The cover story in last week’s Economist looked at the growing global dominance of internet giants such as Google and Facebook. This was partly driven by the fact that the European Parliament recently passed a resolution to more tightly regulate internet search and potentially break up Google, as well as by ongoing worries about competition and online privacy.
So are effective online monopolies (Google has 90% of the European search market for example) a good or bad thing?
Obviously in the real world monopolies are viewed with suspicion, particularly when a dominant position is then used to raise prices, unfairly squeeze competitors and generally provide a poor deal to customers. But a monopoly on its own is not enough for regulators to step in. In many niche markets (say chemicals) the investment needed to compete with a dominant incumbent would put off any new entrants, so it becomes a monopoly by default. If it doesn’t abuse its position regulators tend to just monitor the situation without taking action.
So, no-one would argue against the fact that monopolies need to be watched closely. But what is interesting is the difference between the online and offline worlds, in four key ways. Firstly, the cost of entering an internet market is relatively small – you’d don’t need to build an expensive factory, but can rely on scalable, inexpensive cloud-based servers and storage to host your business. This makes expansion easy, particularly given the widespread adoption of the internet and mobile phones across the globe, providing a proven way of connecting with customers.
The second factor that causes internet businesses to grow exponentially is the network effect. Essentially the more users on a service, such as Facebook, the better it is for everyone involved as there are more people to interact with. In turn this attracts more people in a virtuous circle. It can work the other way though – as the fate of early social networks such as MySpace show.
Thirdly, the majority of the internet services being discussed are free to consumers. So they don’t directly see any negative impact from the monopoly (such as a rise in costs). What isn’t immediately obvious to users is the price of free. Essentially their personal data is used to power advertising, direct mail and other marketing campaigns, with many consumers having a hazy understanding of what their information is being used for, or how to increase privacy settings. In fact, it is advertisers that can feel the impact of higher prices, given the online control of the internet giants.
The final difference, and one that The Economist makes much of, is the speed of change in the technology space, and how this makes today’s monopolies tomorrow’s has-beens. Companies find it hard to jump from leading one wave of innovation to competing in a new space. IBM dominated the mainframe market, but has had to reinvent itself in order to survive, while the replacement of the personal computer with tablets and smartphones has dealt a major blow to Microsoft.
However, these are still multi-billion dollar companies and have hardly withered away. Therefore in my view, technology innovation alone is not enough to regulate the internet giants. What is needed aren’t heavy handed rules, but a more measured approach that balances the needs of consumers with the speed of innovation and the potential competitive impact of monopoly positions. It is an incredibly difficult balancing act – and will require give and take from both sides if it is to succeed. Done right and new breakthrough services will be allowed to grow, but without trampling on other businesses. Get it wrong and innovation is stifled, potentially harming consumers and businesses who want to access the latest technology and services.
The tech market across Europe is on a roll. According to Dow Jones VentureSource European startups raised €2.1 billion (over $2.8 billion) in Q2 2014 from VCs, the highest amount since 2010. The average size of the 365 deals was €2.2 million, up from €1.5 million in Q3 2013. Essentially that means every day of the quarter four startups got funding from VCs.
At the other end of the company journey, Tech.eu counted 92 tech exits in Q2 2014, up 70% from Q1 2014. 10 of these were IPOs, showing a healthy move back to the stock market for tech companies. And while deal size was undisclosed in 72% of cases, 15 were for over €100 million.
So, does this mean that everything is rosy in the tech market and your startup will receive its deserved funding in a heartbeat? Unfortunately not, and there are three worrying points behind the figures:
1 What is a tech company?
I’ve always been suspicious/puritanical on what makes a startup ‘tech’ rather than part of any other sector. Taking a look through both the Tech.eu list of exits and its corresponding index of EU tech funding rounds so far in 2014, I don’t see that many companies I’d class as technology. IPOs and exits included:
- Takeaway platform Just-Eat (food)
- Zoopla (property)
- Markit (financial information)
- Oldford Group (gambling)
- M and M Direct and Game Digital (retail)
- eDreams Odigeo (travel)
- Jobsite (recruitment)
Companies that received the largest amounts of funding mirrored this list – Delivery Hero, which has raised $285 million to date, is an online food ordering platform, while Ozon ($150 million) is an online Russian retailer.
There are what I’d consider genuine tech companies receiving funding (Klarna is a payments provider, Tradeshift is B2B software and Elasticsearch is a search and analytics engine). And looking at the IPOs, Zendesk (customer service software) also fits into my narrow definition of proper tech.
Obviously consumer facing companies need large amounts of funding – they have to market themselves and launch into competitive marketing which takes cash. But my complaint is that technology is part of every business, so just because you sell via the web, that doesn’t make you a tech company. After all, in the early days of the telephone, no-one created a new category for businesses built on the communications power of the phone. By lumping these companies into ‘tech’, investors and commentators overlook the genuine technology companies making software and hardware in favour of more glamourous consumer businesses. It was exactly the same issue in the dotcom boom, with anything that had a website being lauded to the skies as a tech pioneer.
2 Europe lagging the US
The European figures for funding look strong, but in the US private tech companies raised $13.8 billion in the same period. We’re talking about a similar size market in terms of people, yet nearly five times the investment. No wonder that many EU tech firms are crossing the pond to tap into US funding. Zendesk is a good case in point. While founded in Denmark, its successful IPO was on NASDAQ, where it has seen its share price nearly double from $9 to around $17.97 currently.
Clearly, there are structural and funding issues that need to be addressed to convince European companies that this is where they need to build their startups if we are to build a vibrant tech sector across the EU.
3 Selling out too soon?
Some companies are never going to have the scale to survive on their own and fit better as part of a larger entity. So, trade sales are a vital part of the tech ecosystem – investors get their money back (hopefully), enabling them to invest elsewhere, while founders and management teams are able to move on to the next big idea.
But looking through the crop of acquisitions the largest amount (37%) were by US companies. Facebook and TripAdvisor made two European acquisitions, and the likes of Cisco and Intel bought one business each. The risk is that too many smart European tech businesses don’t turn into long term, billion dollar companies with their own ecosystems around them, as they don’t get the chance to grow before being snapped up for their technology or market position. That holds back the wider European tech economy and reinforces US dominance. It would be good to see longer term backing for European tech, with more IPOs and acquisitions by local companies, rather than selling out to US giants.
I don’t want to come across solely as a whingeing naysayer, as it is great news that funding is up for tech businesses across Europe. But I think there needs to be a narrower focus on what tech actually is amongst the media and investors, and a longer term attitude if Europe is ever to come close to building a sustainable tech economy across the continent.