If the UK Wants to Remain a Tech Leader, It Needs Less Regulation, Not More

Cite this Article
Dirk Auer, If the UK Wants to Remain a Tech Leader, It Needs Less Regulation, Not More, Truth on the Market (May 19, 2023), https://truthonthemarket.com/2023/05/19/if-the-uk-wants-to-remain-a-tech-leader-it-needs-less-regulation-not-more/

Brexit was supposed to free the United Kingdom from Brussels’ heavy-handed regulation and red tape. But dreams of a Singapore-on-the-Thames are slowly giving way to ill-considered regulation that threatens to erode Britain’s position as one of the world’s leading tech hubs.

The UK Competition and Markets Authority’s recent decision to block the merger of Microsoft and game-maker Activision-Blizzard offers a case in point. Less than a month after the CMA formally announced its opposition to the deal, the European Commission has thrown a spanner in the works. Looking at the same facts, the commission—no paragon of free-market thinking—concluded the merger would benefit competition and consumers, paving the way for it to move ahead in the Old Continent.

The two regulators disagree on the likely effects of Microsoft’s acquisition. The European Commission surmised that bringing Activision-Blizzard titles to Microsoft’s Xbox will create tougher competition for Sony, leading to lower prices and better games (conditional on several remedies). This makes sense. Sony’s PlayStation 5 is by far the market leader, currently outselling the Xbox four to one. Closing the content gap between these consoles will make the industry more competitive.

In contrast, the CMA’s refusal hinged on hypothetical concerns about the embryonic cloud-gaming market, which is estimated to be worth £2 billion worldwide, compared to £40 billion for console gaming. The CMA feared that, despite proposed temporary remedies, Microsoft would overthrow rivals by eventually making Activision-Blizzard titles exclusive to its cloud platform.

Unfortunately, this narrow focus on cloud gaming at the expense of the console market essentially amounts to choosing a bird in the bush instead of two in the hand. Worse, it highlights the shortcomings of the UK’s current approach to economic regulation.

Even if the CMA was correct on the substance of the case—and there are strong reasons to believe it is not—its decision would still be harmful to the UK economy. For one thing, this tough stance may cause two of the world’s leading tech firms to move thousands of jobs away from the UK. More fundamentally, foreign companies and startup founders will not want to tie themselves to a jurisdiction whose regulatory authorities show such disdain for the firms they host.

Given what we have already seen from the CMA, it would appear ill-advised to further increase the authority’s powers and reduce judicial oversight of its decisions. Yet that is precisely what the pending Digital Markets, Competition and Consumers Bill would do.

The bill would give the CMA vast authority to shape firms operating in “digital markets” according to its whims. It would cover almost any digital service offered by a firm whose turnover exceeds certain thresholds. And just like the CMA’s merger-review powers, these new rules would be subject to only limited judiciary oversight—judicial review rather than merits-based appeals.

The power to shape the internet in the UK (and, indirectly, abroad) would thus be entrusted to a regulator that fails to grasp that hypothetical and remediable concerns in one tiny market (cloud gaming) are no reason to block a transaction that has vast countervailing benefits in another (console gaming).

In turn, this threatens to deter startup creation in the UK. Firms will invest abroad if choosing the UK makes them vulnerable to the whims of an overzealous regulator, which would be the case under the digital markets bill. This could mean fewer tech jobs in the UK, as well as the erosion of London’s status as one of the world’s leading tech hubs.

The UK is arguably at the forefront of technologies like artificial intelligence and nuclear fusion. A tough merger-control policy that signals to startup founders that they will be barred from selling their companies to larger firms could have a disastrous impact on the UK’s competitiveness in those fields.

The upshot is that, when it comes to economic regulation, the United Kingdom is not an island. It cannot stand alone in a globalized world, where tech firms, startup founders, and VCs choose the jurisdictions that are most accommodating and that maximize the chance their businesses will thrive.

With Brexit now complete, the UK is free to replace legacy Brussels red tape with light-touch rules that attract foreign firms and venture capital investments. Yet the UK seems to be replicating many of Brussels’ shortcomings. Fortunately, there is still time for Parliament to change course on the digital markets bill.