SPECIAL REPORT / An explosion in the data-driven economy offers crisis-stricken Europe hopes of recovery, but policymakers who lack the means to measure the phenomenon face challenges in a sector bracing for new regulation.
Services linked to information and communication technologies have consistently outperformed an otherwise lacklustre economy, growing by 5% to 10% in 2012, according to the Organisation for Economic Co-operation and Development’s Internet Economy Outlook, published last October.
The explosion in supply of tablet PCs and smartphones, and the opportunities for online data storage in the cloud, have helped buoy the ICT sector even during the 2008 financial crisis. The OECD report says larger firms recorded 6% growth in annual revenue between 2000 and 2011.
In tough loan capital markets, ICT is bucking the trend too, the OECD said, since the sector bagged more than 50% of all venture capital in the United States, the world’s largest market, in 2011. In Finland, one of Europe’s ICT hotpots, the sector accounts for more than 1.5% of GDP. ICT is showing the highest investment figure for the sector since the 2000 dot-com bubble.
But since that last peak in internet-based economic activity, there has been a sea change in its influence over all sectors of the economy, with the transformation of the markets in music, video, software, books and news media.
The OECD report pointed to how the internet is reshaping the way individuals live, not only in their buying patterns – through the variety of digital goods and services, lower prices, more distribution channels – but also the way they work and are hired, with one in five users using the medium as a recruitment tool.
'Third wave' of internet development
Internet development is on the cusp of a further expansion into sectors not previously associated with communication capabilities – further increasing its potential as a driver for growth – according to another report published last October by consultants McKinsey.
Electricity plugs, automobiles and even light bulbs are increasingly connected to the internet as a way to introduce new functionality. This “third wave” of internet expansion, often referred to as "the Internet of things" is expected to connect anywhere from 10 to 100 devices per family, and potentially millions of devices per company, the report claimed.
This success poses questions for businesses and policymakers alike, however, with issues of trust, privacy and questions surrounding how to harness the digital economy – and how to measure the economic success of the phenomenon – all proving problematic.
As a myriad of signals and data are delivered across multiple devices and networks, the internet is providing information about people to third parties, increasing information security and privacy considerations.
Risks identified by the McKinsey report showed identity theft, loss of intellectual property, violations of privacy, and abuse and damage to reputations as the key issues that companies will need to address.
To address those risks, the European Commission has tabled proposals for a new data protection regulation in January 2012, aimed at safeguarding the privacy of personal data on the internet.
But the proposed legislation is set for a stormy passage through the EU’s legislative machine this year, following the first report on the dossier – submitted last month by the European Parliament’s committee on civil liberties, justice and home affairs.
German Green MEP Jan Philipp Albrecht, who is drafting the Parliament's position on the proposal, told EurActiv he is confident that the House can agree a common position on the paper by April, with a view to beginning negotiations with member states in the EU Council of Ministers.
Questions of control and questions of harnessing success
The big question mark is the position of the 27 EU member states, which have still to adopt a common stance on the issue.
The Council’s take remains unclear for now, with some countries opposed to a regulation in any form, and the position of Germany – which will be decisive – remaining ambivalent.
Albrecht acknowledged that keeping the new rule on schedule for this Parliamentary session, which expires in 2014, will require vigilance.
A key flashpoint will be the interaction of the new European regime with overseas, and particularly US, standards.
On cybersecurity – for which the EU executive is on the verge of announcing a new strategy – there are also tensions as private industry frets over the extent to which it will be obliged to disclose the level and nature of the data security threats they face.
Assessing the impact of the internet economy
The boom in the internet economy does not only pose problems relating to control, however. Understanding how to harness innovation, create the right conditions for new business and understand the extent of the internet economy at all represent challenges.
As the Commission looks to unroll its new 'Horizon 2020' research framework programme, it is seeking to find ways of encouraging the digital economy to rediscover Europe’s role as pioneer of the early internet revolution.
A major difficulty for policymakers is to assess the underlying economics, size and potential of the internet sector before adopting policies.
Internet companies have anticipated those questions and published their own assessments. A recent report commissioned by Facebook through accountants Deloitte valued the indirect economic impact of the company at €15.3 billion for the European economy, claiming it supports 232,000 jobs on the continent.
This is one of a number of reports which give various assessments of the value of the data-driven economy to the continent.
Data call for new thinking on economics statistics
In a policy brief last autumn for the Progressive Policy Institute in Washington, Harvard economist Michael Mandel argued that “economic and regulatory policymakers around the world are not getting the data they need to understand the importance of data for the economy.”
Mandel cited the fact that Eurostat – the European statistical agency – reports how much European businesses invest in buildings and equipment, but not how much those same businesses spend on consumer or business databases, as evidence of a malaise.
“Since the modern concept of economic growth was developed in the 1930s, economists have been systematically trained to think of the economy as being divided into two big categories: ‘goods’ and ‘services’. But data is neither a good or service,” according to Mandel.
He believes that the key statistics watched by policymakers - economic growth, consumption, investment, and trade - dramatically understate the importance of data for the economy, and that “these misleading statistics distort government policy”.
Issues surrounding the quantification of the data economy are likely to resurface as policy debates intensify. Specifically, moves by the French government to seek revenue from so-called ‘over-the-top’ suppliers of internet services – such as Google – for their relative consumption of broadband bandwidth, open up new questions over the taxation of internet sector companies.
If a special case can be made for taxing the internet, the sector will call for more recognition as an economic driver.
“The digital economy is crucial for European growth, as well as having the potential to deliver other EU policy objectives, such as decarbonisation of economic activity, labour market integration of older workers or improving the efficiency, effectiveness and personalisation of public service delivery,” said Fabian Zuleeg, the chief economist at the European Policy Centre.
“There is significant growth potential in the digital sector itself, but, even more importantly, ICT is an enabling technology, which can transform how business is conducted across the vast majority of sectors, if not indeed all of them. ICT can boost productivity and increase competitiveness of Europe's industries, safeguarding jobs in future. But to realise these benefits will require concerted policy action to ensure that national barriers are removed to deliver a pan-European market,” added Zuleeg.
“Broadband, and the Internet in general, have become, what we call in the OECD, a general-purpose technology,” said Taylor Reynolds, OECD’s senior policy analyst on the Internet economy. He also believes there is a need for more international co-operation to “strengthen Internet governance and ensure the continuing free flow of information.”
- April 2013: Parliament expected to agree a position on the Commission's proposals for a data protection regulation
- 2013: Proposals for a cyber security strategy to be unveiled