The “Digital President’s” ultimate challenge

All being well, a new Commission President will take office this year, having proclaimed ‘Digital’ to be her/his top priority.  But what should a Digital President do?  Sort out our fragmented telecoms market?  Perhaps.  Foster entrepreneurial start-ups?  Definitely.  But the real challenge is driving technology-based productivity gains in the rest of the economy: manufacturing, services and the public sector.

Competition can do most of the work in the private sector, which is why completing the single market remains so vital.  But the public sector is the largest part of the economy, generally a monopolist provider, and historically a victim of “Baumol’s disease”.  (The American economist, William Baumol, argued in the 1960s that it was impossible to achieve significant productivity gains by the state because it naturally focused on labour intensive services.)

Public spending % of GDP: maroon > 55%, red 50–55%, orange 45–50%, yellow 40–45%, green 35–40%, blue 30–35% “Depense-publique-sur-PIB” by Marc Baronnet – Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons.

Baumol’s disease has been born out over the last 50 years, but in their recent book entitled The Fourth Revolution, The Global Race to Reinvent the State, John Micklethwait and Adrian Woolridge suggest that the picture could now change.  After charting the history of the western state, the authors argue that it is living up to Plato’s two great concerns: that voters would always favour short-term benefits, and that politicians would pander to this by offering entitlements to paid for by the next (unborn) generation. But they see two contemporary phenomena that will precipitate change.

The first is an emerging Asian model of technocratic government – the book focuses mostly on China, but identifies Singapore as the intellectual origins.  The key features of the model are long term planning and ruthless meritocracy.

Second is technology.  In Education, Moocs create radical new economies of scale for teaching, while giving all students a chance to learn from the best teachers.  The advent of wearable technology places prevention firmly alongside cure in health planning.  Big data helps focus law enforcement towards emerging trouble spots.  Meanwhile, open public data changes the level of accountability of every public service, and private sector developments could reduce demand for some public goods, such as ride-sharing needing less roads.  Ultimately, there is a need to reset our ambitions for the state, and to turn to technology, and the networked society, to find alternative means to the end.

Moreover, the two forces combine.  China has far fewer public sector traditions than the west; has studied the good and the bad of our systems; and can impose best practices quickly.  Given how important the state has been in fostering western economic success, a modern, effective Chinese public sector will become an inescapable global benchmark. The EU neither runs the most costly and labour-intensive parts of the public sector, nor even has competence over them.

The authors are dismissive of the EU, but a Commission that used the relenting economic crisis to drive an EU-wide debate about public sector reform would render a huge service to European citizens.  Fostering the reinvention of the public sector is the real challenge of the ‘Digital President’.

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The Single Market for trust

ImageLate in the 20th century the early adopter in me wanted an LCD TV. Prices on the (Belgian) high street were astronomical, but I found an offer 25% (€500!) cheaper on a French website.  Could I trust the seller?  It didn’t take much search effort to discover lots of customers frustrated with late deliveries, but it told me the company existed, and the savings were just too significant to overlook.  My TV arrived just under a month later, and my calculated act of cross-border trust was rewarded.

The Internet is a boon for small businesses because consumers have been willing to trust the online environment.  Where has the trust come from? Not from regulation I would suggest, but a system of organised ‘word of mouth’.

It began with eBay (and no doubt before them).  After each transaction, sellers and buyers ‘rate’ each other, and subsequent transactors were comforted dealing with someone with a large, positive record.

The beauty of the system is that it leverages technology and, thus, ‘scales’.  Moreover, it works cross-border by default – ratings use the universal language of numbers, and machine translation is more than sufficient to give you a flavour of qualitative comments.

The systems’ main shortcoming was gaming (paid-for ratings), not least because most users originally used pseudonyms.  But here social networks are beginning to show their real value. Posting and liking make such networks fun, but they put a premium on real names, and Facebook has quietly emerged as an (the) identity verifier for the web.

Traditional rating systems were good enough for buying goods, but are the 2.0 systems with real names sufficient if you are thinking of opening your home or car to a stranger?  That’s the question posed by the sharing / collaborative / Peer-2-Peer economy.  And it is really a question about regulation itself – put bluntly, do new business models need licenses and inspectors if they can be regulated by ‘data’?  Regulators don’t scale easily, but they won’t need to if I can get trustworthy information from peers about my room for the night, or about the person and car taking me there?

The P2P economy is giving us a new taste of how broadly disruptive the Internet is really going to be, and that inevitably includes to government as well.  My belief is that the adaptation of government service provision to the Internet could prove to be every bit as decisive for competitiveness as measures to improve private sector productivity.

Looking for public sector superstars

I’ve been reading the Second Machine Age by Erik Brynjolfsson and Andrew McAfee, two leading economists studying the digital economy. The book builds on their previous work about the future of growth and employment in a world of exponentially growing computing power, but one of the many new points that emerged for me from the book was about ‘superstars’.

In essence the Internet makes it possible for superstars to project their talent more broadly than ever before and, in so doing, accrue rewards at the relative expense of others. Whether at the corporate or the individual level, this explains the weak performance of US median wages and growing levels of inequality. The authors rightly fret over the social consequences, and redistribution features frequently in their policy recommendations.

But the perspective is inverted when you consider public services, such as teaching and healthcare. Classroom and hospital superstars can suddenly improve the lives of a far larger part of the population, whether directly or at least by the sharing of their materials and techniques.

Some of these superstars will no doubt be content simply knowing that are more amply fulfilling their public mission.  But others may feel they deserve relative recognition, and I doubt few parents or patients would disagree! Meanwhile, many long serving, but less effective, public workers will be watching from the sidelines. Such distinctions sit uncomfortably with many traditions of public service.

The point is that the Internet’s impact is not limited to the communications technology sector. It will be felt throughout the economy, including the relatively large public sector that we – as Europeans – choose as part of our social model. The public sector needs to lead in embracing the disruptive influence of the Internet, but will it take a political superstar to create the climate for that?

An end-game for sector regulation?

This year’s CRA conference focused on the fascinating interaction between competition and sector regulators.

The competition side started modestly enough with two DG COMP officials citing research that sector specific regulators (in the US) had done a better job of imposing sufficiently strong pro-competitive remedies on errant market players. While anti-trust folk look for quick structural fixes because their job is to move on to the next case, the sectoral people expect to be there for the long game and can police more sophisticated interventions.

But the lead seemed to be lost quickly as focus turned to political economy of regulation. Are the sophisticated remedies all part of the uber plan to provide long term self-justification? Alex Chisholm – CEO of the new UK anti-trust body – was frank about the fact that some sector regulators don’t use their (concurrent) anti-trust powers because they don’t want to give the impression that their sector responsibilities are no longer needed. Chris Fonteijn of the Dutch competition + sectoral regulator positioned the changes in his country as a good way to transition powers (presumably while providing professional certainty to the bureaucrats affected).

Be careful about taking it too far though argued Paul Seabright and Howard Shelanski, as competition authorities take decisions more secretly than their sectoral brethren subject to better regulation requirements. Anti-trust should stick to specific issues, while sector-wide concerns deserve the more open processes of other regulators.

Theory turned to practise in the final panel about industrial policy, where the consensus among John van Reenen, Gert-Jan Koopmans and Eliana Garces Tolon was clearly that the European economy needs (much) more flexibility but that it can’t generally be the competition authorities that have to take the (highly political) decisions about such change, although that’s often the case at present when mergers come to them with a justification that the merged firm will be free of the (implicit) social commitments of the existing parties.

Europe underwent a wave of market liberalisation in the 1990s, resulting in the creation of sector regulators. At the time, success was always understood to mean regulators being wound up, but as the opportunity gets closer, finding the right exit strategy from regulation needs more attention and today was a great part in that.

Is the biggest barrier to pan-EU content services the EU itself?

To the Brussels mind, content services are a conundrum: why don’t market forces naturally take advantage of the Single Market? The canonical example, see the recent Commission consultation, is why can people exercising their ‘free movement rights’ (i.e. ex-pats or Eurocrats) not get access to services from their ‘home’ country?

At first glance, it is an odd situation as large language-based markets already exist:

  • I can buy physical books, CDs and DVDs in the UK and have them delivered to Belgium without difficulty; and
  • A massive ‘blind-eye’ is turned by the entertainment industry to the grey market for foreign satellite TV subscriptions.

Meanwhile, rights holders appeal to a ‘tradition’ (!) of national licensing, and that they can best maximise profits by working within national regimes. The latter at least is no surprise to the economically literate – consumers vary in wealth and price discrimination is a reasonable aim (if the seller can prevent arbitrage between purchasers).

When I sit on a plane, I can be almost certain that the person next to me has paid a different price for their ticket. No one really thinks twice about it, and the student in seat 26A relies upon the fact that the business woman in 3F will pay 10x more. The former had to show their student pass, and security requirements (conveniently) prevent resale to the executive.

But online we hit two big snags:

  • the price transparency that otherwise makes markets work well, facilitates comparison-based advocacy such as the infamous episode in 2000 that led Amazon to commit never to use price discrimination
  • Brussels feels uncomfortable with price differences in the single market.

The iTunes decision of 2008 classically combined the two phenomena for online content.

The real world examples above suggest that rights holders are, in practise, generally satisfied with the market segmentation possible on the basis of language. What I suspect they really fear is:

  • the ‘politics of benchmarking’, and they know that cross-country comparisons have become the soft-law weapon of choice for the Commission (e.g. car prices).
  • the uncertainty in the consultation document from opening up debate about second-hand markets, which inevitably expand arbitrage opportunities.

Consequently, my recommendation is that political leadership is more important than legislative change:

  • defending price diversity as much cultural differences in the single market; and
  • publicly rejecting the ‘property’ metaphor – information is not the same as e.g. apples. Resale should therefore not be a major policy focus, but the time saved can be used for a fuller review of IP without the rhetorical distortions of the ‘property’ metaphor!

On being forgotten

Tech startup Snapchat reportedly turned down a $3bn offer last week from Facebook. The service has 100s of millions of users, mostly teenagers, and the Internet is abuzz with the suggestion that more photos are shared on Snapchat than on its potential purchaser.

Snapchat’s photo sharing has a fascinating twist – once the recipient opens the photo they have but a few seconds to view it and then it disappears forever.  Saving is not possible, and no copy is kept by Snapchat.  Here is an extract from the Snapchat privacy policy:

Once all recipients have viewed a Snap, we automatically delete the Snap from our servers and the Snapchat mobile application is programmed to delete the Snap from the recipients’ devices. We cannot guarantee that deletion always occurs within a particular timeframe. We also cannot prevent others from making copies of your Snaps (e.g., by taking a screenshot). If we are able to detect that the recipient has captured a screenshot of a Snap that you send, we will attempt to notify you.

Valley observers ascribe Snapchat’s popularity to a mixture of kids looking for privacy, and to escape Facebook friend requests from their parents (OMG!).   But the fact is that, while courts and policy makers debate the vexed issue of the right to be forgotten, young people and the technology industry are already alighting on new product solutions.

So, what policy lessons can we draw from the Snapchat evidence?

Clearly there is demand for products that provide a forgettability, and a friend noted to me recently that Snapchat also adds fuel to the debate about whether ‘expiry dates’ can be attached to information.  But the market is moving faster than the legislator and companies are looking for ways to attract new users.

The general rule that regulation should seek to address ‘market failure’ therefore needs to prevail, and overly specific rules are more likely to harm innovation in the EU than truly protect users.

(Snapchat has also faced criticism that it provides a platform for sharing photos of a sexual nature or for the purpose of cyber-bullying.  Digital literacy is the solution here.)

Regulating a revolution

ID-100207059The 3D printing (additive) manufacturing revolution has been heralded by many, and including The Economist and by McKinsey. Today, a new group called Netopia held their inaugural event in Brussels to launch a report that addresses possible policy issues.

The report is a rather depressing read (see below), but the local ‘maker’ / entrepreneur invited to demonstrate 3D printing did capture the real excitement. Above all I was taken by the reference to the ‘maker culture’. Thinking about ‘culture’ helps us understand how profound the transformation is. The same cultural shift is present in open source software, may also be reflected in the emerging sharing economy, and is something that the traditional elites are still struggling to keep pace with.

So the authors’ must be right to question whether present institutional organisation is fir-for-purpose,but this is not a new idea — see for example the Lisbon Council’s Plan I(nnovation). The core idea is that vertically siloed institutions will struggle to provide a coherent response to a horizontal technology change such as 3D printing, or the Internet.

The organisers’ real agenda appeared to be promoting regulation. For example, gun control needs redoubling in light of the first 3D-printed gun, and issues such as liability and ‘copying’ need addressing (the latter is not surprising when you look at the group’s backers). The author of the legal section, Christina Wainikka, who claims rather ominously to focus ‘on using the law to strategic advantage’ calls for levies on 3D printers, like those applied to blank CDs today.

For me, the real challenge for policy makers will not be the substance, but finding a way to apply rules in the context of the broader culturalchange. 3D printing is not only technology for companies, which are used to regulation, but also belongs to prosumers. We’ve seen before that the extension of commercial prohibitions to citizens is not politically straight forward, and if we think of ‘makers’ as budding entrepreneurs, then we should be cautious of red tape anyway.