Issues & Insights

Are Unicorns Headed for Extinction in the EU?

Unicorns may be on their way toward extinction in the European Union (EU). And no, I’m not talking about the mythical creature.

The business climate in Europe is becoming even more unfriendly toward fostering innovation and “unicorns” — which are startups valued at more than $1 billion. Last year, General Data Protection Regulation (GDPR) — the overbroad privacy rule that has the potential to conflict with free speech and crush small businesses — went into effect across the EU. And this year, the stranglehold tightens as the EU finalizes draconian copyright rules.

The new Copyright Directive, approved by the European Council in February and voted into law this spring, would make web platforms liable when users upload copyrighted content without permission. More, the rules impose strict limits on how much content can be reproduced — no more than “individual words or very short extracts,” unless the user has a license. The result? Search engines will have to pay content owners millions of euros simply for quoting content, and anyone who wants to upload content onto a digital platform will pay for an upload filter. 

Rules like these constrict an informed society, make the Internet more expensive and discourage innovation and creation of early-stage startups that need these platforms to do business. They will also frustrate larger tech companies, such as Google and Facebook, and their users as they choke discovery of and access to new sources of content.

The EU often opts for protectionism over innovation. Rather than supporting homegrown innovators and spurring international competition with business-friendly policies, European countries use protectionist rules to hamper international industry leaders.

But it’s not a winning strategy.

The Consumer Technology Association’s International Innovation Scorecard evaluates nations based on the strength of their innovation ecosystems and ranks them in four categories — from “Innovation Champion” at the top to “Modest Innovator” at the bottom.

On the surface, the U.S. and the EU have much in common. They are comparable in the size of the land mass and population, have high levels of intellectual freedom, best-of-the-best in terms of human capital and resilient infrastructure. But the EU falls far behind the United States in one key area: unicorns. 

Between 2009 and 2018 alone, the U.S. produced an impressive 133 unicorns. During the same time, the EU produced merely a fraction of that: just 28.

This disparity isn’t a fluke. It’s the result of a fundamentally different approach to regulation of innovation.

The EU has more regulation, higher taxes and more restrictions on new technologies like the internet. The U.S. has taken a more market-oriented approach rather than restrict innovation.

For example, the Sony Betamax case rejected an effort by content creators to make the VCR illegal and the 2012 SOPA/PIPA protests led Congress to abandon an effort to give any content owner power to shut down any web site. Thus, almost every major internet company began in the U.S. (although China blocked, copied and improved upon several American internet companies). 

The U.S. balanced regulation to allow an ecosystem where creativity, innovation and collaboration could flourish, freeing companies from the fear of crushing lawsuits when users share content. And the EU’s high taxes subsidize foolish government investment in failed behemoth projects like the Airbus 380, choking capital for investment in entrepreneurs and real innovation.

More, a far-sighted Congress enacted Section 230 of the Communications Decency Act, ensuring that liability for material illegally posted online rests with the bad actor, not the platform. Without Section 230, internet platforms would have to screen millions of user submissions every day or be subject to civil or criminal penalties. The massive potential liabilities would have made it impossible for our Internet ecosystem and many of our world-leading companies to get off the ground.

Some proponents of a heavy-handed regulatory approach argue that giving companies too much free rein is unfair to rights holders. But history shows otherwise: after it became clear that consumers were drawn to file-sharing services, many in the entertainment industry threw up their hands in despair and assumed that nobody could compete with something that’s free. Meanwhile, technology innovators such as Apple, Amazon and Pandora developed intuitive and lucrative paid streaming services (Indeed, the streaming service Spotify is one of the few EU-based unicorns with global recognition.). And now, the recording industry is thriving, with Universal announcing that 2018 was the best year for any music company ever.

While the EU embraces other key factors for a healthy innovation ecosystem — including high levels of R&D investment and openness to self-driving vehicles — its aggressive regulatory approach holds it back from making the most of the talent and opportunity it contains. Couple that with the unique “right to be forgotten” law and a proposed tax targeting tech companies, and it looks as though the EU may not shake its status as a second-tier “Innovation Leader” anytime soon.

The solution is not more regulation; it’s innovation.

The EU must take risks, ease back on the onerous rules and be disruptive ninja innovators. Only then will it unleash the creativity of its many startups, small businesses and companies, setting an example for the rest of the world as a global leader in innovation.

Gary Shapiro is president and CEO of the Consumer Technology Association, the U.S. trade association representing more than 2,200 consumer technology companies, and a New York Times best-selling author. He is the author of the new book Ninja Future: Secrets to Success in the New World of Innovation. His views are his own.

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