Innovation’s day in court

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EC Commissioner Martin Bangemann: Actions must be taken (…) to strike down entrenched positions which put Europe at a competitive disadvantage [EC Audiovisual Library]

In Europe, innovative companies are often taken to court when their business model does not meet the established patterns, and this may prevent the EU from becoming a large common market for digital services, argues Žiga Turk.

Žiga Turk is a professor of design communication and vice dean of the University of Ljubljana. He served twice as a minister in the government of Slovenia.

Rapid and broad adoption of innovation is possible in countries where legislators are either responsive enough to anticipate innovation and update the laws in a timely manner, or where they take a laissez-faire, hands-off approach; they don’t regulate at all or the regulation is generic, abstract and independent of technology. The US has some elements of the latter. Europe has fewer.

In Europe, we have always known what we should have been doing. Almost a quarter of a century ago a high-level group on information society – chaired by Martin Bangemann – wrote in its Report:

“Actions must be taken (…) to strike down entrenched positions which put Europe at a competitive disadvantage: it means fostering an entrepreneurial mentality to enable the emergence of new dynamic sectors of the economy; it means developing a common regulatory approach to bring forth a competitive, Europe-wide, market for information services; it does NOT mean more public money, financial assistance, subsidies, dirigisme, or protectionism.”

In the meantime, in the EU we created The Web, Linux operating system, the mobile phone, internet telephony and the MP3 codec. Innovative US companies brought to market the iPod, Internet Explorer, AltaVista and Google Search, Facebook, iTunes, smartphones and the app economy. However, Europe itself has been failing to adapt to these new technologies because it regulated itself into a straightjacket. Actually, the 28 increasingly harmonised straightjackets.

Theory of innovation has an explanation. Innovation is first adopted where it needs no permission: in private use at home. Then it enters the competitive businesses market. If businesses do not adopt innovation, they are overtaken by their competitors who do. Much slower is the adoption in the highly regulated or uncompetitive public sector. And the longest it takes for innovation to change the legal framework of a country.

In fact, innovative companies in Europe are often taken to court when their business model does not meet the established patterns. It was not happening only to large multinationals like Microsoft, it has happened to small European startups like Heetch.

A more recent innovative model taken to court is Uber. It pioneered a service running on smartphones that helps people who are looking for a ride to find a driver that would take them.

These kind of services are redefining the concept of urban mobility and serve the public interest in more than one way: by providing reliable transport, by creating work opportunities, and by reducing the congestion and the impact on the environment. All this is in a sector whose regulations go back to horses and carriages.

The Court of Justice of the European Union must now decide if Uber is a transport or an information society service. That a court has to do so is first and foremost a failure of the legislative branch which was unable, in time, to create proper provisions for the sharing economy and services that make it possible.

Now that Uber is in court, the court has an opportunity to stand for why it’s here in the first place: protect and defend the common market against “dirigisme and protectionism”. Now that the globalisation is in retreat and protectionism is on the rise2 it has an opportunity to demonstrate that in Europe we fight protectionism even when a US company is at stake.

Although the EU’s economy is growing, there are many European countries where work is still hard to find, especially for young people. Since we are increasingly concerned about the environment, new business models can also open up more efficient kinds of mobility.

As a professor of design communication, I teach students about processes in the industry. We are making baseline distinction between information processes and material processes. They are easy to distinguish. If you measure it in bytes and can send it by the internet it is an information product or service. If you measure it in kilos or meters and need a car or a truck it is a result of a material process.

Uber is clearly an information service – providing riders and drivers information of each other. This information is exchanged on the Internet. Such information existed in some rudimentary form before, but innovation in technology is, firstly, significantly improving the quantity and quality of information, and secondly, decoupling information services from the material services.

This is a natural result of the specialisation which, as we know, is a major engine of productivity growth and prosperity – for societies in general and for those offering and using the services in particular. Obstructing innovation makes everyone worse off.

The court has a chance to contribute, as per Bangemann Report, to “developing a common regulatory approach to bring forth a competitive, Europe-wide, market for information services”.

This common regulatory approach for information services has been created on EU level. Such information services exist about travellers and drivers, tourists and hotels & apartments, makers and shoppers.

If they are properly interpreted as information services, they would be Europe wide, contributing to the single market. If they are interpreted as a part of an underlying material service, they would contribute to the continued fragmentation of the single market. And, more importantly, prevent the EU from becoming a large common market for innovative digital services not yet discovered.

Forcing new stuff into old moulds has not worked in the past and will not work in the future. But it may delay the future. Not for the US-based tech company, but for all European citizens and drivers. And, more importantly, for European innovators.