Digital economy

The Digital Economy is worth three trillion dollars today.[12] This is about 30% of the S&P 500, six times the U.S.’ annual trade deficit or more than the GDP of the United Kingdom. What is impressive is the fact that this entire value has been generated in the past 20 years since the launch of the Internet.

It is widely accepted that the growth of the digital economy has widespread impact on the whole economy. Various attempts at categorizing the size of the impact on traditional sectors have been made.[13][14]

The Boston Consulting Group discussed “four waves of change sweeping over consumer goods and retail”, for instance.[15]

In 2012, Deloitte ranked six industry sectors as having a “short fuse” and to experience a "big bang” as a result of the digital economy.[16]

Telstra, a leading Australian telecommunications provider, describes how competition will become more global and more intense as a result of the digital economy.[14]

In 2016, the Digital Economy represented $11.5 trillion, or 15.5 percent of global GDP – 18.4 percent of GDP in developed economies and 10 per cent in developing economies, on average. It found that the digital economy had grown two and a half times faster than global GDP over the previous 15 years, almost doubling in size since 2000. Most of the value in the digital economy was produced in only a few economies: the United States (35 percent), China (13 percent) and Japan (8 percent). The EU together with Iceland, Liechtenstein and Norway accounted for another 25 percent.[17]

The digital economy has had a substantial impact on retail sales of consumer product goods. One effect has been the fast proliferation of retailers with no physical presence, such as eBay or Amazon.[18] Additionally, traditional retailers, like WalMart and Macy's have restructured their businesses to adapt to a digital economy.[19] Some retailers, like Forever 21, have declared bankruptcy as a result of their failure to anticipate and adapt to a digital economy.[20] Others, such as Bebe stores have worked with outside vendors to completely convert their business one that is exclusively digital.[21] These vendors, such as IBM, Microsoft and Branded Online, have [22] enabled smaller retailers to compete with large, multi-national established brands.[23]

Both development and exploitation of intangible assets is a key feature of the digital economy. This investment in and development of intangibles such as software is a core contributor to value creation and economic growth for companies in the digital economy.[3] In early 2000, companies have started to substantially increase the amount of capital advocated to intangibles such as branding, design and, technology rather than in hardware, machinery or property.[24]

Advancements in information and communication technologies (ICT) have significantly reduced the cost associated with the organization and coordination of complex activities over a long period. Long businesses are increasingly able to manage their global operations on an integrated basis from a central location that may be removed geographically from both the locations in which the operations are carried out and the locations in which their suppliers or customers are located. Consequently, it allowed to expand access to remote markets and thus, provided an opportunity to provide those goods and services across the borders.[3]

The Digital economy relies on personal data collection. In 1995, the Data Protection directive (Directive 95/46/CE, art.2), defined data as “any information relating to a natural person who can be identified by reference to his identification number or to information which is specific to him”.  At that time, this regulation emerged in response to the need to integrate the European market. By adopting common European data protection standards, the EU was able to harmonize conflicting national laws that were emerging as a trade barrier, inhibiting commerce in Europe.[25] For this reason, GDPR and its predecessor were viewed as internal market instruments, facilitating the creation of a digital, single market by allowing an unhindered flow of data within the entire common market.[26]

Due to its ability to bridge the information asymmetry between supply and demand, data now has an economic value. When platforms compile personal data, they gather preferences and interests, which allow companies to exert a targeted action on the consumer through advertising. Algorithms classify, reference and prioritize the preferences of individuals to better predict their behavior.[27]

Via free access to platforms in exchange for the collection of personal data, they make the content non-rival. Thus, the intangibility of content tends to give a collective natural aspect to this information accessible to everyone, to benefit public good which would create a digital public space.[27] The McKinsey Global Institute Report (McKinsey Global Institute report, 2014) notes five broad ways in which leveraging big data can create value for businesses:

1. Creating transparency by making data more easily accessible in a promptly on time to stakeholders with the capacity to use the data.
2. Managing performance by enabling experimentation to analyze variability in performance and understand its root causes.
3. Segmenting populations to customize products and services.
4. Improve decision making by replacing or supporting human decision making with automated algorithms.
5. Improve the development of new business models, products, and services.[28]

In 2011, the Boston Consulting Group estimated that personal data collected in Europe was worth 315 billion euros.[29]

This new economic model is based on the 'Network effect'. It occurs when the value of a product or service to  the user increases exponentially with the number of other users using the same product or service. For instance, WhatsApp provides a free communication platform with friends and contacts. The utility to use it relies on the fact that a substantial part of or friends and colleagues are already users. The attractivity relies here on the snowball effect [30]

The Digital market is a market can be labeled as a ‘multi-sided’ market. The notion developed by French Nobel prize laureate Jean Tirole is based on the idea that platforms are ‘two-sided’. This feature allows to explain why these platforms can propose freely their content, with customers on one side and the software developers or advertisers on the other. On a market where multiple groups of persons interact through platforms as intermediaries, the decisions of each group affect the outcome of the other group of persons through a positive or negative externality.[31] When the users spend time on a page or click on links, this creates a positive externality for the advertiser displaying a banner there. The digital Multinational enterprises (MNEs) do not collect revenue from the user side but from the advertiser side, thanks to the sale of online advertisement.[29]

As a result, the outcomes of these intertwined and combined effects tend to lead to the formation of dominant market positions, also called digital monopoly or oligopoly[3] In this sense, digital platforms such as the GAFA (Google, Apple, Facebook, and Amazon) can be considered as first movers -large companies that introduce a service or a product on an immature market, allowing that company to establish strong brand recognition and service loyalty.[32]

The Digital Single Market (DSM) was included as part of the SMA I and SMA II initiatives. Even if the question had already come up earlier in 1990 and was brought up again later in 2010,[25] it emerged at a sensitive moment in the post-crisis of 2008, used as a catalyst for action.[41] The crisis opened a window for opportunities to place the Single Market upfront in the European agenda and was aimed to resolve two issues: financial supervision and economic coordination.[42] This gave a new dimension to the Market. The proposal for the DSM had been made under the strategy of the Commission entitled “Digital Agenda for Europe” in the political guidelines of the second Barroso Commission and pointed out the need to eliminate barriers in order to implement the European Digital Market as an attempt to relaunch the Single Market. This strategy was similar to the one used for the Internal Market in 1985 [43] and focused on one of the weaknesses of this latter namely the fragmentation of the national digital market. Building on the Monti report, the communication 'Towards a Single Market Act' detailed 50 proposals to reform the SM by the end of 2012. But the DSM was only adopted in 2015 and the proposal for a directive of the European Parliament and the Council was made in September 2016.

The DSM is presented as a key priority in the economy of Union, even if there were several attempts to deepen the integration, there are still obstacles remaining. The creation of the DSM constitutes, a catalyst to resolve several issues, and was supposed to have a widespread multiplier effect throughout sectors across the EU.[43] The EU Commission had to face several obstacles. The commission acts in a way to deeply transform the SM. However, the EC lack of political support to enhance the impact of its decision[42] The issue of the low salience was a causal factor explaining the limits of the commission's commitment to reform the single market. Even though the member states approved the DSM, and the definition for the DSM was accepted by European institutions as a key priority, only one proposal was adopted at the end of 2012. Despite being a priority in the SMA I & II, legislative initiatives failed due to the high cost of implementation measures. Also, there were its potential ‘blockbuster for economic gains’ [42] and the protest of citizens against sovereign debt countries rescues and bail-out banks. The slow adoption of the proposal is partly due to Member States’ protectionist temptations after the economic crisis. Each state wanted to put forward its preferences and legislation about concerning this field.

With regard to artificial intelligence (AI), the Commission adopted various initiatives with no meaningful coordination. The more pervasive the digital ecosystem becomes, the more sector-specific regulatory framework should be merged into general regimes.[44]

Even if the Commission used the crisis as a window of opportunity, it did not allow to go deeper and further in implementing a high transformation of the Single Market (SM). The crisis context pushed the political actors to move forward to better manage the crisis, but it does not permit to fully implement the DSM.

One of the key priorities of the EU is to guarantee fair competition. Yet, within the Digital Market, the competition seems to be distorted.[45] The more network effects are exerted, the higher the barriers to entry (difficulty for a new entrant to enter the market and compete) in the hub market. Vertical or horizontal mergers and acquisitions take place in closed ecosystems.[46] In order to limit this digital ecosystem to absorb all the market are the tools, the EU aims to qualify them either as an “abuse of dominant position” or  a “cartel” which are against the competition prosperity within the Single Market. Digital companies such as the GAFA prosper thanks to their various free services that they make available to consumers,[47] which seems to be beneficial for consumers, but less for other firms to compete in a fairway. It seems difficult for the regulators to sanction them, in the way that the GAFA provides jobs and services worldwide.

The problems remain plural for the regulators. They need to identify and define platforms. There is no possibility to regulate exante to limit the size of the platform. The European Commission can sanction afterwards when the platform abuse already of its dominant position. Moreover, Member-states lack coordination, and may be independent of the regulator, who can not have a global vision of the market. Tax evasion of digital MNEs has become a growing concern for most of the European governments, including the European Commission. Attracting foreign investment is less and less seen as a relevant reason to implement tax cuts. Aside from the fiscal revenue shortfall, this issue has taken a political turn in recent years since people and politicians feel that, in a time of financial crisis, these highly profitable firms do not contribute to the national effort.[29]

Digital Market is characterized by its heterogeneity [48] The European Market is in a difficult position  to compete with other advanced countries within the Digital World (such as US or China). There are currently no European digital champions. The European Digital Market is divided in regulations, standards, usages and languages [48] The MS cannot meet the demand, or support innovation (R&D), due to the fact that the digital environment is by nature transborder.[49] As noted by the European parliament, taxation on Digital Market could bring about 415bn euros to the EU economy,  and be considered as an incentive to further deepen the EU integration (EP opinion's 2014).

The EU control ex-post (in the case of abuse of dominance for example) and seems to be very cautious in term of concurrence (exclusive competence). The EU sanctions cartels’ behavior and examines mergers in order to preserve competition and protect small and medium enterprises (SMEs) to enter the market. Within the digital market, the merger is the rule to build a digital giant, it can be a brake to construct digital European giant. Indeed, in a way, the EU regulator may handicap giant to build themselves, and do not inject as well money in the sector. Moreover, the EU could be a leader in regulation to protect people working in the digital sector or for the digital sector (such as Uber’s driver, a case recently in France), which could a window of opportunity. However, the EU needs to be cautious with its regulation in order to create barriers at the market entry.[46]

The European Commission (EC) decided to fine Google €2.42 billion for abusing its dominant position as a search engine by giving an illegal advantage to Google Shopping.[50] The EC aimed to pave the way to concurrent who suffers from its abuse of dominant position.[51] Moreover, it proved that the strategy of the EC does work and may fine companies at a great rate.

The Digital Economy has been a concern for the Commission concern since the 1st Barroso Commission. Yet, it is only under the Junker that the strategy of the DSM was adopted on the 6th May 2015 as it was ranked as the second priority out of the 10 priorities for the new Commission’s mandate. Throughout this document, the DSM emphasized 3 policy pillars:

1. improving access to digital goods and services
2. an environment where digital networks and services can prosper
3. digital as a driver of growth.[52]

As a key priority for the newly President-elect Juncker, he made Andrus Ansip, the vice-president of the Commission, in charge of the DSM. The decision to approach the DSM from a different point of view is also because the digital space is in constant evolution with the growing importance of online platform and the change of market share.[43] The DSM was a priority because of its economic importance; the total of EU e-commerce reached 240 billion € in 2011, and out of that 44 billion were cross-border trade between member state.[53]

In 2020, the digital economy continues to be a top priority for the EC, and belongs once again to the agenda of the Commission president. Frans Timmermans has been designed to be the vice president in charge of one of the six priorities of the EC, called “A Europe fit for digital age”. The priority is elaborated as follow, EC is working on a digital transformation that will benefit to everyone . These goals are set to open up new opportunities for businesses, to boost the development of trustworthy technology, foster an open and democratic society, enable a vibrant and sustainable economy, and help fight climate change and achieve the green transition. The strategy of digital economy is included in a wider strategy for the future of Europe. However, as explained on the EC's website, the aim to become a global role model for the digital economy fit within the EU's goals for decades, as it is the aim in the environmental field. However, the EU had to review its aim in this field, and becomes a 'Leadiator'. It is possible that in the Digital Economy, the EU has to behave and evolves in the same way, because the champions of the digital sector aren't European, which creates a handicap in the way the EU refrain from legislating. The EU cannot restrict the offer to its citizens, because digital leader are not mainly Europeans. One objective of the single market is to make available the better quality at the better price, and propose a better choice to its citizens.

The digital economy is also qualified as "intangible capitalism"f which fosters inequality and social division. In 2017, Haskel and Westlake published “capitalism without capital” which raises concerns about policymakers’ inability to tailor from the transition of the traditional economy to the New Economy based on intangible assets. From the mid-2000s onwards, companies have been investing more in ‘intangibles’ such as branding, design, and technology than they have in machinery, hardware or property.

Businesses such as Uber do not own cars, they own software and data. Coffee bars and gyms rely on branding to help them stand out from the crowd. Pharmaceutical companies have vast budgets for marketing as well as research and development.[24]

As opposed to the traditional production where the marginal cost of production decreases after the first unit produced which does not apply to the software. Once the first unit is produced such as data, insurance, e-books, even movies, the rest of the production is virtually free. As the proportion of the world's economy that does not fit the old model keeps getting larger, it has implications for a wide range of policies.[54]

The intangibility of assets may widen the gap between small and medium enterprises (SMEs) and multinationals enterprises (MNEs). On the one hand, the current bank system struggles to value and monitor immaterial assets. In the old days, when a company went bankrupt, banks could recover their money by selling the physical assets such as buildings, machinery, etc. Yet, if the intangible assets drop, those assets can not be sold easily as the value of the company goes down. As a result, SMEs are more reliant on venture capital which is different than bank financing. The easier access to resources allow MNEs to benefit from synergies of the intangible assets. For instance, in creating the iPod, Apple combined MP3 technology with licensing agreements, record labels, and design expertise to produce a winning product. This ability to combine technologies and then scale up to help these companies to increase their dominant position on the market.[24]

The digital economy has accelerated the spread of global value chains in which Multinationals enterprises (MNEs) integrate their worldwide operations.[4] These advances, coupled with liberalization of trade policy and reduction in transportation costs, have expanded the ability of businesses in all sectors to take advantage of global value chains in which production processes can be geographically dispersed in locations around the world to take advantage of the features of local markets.[3] It is easier for firms to implement their activities where there are low wages and to coordinate their activities from countries with high wages.

The rise of online platforms raises concerns in terms of legal questions about social security and labor law. Since the 2007-2008 financial crisis, there is an increase in 'uberization' of work. As within a company that gives its name to this phenomenon, workers are defined as ‘independent workers’ (with temporary, off-site, autonomous contracts) which challenges the application of labor and occupational health and safety law. As a result, online platforms encourage the flexibilization of jobs and a higher volatility of the labor market rather than on traditional companies.[55] ‘Gig economy’ companies such as Deliveroo and Uber hire drivers which are self-employed and sign a contract with the digital platform while the way they work is much regular to a regular employee statute. Yet, for the first time in March 2020, France's top court (Cour de Cassation) ruling acknowledged that a Uber driver could not qualify as a ‘self-employed’ contractor because he could not build his clientele or set his prices, establishing a relation of a subordinate of the company.[56]

Digital platforms rely on 'deep learning' to scale up their algorithm's capacity. The human-powered content labeling industry is constantly growing as companies seek to harness data for AI training.[57] These practices have raised concerns concerning the low-income revenue and health-related issues of these independent workers. For instance, digital companies such as Facebook or YouTube use ‘content monitor’-contractors who work as outside monitors hired by a professional services company subcontractor- to monitor social media to remove any inappropriate content. Thus, the job consists of watching and listening to disturbing posts that can be violent or sexual. In January 2020, through its subcontractor services society, Facebook and YouTube have asked the ‘content moderators’ to sign a PTSD (Posttraumatic Stress Disorder) disclosure after alleged cases of mental disorders witnessed on workers.[58]