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Creating  a  Connected  &  Entrepreneurial  Digital  Single  Market  Proposals  for  goals,  action  and  reform  

       State  of  Play         p.  1  The  2020  Goal         p.  5    A  Framework  for  Action  and  Reform   p.  7  Annex  I  Remove  Barriers     p.  11  Annex  II  “Better  Regulation”     p.  20          

STATE  OF  PLAY    The  Internet,  and  the  digital  services  that  run  on  top  of  it,  empower  entrepreneurs  across  Europe  to  try  out  new  business  models,  explore  new  markets,  and  experiment  with  new  services.      For   example,   the   eBay   marketplace   allowed   Rachel   White,   founder   of  thingimijigs.com,   to   gradually   take   the   courageous   step   from   employment   to   self-­‐employment  by  starting  out  small:  “At  eBay,  you  can  start  with  £50  of  stuff;  whereas  if  you  have  a  shop  you  have  got  the   investment  of  stock.   I   think   it’s  a  great  way  to  start,  and  you  can  test  the  market.”1    Another  example  is  Oliver  Margarson,  who  in  2008  turned  his  part  time  venture  into  a   full   time  business,  Electrolve  Ltd.  Quickly  outgrowing  his  garage,  he  now  sells  his  audio-­‐visual   items   and   accessories   from   a   16,000   square   foot   warehouse   serving  customers  in  as  many  as  170  different  countries.  In  November  last  year,  Oliver  could  proudly  announce  that  “our  exports  have  now  overtaken  our  domestic  sales  for  the  first  time!”        These  are  just  two  of  the  hundreds  of  thousands  of  innovative  entrepreneurs  using  the  eBay  marketplace  as  both  a  testing  ground  for  new  services  and  a  springboard  to  reach  new  markets.  Some  of   these  entrepreneurs  are   featured   in  our  "Learning  by  Exporting"  report.        

                                                                                                               1     See  http://www.theguardian.com/technology/2014/aug/18/ebay-­‐case-­‐studies-­‐businesses-­‐startups    

 

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What   is   special   with   these   entrepreneurs   is   that   they   leverage   the   power   of   the  Internet   and   technology   to   build   businesses   on   their   own   terms.   They   are   not  dependent  on  the  value  chains  of  large  corporations  in  order  to  reach  customers  and  markets.2      The   Internet   as   a   global   network,   combined   with   technology   solutions,   makes   it  possible   for   entrepreneurs   to   connect   and   establish   trust   directly   with   customers  across  national  and  cultural  borders.  This  allows  them  to  learn  and  succeed  from  the  experience  of  serving  customers  both  locally  and  internationally.  The  very  ability  of  reaching   beyond   a   local   consumer   base   to   global   markets   is   for   many   small  businesses  a  crucial  foundation  for  building  sustainable  operations:  “If  we  had  failed  to   expand   internationally,   our   business   would   no   longer   be   operating”,   stresses  Adam  Mackay,  founder  of  Blue  Water  Sports  Ltd  with  10  employees  and  customers  in  88  countries.3    Importantly,   the   success  of   these   technology-­‐enabled  businesses   is  not   contingent  on   location   in   larger   cities   and   privileged   economic   areas.   Adam  Mackay   did   not  have   to   move   to   London   to   set   up   his   operation;   he   is   operating   a   healthy,  international   business   out   of   Paignton   in   Devon   in   the   south   west   of   England.  Likewise,   Andrea   and  Hans  Goenner   run   a   €5  million   business   selling   high-­‐quality,  branded  wool   in   Riedlingen   (Germany),   a   town  with   just   over   10,000   inhabitants.  They   employ   about   60   people   during   winter   time,   and   their   wool   is   bought   by  customers  as  far  away  as  Russia,  the  US  and  Australia.    

                                                                                                               2    We  call  this  alternative  model  the  “Global  Empowerment  Network”.  For  an  explanation,  see  this  report,  e.g.  pages  6  –  7:  http://www.ebaymainstreet.com/sites/default/files/eBay_Commerce-­‐3-­‐for-­‐Development.pdf    

3     Testimonial  by  Adam  Mackay,  founder  of  Blue  Water  Sports  Ltd.:  https://docs.google.com/document/d/1Qdsl2FUk7tQRidEgVpeHwbX-­‐W5Uk0FgI7YxD367bpSg/pub    

 

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 New  research  by  Sidley  Austin  LLP  shows  how  small  businesses  using  eBay  are  fairly  equally  spread  across  the  regions  of  EU  countries.  For  example,  neither  the   largest  number   nor   the   most   active   technology-­‐enabled   of   businesses   per   100,000  inhabitants  are  found  in  the  capital  regions  Ile-­‐de-­‐France,  Cologne  and  Inner  London  but   in   Languedoc,   Niederbayern   and   Greater   Manchester.   The   Internet   spreads  economic   opportunity   across   regions   and   countries:   the   Internet   breaks   the  shackles  of  geography.4      The  innovative  entrepreneurs  found  on  the  eBay  marketplace,  and  studied  in  detail  in   our   suite   of   "Commerce   3.0"   reports,   embody   the   spirit   of   the   Digital   Single  Market:    

• They  take  advantage  of  the  new  digital  opportunities  Between   91%   and   96%   of   “commercial   sellers”5  using   eBay   in   the   UK,   France,  Germany   and   Spain   engage   in   exporting.   That   is   a   staggering   number   when  contrasted  with  offline  business  exporting,  which  generally  comes  in  below  15%.  In  countries  where  there  is  no  national  eBay  marketplace,  almost  100%  of  small  businesses   turn   to   eBay   to   engage   in   international   sales.   The   explanation   is  simply  that  they  see  the  online  marketplace  as  a  tool  for  reaching  customers.  Erik  Fagerlind,   founder   of   Sneakersnstuff,   a   business   offering   fashionable   sneakers  with  70%  of  sales  going  to  outside  the  home  market  Sweden,  puts  it  like  this:  “I  was   attracted   to   the   internet   marketplace   because   I   knew   it   offered   endless  possibilities   and   there   are   really   no   limits   to   what   you   can   do   through   the  internet.”    • They  know  no  borders  Globally,  these  eBay-­‐enabled  small  businesses  serve  customers  in  approximately  30   different   countries   on   average.6  Looking   only   at   the   European   ones,   the  average   number   of  markets   reached   is   18,   10   of   which   are   within   the   EU.   By  contrast,   a   2012   World   Bank   study   found   that   traditional   exporters   reach   on  average  three  different  markets.  Belgium  is  top,  averaging  seven  countries.  The  international  mind-­‐set   of   technology-­‐enabled   entrepreneurs   is   well   articulated  by  Jean  Louis  Goni,  founder  of  a  small  yet  successful  business  of  five  staff  selling  optical  equipment  and   reading  glasses:   “We  hope   that  by  establishing  Varionet  as  an  online  player  early  on,  it  will  not  only  allow  us  to  become  part  of  the  global  optical  industry,  but  it  will  also  position  us  as  a  leader  in  the  French  market”.  

     

                                                                                                               4     Similar  to  Carl  Sagan’s  famous  quote  “Books  break  the  shakle  of  time,  proof  that  humans  can  work  magic”,  the  Internet  and  technology  services  are  breaking  the  shakle  of  geography  and  proving  that  economic  opportunity  can  belong  to  the  many  and  not  only  the  few  fortunate.    

5     Firms  with  a  minimum  of  $10,000  in  annual  sales  on  the  eBay  marketplace.    6     So  far  our  economic  research,  carried  out  by  a  team  of  economists  from  Sidley  Austin  LLP,  Geneva  University  and  Oxford  University,  has  studied  21  different  countries:  the  US,  the  UK,  Germany,  France,  Australia,  Canada,  Russia,  Brazil,  Turkey,  China,  Hong  Kong,  Tawain,  Macau,  India,  Thailand,  South  Africa,  Peru,  Chile,  Indonesia,  Jordan  and  Ukraine.  See  reports  at  right  hand  side:  http://www.ebaymainstreet.com/commerce-­‐3      

 

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• They  reap  the  productivity  gains  of  access  to  larger  customer  pools  Our   research   has   shown   across   markets   that   small   businesses   utilising  technology   for   exporting   grow   their  market   share   faster   than   traditional   firms  and  are  able   to  compete  on  more  equal   terms  with   the   largest  companies.  For  example,  the  largest  5%  of  firms  in  Spain  account  for  86%  of  exports.  In  the  eBay  marketplace   in   Spain,   the   largest   5%  only   account   for   only   44%  of   exports.   As  Rachel  White  of   thingiimijigs.com  sees   it,  “there  are  no  barriers   to  entry”.    This  important   condition   increases   greatly   the   chances   for   start-­‐ups   to   survive.   The  European   Commission   reports   that   the   five-­‐year   survival   rate   for   enterprises  born  in  2005  was  46%.  We  have  found  the  survival  rate  for  firms  on  eBay  for  the  period  2010  to  2014  to  be  60.9%.    

 It   is   clear   that   intermediary   services   such   as   online   commerce   platforms   have  unlocked  new  sources  of  supply  by  enabling  these  new  types  of  small  businesses  to  access   the   marketplace.   This   has   opened   up   economic   opportunities   to   a   much  broader   base   of   entrepreneurs   and   businesses.   It   has   also   brought   benefits   to  consumers  through  increased  choice,  information  transparency  and  competition  on  services,   selection   and   prices.   The   growing   market   participation   by   technology-­‐enabled   entrepreneurs   leads   to  market   power   becoming   less   concentrated   in   the  established,   large   companies   –   a   phenomenon   that   can   be   characterised   as   the  “democratization  of  trade”.    By   looking  at   the  achievements  and  needs  of   these  entrepreneurs,  one  can  distil  a  blueprint  for  a  strategy  towards  realising  the  Digital  Single  Market.  It  becomes  clear  that  we   need   to   focus   efforts   on   both   connecting   the   Single  Market   by   removing  barriers  as  well  as  creating  a  culture  of  innovation.      We  propose  that  the  achievements  of  these  technology-­‐enabled  entrepreneurs  can  be  translated  into  an  ambitious  yet  realistic  goal  for  the  Digital  Single  Market,  and  that  their  needs  point  us  towards  a  framework  for  the  action  and  reform  required  to  achieve  those  goals.      

                             

 

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THE  2020  GOAL    The   research  we  have  carried  out   together  with  a   team  of  economists   from  Sidley  Austin   LLP,   Geneva   University   and   Oxford   University 7  has   shown   how   small  businesses  in  Europe,  Africa,  the  Americas  and  Asia  using  the  eBay  marketplace  sell  internationally.   Their   customer   base   spans   on   average   30   different   countries.   The  European   average   is   slightly   lower   at   18   different   countries,   though   eBay-­‐enabled  firms  from  some  EU  countries  (for  example  Cyprus,  Estonia  and  Greece)  reach  well  beyond  30  markets.          

     Our  research  findings  clearly  show  that  it  is  perfectly  possible  for  small  businesses  to  be  truly  international  and  serve  customers  in  multiple  countries.  As  described  above,  a  range  of  benefits  flows  from  this  ability  to  extend  operations  beyond  the  locality  to  European  and  global  markets.      The  ability  to  reach  multiple  markets  should  become  the  reality  for  the  majority  of  micro  and  Small  and  Medium-­‐sized  Entrepreneurs  (SME)  in  the  EU.  We  propose  the  following  ambitious  yet  realistic  goal  for  where  the  Digital  Single  Market  should  be  in  2020:    

“50%  of   all  micro,   small   and  medium-­‐sized  enterprises   in   EU28   should  be  selling  cross-­‐border  to  on  average  15  different  countries  annually”8  

 Further  targets  could  be  specified  in  terms  of  sectors  and  could    cover  both  B2C  and  B2B.                                                                                                                    7    Andreas  Lendle,  Marcelo  Olarreaga,  Simon  Schropp  and  Pierre  Louis  Vezina,  see  e.g.  http://www.voxeu.org/sites/default/files/file/DP9094(1).pdf  and  http://www.etsg.org/ETSG2013/Papers/206.pdf  .  

8     An  idea  also  put  forward  in  this  blog  post  by  Peter  Stephens,  Deputy  Director  and  Head,  EU  Strategy  at  UK  Department  of  Business,  Innovation  &  Skills:  https://www.linkedin.com/pulse/reflections-­‐e-­‐commerce-­‐single-­‐market-­‐peter-­‐stephens    

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AUT   BGR   CZE   DNK   EST   FRA   GRC   HUN   ITA   LUX   MLT   POL   ROU   SVN   EU_28  

Num

ber  of  export  

destinations  

eBay  (commercial  sellers)   traditional  Uirms)  

 

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 Moreover,   the   European   Commission   has   pledged   to   “build   partnership   with  Member  States,  national  parliaments,  regions  and  cities  for  more  effective  action  on  the  ground”  9.   In  that  spirit,   the  Commission  could  challenge  cities  and  regions   in  a  competition   to   realise   the   target   goal.   Progress   would   be   measured   on   key  indicators,  such  as   (1)  connectivity  and  broadband  speed;   (2)  uptake  by  businesses  and  consumers  of  various  online  commerce  and  payments   services;   (3)   the  city’s   /  region’s  connectedness  in  terms  of  parcel  delivery  with  cities  and  regions  across  the  EU;  and  (4)  the  level  of  and  uptake  by  businesses  and  consumers  of  e-­‐government.      

“My  objective  is  to  have  at  least  one  world  class  digital  innovation  hub  in  every  region  in  Europe.”  10  

                                                             

                                                                                                               9     COM(2014)  910  final.  10  Speech  by  Günther  Oettinger,  Commissioner  for  Digital  Economy  &  Society,  “Europe’s  future  is  digital”  (14  April  2015),  available:  http://ec.europa.eu/commission/2014-­‐2019/oettinger/announcements/speech-­‐hannover-­‐messe-­‐europes-­‐future-­‐digital_en    

 

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A  FRAMEWORK  FOR  ACTION  &  REFORM    Successfully  achieving  the  above  target  goal  depends  on  creating  a  connected  Digital  Single   Market   with   a   “climate   of   entrepreneurship”   -­‐   a   prerequisite   for   returning  jobs,  growth  and  investment  to  Europe11.  This  requires  work  on  two  parallel  tracks:  (1)  removing  barriers  and  (2)  making  use  of  better  regulation.    Removing   barriers   to   connect   the   Single   Market   is   work   that   needs   to   be  accomplished   in   a   short   time   period.  Making   use   of   better   regulation   is   about  “stimulating  the  digital  economy”12,  a  process  that  must  be  commenced  in  2015  but  should  be  treated  as  an  on-­‐going  project.    To  achieve  the  target  goals,  the  EU  needs  to  act  and  it  needs  to  reform.    The  EU  needs  action  to:      1. Target  interoperability,  transparency  and  competition  to  address  concerns  

about  the  price  structure  for  cross-­‐border  parcel  delivery  We   propose   that   action   at   EU   and   national   level   should   set   out   to   increase   (1)  interoperability   and   standardisation;   (2)   price   and   service   transparency;   and   (3)  competition  between  different  players  in  the  delivery  value  chain.      

2. Actively  use  EU  competition  law  to  promote  intra-­‐EU  online  trade  We  call  on  the  European  Commission  to  actively  use  EU  competition  law  to  promote  intra-­‐EU   online   trade   by   (1)   opening   a   case   against   manufacturers’   distribution  contracts   that   prevent   retailers   from   using   online   sales   channels   such   as   online  marketplaces,  (2)  removing  the  “logo  clause”  from  paragraph  54  of  the  Guidelines  on  Vertical   Restraints,   and   (3)   instituting   an   EU   hotline   for   merchants   to   report  discrimination  and  practices  harming  the  development  of  technology-­‐enabled  trade.    

3. Take  steps  to  modernize  the  application  of  consumer  protection  policy  We  recommend   that   the  European  Commission  provides  guidance  on   the  ultimate  objectives   behind   consumer   information   requirements.   Such   guidance   should   be  accompanied   by   confirmation   on   the   following   issues:   (1)   traders’   information  requirements  are  the  sole  responsibility  of  the  traders,  not  of  intermediaries  such  as  online   marketplaces13;   (2)   greater   flexibility   on   how   to   achieve   the   objectives   of  consumer   protection   legislation   should   be   encouraged;   and   (3)   legally   mandated  consumer  information,  and  not  limited  to  the  CRD,  should  simply  be  “made  available  to  the  consumer  in  a  way  appropriate”  to  the  channel,  screen  and  device  used;  and  the   trader   and/or   commerce   service   provider   should   have   flexibility   to   judge   how  the   particularities   of   certain   channels,   screens,   devices   and   interfaces   are   most  effectively   leveraged   to  achieve   the  objective  behind   the   information  obligation   in  question.                                                                                                                    11    President  Jean  Claude  Junker’s  Political  Guidelines.  12    Speech  by  Vice-­‐President  Ansip,  11  December  2014.  13  Online  marketplaces  would  of  course  still  have  their  own  consumer  information  requirements  which  they  would  have  to  discharge  in  so  far  as  it  applied  to  the  marketplace.  

 

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 4. Uphold  the  “Home  Member  State”  principle  We  want  to  see  the  European  Commission  encourage  Member  States  to  use  existing  information   sharing   tools   and   support   a   process   of   improving   the   level   of   their  cooperation   in   order   to   allow   businesses   to   deal   with   a   single   regulator   (the  regulator  of  their  “Home  Member  State”)  within  the  EU.    

5. Support  the  digital  economy  through  a  balanced  intermediary  liability  framework  

We  call  on  the  European  Commission  to  rigorously  uphold  the  current  balanced  intermediary  liability  framework.  In  particular,  the  Commission  should  take  action  to  ensure  that  injunctions  against  intermediaries  do  not  amount  to  monitoring  obligations.      

6. Streamline  VAT  and  customs  administration    We  urge  the  European  Commission  to  streamline  the  current  EU  VAT  framework  by  allowing   businesses,  which   cross   the   threshold   for   cross-­‐border   sales   into   another  EU   country,   to  make   a   single   VAT   declaration   and   payment   in   their   own  Member  State,   rather   than  having   to  declare  and  pay  VAT  to  each   individual  Member  State  where   their   customers   are   based.   Such   one-­‐stop-­‐shop   system   should   be  accompanied   by   SME-­‐friendly   rules   on   audits,   VAT   thresholds,   registration,   and  payment   systems.   Furthermore,   the   EU   should   establish   itself   as   an   international  leader  in  e-­‐Commerce  friendly  customs  policy  by  aligning  the  customs  duty  threshold  for  goods  bought  online  (currently  150e)  with  that  of  personal  imports  offline  (430e),  establishing   a   simplified   fast-­‐track   customs   procedure   for   e-­‐Commerce,   and  maintaining  the  current  Low  Value  Consignment  Relief  (LVCR)  VAT  threshold.    The  EU  needs  reform  to:    1. Create  a  performance-­‐based  environment  The  European  Commission  should  adopt  a  performance-­‐based  approach  to  all  policy  and  legislation  for  the  Digital  Single  Market.  Inspiration  for  this  type  of  regulatory  model  could  be  found  in  the  air  navigation  sector,  which  has  for  decades  cultivated  a  performance-­‐based  environment  to  achieve  goals  of  safety,  environment,  capacity  and  cost-­‐efficiency.  Taking  a  performance-­‐based  approach  as  the  very  starting  point  for  policy  design  is  first  and  foremost  about  viewing  the  policymaker’s  role  as  one  of  “system  stewardship”.  This  is  not  a  laissez-­‐fair  mentality.  A  performance-­‐based  model  can  be  institutionalized  through  public  entities,  processes  and  complementing  rules.      2. Develop  and  interpret  policy  through  dialogue  Dialogue-­‐oriented   policy   design   should   be   employed   in   the   context   of   consumer  information   requirements.   Especially   in   the   context   of   disruptive   services   and  business  models,   the  application  and   interpretation  of   legislative   requirements  are  better  shaped  through  a  process  of  dialogue  between  market  actors  and  regulators  than   through   top-­‐down  commands   that   fail   to   recognize   the  valuable  and  relevant  

 

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knowledge  market   actors   sit   on.   A   good   example   of   what   policy   design   based   on  dialogue   can   look   like  may  be   found   in   the   context   of   certifying   air   products.   In   a  sector   where   safety   is   of   outmost   importance,   the   competent   regulator   EASA  (European   Aviation   Safety   Authority)   has   not   succumbed   to   prescriptive,   “control  and   command”-­‐type   of   regulation.   Instead,   the   governing   regulatory   framework  promotes   dialogue   through   a   combination   of   binding   rules   and   non-­‐binding  standards.  Inspired  by  EASA’s  philosophy,  we  envisage  a  system  within  the  consumer  protection  area  where  a  basic   regulation  would  set  out   the  objectives;   it  would  be  complemented  by  non-­‐binding  soft   law,  developed  together  with  stakeholders  and  describing   “acceptable   means   of   compliance”;   the   soft   law   would   create   a  presumption   of   legal   compliance   to   be   recognized   by   national   authorities;   traders  would   have   the   option   of   alternative   means   of   compliance   where   those  demonstrably   achieve   the   objectives;   and  mechanisms   similar   to   those   developed  within  the  EASA  system  would  be  used  to  ensure  consistency  and  coherence  across  the  EU.  

 3. Achieve  complementary  policy  objectives  through  flexibility  The   model   of   realizing   important   policy   objectives   through   flexible   regulatory  frameworks  is  the  approach  that  should  be  applied  to  the  digital  economy  in  general  and   to   innovative,   disruptive   sectors   in   particular.   A   good   example   of   the   latter   is  online   and  mobile   payments.   Just   as   EASA   entrusts   drone   operators  with   carrying  out   safety   risk   assessments  of  operations  and   identifying  mitigation  measures,   the  payment   service   provider   is   the   best   placed   and   most   capable   to   assess   which  authentication  method   is   the  most  appropriate  for  types  of  transactions.   It   is  most  often  counterproductive  to  impose  a  certain  method  or  process  on  market  actors  in  a   fast-­‐changing,   innovative   industry   (where   rogue  actors  move   just  as   swiftly)  with  the  hope  of  achieving  a  certain  policy  objective;  desired  market  outcomes  are  more  likely   generated   where   industry   investments   in   the   next   generation  methods   and  processes   are   supported.     The   policy   objective   of   ensuring   adequate   levels   of  security   in   the   online   and   mobile   payment   sector   should   therefore   be   pursued  through   legislation   that   allows   payment   service   providers   to   deploy   alternative  security  solutions.    

 4. Develop  regulatory  frameworks  based  on  experience  and  learning  Maximizing  the  growth  potential  of  the  European  Digital  Economy  requires  a  regulatory  environment  where  small  businesses  in  particular  feel  encouraged  to  exploit  the  possibilities  in  new  technologies  and  open  markets.  This  is  about  expanding  into  the  unknown.  The  requisite  regulatory  framework  should  be  one  where  (i)  companies  are  encouraged  to  gain  experience  through  responsible  risk  taking  and  (ii)  such  experience  can  also  benefit  policymakers  and  contribute  to  informing  policies  and  regulation.  This  means  that  policymakers  must  be  prepared  to  accept  interim  solutions  and  must  actively  engage  in  creating  a  climate  of  mutual  trust:  companies  must  feel  comfortable  to  provide  feedback  about  trial  and  error  for  the  purpose  of  informing  policymaking.  To  this  end,  the  concept  of  a  “just  culture”  could  be  introduced  for  the  Digital  Economy.  This  concept  represents  “a  culture  in  which  …  operators  …  are  not  punished  for  actions,  omissions  or  decisions  taken  by  them  that  are  commensurate  with  their  experience  and  training.”  It  is  about  creating  

 

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an  environment  of  active  learning,  recognizing  that  improving  performance  of  a  sector  or  industry  depends  to  a  large  extent  on  feedback  of  knowledge  generated  by  a  system  of  data  collection  and  analysis.                                More  details  on  our  recommendations  for  action  and  reform  

are  to  be  found  in  Annexes  I  and  II.    

   

         

   

 

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ANNEX  I    

Remove  Barriers  Short  Term  Actions  

 The  type  of  Internet-­‐enabled  entrepreneurship  described  above  offers  individuals  powerful  tools   for   overcoming   some   of   the   barriers   associated  with   cross-­‐border   transactions.   This  can   be   expressed   in   economic   theory   terms.   Geographical   distance,   as   a   proxy   for   trade  costs,  has  always  been  found  to  inhibit  trade.  Traditionally,  an  increase  in  distance  between  trading   partners   of   10%   reduces   trade   by   15%   to   20%.   For   transactions   over   the   eBay  marketplace   within   the   EU,   such   an   increase   in   distance   only   reduces   cross-­‐border  transactions  by  4%14.  Our  estimate  is  that  trade  costs  are  four  times  lower  for  traders  using  the  Internet  and  technology  solutions.      However,   significant   trade   costs   –   or   barriers   –   remain.   Some   of   these   barriers   affect  technology-­‐enabled  trade  by  small  businesses  more   than   it  affects   traditional  cross-­‐border  trade  (as  generally  carried  out  by  larger  companies  with  greater  resources).15      Our   "Learning   by   Exporting"   report   describes   from   the   point   of   view   of   the   entrepreneur  some  of  the  key  challenges  -­‐  such  as  expensive,  unreliable,  and  slow  cross-­‐border  shipping;  burdensome   VAT   and   customs   administration;   and   online   sales   restrictions.   Other   issues  that   also   significantly   affect   the   landscape   for   technology-­‐enabled   and   cross-­‐border  operations  include  the  ability  of  companies  to  roll  out  innovative  payment  solutions  and  to  operate  and  maintain  open  online  marketplaces.      In   order   to   realise   the   2020   target   goal   set   out   above,   we   recommend   the   following  immediate  action:    1.   Target   interoperability,   transparency   and   competition   to   address   concerns   about   the  price  structure  for  cross-­‐border  parcel  delivery    Our  economic  research  has  shown  that  shipping  costs  have  a  negative  effect  on  online  cross-­‐border   transactions.  Sidley  Austin  has  estimated  that   the   trade  reducing  effect  of  shipping  costs  is  four  times  larger  for  online  compared  to  offline.16      These  research  findings  are  supported  by  surveys  of,  and  testimonials  by,  small  businesses  engaging  in  or  wanting  to  expand  into  cross-­‐border  trade.17  For  example,  Hans  and  Andrea  

                                                                                                               14  The  global  effect  is  only  3%,  see  e.g.  eBay’s  report  “Commerce  3.0  for  Development”  (2013),  http://www.ebaymainstreet.com/sites/default/files/eBay_Commerce-­‐3-­‐for-­‐Development.pdf;  Lendle  et  al  (2012),  http://www.voxeu.org/sites/default/files/file/DP9094(1).pdf;  and  OECD,  Electronic  and  Mobile  Commerce  (2013),  page  10,  http://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=DSTI/ICCP/IE/IIS(2012)1/FINAL&docLanguage=En        

15  This  is  also  a  conclusion  reach  by  the  European  Parliament  Research  Service,  confirming  that  distance  matters  less  online  but  the  negative  border  effect  remains  because  of  other  barriers.  “The  cost  of  non-­‐Europe  in  the  Single  Market”,  September  2014:  http://www.europarl.europa.eu/EPRS/EPRS_STUDY_536356_CoNE_Single_Market_III.pdf    

16  eBay’s  report  “Enabling  traders  to  enter  and  grow  on  the  global  stage”  (2012),  see  page  13:  http://www.ebaymainstreet.com/sites/default/files/EBAY_Marketplace_Updated_FIN_lowres.pdf    

17  See  e.g.  eBay’s  report  “Making  global  trade  frictionless”  (2013),  http://www.ebaymainstreet.com/sites/default/files/wto_making_global_trade_frictionless.pdf  and  

 

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Goenner,  running  the  wool  business  Garnwelt  out  of  the  small  town  Riedlingen,  feel  that  if  shipping  rates  were  lower  they  could  expand  their  international  sales  further.      

“It  is  currently  very  expensive  to  ship  cross-­‐border  and  we  are  constantly  working  on  our  cost  structure  because  of  it”  (Erik  Fagerlind  of  Sneakersnstuff)  

 Many  small  sellers  struggle  to  access  commercial  delivery  services  as  the  account  structures  used  by  service  providers  are  largely  designed  for  large  merchants.  As  a  consequence,  small  sellers  are  forced  to  use  consumer  services  and  access  points  –  even  taking  sacks  of  parcels  to  the  local  post  office  and  queuing  to  receive  service.    Such  services  levels  are  not  adapted  to  the  many-­‐to-­‐many  delivery  world  which  the  e-­‐Commerce  revolution  has  facilitated.    Also  Ecommerce  Europe  emphasizes  how  shipping  costs  often  represent  one  of   the  higher  operating   costs   of   a  merchant.   Ecommerce   Europe   stresses   that   “decreasing   international  delivery  costs  would  be  a  powerful  way  of   fostering  cross-­‐border  e-­‐commerce  and  enhance  competition   to   the   benefit   of   the   consumers”.18     The   European   Parliament   has   also   noted  that   “SMEs   seeking  business  opportunities  across   the  EU  are   confronted  with  higher   costs,  greater  complexity  and  a  lack  of  transparency  when  it  comes  to  cross-­‐border  delivery”.19    Targeted   policy   actions   to   enhance   competition   in   the   EU   parcel   delivery   market   could  achieve   efficiency   gains,   push   down   prices,   and   increase   service   levels   for   the   benefit   of  small  merchants.  Both  commercial  services  and  the  postal  system  are  needed  to  effectively  serve  the  needs  of  small  businesses.      The  price  of  cross-­‐border  shipping  should  be  less  than  the  sum  of  a  domestic  delivery  in  each  country  as  in  one  case  the  last  mile  is  not  present  and  in  the  other  the  first  mile  is  replaced.  However,   in  many  cases,  the  cost  of  cross-­‐border  shipping   is  greater  than  these  two  parts.  The   cost   of   cross-­‐border   shipping   therefore   does   not   reflect   cost   structure   –   suggesting   a  lack  of  competition  in  the  market.    We  believe  priority  should  be  given  to:    

• Interoperability   and   standardization 20  –   For   example,   there   is   today   no  standardised   format   for   parcel   sizes   and   labels   and  no   common   standard  defining  the   term   “tracking”   and   covering   the   various   technical   aspects   of   tracking.  While  there   are   examples   for   standards   covering   returns,   such   as   the   International   Post  Corporation’s   (IPC)   Easy   Return   Solution,   there   are   currently   no   equivalent  standards  for  outbound  delivery.  Standardization  and  common  definitions  of  service  levels  would  also  facilitate  product  comparison  and  competition.  

                                                                                                                                                                                                                                                                                                                             European  Commission’s  survey  of  Top  10  Barriers  for  SMEs,  http://ec.europa.eu/enterprise/policies/sme/index_en.htm    

18  Ecommerce  Europe,  “Position  paper  cross-­‐border  e-­‐logistics:  a  need  for  integrated  European  e-­‐logistics  solutions”  (2014),  http://www.ecommerce-­‐europe.eu/position-­‐papers    

19  European  Parliament  resolution  of  4  February  2014  on  an  integrated  parcel  delivery  market  for  the  growth  of  e-­‐commerce  in  the  EU  

20  The  positive  impact  of  interoperability  and  standardization  where  also  noted  in  WIK  Consult’s  Study  for  the  European  Commission  “Also  Design  and  development  of  initiatives  to  support  the  growth  of  e-­‐commerce  via  better  functioning  parcel  delivery  systems  in  Europe”  (WIK  Consult,  August  2014),  available  here:  http://ec.europa.eu/growth/single-­‐market/services/post/studies/index_en.htm  

 

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• Transparency  of  prices  and  services  -­‐  creation  of  a  “one-­‐stop-­‐shop”  web  portal  with  all   the   necessary   information   would   allow   an   easy   access   for   merchants   to  information  on  delivery  in  the  targeted  countries.  

• Competition  between  different  players  in  the  delivery  value  chain  –  the  regulatory  framework   should   incentivize   cooperation   and   facilitate   competition   between  different  players  in  the  delivery  value  chain  with  the  aim  of  achieving  more  efficient  pan-­‐European  networks.    

   ⇒We   call   on   the   European   Commission   to   prioritise   interoperability   and   standardisation,  transparency   of   prices   and   services,   and   competition   between   different   players   in   the  delivery  value  chain.    2.  Actively  use  EU  competition  law  to  promote  intra-­‐EU  online  trade    Online   marketplaces   connect   buyers   and   sellers   globally,   and   empower   European   small  businesses  to  access  new  markets  and  serve  a  larger  consumer  base.  They  offer  a  tool  –  or  actually  a  suite  of  tools  –  for  small  businesses,  entrepreneurs  and  individuals  to  explore  and  take  advantage  of  “a  global  digital  market”.  Built  on  the  Internet,  they  offer  a  (theoretically)  borderless  network;  augmenting  the  traditional  idea  of  the  marketplace  through  technology,  they   provide   unparalleled   information   transparency;   and   leveraging   digital   services,   they  make  available  mechanisms  for  communication  and  for  creating  trust   in  the  transaction,   in  the  product  and  in  the  trading  partner.    We  have  described  above   the  economic  opportunities   that  online  marketplaces   create   for  entrepreneurs,  startups  and  small  businesses  almost  irrespective  of  where  in  the  EU  or  in  a  country   they   are   located.   Indeed,   estimates   by   Sidley   Austin   showed   that   intra-­‐EU   cross-­‐border  transactions  for  the  period  2010  to  2014  grew  four  times  as  fast  for  trade  over  the  eBay   marketplace   compared   to   traditional   trade.   There   are   significant   consumer   welfare  gains  from  the  increased  access  and  choice  that  come  with  cross-­‐border  trade.    Sidley  Austin  has  calculated  that  consumers  in  the  EU  would  gain  about  3.4%  in  real  income  from  buying  online   cross-­‐border  because  of   lower  prices  and  wider   choice.21  A  2008   survey  by  Frontier  Economics  found  that  consumers  benefitted  from  price  savings  of  17%  from  buying  products  online   compared   to  offline   retail   stores.22  These   savings   amounted   to   about   €1  billion  per  year.      Evidently,  the  usage  of  online  channels  particularly  facilitates  market  participation  by  SMEs  as   well   as   enhancing   competition   generally   in   terms   of   price   and   selection.   However,   in  recent   years,  we   have  witnessed   how   an   increasing   number   of  manufacturers   respond   to  broadened   market   participation   and   intensified   competition   by   prohibiting   their   retailers  from  trading  online  and  in  particular  on  online  marketplaces  such  as  Amazon,  eBay,  Rakuten  and   Allegro   (“online   platform   bans”).   Such   distribution   restrictions   limit   intra-­‐   and   inter-­‐brand  competition  online,  leading  to  higher  prices,  limited  choice,  reduced  convenience,  and  obscurity   of   information   for   consumers.   In   a   survey   carried   out   by   BVOH,   31%   of   online  

                                                                                                               21  The  European  Commission  has  produced  similar  calculations,  estimating  that  consumer  welfare  gains  (in  terms  of  lower  prices  and  wider  choice)  would  amount  to  EUR  204  billion,  equivalent  to  1.7%  of  EU  GDP,  would  e-­‐commerce  grow  to  15%  of  the  total  retail  sector  and  internal  market  barriers  be  eliminated.  COM(2012)  784  final.  

22  Frontier  Economics,  “Economic  study  of  the  consumer  savings  on  eBay”,  reported  prepared  for  eBay  (2008),  http://www.ebaymainstreet.com/sites/default/files/eBay_Frontier-­‐Report.pdf      

 

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sellers  indicated  that  the  future  of  their  business  is  threatened  by  online  sales  restrictions.23  As  confirmed  by  a  recent  European  Parliament  study,  “from  the  consumer’s  perspective,  the  distorted  access  to  goods  or  services  means  discrimination  within  the  internal  market”24    Online  distribution  restrictions  are  a  form  of  geo-­‐blocking  –  a  set  of  practices  which  aim  to  segment  markets  along  national  borders,  distribution  platforms,  or  retail  partners.  Unjustified  geo-­‐blocking  practices  prevent  consumers  and  businesses  from  reaping  the  benefits  of  the  Digital  Single  Market  and  should  therefore  be  closely  analyzed  by  policy  makers.      Manufacturers  maintain   anticompetitive   distribution   policies   despite   the   existing   EU   legal  framework   on   vertical   restraints   prohibiting   such   practices.   In   its   guidelines   on   vertical  restraints,   the  Commission   regards   as   a   hardcore   restriction   any   obligation   that   dissuades  appointed   dealers   from   using   the   internet   to   reach   more   and   different   customers   by  imposing  criteria  for  online  sales  which  are  not  overall  equivalent  to  the  criteria  imposed  for  the   sales   from   the   brick   and   mortar   shop.     The   Commission   together   with   National  Competition  Authorities  (NCA)  will  need  to  vigorously  monitor  adherence  with  and  enforce  the  current  legal  framework.    Three   concrete  policy  measures   could   significantly  help  European   small  merchants  against  restrictions  on  technology-­‐enabled  trade:  

• Open  a  case  targeting  “online  platform  bans”    

German   courts   and   the  German   competition   authority   have   already   ruled   that   closing  off   an   important   online   distribution   channel   must   be   considered   as   anti-­‐competitive.  This  message  should  now  be  sent  to  the  whole  EU  market,  something  that  could  be  done  effectively   through  a   case   against  one  or   several  manufacturers  by   the  European   Commission   under   the   EU   Vertical   Restraints   framework   condemning  discriminatory  distribution  policies.    

An  example  of  such  a  policy  is  the  prohibition  of  the  use  of  third  party  online  platforms  while  distribution  through  malls,  stores  and  other  establishments  under  a  third  party’s  logo  is  allowed.  It  needs  to  be  clarified  how  paragraph  54  of  the  Guidelines  on  Vertical  Restraints  (the  “logo  clause”)  must  be  read  in  its  context  and  interpreted  narrowly  if  not  to   open   up   for   abuse,   which   prevents   the   use   of   modern,   popular   and   efficient  distribution   channels.25  The   German   Cartel   Office   and   several   German   courts   support  this  interpretation  (especially  regional  court  of  Frankfurt  in  a  decision  that  concerned  a  selective  distribution  system).26  

 

                                                                                                               23  The  survey  results  are  available  at  http://www.bvoh.de/infografik-­‐selektive-­‐vertriebsbeschraenkung-­‐im-­‐onlinehandel/  

24  European  Parliament  DG  Internal  Policies,  “Discrimination  of  Consumers  in  the  Digital  Single  Market“  (November  2013),  p.  62.    

25  Paragraph  56  of   the  Guidelines  provides  the  context  and  states:  “[The]  Commission  considers  any  obligations  which   dissuade   appointed   dealers   from  using   the   internet   to   reach  a   greater   number  and  variety  of  customers  by  imposing  criteria  for  online  sales  which  are  not  overall  equivalent  to  the  criteria  imposed  for  the  sales  from  the  brick  and  mortar  shop  as  a  hardcore  restriction”.  

26  LG  Frankfurt  a.M.,  Urteil  vom  18.06.2014  -­‐  2-­‐03  O158/13  

 

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• Remove  the  “logo  clause”  from  the  Guidelines  on  Vertical  Restraints  

In  addition  to  having  been  interpreted  incorrectly,  the  “logo  clause”  in  paragraph  54  of  the   Guidelines   on   Vertical   Restraints   is   also   outdated.   Consumers   increasingly   use  applications   on  mobile   devices   to   shop.27  If   merchants   are   not   allowed   to   sell   on   the  marketplaces  that  run  these  applications,  they  are  not  able  to  effectively  reach  today’s  consumers.   Restrictions   based   on   the   “logo   clause”   therefore   have   such   detrimental  economic  impact  that  even  an  offline-­‐equivalent  policy  would  not  justify  their  use.  

Moreover,  the  reason  third  party  online  platforms  are  so  important  to  merchants  is  the  logo,  or  brand,  of  the  platform  (like  Amazon,  eBay,  Allegro).  The  brand  signals  security,  choice,  convenience  and  quality  to  consumers  –  all  factors  that  are  crucial  for  consumers  to   engage   in   online   cross-­‐border   transactions.   This   in   turn   attracts   merchants   to   the  platform,   because   the   platform  offers   traffic,   something   in   particular   small  merchants  and  start  ups  cannot  afford  to  drive  themselves.  No  online  platform  can  reach  the  scale  needed  to  successfully  serve  both  buyers  and  sellers  without  a  trusted  brand  (logo).    

Removing  the  “logo  clause”  would  bring  clarity  and  legal  certainty  for  small  businesses  in  their  contractual  negotiations  with  manufacturers  –  and  thereby  remove  an  unnecessary  restriction  to  technology-­‐enabled  trade.    

• EU  hotline  for  merchants  

The  European  Commission  should  institute  an  “EU  Hotline”  for  merchants  to  report  discrimination  and  practices  harming  technology-­‐enabled  trade.  This  would  not  only  be  a  concrete  practical  measure  to  show  support  to  Europe’s  small  businesses  but  also  send  out  a  strong  political  signal  to  manufacturers  and  national  competition  authority  that  this  is  a  prioritized  issue.  

 ⇒We  call  on  the  European  Commission  to  actively  use  EU  competition  law  to  promote  intra-­‐EU  online   trade   by   (1)   opening   a   case   targeting   the   inclusion   of   “online   platform  bans”   in  distribution  policies,  (2)  removing  the  “logo  clause”  from  paragraph  54  of  the  Guidelines  on  Vertical  Restraints,  and   (3)   instituting,  as  a  political   signal,   an  EU  hotline   for  merchants   to  report  discrimination  and  practices  harming  the  development  of  technology-­‐enabled  trade.      3.  Take  steps  to  modernize  the  application  of  consumer  protection  policy    The  current  EU  consumer  protection  acquis  is  a  patchwork  of  different  pieces  of  legislation  that   confuses   businesses   and   consumers   alike.   Overlapping   requirements,   conflicting  national   implementations,   and   diverging   enforcement   have   created   a   complicated  environment  for  providing  online  commerce  services.      Notably,  numerous  and   inflexible   information  obligations   required  at   several   stages  of   the  purchasing   process   lead   to   a   disordered   user   experience.   This   risks   overwhelming   users  rather   than   informing   them.   It   also   obstructs   the   merchant   or   service   provider   (e.g.   the  

                                                                                                               27  For  example,  in  2014,  50%  of  transactions  on  eBay  included  a  mobile  touch-­‐point  and  eBay  enabled  USD  28  billion  of  mobile  commerce  volume.  eBay’s  apps  have  been  downloaded  to  more  than  300  million  devices  worldwide.    

 

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online  marketplace  where   the  merchants   operates   a  webshop)   from  providing   consumers  with  a  user-­‐friendly  and  simple  experience.    The   area   of   energy   labeling28  offers   several   examples   of   problematic   application   of   legal  consumer  information  obligations:    

a) Requiring  the  display  of  legally  mandated  information  in  all  advertising  presented  to  a   potential   buyer.   Such   a   requirement   coupled   with   a   wide   interpretation   of   the  term   “advertising”   create   the   untenable   situation  where   the   information  must   be  made  available  to  users  at  every  instance  on  an  online  marketplace.  This  leads  to  a  certain  piece  of  information  being  presented  to  potential  buyers  numerous  times  on  their  way  to  the  actual  purchase.    

b) Stipulating   in   detail   how   consumer   information   must   be   displayed.   Prescriptive  legislation   leaves   no   flexibility   for   implementation,   which   prevents   valuable  experimentation  and  the  emergence  of  best-­‐practices;  it  may  (unintentionally)  steer  developments  in  a  certain  direction  without  it  being  the  natural  or  in  the  longer  run  the  best  direction  for  users  and/or  the  society;  and,  moreover,  a  rigid  focus  on  exact  adherence  to   legal   instructions  risks  delaying  or  even  hindering  the   introduction  of  new  technologies.29    

c) Creating  market  uncertainty   through  unclear  and  complicated   technical  definitions  in   the   law.   For   example,   the   definition   of   “TV   monitors”30  in   the   context   of   the  energy   labeling   framework   puts   into   question   whether   other   screens,   which   are  increasingly   used  by   consumers   to  watch   content   (such   as   computer   screens),   are  also   covered   by   the   legislation.       It   therefore   creates   confusion   in   the  market   for  computer  monitor  /  other  displays.  

To   address   this   situation   the   Commission   needs   to   act   on   two   parallel   tracks.   Firstly   and  most   urgently,   the   Commission   must   review   the   plethora   of   information   requirements  applicable  in  the  context  of  consumer  advertising  and  sale.  Following  such  an  inventory  of  all  relevant  legislation,  the  Commission  should  publish  guidance  and  principles  to  help  Member  States   with   how   consumer   information   obligations   across   the   board   apply   to   online   and  mobile  commerce  services.  We  propose  the  following  as  the  baseline:    

• The  objective  is  what  matters  The  European  Commission  should  provide  general  as  well  as  more  specific  clarification  on  the  ultimate  objectives  behind  information  requirements  within  consumer  protection  laws  and  should  give  traders’  greater  flexibility  on  how  those  objectives  are  best  realized  in  specific  instances.      

                                                                                                               28  See  Delegated  Act  1062/2010  regarding  energy  labeling  of  televisions  and  Delegated  Act  518/2014  regarding  the  labeling  of  energy-­‐related  products  on  the  Internet.  

29  A  more  constructive  approach  is  proposed  in  the  revised  OECD  recommendations  on  consumer  protection  and  empowerment  in  e-­‐commerce  with  language  encouraging  businesses  to  take  into  account  empirical  research  about  how  consumers  view  and  understand  disclosures  on  different  types  of  devices  and  platforms.    

30  “Television  monitor”  is  defined  as  a  product  designed  to  display  on  an  integrated  screen  a  video  signal  from  a  variety  of  sources,  including  television  broadcast  signals,  which  optionally  controls  and  reproduces  audio  signals  from  an  external  source  device,  which  is  linked  through  standardised  video  signal  paths  including  cinch  (component,  composite),  SCART,  HDMI,  and  future  wireless  standards  (but  excluding  non-­‐standardised  video  signal  paths  like  DVI  and  SDI),  but  cannot  receive  and  process  broadcast  signals.  

 

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To  provide  an  example:  Article  5(1)(a)  of  the  Consumer  Rights  Directive  (CRD)  2011/83  requires  the  display  of  the  “main  characteristics”  of  the  product  prior  to  the  conclusion  of   the  purchase.   Court   rulings   in  Germany  have   indicated   that   the  definition  of   “main  characteristics”   (i.e.   information   that  needs   to  be  displayed  on   the  confirmation  page)  depends   on   what   has   been   displayed   earlier   in   the   buying   flow.     As   a   result,   it   has  proven   difficult   in   practice   for   sellers   to   understand   what   information   is   actually  required   from   them   as   well   as   for   an   online   marketplace   to   technically   display   the  required   information   on   the   page   just   before   the   order   is   placed.   A   preferred   way  forward  would  be  leave  it  to  the  trader  to  decide  what  information  should  be  provided  when   in  order  to  enable  consumers  to  make  informed  decisions.  The  trader’s  decisions  would  depend  on  the  type,  context  and  stage  of  the  transaction.31    

 • Clear  attribution  of  responsibility  The  European  Commission  needs  to  clarify  the  attribution  of  responsibility  for  adhering  to  legal  consumer  protection  obligations.  We  have  lately  observed  how  national  courts  attribute   responsibility   to   eBay   for   the   failure   by  merchants,   who   are   using   the   eBay  marketplace,   to   comply   with   consumer   legislation   despite   the   addressee   of   the   law  being  the  merchant/trader.      

 • Recognize   the  particularities   of   different   technologies,   services   and  devices   used  

for  commerce  Consumers  turn  to  multiple  devices  (and  different  channels)  throughout  the  purchasing  process.  Mobile  devices  are  becoming   increasingly  popular   for   shopping;   illustrated  by  how  today  they  are  used  in  50%  of  all  transactions  on  eBay.  Intriguingly,  what  makes  a  “mobile   device”   is   not   set   in   stone   as   new   technologies   from   digital   storefronts   to  wearables  to  interactive  textiles  gain  traction.  Screens  will  be  both  larger  and  public  as  well   as   smaller   and   attached   to   the   user;  moreover,   the   interface   through  which   the  purchase   is   made  may   not   even   have   a   screen   but   be   a   detached   button,   a   physical  space  or  a  command.  The  way  consumer  information  is  displayed  across  these  screens,  devices  and  interfaces  will  and  should  vary  so  as  to  best  serve  the  objective  behind  the  information   requirement.32  Even   though   individuals   are   comfortable   buying   high-­‐value  items  on  a  smartphone,  for  example,  we  find  that  a  “PC  mindset”  still  lingers  in  laws  and  enforcement  practices.  Policymaking  needs  to  firmly  move  into  the  mobile  (or  interface)  era;  and  so  at  least  for  a  passage  of  time,  language  along  the  lines  of  Article  8  (1)  and  (4)  of   the  CRD  recognizing  the  particularities   (or   limitations)  of  certain  “means  of  distance  communication”  is  required.    

 ⇒We  recommend   the  European  Commission  provides  guidance  on   the  ultimate  objectives  behind  information  requirements.  Such  guidance  should  be  accompanied  by  confirmation  on  the  following  issues:  (1)  traders’  information  requirements  are  thre  sole  responsibility  of  the  traders,  not  of   intermediaries  such  as  online  marketplaces(2)  greater   flexibility   for  business  on  how  to  achieve  the  objectives  are  to  be  encouraged;  and  (3)  legally  mandated  consumer  information,  and  not  limited  to  the  CRD,  should  simply  be  “made  available  to  the  consumer  in  a  way  appropriate”  to  the  channel,  screen  and  device  used  and  that  it  is  the  trader  and/or  commerce  service  provider  who  is  best  placed  to  appraise  how  the  particularities  of  certain  

                                                                                                               31  Similar  language  is  being  proposed  for  the  revised  OECD  recommendations  on  consumer  protection  and  empowerment  in  e-­‐commerce.    

32  Language  proposed  for  the  revised  OED  recommendation  on  consumer  protection  and  empowerment  in  e-­‐commerce  recognize  not  only  the  limitations  or  special  characteristics  of  a  communications  methods  but  also  that  it  is  the  business  that  is  best  placed  to  determine  how  these  limitations  and  characteristics  influence  accessibility  and  readability  of  information  disclosures.    

 

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channels,   screens,   devices   and   interfaces   are   most   effectively   leveraged   to   achieve   the  objective  behind  the  information  obligation  in  question.      Secondly,  and  in  parallel,  the  Commission  must  change  the  way  it  regulates  businesses.  The  current  model   of   fixed  designs   for   consumer  protection  policy   stifles   the  digital   economy.  The   Commission   must   move   towards   policy   models   that   are   flexible   and   can   adapt   to  different  situations.  We  provide  more  details  on  how  this  could  look  in  Annex  II.      4.  Uphold  the  “Home  Member  State”  principle    In   a   number   of   Directives   and   Regulations,  which   are   currently   being   reviewed   (4th   Anti-­‐Money   Laundering   Directive,   2nd   Payment   Services   Directive,   Data   Protection   Regulation,  etc.),  we  observe  how  Member  States  move  towards  increased  regulation  and  supervision  at  local  level  of  companies  operating  on  a  cross-­‐border  basis.    This  trend  is  extremely  worrying  as  it  undermines  the  very  freedom  to  provide  cross-­‐border  services,  set  out  in  Article  56  of  the  TFEU,  which  is  central  to  the  effective  functioning  of  the  Internal  Market.    

 For  example,  in  the  context  of  the  discussions  on  the  4th  Anti-­‐Money  Laundering  Directive,  some  Member  States  are  pushing  to  create  an  obligation  for  cross-­‐border  payment  service  providers  to  report  suspicious  activities  in  each  of  the  28  EU  Member  states,  as  opposed  to  the  authorities  of  their  Home  State  only,  as  is  currently  the  case.  Obviously,  this  gives  rise  to  additional  red  tape  and  increased  compliance  costs  on  the  industry.      ⇒We   want   to   see   the   European   Commission   encourage   Member   States   to   use   existing  information  sharing  tools  and  support  a  process  of  improving  the  level  of  their  cooperation.      5.  Support  the  digital  economy  through  a  balanced  liability  framework    The  digital  economy  has  been  able  to  develop  and  thrive  largely  thanks  to  the  legal  certainty  created   by   EU   hosting   liability   framework,   established   by   the   E-­‐Commerce   Directive  2000/31/EC   and   the   IP   Enforcement   Directive   2004/48/EC.   This   legal   cornerstone   is  designed   to   ensure   that   internet   intermediaries   have   no   general  monitoring   obligation   to  prevent   infringing   content   from   appearing   on   their   site   and   are   not   liable   for   third   party  infringements  (as  long  as  those  intermediaries  expeditiously  remove  infringing  content  from  their   site  upon  gaining  actual  knowledge).    That   framework   is  critical   to   the   functioning  of  cross-­‐border   technology-­‐enabled   commerce   and   content   delivery   sites   of   all   types.     It   has  been  an  essential  driver  of  innovation,  consumer  choice,  and  economic  development  across  Europe.      However,   this   balanced   framework   has   recently   come   under   attack   from  Member   States’  Courts.  For  example,  the  German  Supreme  Court  imposed  in  2013  a  wide-­‐ranging  injunction  against   eBay,   requiring   manual   comparison   of   pictures   associated   with   new   listings   on   a  daily  basis   to  ensure  new   listings  do  not   infringe   the   copyright  of   the   claimant.   The   ruling  sets   a   dangerous   precedent   that   could   lead   to   a   flood   of   broad   injunctions   imposed   on  intermediaries  in  Germany.    Particularly  at  the  scale  and  scope  of  a  provider  like  eBay,  which  enables   literally  millions  of  unique  products   to  be  made  available   to  European  consumers,  such  manual  comparison  is  simply  impossible.        ⇒We  call  on  the  European  Commission  to  rigorously  uphold  the  current  balanced  intermediary  liability  framework.  In  particular,  the  Commission  should  take  action  to  ensure  that  injunctions  against  intermediaries  do  not  amount  to  monitoring  obligations.    

 

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 6.  Streamline  VAT  and  customs  administration    Within  the  EU,  different  VAT  systems  in  different  Member  States  present  a  major  obstacle  to  online   sellers  who  cross   the  VAT   threshold   for   cross-­‐border   sales   into  another  EU  country  and   thereby  need   to  deal  with  VAT  administration   in   countries  where   their   customers  are  based.  At   the  very   least,  a   ‘one-­‐stop-­‐shop’,  which  allows  such  businesses   to  deal  with  one  single   authority   for   VAT   purposes  when   trading   across   the   EU,  would   better   enable   small  business   to   cope  with   this   administrative  burden.   Furthermore,   international   e-­‐Commerce  transactions   are   slowed   down   by   discriminatory   customs   duty   thresholds,   as  well   as   slow  and   burdensome   customs   procedures.   Such   international   barriers   not   only   prevent  consumers   from  fully  embracing  the  opportunities  offered  by  global  digital  commerce,  but  also   make   it   difficult   for   European   small   businesses   to   offer   returns   to   their   customers  globally.    ⇒  We   urge   the   European   Commission   to   streamline   the   current   EU   VAT   framework   by  allowing   businesses,   which   cross   the   threshold   for   cross-­‐border   sales   into   another   EU  country,  to  make  a  single  VAT  declaration  and  payment   in  their  own  Member  State,  rather  than  having  to  declare  and  pay  VAT  to  each  individual  Member  State  where  their  customers  are   based.   Such   one-­‐stop-­‐shop   system   should   be   accompanied   by   SME-­‐friendly   rules   on  audits,   VAT   thresholds,   registration,   and   payment   systems.   Furthermore,   the   EU   should  establish  itself  as  an  international   leader  in  e-­‐Commerce  friendly  customs  policy  by  aligning  the   customs  duty   threshold   for  goods  bought  online   (currently  150e)  with   that  of  personal  imports   offline   (430e),   establishing   a   simplified   fast-­‐track   customs   procedure   for   e-­‐Commerce,  and  maintaining  the  current  Low  Value  Consignment  Relief  (LVCR)  VAT  threshold.                                

 

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Annex  II    

“Better  Regulation”  Action  in  the  shorter  term  

 Creating   a   connected   Digital   Single  Market   is   not   an   end   in   itself   but   a  means   towards   a  prospering   Europe.   Indeed,   the   European   Commission   estimates   that   a   connected   Digital  Single  Market  can  generate  up  to  €250  billion  in  additional  growth.      This   requires   efforts   beyond   the   tearing   down   of   existing   barriers   to   a   fully   integrated  European  market.  As  European  Commission  President  Jean  Claude  Juncker  makes  clear  in  his  Political   Guidelines,  we   need   to   create   the   right   regulatory   environment  and   a   climate   of  entrepreneurship.  Too  prescriptive  and  too  detailed  regulations  risk  stifling  innovation:    

“Jobs,   growth   and   investment   will   only   return   to   Europe   if   we   create   the   right  regulatory  environment  and  promote  a  climate  of  entrepreneurship  and  job  creation.  We   must   not   stifle   innovation   and   competitiveness   with   too   prescriptive   and   too  detailed   regulations,   notably   when   it   comes   to   small   and   medium   sized  enterprises.”33  

 As   described   in   the   previous   section,   thoughtful   design34  of   policy  measures   can   facilitate  cross-­‐border  entrepreneurship  by  removing  red  tape.  Just  as  important,  thoughtful  design  of  policy   can   encourage   cross-­‐border   entrepreneurship   by   supporting   experimentation,  endorsing  responsible  risk-­‐taking,  and  promoting  innovation.      As  part  of  the  work  to  create  a  connected  the  Digital  Single  Market  that  encourages  cross-­‐border   entrepreneurship,   the   European   Commission   must   also   reform   the   current   EU  approach   to  policy  design.  The  notion  of  “better   regulation”  needs   to  be  understood  as  a  broader  concept  reflective  of  how  policy  design  entails  far  more  than  pure  regulation.    

“[W]e  need  to  ensure  that  existing  and  new  regulation  is  fit  for  purpose  in  the  digital  world  …   .  New  digital   business  models   are   challenging   existing   regulatory   systems  worldwide,   requiring   a   new   way   of   policy-­‐making.   Our   current   regulatory  environment   can   create   unforeseen   hurdles   to   digitalisation   and   uncertainty   for  digital  businesses.”35  

 In  the  context  of  such  a  reform,  we  propose  that  the  following  four  processes  be  explored:      1.  Create  a  performance-­‐based  environment    Outcome-­‐based   regulation,   whether   performance   standards   or   principle-­‐based,   allows  companies  to  achieve  regulatory  aims  in  a  way  that  is  more  effective  and  efficient  for  them.  This   approach   shifts   the   focus   away   from   adherence   to   the   letter   of   the   law   towards  compliance   with   the   spirit   of   the   law.   It   becomes   a   matter   of   demonstrating   compliant  

                                                                                                               33  From  the  Political  Guidelines  of  Jean  Claude  Juncker,  President  of  the  European  Commission.  34  Policy  design  refers  to  translating  policy  ideas  into  implementable  action.    35  Speech  by  Günther  Oettinger,  Commissioner  for  Digital  Economy  &  Society,  “Europe’s  future  is  digital”  (14  April  2015),  available:  http://ec.europa.eu/commission/2014-­‐2019/oettinger/announcements/speech-­‐hannover-­‐messe-­‐europes-­‐future-­‐digital_en    

 

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outcomes   rather   than   merely   ticking   boxes.   At   the   same   time,   regulators   do   not   lock  themselves  in  with  regard  to  how  compliance  should  be  achieved.    Outcome-­‐based   regulation   can   increase   understanding   about   what   is   being   asked   by  regulators,   allow   companies   to   explain   compliance,   and   encourage   engagement   with  regulators   and   governments   to   discuss   best   practices   and   the   effectiveness   of   the  regulation:  “results-­‐based  regulation  is  an  approach  that  can  …  ensure  that  we  never  loose  sight  of  the  purpose  of  regulation”  36    Nevertheless,   rule-­‐based   regulation  –  or  design   standards  –   is   today   the  dominant  model.  This  can  be  explained  by  how   it  has   traditionally  been  difficult   for   regulators   to  determine  what  inputs  are  needed  to  measure  compliance,  to  collect  the  data,  and  to  make  sense  of  it.  Moreover,  companies  see  higher  risk  with  performance  standards  as  they  afford  regulators  discretion.  The  preference  has  therefore  been  for  less  subjective,  though  prescriptive,  rules.      The   response   to   concerns   about   discretion   and   consistency   in   enforcement   as   well   as  accountability   should  be   the  development  of  outcome-­‐based  regulatory  models   that  value  performance  in  a  manner  that  appeals  to  business,  policymakers  and  consumers.      We  propose  that  this  could  take  the  shape  of  regulatory  models  characterized  by:    1) Measuring   and   improving   performance   through   a   continuous   process   of   securing  

relevant  data  about  performance  from  all  regulated  entities,  using  algorithms  to  derive  insights   from   the  data,   and   interpreting  and  applying   the   insights   in  dialogue  with   the  regulated  entities  to  develop  market  performance  and  inform  the  regulation.    

2) The  role  of  the  regulator  being  one  of  (i)  managing  the  process,  (ii)  auditing  the  process,  or  (iii)  overseeing  the  process.  37  

 Inspiration   for   this   type   of   regulatory  model   could   be   found   in   the   air   navigation   sector,  which   has   –   on   a   self-­‐regulatory   basis   -­‐   cultivated   a   performance-­‐based   environment   for  decades.  Since  2010,  EU  legislation   lays  down  the  framework  for  this  performance  scheme  with  the  goals  of  (i)  improving  performance  within  the  overriding  objectives,  (ii)  putting  the  genuine  needs  of  stakeholders  at  the  core  of  the  system,  (iii)  realizing  a  Single  Market,   (iv)  giving  more  responsibility  to  the  industry,  and  (v)  involving  the  industry  in  rulemaking.  38    Notably,   these   are   all   goals   that   are   directly   applicable   to   the   Digital   Single   Market.  Moreover,   the   system   developed   for   the   air   navigation   sector   has   several   interesting  features  that  could  provide  a  blueprint  for  policy  design  for  the  digital  economy:    

                                                                                                               36  “Beyond  ideology:  a  results-­‐based  approach”,  by  John  W.  Mayo,  essay  part  of  the  “Regulating  the  Digital  Economy”  symposium,  Democracy  Journal,  available:  http://www.democracyjournal.org/34/beyond-­‐ideology-­‐a-­‐results-­‐based-­‐approach.php    

37  This  is  comparable  to  the  notion  of  ”system  stewardship”  introduced  by  the  2011  study  by  the  Institute  for  Government  (see  footnote  32),  where  the  role  of  policymakers  is  “overseeing  the  ways  in  which  the  policy  is  being  adapted,  and  attempting  to  steer  the  system  towards  certain  outcomes,  if  appropriate”.  

38  “A  framework  for  driving  performance  improvement”,  a  report  of  the  High  Level  Group  for  the  future  European  Aviation  Regulatory  Framework  (July  2007),  available:  http://ec.europa.eu/transport/modes/air/doc/hlg_2007_07_03_report.pdf      

 

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• The  system  operates  at  both  EU  and  national   level.  The  European  Commission  sets  the   EU-­‐wide   performance   targets   and   national   authorities   translate   those   into  national  plans.  

• There  is  a  central  entity,  which  assists  in  the  implementation  of  the  scheme  by,  inter  alia,  examining  performance  data,  revising  EU  targets,  and  assessing  national  plans.  

• It  is  an  iterative  system  with  a  “continuous  process  of  collecting  and  analyzing  data  in  order  to  measure  the  actual  output  of  a  system“  vis-­‐à-­‐vis  predefined  targets.  39      

• So-­‐called   pilot   studies   are   used   to   test  whether   new  data   requirements  would   be  helpful  and  proportionate.    

• Data   points   provided   by   the   regulated   entities   are   combined   with   data   collected  through  other  European  instruments.    

 ⇒  We  suggest  that  the  European  Commission  adopts  a  performance-­‐based  approach  to  all  policy  and  legislation  for  the  Digital  Single  Market.  To  be  clear,  this  is  not  to  say  that  rule-­‐based  legislation  should  be  abandoned  but  that  more  effort  needs  to  go  into  finding  the  right  balance  between,  as  well  as  combination  of,  rules  and  principles.  Taking  a  performance-­‐based  approach  as  the  very  starting  point  is  first  and  foremost  about  viewing  the  policymaker’s  role  as  one  of  “system  stewardship”,  rather  than  seeking  to  control  outcomes.  This  is  not  a  laissez-­‐fair  mentality.  As  described  in  this  section,  a  performance-­‐based  model  can  be  institutionalized  through  public  entities,  processes  and  complementing  rules.  A  successful  performance-­‐based  environment  will  furthermore  depend  on  the  conditions  outlined  below.      2.  Develop  and  interpret  policy  through  dialogue    Especially   in   the   context   of   disruptive   services   and   business   models,   the   application   and  interpretation  of   legislative   requirements   should  be   shaped   through  a  process  of  dialogue  between  market  actors  and  regulators  –  not  through  top-­‐down  commands.      Regulators  must  appreciate  that  market  actors  sit  on  valuable  and  relevant  knowledge  about  the  ability  and  constraints  of  specific  services,  the  capacity  and  limitations  of  the  underlying  technology,  as  well  as  emerging  technology  iterations  and  developments.      A   good   example   of   how   policy   design   based   on   dialogue  may   look   could   be   found   in   the  context   of   certifying   air   products.   In   a   sector  where   safety   is   of   outmost   importance,   the  competent   regulator   EASA   (European   Aviation   Safety   Authority)   has   not   succumbed   to  prescriptive,   “control   and   command”-­‐type  of   regulation.   Instead,   the  governing   regulatory  framework   promotes   dialogue   through   a   combination   of   binding   rules   and   non-­‐binding  standards.      The   non-­‐binding   standards,   called   Acceptable  Means   of   Compliance   (AMC)   and   issued   by  EASA,   describe   ways   of   complying   with   the   binding   rules   and   create   a   presumption   of  compliance.  The  regulated  entity  always  remains  free  to  choose  alternative  means  provided  it  can  demonstrate  that  the  alternative  achieves  compliance  with  the  rules.40    It   should   be   noted   that   this   process   does   not   grant   the   regulator   the   sole   discretion   to  determine  how  the  regulated  entities  should  achieve  the  objectives  of  the  rules.  Instead,  the  

                                                                                                               39  Article  2(12)  of  Commission  Implementing  Regulation  390/2013  laying  down  a  performance  scheme  for  air  navigation  services  and  network  functions.    

40  See  e.g.  http://easa.europa.eu/document-­‐library/acceptable-­‐means-­‐compliance-­‐amcs-­‐and-­‐alternative-­‐means-­‐compliance-­‐altmocs    

 

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process  invites  the  regulated  entity,  in  dialogue  with  the  regulator,  to  propose  ways  in  which  the   objectives   can   be   adequately   accomplished.   This   leaves   room   for   innovating   and  evolving  best  practices.      With  the  aim  of  developing  a  culture  of  entrepreneurship,  the  European  Commission  should  foster   a   new   type   of   relationship   between   market   actors   and   regulators.   It   should   steer  developments   away   from   top-­‐down   delivered   interpretations   of   legislative   requirements  towards   the   shaping   of   policy   through   dialogue.   To   start   with,   this   approach   should   be  employed   in   the  context  of  consumer   information,  e.g.   to  general   requirements  under   the  Consumer  Rights  Directive  and  specific  obligations  under   legislation  on  energy   labeling   for  consumer  products.      ⇒  We   suggest   that   dialogue-­‐oriented   policy   design   should   be   employed   in   the   context   of  consumer   information   requirements.   We   envisage   a   system   where   the   basic   regulation  would  set  out  the  objectives;  it  would  be  complemented  by  non-­‐binding  soft  law,  developed  together  with   stakeholders  and  describing  “acceptable  means  of   compliance”;   the   soft   law  would   create   a   presumption   of   legal   compliance   to   be   recognized   by   national   authorities;  traders  would  have  the  option  of  alternative  means  of  compliance  where  those  demonstrably  achieve  the  objectives;  and  mechanisms  similar  to  those  developed  within  the  EASA  system  would  be  used  to  ensure  consistency  and  coherence  across  the  EU.    3.  Achieve  complementary  policy  objectives  through  flexibility    Our  proposals  for  performance-­‐based  and  dialogue-­‐driven  policy  design  introduce  flexibility  into   the  system  to  allow  for  market   innovation  and  ensure  effective  achievement  of  other  policy  objectives.      Flexibility   and   achieving   important   policy   objectives   are   not   contradictory   aims.   The   way  EASA  has   approached   the  new  and  highly   innovative  phenomenon  of   civil   drones  offers   a  great  illustration  of  that.    In  2009,  EASA  issued  a  policy  statement  to  explain  how  the  airworthiness  of  drones  could  be  assessed  under  the  existing  regulatory  framework.  41    The  aim  was  to  “facilitate  acceptance  of  airworthiness  applications”  for  civil  drones  while  “not  increas[ing]  the  risk  to  people  and  property  on  the  ground  compared  with  manned  aircraft  of  equivalent  category.”      To  that  end,  EASA  recognized  that  the  need  to  “facilitate  an  early  introduction”  of  civil  drone  operations  required  alternative  approaches  and  procedures  for  airworthiness  approval.  The  necessary   degree   of   flexibility   in   the   system   was   provided   for   through   derogations   from  standard  approval  criteria  subject  to  ensuring  “adequate  safety  with  regard  to  its  purpose”.      As  EASA  gained  more  knowledge  about  civil  drones,  it  proceeded  to  develop  the  regulatory  framework   together  with   stakeholders.   The  ambition   remained  “to  offer  enough   flexibility  for  the  new  industry  to  ..  innovate”.  The  policy  design  it  came  to  use  rests  on  dividing  drone  operations   into   three   broad   categories,   where   categorization   is   proportionate   to   risk   and  intended   operation.   42     Under   this   new   framework,   only   when   operations   start   posing  significant   risks   is   the   drone   operator   required   to   perform   a   risk   assessment   and   identify  

                                                                                                               41  Policy  Statement,  Airworthiness  certification  of  Unmanned  Aircraft  Systems,  E.Y013-­‐01,  available:  https://easa.europa.eu/system/files/dfu/E.Y013-­‐01_%20UAS_%20Policy.pdf    

42  See  https://www.easa.europa.eu/easa-­‐and-­‐you/key-­‐topics/civil-­‐drones-­‐rpas    

 

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measures  that  could  mitigate  the  risks  (e.g.   limitations  on  the  operations,  qualifications  for  the  personnel,  certification  of  the  drone  itself,  etc.).    The   aim   is   to   pursue   the   two   goals   of   (i)   integration   and   acceptance   of   drones   into   the  existing  aviation  system  in  a  safe  and  proportionate  manner  and  (ii)  fostering  an  innovative  and   competitive   European  drone   industry   and   creating  new  employment,   in   particular   for  small  and  medium-­‐sized  enterprises.  These  goals  are  to  be  achieved  simultaneously  through  a  regulatory  framework,  which  focuses  on  the  operations  of  drones  and  which  “set[s]  a  level  of   safety   and   of   environmental   protection   acceptable   to   the   society   and   offer[s]   enough  flexibility  for  the  new  industry  to  evolve,  innovate  and  mature”.      ⇒  We  propose   that   the   approach   of   realizing   important   policy   objectives   through   flexible  regulatory  frameworks  is  the  model  that  should  be  applied  to  the  digital  economy  in  general  and   innovative,   disruptive   sectors   in   particular.  A  good  example  of   the   latter   is   online  and  mobile   payments.   Just   as   EASA   entrusts   drone   operators   with   carrying   out   safety   risk  assessments   of   operations   and   identifying   mitigation   measures,   the   payment   service  provider   is   the  best  placed  and  most  capable  to  assess  which  authentication  method   is   the  most  appropriate   for   types  of   transactions.   It   is  most  often   counterproductive   to   impose  a  certain  method  or  process  on  market  actors   in  a   fast-­‐changing,   innovative   industry   (where  rogue   actors   move   just   as   swiftly)   with   the   hope   of   achieving   a   certain   policy   objective;  desired  market  outcomes  are  more   likely  generated  where   industry   investments   in  the  next  generation  methods  and  processes  are  supported.    The  policy  objective  of  ensuring  adequate  levels   of   security   in   the   online   and   mobile   payment   sector   should   therefore   be   pursued  through   legislation   that   allows   payment   service   providers   to   deploy   alternative   security  solutions.      4.  Develop  regulatory  frameworks  based  on  experience  and  in  tandem  with  the  evolution  of  the  sector   As   described,   the   Internet   and   the   digital   services   running   on   top   of   it   empower  entrepreneurs   to   “learn   by   exporting”.   This   necessarily   involves   varying   degrees   of   risk  taking43     –   and   so   does   the   development   of   the   services   that   power   these   entrepreneurs.  Policies  that  aim  to  promote  a  “climate  of  entrepreneurship”  must  be  able  to  embrace  risk  taking  and  learn  from  it.      As  explained  above,  this  requires  that  policymakers  and  regulators  engage  in  dialogue  with  companies  in  order  to  increase  learning  and  understanding  of  new  phenomena.  Dialogue  is  one  necessary  building  block  for  “develop[ing]  rules  based  on  observed  market  behavior  and  …  introduce[ing]  regulation  iteratively”44.    

                                                                                                               43  For  instance,  international  selling  creates  novel  challenges  for  sellers.  To  help  sellers  manage  risks,  eBay  introduced  a  policy  to  protect  sellers’  domestic  performance  status  when  they  sell  internationally:  “We  appreciate  that  when  you  expand  into  new  markets,  it  is  more  important  than  ever  to  make  sure  your  domestic  seller  status  is  protected.”  http://sellerupdate.ebay.co.uk/spring2015/international-­‐seller-­‐protection?clk_rvr_id=821269232612&rmvSB=true    

44  “Can  ‘Lean  Regulation’  be  a  game  changer  for  financial  innovation”,  by  Chris  Bishko  and  Pearl  Chan  of  the  Omidyar  Network,  Forbes  (10  March  2013),  available:  http://www.forbes.com/sites/kerryadolan/2013/10/03/m-­‐pesa-­‐and-­‐gcash-­‐can-­‐lean-­‐regulation-­‐be-­‐a-­‐gamechanger-­‐for-­‐financial-­‐innovation/    

 

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Jessica   Rosenworcel   of   the   US   Federal   Communications   Commission   (FCC)   has   called  iterative  policymaking  “government  in  the  sandbox”.  She  warns  that  in  today’s  policymaking  processes  “[t]here   is  too  little  opportunity  for   iterative   learning  –  testing   ideas  and  making  quick  adjustments  based  on  experience”.  45    There   are   several   conceivable  ways   to   structure   a  model   whereby   policymaking   could   be  developed  iteratively  and  be  informed  by  the  experience  of  market  actors  and  effects  in  the  market.  For  example:    1) As  companies  experiment  with  new  products  or  services,   they  could  carve  out  an  area  

where   controlled   experimentation  would   be   carried  out   together  with   regulators,   and  both  would  learn  from  the  risk  taking.46    

2) EASA’s  approach  to  drones  provides  another  possible  model,  where  the  decision  to  not  subject   a   certain   category   of   drone   operations   to   approval   processes   is   intended   to  allow  “the  small  and  medium-­‐sized  enterprises  to  gain  experience”.  The  aim  behind  this  risk-­‐proportionate   categorization   of   activity   is   indeed   to   “support   SMEs   to   learn   and  progress   from   simple   operations   to   higher   risk   operations   as   they   gain   experience  allowing  them  to  increase  the  range  of  operations  and  applications”.  [17]  

3) The   FCC   has   used  models   such   as   running   practical,   small-­‐scale   tests   to   inform   future  policymaking.  One  example  concerns  the  FCC’s  ambition  to  have  television  broadcasters  combine  technical  operations  and  broadcasts  over  less  spectrum.  While  the  goal  was  to  effect   such   a   shift   at   national   level,   the   FCC   started   at   city   level.   It   identified   two  broadcasters   in   Los   Angeles   and   tasked   them   with   figuring   out   how   to   implement  channel-­‐sharing;   this   process   provided   the   FCC   with   information   about   technical   and  legal  issues  that  arise  when  broadcasters  share  facilities  under  real-­‐world  conditions.  47  

 A  sandbox  approach  to  policy  design  depends  on  a  willingness  to  accept   interim  solutions.  For  example,  EASA  explicitly  chose  not  to  regulate  drones  back  in  2009,  but  instead  to  issue  a   policy   document   as   “an   interim   solution”   and   wait   until   “more   experience   has   been  gained”  about  drone  operations  before  developing  regulation.    Equally  important,  an  environment  where  responsible  risk  taking  by  companies  is  supported  and   the   experience   tapped   to   inform   policy   design   demands   a   climate   of   mutual   trust.  Companies  must  not  fear  punishment  for  factors  out  of  their  control  and  be  comfortable  in  providing  feedback  about  trial  and  errors  for  the  purpose  of  informing  policymaking.      To  this  end,  the  concept  of  “just  culture”  could  be  borrowed  from  air  safety  and  health  care  sectors.   This   concept   represents   “a   culture   in   which   …   operators   …   are   not   punished   for  actions,  omissions  or  decisions  taken  by  them  that  are  commensurate  with  their  experience  

                                                                                                               45  “Sandbox  thinking”,  by  Jessica  Rosenworcel,  essay  part  of  the  “Regulating  the  Digital  Economy”  symposium,  Democracy  Journal,  available:  http://www.democracyjournal.org/34/sandbox-­‐thinking.php    

46  Consider  Max  Levchin’s  description  at  2015  World  Economic  Forum  of  an  approach  he  is  pursuing  with  his  latest  company  Affirm:  disruptive  companies  reach  out  to  regulators  saying  “we  are  the  new  kids  on  the  block,  we  are  going  to  take  risks  on  your  time,  but  we  are  going  to  provide  you  with  our  learnings”  and  “here’s  an  experiment,  it’s  going  to  be  important  to  find  out  what  the  outcome  is  but  there  is  no  guaranteed  protection”.    

47  Rosenworcel    

 

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and   training”   –   one  must   accept   that   “honest  mistakes”   happen,  while   “gross   negligence,  wilful  violations  and  destructive  acts  are  not  tolerated”.48      The  recognition  behind  this  concept   is  that   improving  performance  of  a  sector,   industry  or  market  depends  to  a  large  extent  on  feedback  of  knowledge.      ⇒  We  argue  that  maximising  the  growth  potential  of  the  European  Digital  Economy  requires  a  regulatory  environment  where,  in  particular,  small  businesses  feel  encouraged  to  exploit  the  possibilities  in  new  technologies  and  open  markets.  This  is  about  expanding  into  the  unknown.  The  requisite  regulatory  framework  would  be  one  where  (i)  companies  are  encouraged  to  gain  experience  through  responsible  risk  taking  and  (ii)  such  experience  can  also  benefit  policymakers  and  contribute  to  informing  policies  and  regulation.  This  means  that  policymakers  must  be  prepared  to  accept  interim  solutions  and  must  actively  engage  in  creating  a  climate  of  mutual  trust:  companies  must  feel  comfortable  to  provide  feedback  about  trial  and  errors  for  the  purpose  of  informing  policymaking.  To  this  end,  the  concept  of  “just  culture”  could  be  introduced  for  the  Digital  Economy.  This  concept  represents  “a  culture  in  which  …  operators  …  are  not  punished  for  actions,  omissions  or  decisions  taken  by  them  that  are  commensurate  with  their  experience  and  training”.  It  is  about  creating  an  environment  of  active  learning,  recognizing  that  improving  performance  of  a  sector  or  industry  depends  to  a  large  extent  on  feedback  of  knowledge  generated  by  a  system  of  data  collection  and  analysis.        

                                                                                                               48  See  for  example  Eurocontrol’s  explanation  of  this  concept:  https://www.eurocontrol.int/articles/just-­‐culture