Is Europe Dying?
Regulation and Innovation
Bindu Reddy is an accomplished Silicon Valley technical founder. She is also a prolific poster to X.
This week (see X of the Week below), she posted this:
Raph H replied with a Leon Blum quote from 1932:
I spent the past two weeks in Paris and London so this piqued my interest.
The news that the AI regulations passed by the European Commission come into force this week and the accompanying US news that Google has been found guilty of being a monopolist in mobile search and is abusing that monopoly both serve to force a discussion about regulation and decline—or, in the inverse, regulation, and innovation.
MG Seigler’s essay about what eventually undermined Microsoft (not regulation) is also pertinent in this context. Market forces shrunk the impact of Microsoft, especially the rise of the Internet and Mobile.
“Europe is slowly dying because it's not innovating and the governments are stifling” (Bindu Reddy)
The lack of innovation in Europe is real. But it does not have to do with stifling regulations alone. The primary cause is the lack of funding for innovation, and therefore lack of innovation. Most of that is coming from the USA and some from China.
In some ways, governments do try to counter the lack of funds. The European Investment Bank is a large investor in funds and startups, as is the British Government via the British Business Bank. But those amounts are trifling compared to the USA and China. What is missing is genuine risk-seeking capital at all stages. Unlike in the US, European pools of capital (self-directed pension funds, for example) are not permitted to invest in the venture capital ecosystem. This means that billions of Euros are left on the sidelines and invested in asset classes with less impact on innovation.
Most venture capital in Europe, and increasingly so, is sourced from US origins. However, the trend is for US investors to reduce their allocation to Europe as it becomes clear that Europe is not doing its part to support venture-backed companies.
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Regulations compound this structural reality. When the EU tells Apple to put a USBc port on an iPhone, insists on permitting third-party app stores, or places bureaucratic requirements on AI developers, it signals that the free market does not exist or at least does not function. Worse, governments play the role of product managers in the tech ecosystem. Merger and acquisition rules also run amok, preventing venture exits and capital recycling.
The recent UK moves to control content on X adds a further dimension. The claim is that X is not as cooperative as other networks in prohibiting and removing content that, while not illegal, is considered (struggling for a word here) - hateful, harmful or misleading, or “misinformation.”
Apple’s decision not to ship its AI features in Europe points to a likely consequence. Companies will not risk product innovations for fear of being fined billions of euros afterward. They will seek clarity. And that clarity will not be forthcoming. So innovation will further freeze, alongside the freezing of capital flows.
The US is showing significant signs of joining Europe in “biting the hand that feeds it.” Google is a large, powerful company that dominates search. However, the federal prosecutors could not make a case for search being monopolized because more searches happen off Google than on Google (Amazon, Facebook, etc.). instead, they defined a sub-market - mobile search. They claimed Google has a monopoly there. That is contestable. Every app has a search, and most do not use Google. Android and iOS do use Google but only in the browser. The browser is less and less of the total attention on mobile. However, the court ruled that Mobile search is a market and that Google has a monopoly in it. A highly dubious finding in my opinion.
We should remember that Google makes no money from searches. Search is a feature and a cost, involving capital and operational expenditures. Google’s payment to Apple for Safari’s embedding of Google Search is a case in point—a cost, not a revenue earner. Search is an onramp to advertising, as is Amazon, Facebook, and TikTok.
If we abstract to the total number of mobile searches leading to the delivery of an ad, then Google would be a minority player. Google dominates only by limiting the scope to a shrinking browser-based search behavior.
Google does have a big business, but it is advertising. In that business, Amazon, Facebook, and TikTok are giant percentage owners of the revenue on both mobile and desktop, not to mention the tens of thousands of apps with search and advertising built in.
Google’s only actual crime is that it is booming and big. Governments seem to want to restrict success. The claimed consumer protection is nakedly false. Where are the better search engine users prevented from using?
In Europe and America, those in power fear the freedom of speech and the economic power of their successful companies. In America, new startups are funded. In Europe, too, but on a far lesser scale. Time, money, and effort are dedicated to slowing, reversing, or stopping growth and innovation. This is at a time when AI promises to transform the human experience, reducing working time through automation.
What is striking is the political class's lack of a compelling vision for enhancing human existence through technical innovation or an optimistic and executable plan for the future. What I see are calls for less speech and more constraints on innovation. We need leaders with vision and passion for innovation's fantastic impact on our lives and an understanding of the role of human ingenuity in producing technologies that enhance life.
Leon Blum may have been right in his day, but today, we would have to rewrite his thesis to focus on the adverse effects of regulation on innovation. "The essence of American and European capitalism is driven by fear of the market and innovation. Regulation is a stranglehold on progress."