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Growing European Issues Imperil U.S. Tech Business Models

stacks_image_354Apple, Google, and Facebook are playing a game of high-stakes global brinksmanship around who has rights to control their data, which impacts their European growth prospects, business models, and ultimately stock valuations.

From Paris to Berlin and from Madrid and London to Moscow, the tech giants find themselves in battles over data privacy, taxation, national politics and other sovereign interests which are foreign to the business environment in the United States.

To say the primary issue is economics oversimplifies a range of nationalistic issues that would usually be reserved for discussions with other nation-states. The root of the emotions driving national demands is a sense of being invaded, even “colonized,” and not knowing where the invasion will end.

As reported in the Wall Street Journal, France and Germany have recently acted to curb the business practices of top U.S. tech firms, with overwhelming approval by the European Parliament of a resolution which calls for actions aimed at possibly breaking up Google.

European Data This resolution follows a reported five years of investigation and failed settlement discussions in which the search giant was accused of dominating the European search market in a way which “promotes its own businesses” over the interests of local firms.

Emotions run high and the issues deep. Anne Sander, a French lawmaker with the European People’s Party, justified such strong measures to ensure that Europe’s fate is not one of being ensnared into being “a colony of the new digital world” where U.S.-based tech giants gather information from European citizens which is used to fuel sale of online advertising. Profits therefrom are sent back home to America, providing limited if any taxation revenue.

This characterization overlooks the value received by local citizens from the social media and search capabilities received. Further, there are typically no alternative local purveyors of such services to tax in any regard.

Layered in the discussion and beyond economics burrows the highly emotional subject of the “right to be forgotten,” where data considered harmful or otherwise undesirable is deleted from search results. On this point national laws differ, with the Continent’s emphasis on national privacy clashing with those of the U.S., which emphasize freedom of speech. From his vantage point, Google’s Eric Schmidt maintains that search users have a “right to know” that information which has become public, a belief conflicting with the selective censorship desired in Europe.

Issues exist in varying forms. England has recently announced a “Google tax” targeting profits of U.S. tech firms reaped locally. Russia and Turkey, which demand censorship control over information Google, Facebook and Twitter convey regarding “subversive” and selected local political matters.

All of this ultimately leads to the question of who controls the information flowing through the Internet. Pressures on tech firms to comply with nationalistic desires vary. Russia and others threaten to block U.S. social media services if their demands are not met. Other European countries want local data stored in local computer centers.

Such arguments are not without their detractors. Some argue that a wave of new regulation might discourage tech investment and slow technology advancements throughout the Continent. And given the variations in national interests, a common voice will be difficult to come by, ultimately slowing regulatory progress against the tech firms.

At issue for U.S. firms is not only the impact economically but on their business growth and data security standards. Fragmented business models where data stored in a computer center in France might very well lead to local jurisdiction for data protection, access and use and by extension, conflicting standards from multiple nations.

Where all of this will lead is yet to be determined. Rivalry with the U.S. is a recurring theme in European politics, particularly as the U.S. is recovering from its recession while European economies track sideways and the Euro weakens. Such forces can drive policies which are in essence expressions for protectionism as countries urgently attempt to keep some of the surging U.S. digital business for themselves.

In a larger sense, it may be argued that the issues being experienced by Europe are normal fallout from the disruption in business models that digital technology enables. Thus Europe may easily see room-provider AirBnB, ride-sharing transport firm Uber and instant messaging service Instagram as growing benefactors of the same competitive rights claimed by U.S. tech firms.

As the battles wage on in Europe, the tech giants are experiencing different issues in their financial markets. Continued revenue and profit growth to fuel rich stock valuations is increasingly dependent on markets outside of the U.S., with Europe a prime target. Until some resolution on the European issues is evident, U.S. firms will operate under a veil of uncertainty that has turned some on Wall Street cautious.

Bank of America Merrill Lynch analyst Justin Post recently downgraded Google shares, citing European regulatory risk, stating that these clashes pose “one of the greatest threats to U.S. technology giants since their emergence from garages and college campuses over the past four decades.”

Clearly, the bountiful rewards from digital disruption do not come without costs.

By James McFarlin

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