How to Regulate Big Tech Without Stifling Innovation

The world’s borderless tech titans find themselves at a reputational inflection point. A contentious US presidential election has again focused attention on the role of social media in democracy. Meanwhile, the COVID-19 pandemic has underscored our dependence on Big Tech. Both aspects of their role in society will inform how governments move forward on regulatory approaches.

In our focus on innovation as a driver of new products and services, better productivity, higher growth, and better paying jobs, we tend to zero in on encouraging advanced technologies, attracting world class talent, building superclusters and promoting a culture of innovation and entrepreneurship. Less attention is paid to business framework policies and their impacts on innovation, and few tangible actions have yet to materialize on that front.

It is time for Canada to broaden its tech approach to include framework policies such as competition policy, regulatory systems and intellectual property regimes and how they can encourage or impede innovative firms.

The United States provides a salutary example of this. The CEOs of the tech giants Amazon, Google, Facebook and Apple were hauled before a congressional committee at the end of July in a “virtual perp walk” to face a slew of accusations ranging from stifling competition, to misusing customer data, to lax data privacy protections, to enabling foreign interference in elections. Democrats are adamant that the info-tech titans have failed to police disinformation on their sites, thereby undermining social cohesion. Republicans accuse them of unwarranted censorship, thereby attacking free speech.

Yet, despite this political tempest, it would be premature to conclude that this will lead to anti-trust actions in the US. Big Tech is more likely to be viewed as both saint and sinner: too essential to the digital economy and society to break up and too dominant to leave unconstrained. In these conflicting circumstances, expect more of a shake-up than a break-up of the American digital titans.

Digital technologies are the main drivers of economic and social disruption today, and key contributors to innovation and economic growth. This new ecosystem is being propelled by a handful of digital tech titans, primarily the so-called FAANGs (Facebook, Apple, Amazon, Netflix and Google) in the West, and a comparable group of digital dragons in China (Alibaba, Tencent, Baidu, and Xiaomi).

Their size, valuation, market share and power are large by any measure. These five American firms alone account for more than 20 percent of the S&P 500 and over $6 trillion in market value at their early September peak. Are they the “new monopolists” of the digital age?

Perhaps, but spotting a digital monopolist may be easier than confirming the identification. For example, US Department of Justice anti-trust guidelines indicate that a company must have used its market dominance to harm society through lower output, higher prices and less innovation. This is challenging as the tech titans have lowered prices to consumers (sometimes to zero), spent prodigiously on organic and acquired R&D and expanded their service offerings massively.

Critics argue that this test is designed for an analog—not digital—economy, and that consumer harm emanates from poor data handling: inadequate data privacy, data security, data integrity and data rights. They also argue that the tech titans dynamically reinforce market dominance by buying large numbers of innovative startups for their intangible assets such as IP and talent, rather than through acquisitions of large competitors in other sectors of the economy.

While policy thinking around what constitutes a digital monopoly is evolving for the reasons above, it is also getting caught up in geopolitics, particularly between the US and China.

The US has expanded its trade disputes with China to include, indeed focus on, technology. Early battles over 5G and network security (Huawei) have grown to include data security (TikTok and WeChat) and the enabling digital ecosystem (AI and predictive analytics). The US has labelled China a “strategic competitor”. China has

countered with its own digital firewall and new export restrictions on data-intensive Chinese firms.

One consequence of this geopolitical tension is that strategic tech supremacy could become a higher priority than concerns about tech market dominance for countries like the United States and China.

Public concerns with the sins of big tech on data privacy, data security and data rights fronts, however, have not dissipated. Indeed, if anything, concerns have increased, as evidence mounts of social media-enabled misinformation campaigns on a variety of issues, including race, pandemic health and vaccines to name a few.

In contrast, the pandemic has highlighted the saintly side of these digital titans in helping individuals and businesses to navigate the COVID-19 lockdowns. Who hasn’t used Amazon to order products for home delivery as retails stores were shuttered? Who hasn’t counted on Netflix to provide home entertainment through months of shutdowns? Who hasn’t used Microsoft Teams to work from home as offices closed but work remained? What small business hasn’t shifted to online commerce to survive, often with the help of Shopify? The digital economy has certainly delivered support to an anxious public at a time of unprecedented disruption.

So, faced with these competing concerns and realities, what does the toolkit of policymakers contain besides conventional anti-trust remedies?

First, it is extremely unlikely the US will use anti-trust laws to break up the tech titans, and the rest of us have limited (European Union) to no capacity (Canada) to take a different path. But the market framework toolkit also contains regulatory policy, taxation policy, competition policy (acquisitions) and fines, and here there is more scope for surgical actions, and more likelihood of differential policy choices across countries.

Second, regulation will be the likely digital policy of choice, with data handling—privacy, security and rights—and misinformation carried over social media as the primary targets. However, regulation can be either principles-based or prescriptive, with the US tending to the latter and the EU and Canada more to the former. A smart, principles-based approach is more resilient given how rapidly technologies and markets are changing. Canada will have to decide what regulatory alignment is in the best interests of Canadians.

Third, coming out of any recession, there is typically a pick-up in merger activity as financially strong firms seek out acquisition opportunities to consolidate their positions. With the sky-high stock valuations of the US (and Chinese) tech titans, we should expect them to be particularly active, scooping up numerous innovative start-ups with their technologies and talent. This will reinforce their market dominance, and Canadian competition policy should consider looking at the aggregation of acquisition activity by digital firms over a specific time horizon rather than just on the current minimum size, transaction-by-transaction, basis.

Fourth, Canadian governments should be digital exemplars in their operations. COVID-19 is creating the need for better digital health delivery, and it is highlighting how slow we have been to digitize the health system. Education is going online too, but with an analog mindset. Rapid digitization improves health and education outcomes and creates opportunities for innovative Canadian firms. Governments can play a role in validating digital identity systems to protect citizens’ data which, in turn, could be leveraged to grow the Canadian fintech sector. Canada can play a greater role in establishing global digital standards.

Fifth, in a world where industrial policy is making a comeback, we should focus on enabling winning conditions to create digital champions, not on trying to pick specific winners. Canada can do so through smart education, skills training, immigration, procurement, regulation and taxation policies.

Governments should dramatically increase the number of spots in engineering schools, help workers displaced by the pandemic upgrade their skills for new jobs in the digital-driven economy, and increase immigration. During the Trump administration’s H1-B visa ban, we’ve had a window to attract the brightest minds to Canada. Government procurement policies implicitly favour Big Tech, and the federal government’s $600 billion procurement budget could better help innovative Canadian companies scale-up to global champions. And, we should maintain competitive tax treatment of the Canadian tech sector to retain talent and IP in Canada. With the right winning conditions, we can enable more Canadian-based innovation champions—firms like Shopify, Constellation Software, CGI, Open Text and Ceridian—not fewer.

Big Tech is neither saint nor sinner in this disruptive world where technology is transforming competitiveness and markets, geopolitics is redefining globalization, and populism is reshaping political discourse. It cannot be a blocker to new digital firms springing up and serving global markets from Canada or elsewhere, nor can it have a seeming monopoly on attracting our country’s greatest resource: our talent. We need to ensure level playing fields in key framework policies such as regulation, procurement, taxation, intellectual property, and competition. Smart digital regulation can be an enabler of better consumer outcomes and more producer surplus in Canada. And whatever we do with respect to market frameworks, one objective should always be to encourage innovation—it is in the public interest.

Contributing Writer Kevin Lynch was formerly Clerk of the Privy Council and Vice Chair of BMO Financial Group.

Contributing Writer Paul Deegan, CEO of Deegan Public Strategies, was a public affairs executive at BMO Financial Group and CN, and served in the Clinton White House.