Innovate or Regulate: A False Choice for the Digital in Brazil

Less than a ‘gun to the of big techs’ heads, in some countries regulation can ensure more innovation and national development

Por James Görgen*

Original available in Portuguese at: https://www.jota.info/opiniao-e-analise/artigos/inovar-ou-regular-uma-falsa-escolha-para-o-digital-29042024---

In last May, the Ministry of Finance of Brazil has concluded a public consultation aimed at gathering, in a timely and strategic manner, information on the economic and competitive aspects of digital platform regulation. As demonstrated by a seminar held by the Ministry, the debate is only beginning but already presents some arguments that we will see repeated many times until we approve legislation that addresses the issue in a mature, objective, and balanced way.

Two claims will be most used by those who wish to combat the provision of limits against abusive economic practices in these digital markets. First, that any regulation that is not principle-based and geared towards self-regulation will hinder innovation in the country. The other argument is that excessive regulation could impact the price of services. To be on the safe side, these actors say, we should not rush into this matter or copy legislation from other countries.

Both statements assume that regulation in the field of digital technologies is an inhibitor of economic development, innovation, freedom of expression, and free competition. In other words, as has been said in similar cases, the best law would be no law at all in this topic. In the debates that have taken place around the world regarding the regulation of digital markets, this view has its antithesis.

Some actors, on the other side of the discussion, argue that the lack of regulation can result in the expansion of oligopolies and anti-competitive behavior, bringing deleterious effects due to the excessive power of large digital platforms and artificial intelligence systems over the economy, politics, culture, and innovation itself.

These polarized views have served, in some cases, to paralyze the debate and hinder the implementation of effective public policies for the development of, for example, a Brazilian digital economy, which is still in its infancy. At other times, principle-based legislation is enacted without guaranteeing that the issues arising from the abuses committed by the platforms will be properly addressed.

It is a fact that economic regulation in the form of laws, in sectors subject to accelerated technological innovation, cannot be extremely detailed, otherwise it will not only quickly become obsolete, but will effectively inhibit innovation. However, regulation, emanating from a regulatory body with legal competence to promote the integration and implementation of the rules in the context in which companies operate, cannot be so weak or generic that it fails to prevent excesses committed by players with a dominant position in digital markets.

A recent article1 by Anu Bradford, of Columbia Law School, reveals the cultural environment in which these two positions proliferated and the impact that deliberate inaction by the United States has had on the evolution of the Internet and its actors over the past two decades around the globe. The researcher demonstrates that the posture of protecting national conglomerates by U.S. legislators and governments, always leaning towards deregulation of this sector, using the arguments of freedom of expression, innovation, free competition, and a free and open Internet, began in 1996 with the publication of the Communication Decency Act (CDA).

At that time, in the early days of commercial Internet, the ideas of the free market were incorporated into the country’s legal regime, particularly evidenced by Section 230 of that Act. This regulatory framework created a sort of safe harbour that granted immunity to online intermediaries, preventing them from being legally held accountable for third-party content hosted on their platforms with few exceptions. For example, YouTube cannot be held liable when a user uploads a video promoting violence, and Meta cannot be accused of defamation when a Facebook user posts a defamatory comment about someone on the platform.

At the same time, if YouTube chooses to remove the illegal video or Meta decides to delete the defamatory post, these companies are free to do so without fearing that they are violating the user’s freedom of expression rights. This double immunity, which protects both the actions and inactions of platforms, has been seen as essential for the growth and flourishing of digital services. Proof of this is the automatic takedown tools for content involving paedophilia or those protected by copyright. Incidentally, in the latter case, a traditional source of revenue for these platforms.

The Brazilian Case

Almost 20 years after the CDA has been approved, in 2014, this approach also prevailed in the formulation of the Brazilian Civil Rights Framework for the Internet (MCI). Its Article 19 ensured that application providers could only be held liable for damages arising from third-party content if, after a court order, they did not take the necessary steps to make the infringing content unavailable. And, replicating the ideology that underpins the CDA, it was argued that this was necessary to ensure freedom of expression, promote innovation, and prevent censorship on the World Wide Web.

But unlike the 1990s, when the business models of these companies were still unknown to most policymakers, the same cannot be said of the second decade of the 21st century. The usage that some conglomerates made of user data for monetization purposes and how this safe harbor proliferated a digital laissez-faire that had devastating effects on Western democracies and users’ mental health and continues to be felt today were already public and declared.

For example, it was already known that it was no longer possible to compare user communication driven by social networks with interpersonal communication, which prevails in telecommunications, emails, and even messaging services. According to the MCI, mimetizing CDA’ Section 230, only judicial authorization allows their interception or banning, which will be subject to a constitutional decision by the Brazilian Supreme Court (STF) soon.

In other words, it was a choice by the legislator, and the pressure groups that won the debate at the time, to spare part of the internet application providers that were already altering third-party content through their algorithms or targeting advertising from obligations of duty of care and legal responsibility. There was no distinction separating “neutral” intermediaries, like a platform that hosts blogs, from their more profit-driven competitors. If a paragraph in Article 19 had made this distinction, we would have avoided many issues without compromising innovation on the Brazilian internet market.

This kind of action in line with the CDA was so controversial that it is not surprising that, in the same decade, the European Union began creating several regulations to limit this unilateral freedom, a movement that continues to this day. In the past six years, the European Parliament has approved a bundle of laws that regulated the protection of personal data of European citizens (GDPR), a common data market (Data Act), the social and economic regulation of digital platforms (DSA and DMA), and in March 2024, the AI Act, creating checks and balances for the development and use of artificial intelligence systems by controlling levels of risk.

Something interesting to highlight is that the researcher identifies a difference between the digital markets of Europe and the United States that may have motivated some of these positions. At first glance, it seems understandable that the US is reluctant to follow the EU’s path in digital regulation. It is tempting to observe a causal relationship between the EU’s strict regulatory regime and the scarcity of leading tech companies originating from Europe. After all, there is no European Amazon, Apple, Google, Meta, or Microsoft. European companies contribute less than 4% of the market capitalization of the world’s top 70 platforms, while the US share is 73%.

There are also other variables, beyond technological regulation, that largely explain why today’s tech giants come from the US and not the EU. US tech companies benefited from a large and integrated domestic market, which allowed them to scale better than their European counterparts. They had access to ample venture capital that funded their innovations and public funds anchored in an industrial policy that united the military complex and the free market.

US companies were also more willing to take risks and pursue more disruptive innovations without the burdens imposed by bankruptcy laws and a culture that does not tolerate business failure. Finally, US tech companies have unparalleled access to global talent, which has allowed them to draw from a diverse and extensive pool of human capital, contributing to greater dynamism and innovation.

Geopolitics of Digital Ecosystems

Another dilemma is the challenge of regulating digital innovation in a global context that is complex and multifaceted, especially in the face of competition with solutions created in large, unregulated markets or with rules that favour national companies. In US, for example, the culture of free market and the prioritisation of innovation often result in this lighter regulatory approach, allowing tech giants to thrive without significant restrictions. In countries like India, Russia, and China, where protectionist industrial policies and regulatory barriers may favour domestic companies, authorities face the additional challenge of ensuring a level playing field for foreign companies or simply banning them.

This can lead to geopolitical tensions and trade disputes, such as the one we are witnessing with TikTok in the US. As countries seek to protect their economic interests, they need to remain relevant and competitive in an increasingly digital world. In India, a nation with the cheapest mobile network in the world and where TikTok had 200 million users, the platform was also banned in 2020, along with 58 other Chinese digital services, after an armed conflict at the border between the two countries.

In a country like Brazil, which does not have large public funds or more flexible mechanisms to promote the emergence of new competitive companies, and much less has national companies that stand out in the digital economy, the dilemma of legislating and regulating without stifling technological development is even more delicate.

But, regardless of economic factors and the struggle to preserve national and regional markets, the fact is that the numerous negative externalities caused by this business model have brought regulation to the forefront in various countries. Legal frameworks and the enforcement power of national states have become essential to ensure the protection of individual and collective rights in the digital environment, as well as competition itself, trying to prevent anticompetitive practices ex-ante.

In the name of freedom and innovation, US governments have endorsed the transnational development of their tech companies over more than 30 years, resulting in a global economic hypertrophy, generating a movement contrary to the intended market openness.

The reality of global concentration has given rise to a range of protectionist trade policies in countries trying to preserve or establish strategic players in their innovation ecosystems. If the Internet is under risk of fragmentation today, it is not being provoked solely by countries classified as authoritarian by the liberal discourse that dominates Internet governance fora. From 1998 to 2016, the management of domain names and numbers on the Internet, one of the network’s most sensitive assets, was handled by an entity that had a contract with the US Department of Commerce, which was responsible for the institution’s direct supervision.

And the country is protective of its territory. In April 2024, Devex revealed a confidential document in which the Biden administration informed some countries represented at the United Nations that it is putting the brakes on UN Secretary-General António Guterres’ ambitions regarding AI leadership through global governance mechanisms. Doubting whether this architecture could have multilateral colors, it is better to abort the process.

It would not be speculation to say that even today countries like the US and its allies only accept that the Internet be governed in a multistakeholder manner, with the institutional weight of governments equated with that of NGOs, academia, and companies. This dilution of power may seem democratic at first glance, but it helps perpetuate the current model of imbalance of power between national states. This crystallized situation has been driving some countries away from this type of arena and increasing the trend of national regulations.

The very cradle of big techs has realized that the hypertrophy has gone too far, and often, the domestic correction is starting to come from public authority decisions. This is the case with legal challenges around Section 230 of the CDA and actions against anticompetitive abuses by companies carried out by the Federal Trade Commission (FTC). In other words, the land of digital liberalism is fighting against the monster it created.

Off-the-shelf innovation

But, after all, what does all this have to do with innovation? All movements that work to preserve the status quo of a given market in a monopolistic consolidation phase end up creating barriers to entry for other competitors, who could bring more technological and social development to the ecosystem as a whole.

In this sense, Anu Bradford suggests that the European Union should focus its political ambition on completing the digital single market, creating a true union of capital markets, harmonizing the bankruptcy regimes of Member States, and viewing immigration as an opportunity for technological progress and economic growth in Europe. Although the EU still has a long way to go to catch up with the US tech sectors, abandoning digital regulation is not the way to achieve this goal, argues the researcher.

It is also necessary to recognize that the classic concept of innovation has a different nature in the world of digital technology conglomerates. What has been happening for some years is that large companies make incremental innovations in-house and go shopping instead of investing in original solutions. Over the past 30 years, consultancy CB Insights estimates that the five largest American companies in the sector have made acquisitions totaling $148.9 billion. The 2021 study analyzed mergers and acquisitions by Google, Amazon, Facebook, Apple and Microsoft (known by the acronym GAFAM), observing their expansion into new markets, product lines, and disruptive technologies over this period. Not to mention investments in the capital of promising startups another source of innovation appropriation.

The first billion-dollar acquisition by the GAFAM occurred in 1999, when Microsoft bought Visio Corporation. Since then, Bill Gates’ company has led in the number of billion-dollar acquisitions, with 12 purchases, followed by Google with eight, and Facebook and Amazon with five each.

The largest acquisition ever made by a big tech was by Microsoft, buying LinkedIn for $26.2 billion in 2016. The second largest was Facebook acquiring WhatsApp for $22 billion in 2014, followed by Amazon purchasing Whole Foods for $13.7 billion in 2017. In total, the five conglomerates have made over 800 acquisitions, with 32 of them above $1 billion. Apple had the fewest billion-dollar acquisitions, with only two: the purchase of Beats Electronics for $3 billion and the acquisition of Intel’s smartphone modem business for $1 billion.

This voracious appetite for new acquisitions or capitalization for embryonic startups clearly demonstrates that if we want to develop a robust and sovereign digital economy that can position Brazil as a global player in this sector, it does not seem fruitful to cling to a romantic vision that the principles and libertarian values that governed the Internet until the mid-1990s are the same ones that will allow new advances in the coming decades. In other words, rather than being a weapon pointed at the heads of tech companies, national regulation can be a guarantee of more innovation and local development. And this can only be answered if we first define what kind of innovation we are talking about.

In light of this, Bradford’s clear warning stands:

“Of course, all digital regulation is not beneficial. But neither is all innovation. While many techno-optimists herald the revolutionary nature of digital technologies, others question whether today’s leading tech companies are producing truly welfare-enhancing innovations that are leading to meaningful technological progress and economic growth or enhancing the human experience. A growing number of technologists, investors, journalists, and politicians are criticizing tech companies’ business models that rely on the exploitation of internet users’ data, asking whether those digital services ought to be considered “innovations” that are worth shielding from regulation.”

As Brazil begins to more organically discuss the economic regulation of digital platforms through the actions of the Ministry of Finance and Bill 2768/22, it is worth vaccinating against simplistic arguments that reduce the entire battle presented here to an artificial dichotomy — and one that lacks intelligence.

1 Bradford, Anu, The False Choice Between Digital Regulation and Innovation (March 7, 2024). Northwestern University Law Review, Vol. 118, Issue 2, October 6, 2024, Available at SSRN: https://ssrn.com/abstract=4753107.

James Görgen — Specialist in Public Policy and Government Management and Coordinator for Digital Markets at the Ministry of Development, Industry, Commerce, and Services (MDIC) of Brazil.