Politicians have something of a love-hate relationship with technology. In the UK, political support for digital innovation sits alongside complaints from policymakers who can’t keep up with the rapid pace of change. Now more than ever, politicians are painfully aware of the need to be on top of technological progress in order to create laws and policies that will stand the test of time rather than become obsolete by the end of a parliamentary session.
On the other side of the coin, for businesses and investors working in the technology sector, it is an understanding of political change that is often crucial in protecting their license to operate. The Digital Single Market (DSM) – the EU’s vision for a coherent and unified online landscape – will set the policy and regulatory framework within which digital businesses will operate in the EU. Understanding the political forces behind this is key to determining the level of risk for any investment in the sector.
At present, digital businesses have to navigate 28 different national regulatory and legal frameworks, adding an estimated €4 – €8 billion in annual costs. The Centre for Global Enterprise reports that only 15 per cent of the world’s largest tech platforms are based in Europe, and there is a feeling in Brussels that the fragmentation of the current system is the reason behind this.
According to current timelines, the DSM will come into effect in May 2018. The headline proposal is that consumers across the EU will be entitled to access the same online content regardless of which member state they are in. However, the DSM covers all aspects of the digital landscape, ranging from copyright policy and the radio spectrum to data protection and free Wi-Fi. Technology, media and telecommunications investors will be keeping a particularly close eye on developments, but the DSM proposals will impact all businesses with a digital element.
Despite consensus in the EU on the need for change, each member state has its own ideas about what the DSM should look like. Earlier this month, the Dutch government passed new net neutrality legislation which, according to telecoms association GSMA, risks undermining the net neutrality provisions within the DSM. Estonia, whose presidency of the European Council has been fast-tracked to the second half of 2017 as a result of the UK’s Brexit vote, has been clear that it will prioritise the free movement of data across the EU. This jars with British and Scandinavian concerns about the implications of this for the creative industries, which rely heavily on funding raised through selling media rights to other European broadcasters.
It’s not just the political priorities of the member states that investors have to be mindful of when calculating political risk. The Economist recently reported that EU commissioners Andrus Ansip and Günther Oettinger, leading the Digital Single Market project, are amongst the most lobbied commissioners in Europe. On average, they and their teams have 6.5 meetings with lobbyists per day, highlighting the myriad pressures and influencers shaping digital policy in Brussels.
There’s also the Brexit-shaped elephant in the room: what will Britain’s relationship with the Digital Single Market be now that it has voted to leave the EU? Although the DSM is expected to come into effect in May 2018, and the UK will leave the EU in March 2019 at the very earliest, it is still unclear whether the UK will join the DSM and, if so, on what basis. Representatives across UK politics and business agree that access to the DSM will be of significant benefit to the UK’s digital economy, so Brexit negotiators are likely to be lobbied by domestic interests to ensure that access is protected.
For investors looking outside the UK, the ramifications of Brexit for digital policy don’t stop at the English Channel. Historically, the regulatory environment for European tech businesses has been heavily shaped by the UK’s assertive stance on intellectual property. As a result of Brexit, Brussels will lose the loudest voice campaigning for stricter copyright protection. Indeed, there are already reports of UK representatives being quietly side-lined from EU working committees on digital policy. While we are unlikely to see existing legislation loosened, Britain’s departure may result in a slower pace of regulatory change for EU businesses in future.
The development of the Digital Single Market will also impact non-EU businesses operating in Europe. European telecoms operators, arguably the strongest lobbying voice in the debate, are using the DSM as an opportunity to push for a ‘level playing field’ with their American tech giant rivals. They seem to have won several battles already – internet telephone services such as Skype, for instance, will in future be obliged to obey telecoms regulations just like any traditional operator.
The complexities of rapid and ongoing technological advancement are matched by a constantly evolving political and regulatory environment. The level of political risk varies with each individual investment, with the DSM offering both opportunities and challenges. Understanding this risk is essential for any investor seeking to navigate the labyrinthine world of tech in post-Brexit Europe.
Westminster Advisers provides political due diligence, strategic advice and reputation management for investors and assets in sensitive and regulated markets. If your investments are subject to political risks, we can help.