Mon. Sep 21st, 2020

Although largely ignored in the Brexit debate, network effects will damage the UK’s high-tech industry if Britain leaves Europe

The Treasury analysis of the costs of Brexit seems to have largely ignored network effects, despite the fact that these are crucial to the IT industry.

Network effects are where a transaction’s value depends on the number of people doing related transactions, and are one of the reasons the industry is full of monopolies.

Facebook beat Myspace and Friendster because people want to be where their friends are, and it’s extra bother to use several platforms. Auctions are dominated by eBay, as buyers go where there’s the most stuff for sale, and sellers want the biggest crowd of buyers. There are more computers running Windows than Apple because software markets work the same way.

We’ve come to understand network effects fairly well over the past 25 years. The basics of network economics were explained in the 1990s [1], and since 2001 we’ve learned that network economics explain much of what goes wrong with security and dependability in large systems [2].

There are now hundreds of people studying the economics of networks, games on networks, how online networks interact with physical networks such as the clusters of firms in cities, and how network effects impact international relations [3].

Four things need saying about Brexit and the tech industry. First, the idea that a UK government can “take back control” goes against experience.

Back in the 1970s, ministers tried to bully universities into buying computers from ICL – a company nationalised by EU opponent Tony Benn. Academics refused because the software we used at the time mostly ran on IBM.

A UK that makes up 1% of world population and 3% of world GDP has little influence on IT markets; a post-Brexit Britain would have even less. Most software markets have been global for decades.

EU calls the shots on privacy and competition law

The EU has real clout though. From the viewpoint of Silicon Valley, Brussels is the world’s privacy regulator, since Washington doesn’t care and nobody else is big enough to matter.

Brussels also calls the shots on competition policy. The reason you get offered a randomised choice of default browser when switching on a new Windows PC in Europe is that the EU competition authorities insisted on it. This was punishment for Microsoft using its desktop monopoly to trash Netscape – which was an offence in the US too, but the Bush administration couldn’t be bothered to prosecute it.

If you want someone to police the side-effects of network effects and globalisation, the European Commission is just about the only sheriff in town.

So regardless of whether a post-Brexit England were like Switzerland (in the Single Market, but with no MEPs), Albania (following Single Market rules, but no MEPs) or Kenya (neither in the Single Market, nor having any MEPs), the rules and standards set in Brussels would have huge and continuing influence on the UK IT industry [3].

UK companies could face pressure to move EU data to European datacentres

Second, privacy and data protection will be a test case. Margaret Thatcher brought in the first Data Protection Act because without it UK companies would not have been able to process personal data on Europeans, so London banks would not have been able to use their UK datacentres to maintain account information on customers in Germany.

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