From Google to Amazon: EU goes to war against power of US digital giants
From Google to Amazon: EU goes to war against power of US digital giants
In Europe there is a growing fear of becoming a 'digital colony' ruled by Silicon Valley, whose giant firms wield huge power over privacy – and like to avoid tax. Now regulators are striking back
By Juliette Garside, telecoms correspondent
The Observer, Saturday 5 July 2014
Within the salons of the Elysée Palace, along the corridors of the European parliament and under the glass dome of the Reichstag, Old Europe is preparing for a new war. This is not a battle over religion or politics, over land or natural resources. The raw material that Paris, Brussels and Berlin are mobilising to defend is the digital environment of Europe's inhabitants; their enemies are the Silicon Valley corporations that seek to dominate it.
Coal, gas and oil powered the industrial revolution, but in the digital era, data is replacing fossil fuels as the most valuable resource on Earth, and the ability to collect and interrogate it has created organisations with a power that can at times seem beyond the control of nation states. Amazon, Apple, Facebook and Google represent, in the words of Germany's economy minister Sigmar Gabriel, "brutal information capitalism", and Europe must act now to protect itself.
"Either we defend our freedom and change our policies, or we become digitally hypnotised subjects of a digital rulership," Gabriel warned in a passionate call to action published by the Frankfurter Allgemeine. "It is the future of democracy in the digital age, and nothing less, that is at stake here, and with it, the freedom, emancipation, participation and self-determination of 500 million people in Europe."
In France, economy minister Arnaud Montebourg believes Europe risks becoming a "digital colony of the global internet giants", and ministers have called for Google to contribute to the cost of upgrading the country's broadband infrastructure. Gabriel says Germany's cartel office is currently examining whether Google should be regulated as a utility, like a telecoms supplier – the group has 91.2% market share of search in Germany.
He believes that, as a last resort, there may be a case for "unbundling" Google, separating its search arm from mobile, or YouTube, or services such as email.
As a first step, he is in favour of regulation that allows competitors to use the Google platform fairly. The pushback against Amazon has also begun: as of last year, the online retailer can no longer stop independent sellers on its German website from offering their own goods cheaper elsewhere, including on their own websites.
European regulators have also begun to take action. In May, the European court upheld a plea by a Spaniard, Mario Costeja González, who wanted pages hidden from any Google search for his name in the EU. Judges decided the past transgressions of private individuals have a right to be "forgotten". The threats that ruling poses to freedom of the press are now being debated, but it was a watershed moment, representing Europe's first major regulatory strike against the search and software colossus.
On 11 June, the European commission's competition regulator, Joaquín Almunia, wrote to colleagues to warn that his investigation into Google's search rankings could be reopened, after new complainants had stepped forward. On the same day, he announced a potentially wide-ranging inquiry into tax avoidance, starting with a focus on three companies: Apple and its international headquarters in Ireland, and Starbucks and its head office in the Netherlands (the third company being carmaker Fiat). On Thursday, a leak from Brussels suggested Amazon, which operates through a European HQ in Luxembourg, was also being dragged into the net.
"In the current context of tight public budgets, it is particularly important that large multinationals pay their fair share of taxes," Almunia said. His intervention was widely interpreted as a politically motivated act. It almost certainly was.
There are those who believe that Jean-Claude Juncker, the former Luxembourg prime minister who has just been elected as the next president of the European commission – despite vocal opposition from David Cameron – is out to get Google.
Its corporate motto is still "don't be evil", but Google seems to have replaced Microsoft – which was embroiled for years with regulators over monopolistic practices – as the bête noire of Brussels. The comparison is perhaps unfair. Google has taken a less confrontational stance than Microsoft, by accepting the commission's right to regulate its business in Europe and readily engaging in a negotiated settlement on search.
Nevertheless, says Ian Maude, new media specialist at research firm Enders Analysis, "Google, as far as regulators are concerned, is the new Microsoft. It is the big bad wolf. Privacy has become a much more important issue.
"Media markets historically have been national, but Google straddles borders and stands head and shoulders above any other online players. The European regulators have more power than any bar those in the US, and Google is now such a giant that it is going to face increased regulatory scrutiny. Regulation, rather than competition, is probably its main challenge right now."
Google has a friendly face, but its creeping power is causing alarm. The company controls two of the world's biggest search engines: Google itself and its video site YouTube, which ranks alongside Microsoft's Bing! and China's Baidu. The company's own web browser, Chrome, has overtaken Firefox and Microsoft's Explorer as the most popular browser, its Gmail is the largest email service, and its Android software controls more mobile phones than any other operating system.
Now Google is moving into the home, buying cloud-connected thermostat maker Nest and home security camera operator Dropcam. It wants to drive our smart cars and build humanoid robots, and it is funding a network of satellites to beam internet connections from space.
In an extraordinary metaphor, the boss of German media group Axel Springer has compared Google to the dragon Fáfnir, from the Norse myth that inspired Tolkien to write The Hobbit and Wagner to compose the Ring Cycle. Fáfnir was the son of a dwarf king, who became so jealous of the family's vast store of gold and gems that he killed his father to take sole possession of the treasure. Greed turned Fáfnir into a dragon, who guarded his hoard with fire and poison.
"Google is sitting on the entire current data trove of humanity like the giant Fáfner in The Ring of the Nibelung," Axel Springer boss Mathias Döpfner wrote in an open letter to the firm's chairman, Eric Schmidt, in April. More recently, he has condemned Almunia's settlement with Google over search. Google is under fire for allegedly downgrading results from companies that offer similar services to its own, prioritising its price comparison sites, stock price information or maps even when those services receive less traffic than rivals. Almunia has agreed that companies appearing too low in the rankings to draw traffic can pay to appear in a box at the top of the page. Döpfner told Radio 4's Today programme last week: "I would call that protection money. It is basically the business principle of the mafia."
Google's earnings from search have drained advertising spending from European newspapers, magazines and radio stations. Piracy, facilitated by search engines and broadband, has hit revenues for record labels hard. Bookshops and electronics stores have disappeared from high streets as sales migrate to Amazon and even Apple's bricks and mortar retail outlets. Europe's mobile phone networks, once considered global technology pioneers, have handed fortunes to Apple and South Korea's Samsung in subsidies for mobile phone handsets.
The sense of injustice has been reinforced by revelations about tax. Amazon, Google and Apple have found ways to reduce their corporation tax payments on international revenues to single-digit percentages of profits. Now fear has been added to the mix, with Edward Snowden's revelations about digital surveillance.
Reaction on the continent to the NSA scandal has been far stronger than in Britain. Gabriel argues that we are compromising our national security, and selling our economic and personal freedom, every time we exchange our personal data for access to free music or email, cheap smartphones or a page on a social network. Our preferences, our movements and our mistakes are being collected and stored, ready to be passed on to advertisers, medical researchers, car insurers, political strategists and even government spies, he suggests.
When Germany's chancellor, Angela Merkel, withdrew her support for Cameron in his push to promote an alternative candidate to Juncker, fingers were pointed at Döpfner, whose group publishes the influential German tabloid Bild. Döpfner is said to have persuaded Merkel to back Juncker in the belief that he would support the battle against Google.
Juncker has not publicly indulged in Google-bashing, but he has made the creation of a strong digital economy in Europe the first priority of his presidency. "Europe's path to growth is paved with tablets and smartphones," according to his campaign manifesto. He is using the dream of creating the next digital giant in Europe as a rallying cry for closer integration, in particular the creation of a single market for telecoms and digital businesses.
Under the industrial policy being drafted by his team, Brussels will encourage the harmonisation of national laws on copyright, data protection, telecoms regulation and the auction of the electromagnetic spectrum used by mobile phone networks.
Mobile networks, perhaps unrealistically, are seen as central to the fightback against America's information capitalists. With companies like Britain's Vodafone, Germany's Deutsche Telekom and Spain's Telefónica, Europe was able to create multinationals on a far grander scale than America's own domestically focused networks.
That competitive edge has since been lost. During spectrum auctions, when operators bidded for the airwaves they needed to link handsets to the internet, vast sums were handed over to national governments for 3G licences. The UK raised £22bn in 2000, but networks were left without the cash needed to expand 3G networks. The problem was compounded again with 4G, which delivers faster internet speeds. Wrangles over the timing of auctions, which did not occur simultaneously across Europe, allowed the US and many other countries a headstart.
"The reason the European telecoms industry has lost its edge is because of our own regulatory and political decisions," says Bengt Nordström, whose Northstream consultancy advises on telecoms. "Without spectrum harmonisation we are just a continent of various middle-sized and small countries and can never be an industrial leader."
With a population of 310 million to supply, American firms gain meaningful scale before they export. The same is true in China, where e-commerce group Alibaba and Baidu are dominant. If Europe's 500m inhabitants are corralled into a single market, Juncker believes that home-grown companies, like the flights comparison service Skyscanner, or music streaming firm Spotify, can gain scale.
Will his ideas gain favour in Britain? Labour is clear that, on tax and on search rankings, Google and its peers must operate on a level playing field. "It's important the large online organisations pay their fair share of tax," says shadow culture and media minister Helen Goodman. "If your competitive advantage is built on you being able to charge lower prices because you are paying less tax, that is not a sustainable way for us to run our economies."
In Brussels, Cameron and Google are seen as a little too close for comfort. The company's head of communications and public policy, Rachel Whetstone, is a close friend of the prime minister. She is married to Steve Hilton, architect of the "big society" policy that helped return the Tories to power. Google's European headquarters are officially in Ireland, but 2,000 programmers, salespeople and managers are based in London. The company is building a new headquarters in King's Cross that could house as many as 4,500.
John Springford of thinktank the Centre for European Reform says Cameron signed up to the idea of a digital single market as long ago as 2011, but that while he supports the removal of barriers to trade, he may be reluctant to accept edicts from Brussels on copyright and spectrum sales. On tax, however, the prime minister has made his position clear, saying avoiders like Starbucks need to "wake up and smell the coffee".
Margaret Hodge MP, whose influential parliamentary public accounts committee has brought digital tax evasion to national attention, welcomes action from Brussels.
"This is a very good first issue on which David Cameron can make common cause with the new president of Europe to heal some of the wounds and to ensure digital companies don't evade their responsibility to the jurisdictions where they make their money. Let's see him smelling the coffee," she says.
The big four: Europe's key issues
Google has reached a negotiated settlement with the European commission over its search results, but new complainants have come forward and the investigation could be reopened. In the UK, the search and software group has come under fire for tax avoidance, and independent record labels have complained to Brussels after being told their artists could be removed from YouTube unless they sign up for Google's forthcoming music subscription service.
Amazon is under fire for tax avoidance and strong-arming publishers and traders. In Europe, it has been banned from telling companies that sell on its German website that they can't offer their goods at cheaper prices elsewhere. The online retailer shelters profits by funnelling most of its European revenues through Luxembourg. The European commission is considering whether to investigate as part of a potentially wide-ranging tax probe which began in June.
With 1.2 billion users and counting, Facebook is the largest social media platform, but its share of advertising revenue is far from dominant at just 6% of global digital spend.
Complaints have tended to focus on privacy. The UK and Ireland are investigating whether a study that aimed to manipulate the emotions of its members overstepped the mark. In the US, privacy campaigners are concerned about Facebook's purchase of WhatsApp, and how it will use the so far advert-free messaging service's store of mobile numbers.
Apple channels its non-US revenues through Ireland, and an alleged sweetheart deal with the Irish tax office, supposedly negotiated under Steve Jobs, allowed it to pay just 3.7% on international profits in 2013, according to European commission experts. This deal is now being investigated by Brussels, and could be challenged if found to favour the company over other corporations with tax registrations in Ireland.