed the proposal might have deterred major spin-offs that toppled established players. Microsoft Internet Explorer’s dominance in the browser market was only halted by Google harnessing its search and email products to create Chrome. Cameras that were launched as add-ons to mobile phones cannibalised the camera sector. Large companies leveraging platforms or customer bases to launch into new sectors can drive beneficial creative destruction.

The CMA would say that such innovation is not at risk with the permission requirement. If a company dreams up a product that benefits users, they would green-light it. But placing the burden of proof for establishing those benefits on the business risks chilling an innovation culture of constantly tinkering and testing new services through trial and error. Innovative efforts are often serendipitous. Compliance costs and government rejection risks on top of the prospect of product failure will cause some companies to avoid toying with ideas.

And how exactly would bureaucrats judge potential user benefits, given that companies themselves are terrible at forecasting whether innovations will be hits or flops? Would regulators have predicted that Google Plus would fail and Google Home would succeed? Would they have predicted that Apple’s AirPower wireless charging product would go nowhere but AirPods would become a roaring success? User benefits can only be based around observing customers’ actual responses in real markets, not regulators’ guesswork.

This points to a general problem with the zeitgeist driving the Digital Markets Unit’s creation. “The CMA used to believe that competition is what makes markets work but that is starting to morph into an idea that it is competition authorities who make markets work,” David Foster, competition economist at Frontier Economics, told me.

Forgetting decades of economic insights about the circumstances under which adjacent services are better provided in-house, agencies worldwide now speak and act as if platform neutrality and separation between platform hosts and producers are inherently desirable. They are trying to shape markets into their conception of fair competition, rather than protecting the market-led competitive process.

If parliament ends permissionless innovation it would actually be outdoing the EU’s Digital Markets Act in broadening the regulatory net. Ministers claimed in the consultation launch document that they were “unashamedly pro-tech and want to be the most innovative, pro-enterprise government ever”. How does one square that with letting a bureaucrat decide whether Facebook can add its own Bitmojis to Instagram?