AI and privacy rules meant for Big Tech could hurt small businesses

As lawmakers and regulators in the U.S. consider policy born of their Big Tech concerns such as data privacy and artificial intelligence, they should carefully consider how such changes could end up trampling the small and midsize businesses that drive innovation and competition.

While policymakers may have Google and Facebook in mind, the actual policies could unintentionally create new regulatory burdens that could deter investment in smaller businesses and prevent new companies from emerging. For example, calls to end Section 230 — part of a 1996 law that protects internet companies from some lawsuits — portray it as a handout to Big Tech, when in practice it would mean new social media companies would face liability early on, making it more difficult to compete and discouraging them from carrying user-generated content that provides new opportunities or ways of connecting.

In this way, regulations that policymakers may think target Big Tech could ultimately serve the biggest companies by placing increasing burdens on potential competitors.

In the U.S., the government has generally taken a hands-off approach to the technology industry, keeping barriers to entry low and fostering entrepreneurship. Today’s leading companies were once small startups, and regulators’ light touch allowed them to flourish, creating benefits for consumers that could not have been predicted. The economy and consumers need this approach to continue so today’s startups have a chance as well.

We can see this theory play out in the real world. Europe has taken a significantly different approach to technology policy, which has stifled small businesses. For example, after a European privacy law, the General Data Protection Regulation, went into effect in 2018, investment in small and startup businesses decreased, largely out of concerns that small companies would struggle to comply with the new rules.

In the short run, such investment decreased by 36%, and large players gained market share in the advertising sector. One effect of the regulation, according to a National Bureau of Economic Research study, is a “lost generation” of innovation; smartphone app stores have added nearly one-third fewer applications.

To protect consumers from exploitation by Big Tech, some policymakers in the U.S. have been flirting with a more European approach. However, many proposed policy changes would increase compliance costs or liability burdens on newer and smaller players that might not be able to afford them. This includes state-level data privacy policy that risks creating a burdensome and costly patchwork as well as calls by senators to impose AI licensing.

Beyond issues that have compliance costs such as data privacy and AI, some critics of Big Tech have called for antitrust enforcement to protect small businesses from the “kill zone” — the window of time in which a growing startup is bought by a big company before it can become a rival to that company. These critics also call for changes that would potentially limit mergers or acquisitions.

But this approach creates a false dichotomy between “big” and “small” business that misunderstands the way the startup ecosystem works. This strategy could hurt small businesses in many ways. Some may want to grow into challengers, but others were created with the hope of being sold; investors in startups are often looking for the right moment for the company to be acquired so they can recoup their money. That’s valid too; this cycle leads to more investment and more innovation.

Blocking mergers and acquisitions could force small businesses to stay small, or, worse yet, it could push them out of business. Antitrust rules that are preoccupied with curbing Big Tech would end up hurting the industry, the economy and consumers.

We saw this play out recently when regulators blocked Amazon’s acquisition of IRobot. The result is most likely not renewed competition but that consumers will have fewer options as IRobot faces a dire financial situation and lays off workers. If further burdens to mergers and acquisitions and a shift away from the focus on consumers continue, this could become a more frequent phenomenon, to the detriment of both small businesses and consumers.

Small businesses and startups play an important role in the tech ecosystem and have flourished under the light touch of U.S. regulators. After decades of experience, allowing policy to be shaped by today’s enmity toward Big Tech would be a dangerous swerve and could have unintended consequences for startups and consumers.

Jennifer Huddleston is a senior fellow in technology policy at the Cato Institute and an adjunct professor at George Mason University’s Antonin Scalia Law School.