Don’t Follow Europe on Tech Regulation

Policy-makers in the EU are about to finalize new digital-platform rules, many of which mirror U.S. proposals currently stalled in Congress. Like past European tech regulation, the EU’s Digital Services Act (DSA) will bring harmful unintended consequences for consumers and businesses. American politicians should reject this approach and keep to the regulatory regime that’s helped make the U.S. a global tech leader.

The DSA mainly focuses on content-moderation issues and digital advertising practices. While the final text of the legislation has yet to be released, it’s known that the regulations demand transparency for how algorithms operate, outlaw certain targeted advertising and impose new obligations around content moderation.

The DSA mandates that large platforms make their algorithms transparent to users. Meaning, Netflix will have to explain why it recommends the shows it does and Facebook must explain its sorting of content in newsfeeds. The U.S. has an assortment of similar legislative proposals.

Never mind that Facebook and Twitter already offer the option of a chronological feed. The market has responded to consumers’ desire for that alternative, so there’s no need to regulate. Also, one suspects that many consumers benefit from the recommendations Netflix, Amazon, and Google make and do not wish to understand the process in all its technical detail. Not everyone wants to know how the knackwurst, kielbasa, or chorizo (pick your EU nation) is made.

The DSA also bans targeting advertising based on a user’s religion, sexual orientation, or ethnicity and prohibits targeted advertising to minors altogether. This is similar to the Banning Surveillance Advertising Act, introduced this year by Representatives Anna Eshoo (D., Calif.), Jan Schakowsky (D., Ill.) and Cory Booker (D., N.J.). In practice, it’s likely the EU rule and the proposed U.S. legislation would hit smaller, niche businesses that rely on more narrowly tailored advertising hardest. Start-ups selling a very specific item or service need the best information about who might be a potential customer for their handmade soaps, organic produce or monthly pet-toys subscriptions. One can’t interrupt decades of information flow that began in direct-market advertising without collateral damage. Less advertising revenue to publishers of websites might mean less total content online.

That the distortion in the online advertising ecosystem benefits the biggest players at the expense of the little guys is a repeat performance of Europe’s privacy law, the General Data Protection Regulation (GDPR). A recent working paper from the National Bureau of Economic Research found that “GDPR induced the exit of about a third of available apps; and in the quarters following implementation, entry of new apps fell by half” on the Google Play store. Those are the smaller developers that use Google’s larger platform for distribution. The authors write, “Whatever the privacy benefits of GDPR, they come at substantial costs in foregone [sic] innovation.” The same poor tradeoffs would prove true for the DSA.

Perhaps the messiest part of the DSA is the obligation for platforms to justify their removal of content and provide a process for user appeals. Individual countries will determine what content is and is not illegal, potentially creating a patchwork of 27 different and conflicting standards. In general, the DSA imposes the biggest regulatory burdens on the biggest platforms. That’s a quiet acknowledgement of cost burdens, but this heightened compliance requirement will be burdensome even for the largest companies, those with 45 million users or more in the EU.

Content moderation is fundamentally different in the U.S. because platforms enjoy the protections of the First Amendment. That means platforms cannot be forced to carry speech that they do not wish to host. Section 230 buttresses those protections by acting as a procedural fast lane, sparing platforms the trouble and cost of litigating the question every time it’s challenged in court. But Section 230 is under threat of repeal from members of both political parties in Congress. If successful, those changes would prove a net loss for the proliferation of third-party speech online.

The EU has a poor track record for over-regulating farther up the tech stack, too. The utility-style approach to telecommunications proved problematic under the increased strain on the networks during the Covid pandemic. With so many Europeans working, learning, and being entertained online, officials had to ask for throttling, or slowing down of data, by edge providers for fear of the network becoming overwhelmed. Contrast that with the American experience: Repealing utility-style net-neutrality regulations in 2018 spurred increased private investment, and the resulting more robust network was able to handle the increased demand with few problems.

Past regulatory failures should make the EU think twice about going down the same heavy-handed path again. It’s no accident that not one of the top ten tech companies globally are from the EU. The DSA is another example of why Europe is a nice place to visit, but you wouldn’t want to be regulated there.

Read the full article at National Review