Archives For European Union

Unexpectedly, on the day that the white copy of the upcoming repeal of the 2015 Open Internet Order was published, a mobile operator in Portugal with about 7.5 million subscribers is garnering a lot of attention. Curiously, it’s not because Portugal is a beautiful country (Iker Casillas’ Instagram feed is dope) nor because Portuguese is a beautiful romance language.

Rather it’s because old-fashioned misinformation is being peddled to perpetuate doomsday images that Portuguese ISPs have carved the Internet into pieces — and if the repeal of the 2015 Open Internet Order passes, the same butchery is coming to an AT&T store near you.

Much ado about data

This tempest in the teacup is about mobile data plans, specifically the ability of mobile subscribers to supplement their data plan (typically ranging from 200 MB to 3 GB per month) with additional 10 GB data packages containing specific bundles of apps – messaging apps, social apps, video apps, music apps, and email and cloud apps. Each additional 10 GB data package costs EUR 6.99 per month and Meo (the mobile operator) also offers its own zero rated apps. Similar plans have been offered in Portugal since at least 2012.

Screen Shot 2017-11-22 at 3.39.21 PM

These data packages are a clear win for mobile subscribers, especially pre-paid subscribers who tend to be at a lower income level than post-paid subscribers. They allow consumers to customize their plan beyond their mobile broadband subscription, enabling them to consume data in ways that are better attuned to their preferences. Without access to these data packages, consuming an additional 10 GB of data would cost each user an additional EUR 26 per month and require her to enter into a two year contract.

These discounted data packages also facilitate product differentiation among mobile operators that offer a variety of plans. Keeping with the Portugal example, Vodafone Portugal offers 20 GB of additional data for certain apps (Facebook, Instagram, SnapChat, and Skype, among others) with the purchase of a 3 GB mobile data plan. Consumers can pick which operator offers the best plan for them.

In addition, data packages like the ones in question here tend to increase the overall consumption of content, reduce users’ cost of obtaining information, and allow for consumers to experiment with new, less familiar apps. In short, they are overwhelmingly pro-consumer.

Even if Portugal actually didn’t have net neutrality rules, this would be the furthest thing from the apocalypse critics make it out to be.

Screen Shot 2017-11-22 at 6.51.36 PM

Net Neutrality in Portugal

But, contrary to activists’ misinformation, Portugal does have net neutrality rules. The EU implemented its net neutrality framework in November 2015 as a regulation, meaning that the regulation became the law of the EU when it was enacted, and national governments, including Portugal, did not need to transpose it into national legislation.

While the regulation was automatically enacted in Portugal, the regulation and the 2016 EC guidelines left the decision of whether to allow sponsored data and zero rating plans (the Regulation likely classifies data packages at issue here to be zero rated plans because they give users a lot of data for a low price) in the hands of national regulators. While Portugal is still formulating the standard it will use to evaluate sponsored data and zero rating under the EU’s framework, there is little reason to think that this common practice would be disallowed in Portugal.

On average, in fact, despite its strong net neutrality regulation, the EU appears to be softening its stance toward zero rating. This was evident in a recent EC competition policy authority (DG-Comp) study concluding that there is little reason to believe that such data practices raise concerns.

The activists’ willful misunderstanding of clearly pro-consumer data plans and purposeful mischaracterization of Portugal as not having net neutrality rules are inflammatory and deceitful. Even more puzzling for activists (but great for consumers) is their position given there is nothing in the 2015 Open Internet Order that would prevent these types of data packages from being offered in the US so long as ISPs are transparent with consumers.

A key issue raised by the United Kingdom’s (UK) withdrawal from the European Union (EU) – popularly referred to as Brexit – is its implications for competition and economic welfare.  The competition issue is rather complex.  Various potentially significant UK competition policy reforms flowing from Brexit that immediately suggest themselves are briefly summarized below.  (These are merely examples – further evaluation may point to additional significant competition policy changes that Brexit is likely to inspire.)

First, UK competition policy will no longer be subject to European Commission (EC) competition law strictures, but will be guided instead solely by UK institutions, led by the UK Competition and Markets Authority (CMA).  The CMA is a free market-oriented, well-run agency that incorporates careful economic analysis into its enforcement investigations and industry studies.  It is widely deemed to be one of the world’s best competition and consumer protection enforcers, and has first-rate leadership.  (Former U.S. Federal Trade Commission Chairman William Kovacic, a very sound antitrust scholar, professor, and head of George Washington University Law School’s Competition Law Center, serves as one of the CMA’s “Non-Executive Directors,” who set the CMA’s policies.)  Post-Brexit, the CMA will no longer have to conform its policies to the approaches adopted by the EC’s Directorate General for Competition (DG Comp) and determinations by European courts.   Despite its recent increased reliance on an “economic effects-based” analytical approach, DG-Comp still suffers from excessive formalism and an over-reliance on pure theories of harm, rather than hard empiricism.  Moreover, EU courts still tend to be overly formalistic and deferential to EC administrative determinations.  In short, CMA decision-making in the competition and consumer protection spheres, free from constraining EU influences, should (at least marginally) prove to be more welfare-enhancing within the UK post-Brexit.  (For a more detailed discussion of Brexit’s implication for EU and UK competition law, see here.)  There is a countervailing risk that Brexit might marginally worsen EU competition policy by eliminating UK pro-free market influence on EU policies, but the likelihood and scope of such a marginal effect is not readily measurable.

Second, Brexit will allow the UK to escape participation in the protectionist, wasteful, output-limiting European agricultural cartel knows as the “Common Agricultural Policy,” or CAP, which involves inefficient subsidies whose costs are borne by consumers.  This would be a clearly procompetitive and welfare-enhancing result, to the extent that it undermined the CAP.  In the near term, however, its net effects on CAP financing and on the welfare of UK farmers appear to be relatively small.

Third, the UK may be able to avoid the restrictive EU Common Fisheries Policy and exercise greater control over its coastal fisheries.  In so doing, the UK could choose to authorize the creation of a market-based tradable fisheries permit system that would enhance consumer and producer welfare and increase competition.

Fourth, Brexit will free the UK economy from one-size-fits-all supervisory regulatory frameworks in such areas as the environment, broadband policy (“digital Europe”), labor, food and consumer products, among others.  This regulatory freedom, properly handled, could prove a major force for economic flexibility, reductions in regulatory burdens, and enhanced efficiency.

Fifth, Brexit will enable the UK to enter into true free trade pacts with the United States and other nations that avoid the counterproductive bells and whistles of EU industrial policy.  For example, a “zero tariffs” agreement with the United States that featured reciprocal mutual recognition of health, safety, and other regulatory standards would avoid heavy-handed regulatory harmonization features of the Transatlantic Trade and Investment Policy agreement being negotiated between the EU and the United States.  (As I explained in a previous Truth on the Market post, “a TTIP focus on ‘harmonizing’ regulations could actually lower economic freedom (and welfare) by ‘regulating upward’ through acceptance of [a] more intrusive approach, and by precluding future competition among alternative regulatory models that could lead to welfare-enhancing regulatory improvements.”)

In sum, while Brexit’s implications for other economic factors, such as macroeconomic stability, remain to be seen, Brexit will likely prove to have an economic welfare-enhancing influence on key aspects of competition policy.

P.S.  Notably, a recent excellent study by Iain Murray and Rory Broomfield of Brexit’s implications for various UK industry sectors (commissioned by the London-based Institute of Economic Affairs) concluded “that in almost every area we have examined the benefit: cost trade-off [of Brexit] is positive. . . .  Overall, the UK will benefit substantially from a reduction in regulation, a better fisheries management system, a market-based immigration system, a free market in agriculture, a globally-focused free trade policy, control over extradition, and a shale gas-based energy policy.”

Nearly all economists from across the political spectrum agree: free trade is good. Yet free trade agreements are not always the same thing as free trade. Whether we’re talking about the Trans-Pacific Partnership or the European Union’s Digital Single Market (DSM) initiative, the question is always whether the agreement in question is reducing barriers to trade, or actually enacting barriers to trade into law.

It’s becoming more and more clear that there should be real concerns about the direction the EU is heading with its DSM. As the EU moves forward with the 16 different action proposals that make up this ambitious strategy, we should all pay special attention to the actual rules that come out of it, such as the recent Data Protection Regulation. Are EU regulators simply trying to hogtie innovators in the the wild, wild, west, as some have suggested? Let’s break it down. Here are The Good, The Bad, and the Ugly.

The Good

The Data Protection Regulation, as proposed by the Ministers of Justice Council and to be taken up in trilogue negotiations with the Parliament and Council this month, will set up a single set of rules for companies to follow throughout the EU. Rather than having to deal with the disparate rules of 28 different countries, companies will have to follow only the EU-wide Data Protection Regulation. It’s hard to determine whether the EU is right about its lofty estimate of this benefit (€2.3 billion a year), but no doubt it’s positive. This is what free trade is about: making commerce “regular” by reducing barriers to trade between states and nations.

Additionally, the Data Protection Regulation would create a “one-stop shop” for consumers and businesses alike. Regardless of where companies are located or process personal information, consumers would be able to go to their own national authority, in their own language, to help them. Similarly, companies would need to deal with only one supervisory authority.

Further, there will be benefits to smaller businesses. For instance, the Data Protection Regulation will exempt businesses smaller than a certain threshold from the obligation to appoint a data protection officer if data processing is not a part of their core business activity. On top of that, businesses will not have to notify every supervisory authority about each instance of collection and processing, and will have the ability to charge consumers fees for certain requests to access data. These changes will allow businesses, especially smaller ones, to save considerable money and human capital. Finally, smaller entities won’t have to carry out an impact assessment before engaging in processing unless there is a specific risk. These rules are designed to increase flexibility on the margin.

If this were all the rules were about, then they would be a boon to the major American tech companies that have expressed concern about the DSM. These companies would be able to deal with EU citizens under one set of rules and consumers would be able to take advantage of the many benefits of free flowing information in the digital economy.

The Bad

Unfortunately, the substance of the Data Protection Regulation isn’t limited simply to preempting 28 bad privacy rules with an economically sensible standard for Internet companies that rely on data collection and targeted advertising for their business model. Instead, the Data Protection Regulation would set up new rules that will impose significant costs on the Internet ecosphere.

For instance, giving citizens a “right to be forgotten” sounds good, but it will considerably impact companies built on providing information to the world. There are real costs to administering such a rule, and these costs will not ultimately be borne by search engines, social networks, and advertisers, but by consumers who ultimately will have to find either a different way to pay for the popular online services they want or go without them. For instance, Google has had to hire a large “team of lawyers, engineers and paralegals who have so far evaluated over half a million URLs that were requested to be delisted from search results by European citizens.”

Privacy rights need to be balanced with not only economic efficiency, but also with the right to free expression that most European countries hold (though not necessarily with a robust First Amendment like that in the United States). Stories about the right to be forgotten conflicting with the ability of journalists to report on issues of public concern make clear that there is a potential problem there. The Data Protection Regulation does attempt to balance the right to be forgotten with the right to report, but it’s not likely that a similar rule would survive First Amendment scrutiny in the United States. American companies accustomed to such protections will need to be wary operating under the EU’s standard.

Similarly, mandating rules on data minimization and data portability may sound like good design ideas in light of data security and privacy concerns, but there are real costs to consumers and innovation in forcing companies to adopt particular business models.

Mandated data minimization limits the ability of companies to innovate and lessens the opportunity for consumers to benefit from unexpected uses of information. Overly strict requirements on data minimization could slow down the incredible growth of the economy from the Big Data revolution, which has provided a plethora of benefits to consumers from new uses of information, often in ways unfathomable even a short time ago. As an article in Harvard Magazine recently noted,

The story [of data analytics] follows a similar pattern in every field… The leaders are qualitative experts in their field. Then a statistical researcher who doesn’t know the details of the field comes in and, using modern data analysis, adds tremendous insight and value.

And mandated data portability is an overbroad per se remedy for possible exclusionary conduct that could also benefit consumers greatly. The rule will apply to businesses regardless of market power, meaning that it will also impair small companies with no ability to actually hurt consumers by restricting their ability to take data elsewhere. Aside from this, multi-homing is ubiquitous in the Internet economy, anyway. This appears to be another remedy in search of a problem.

The bad news is that these rules will likely deter innovation and reduce consumer welfare for EU citizens.

The Ugly

Finally, the Data Protection Regulation suffers from an ugly defect: it may actually be ratifying a form of protectionism into the rules. Both the intent and likely effect of the rules appears to be to “level the playing field” by knocking down American Internet companies.

For instance, the EU has long allowed flexibility for US companies operating in Europe under the US-EU Safe Harbor. But EU officials are aiming at reducing this flexibility. As the Wall Street Journal has reported:

For months, European government officials and regulators have clashed with the likes of Google, Amazon.com and Facebook over everything from taxes to privacy…. “American companies come from outside and act as if it was a lawless environment to which they are coming,” [Commissioner Reding] told the Journal. “There are conflicts not only about competition rules but also simply about obeying the rules.” In many past tussles with European officialdom, American executives have countered that they bring innovation, and follow all local laws and regulations… A recent EU report found that European citizens’ personal data, sent to the U.S. under Safe Harbor, may be processed by U.S. authorities in a way incompatible with the grounds on which they were originally collected in the EU. Europeans allege this harms European tech companies, which must play by stricter rules about what they can do with citizens’ data for advertising, targeting products and searches. Ms. Reding said Safe Harbor offered a “unilateral advantage” to American companies.

Thus, while “when in Rome…” is generally good advice, the Data Protection Regulation appears to be aimed primarily at removing the “advantages” of American Internet companies—at which rent-seekers and regulators throughout the continent have taken aim. As mentioned above, supporters often name American companies outright in the reasons for why the DSM’s Data Protection Regulation are needed. But opponents have noted that new regulation aimed at American companies is not needed in order to police abuses:

Speaking at an event in London, [EU Antitrust Chief] Ms. Vestager said it would be “tricky” to design EU regulation targeting the various large Internet firms like Facebook, Amazon.com Inc. and eBay Inc. because it was hard to establish what they had in common besides “facilitating something”… New EU regulation aimed at reining in large Internet companies would take years to create and would then address historic rather than future problems, Ms. Vestager said. “We need to think about what it is we want to achieve that can’t be achieved by enforcing competition law,” Ms. Vestager said.

Moreover, of the 15 largest Internet companies, 11 are American and 4 are Chinese. None is European. So any rules applying to the Internet ecosphere are inevitably going to disproportionately affect these important, US companies most of all. But if Europe wants to compete more effectively, it should foster a regulatory regime friendly to Internet business, rather than extend inefficient privacy rules to American companies under the guise of free trade.

Conclusion

Near the end of the The Good, the Bad, and the Ugly, Blondie and Tuco have this exchange that seems apropos to the situation we’re in:

Bloeastwoodndie: [watching the soldiers fighting on the bridge] I have a feeling it’s really gonna be a good, long battle.
Tuco: Blondie, the money’s on the other side of the river.
Blondie: Oh? Where?
Tuco: Amigo, I said on the other side, and that’s enough. But while the Confederates are there we can’t get across.
Blondie: What would happen if somebody were to blow up that bridge?

The EU’s DSM proposals are going to be a good, long battle. But key players in the EU recognize that the tech money — along with the services and ongoing innovation that benefit EU citizens — is really on the other side of the river. If they blow up the bridge of trade between the EU and the US, though, we will all be worse off — but Europeans most of all.