The internet is now 10% of US economy: a regulatory conundrum

Placing more stringent regulations on a sector is a delicate equation to balance, especially when it contributes so much to the national economy.

According to estimates from the Internet Association, the industry now accounts for 10.1% of the overall US economy, directly employing 4% of the working population and indirectly supporting a further 8.7%. These are the figures which have placed the politicians in such a precarious position.

Silicon Valley is driving progress in the US, however it has arguably become too powerful. The years of the ‘Wild Web’ cannot be allowed to continue, though politicians and regulators have to be careful when designing and placing the shackles on these monstrous companies; the last thing anyone wants is to inhibit or undermine an industry so important to economic growth.

Over the course of 2018, the Internet Association estimates the industry contributed $2.1 trillion to the US economy. This is more than double the $966 billion from five years ago, accounting for as much as 10.1% of the total. The number of jobs it also supports has doubled from 2014, directly employing 6 million individuals, while 13.1 million jobs were indirectly supported by the internet companies.

In comparison to other segments, the internet sector grew nine times faster than the US economy as a whole between 2012 and 2018. Since 2007, the US economy has grown by 41.8% compared to growth of 372% for the internet’s contribution. It is now the fourth largest sector in the US, only behind manufacturing, public administration and real estate.

And some might suggest this is only the tip of the iceberg. As more digital products and innovations are introduced, alongside more traditional aspects of our daily lives heading online, growth would presumably only head one direction.

As mentioned beforehand, this presents a conundrum to the politicians and regulators.

It has become increasingly popular over the last few months to point the finger of accusation at Silicon Valley. According to the politicians, these are companies who are navigating around the rules, ignoring the privacy rights of citizens and offering the opportunity for nefarious actors to trick, con and mislead.

Everyone realises the internet economy has to be brought under control through a stricter regulatory regime. The companies involved have not been responsible enough with the light-touch regulatory environment which has been afforded to them, however the iron fist of regulation cannot strike too hard. This is an industry which is thriving and adding so much value to the US economy, and subsequently, society.

Internet Association figures

If the US is to maintain its leadership position in the global economy, the internet industry is critically important, likewise the telecommunications industry.

5G is a topic which is dominating the headlines and will continue to do so. Those who harness the connectivity euphoria earliest could dominate the international markets for decades to come.

Launching 5G first is not necessarily anything to shout about, but the nation which can scale these networks the quickest will put themselves in an excellent position. Soon enough, the innovators will start to think of new products and services which have been enabled by 5G, irrelevant to whether they are consumer or enterprise focused, though the success of these products will depend on how widespread 5G connectivity actually is.

If you don’t have a large enough 5G network, these innovators cannot test their new ideas at scale, validate business models, or make the necessary tweaks to protect their investment from fast-followers. This concept was very evident in the 4G era.

The idea of Facebook as a mobile product or Uber did not exist until the 4G networks had scaled. There are numerous other examples, though these two are the most obvious. Once 4G networks and devices had been adopted by the mass market, these companies grew rapidly, contributing notably to the US economy.

Let’s compare this to a country which was slow to scale 4G networks. Someone might have had the same idea as Uber founder Travis Kalanick in the UK let’s say, but without the scaled 4G network, the idea couldn’t be validated or test properly, funding would have been more difficult to secure, domestic growth would have been stifled and less funds would have been available for international expansion. By the time the UK version was ready to push out internationally, it might have been so far behind Kalanick in the US the business died.

We have of course made this comparison up, but it proves a point of the importance of scaling the network, not just being the first to launch commercial services.

The same could be said about 5G networks. New businesses will emerge with this new connectivity dynamic, but where will the best ideas have the opportunity to scale domestically, before launching an assault on the global markets. Another interesting element is the attraction of foreign dollars. It you have the best network, you will lure R&D investments to the country from the likes of China, Germany and the UK. How many companies have a R&D centre in Silicon Valley nowadays?

All of these ideas will contribute to the success of the internet economy in the US.

However, the industry is at a critical point. It is facing a regulatory crack-down and 5G is quickly developing all around the world. Politicians and regulators need to create new rules to govern and force accountability, though they need to be careful they do not shackle an industry which is providing so much stimulus to the national economy.

The US or cash? Huawei asks Poland to choose sides

Huawei has put its financially favourable foot forward, suggesting Poland will only get a cash boost if the vendor is allowed to participate in the 5G bonanza.

The role of Huawei in European networks has been under scrutiny for a considerable amount of time, and while it does appear it will be safe in numerous markets, Poland is one which is still hanging in the balance.

According to Reuters, Huawei is prepared to invest roughly $793 million in the country as long as it is allowed to sell equipment to the Polish telcos. While this might be enough to force some politicians into switching on the green-light, Poland is an area where Huawei has found itself in a bit of bother recently.

Back in January, a Chinese employee of Huawei and a Polish national working for Orange were both arrested on spying allegations by Polish security services. Evidence was not produced at the time, though concrete evidence has not been needed to ban Huawei in the US, or in countries such as Australia.

In terms of the US, Poland has had a strong relationship with the country for some time. Polish–US relations were officially established in 1919 and the country has remained one of the most stable allies of the US since. This filters down to the general public also, with Poland one of the most consistently pro-American nations in Europe and the world.

You also have to factor in more direct threats from the US. In February, the combative Secretary of State Mike Pompeo effectively suggested Eastern European nations would have to choose between working with the US or Huawei.

Looking at the Polish economy, a fractured relationship with the US would be difficult. Poland is the 24th largest export economy in the world, with the vast majority of exports heading to nations in Europe. However, the US is the largest single market outside of Europe for Poland, accounting for 2.7% according to Observatory of Economic Complexity, a MIT project.

With the US leaning so heavily on European allies to ban Huawei, seemingly as a means of putting pressure on the Chinese Government, Poland might turn out to be an interesting battle ground. Of course, you have to consider the cash incentive from Huawei.

Poland is effectively the Eastern European home ground of Huawei. The firm employs roughly 900 people in the country and will have a positive impact with its Polish supply chain. With further investments planned in the country, the direct impact of £793 million will keep the Polish Government happy, but there will be considerable knock-ons in other parts of the economy.

Another consideration for Poland will be market competition. Polish telcos will need a suitable amount of competition to ensure investments in network infrastructure is as low as possible. When you consider ARPU on mobile users, the demands become much more evident.

Orange’s Polish business currently has 9.7 million subscribers, each generating roughly £5.67 a month in revenue. For Play, Poland’s largest MNO, just over 12 million subscribers generate £6.71 a month for data services. For Polish telcos to generate ROI, competition between the network infrastructure vendors is clearly needed; banning Huawei might have some difficult implications to stomach.

Huawei knows this of course and is playing an excellent move. Poland will have to make a decision before too long; persist with its relationship with the US or effectively help Huawei gain traction in Eastern Europe.

Chinese spying law, no idea what you mean – Huawei Chairman

Huawei Chairman Liang Hua is the latest to enter the fray to defend the principles and reputation of the telco vendor, this time questioning the legitimacy of accusations.

Speaking during a roundtable session in the wings of Huawei’s latest London event, Hua gave a measured representation of the firm. Once again, Hua put forward the idea of assessing technology and security on merit and evidence instead of political rhetoric, but the Huawei boss also questioned the legitimacy of accusations levelled at the vendor.

“When we are operating globally we are committed to be compliant with regulations in that country,” said Hua.

This is one of the statements which Huawei executives have used consistently through the saga. Huawei is a global organization with customers in more than 130 countries. It operates in utter compliance with local laws and regulations, otherwise it would undermine customer confidence and validity of the firm in that market. Anything aside from compliance would destroy its own business and doom the firm to failure.

This statement is all well and good, though many will still wonder with caution. There is after all a Chinese law which forces companies to adhere to the demands of the government.

Or is there? Hua is adamant there isn’t.

“Chinese officials on many occasions have stated there are no laws which require enterprises to collect information for the government,” said Hua. “So far, we haven’t received any requests of this kind from any department.”

The denial goes all the way to the top as well. Back in March, Premier Li Keqiang firmly denied the government would, or has, forced Chinese companies to assist it in intelligence gathering activities.

“This is not how China behaves,” said Keqiang. “We did not do that and will not do that in the future.”

Technically, Hua is correct in denying the law exists explicitly. There are no such laws written to suggest Huawei, or any other Chinese firm for that matter, would have to relay information to the Chinese government or insert backdoors into software. It isn’t in concrete language.

However, there is a law which requires Chinese firms to ‘co-operate’ with state departments for ‘intelligence activities’. The way in which it is written is suitably vague enough to ensure wiggle room on both sides. In theory, the government could compel Huawei to assist, however, there are also safeguards built in to prevent ‘abuse’.

Under Chinese law, government departments are banned from forcing a company from acting against ‘legitimate’ or ‘legal’ interests. Technically, if it is bad for business or illegal in the country of operations, Huawei can refuse the request from the government.

There might be some who still don’t believe this position, questioning the nuance of language. However, Hua has endorsed recent statement from founder Ren Zhengfei, where the media-shy former executive promised to shut down the company if he or any employee was forced to act as a puppet of the Chinese state.

Whether anyone actually believes this statement is down to personal opinion, but always remember, shutting down Huawei would cause as many problems as it solves. Huawei is renowned for its post-sale customer service, and any vendor would have to prove its customer support credentials for the lifecycle of products it sells. If the company just shut down, all of Huawei’s customers would be on their own, attempting to maintain products in the wild when they do not have the personnel to do so.

Opinions on how deeply embedded Huawei is in the Chinese government’s pocket vary quite wildly, though it is always worth remembering the facts instead of being swept away in the political rhetoric. There is a law which compels Chinese companies into acting on behalf of the government, but there are also clauses which mean the company can refuse to do so if said actions would mean breaking the law in that market.

Huawei is a company which is in a sticky position right now. Of course, there are still markets where the firm will make billions, but there are others where the risk of limited operations or being completely shut out is present. The question is what approach will these precarious markets take?

“Cybersecurity is indeed an important element,” said Hua. “We are happy to see the cyber security issue raised and we believe it is a technical issue at the core.

“The UK government has established a good mechanism to identify and mitigate risks.”

This is the approach Huawei has been pleading with governments around the world to take. Speaking in Shenzhen last month, cybersecurity boss John Suffolk told an audience of journalists Huawei had passed every security and resilience test which had been presented to the firm.

“Being a Chinese company means the spotlight will always be on you in some places, that is not our fault but something we will deal with,” said Suffolk.

Huawei is attempting to move the conversation back to technology. If it remains in the realms of politics, it will lose. Such is the political power of the US, eventually trade partners will crack. But this also leaves the UK in a very sticky position. It is reliant on the ‘special relationship’ which is so frequently brought up, but the silk road is lucrative.

Unveiled at the same London event, an Oxford Economics report suggested Huawei has a £1.7 billion impact on the UK economy. This is through direct employment and tax, indirect employment through its supply chain and also induced impact from the money spent by those employed directly and indirectly. Critically, Huawei also inspires a notable amount of R&D in the UK.

While the £1.7 billion contribution to the national economy is only 0.01% of total GDP, the £112 million R&D expenditure in the UK during 2018 accounted for 0.3% of the total in the UK. Huawei is punching above its weight from a monetary contribution, and the 35 partnerships with UK universities is also a factor to consider. Increasing R&D investments across the country is a key ambition of the UK government, therefore it will want to tread carefully around Huawei.

Another factor to consider is the direct investment made by Huawei in the UK. It currently employs 1600 employees in the UK, each contributing 3X more to the economy (tax, output, expenditure etc.) than the average UK employee. Most importantly however, this is an industry with further room for growth, which doesn’t displace any UK business.

The more successful Huawei is, the more success is brought into the UK economy and society, should current investment trends continue. However, Huawei’s direct competitors are Swedish and Finnish. These companies do have operations in the UK, though the displacement effect will be felt more in the Nordics than here.

Although the final decision from the UK’s supply chain review is due to be released in the next couple of weeks, you can see why the investigation has taken so long. There are plenty of moving parts to consider and, while it should not be considered a silver bullet, Huawei’s presence and investment in the UK means a lot to the economy and society.

5G is big business but only if we hurry up

A report from Barclays Corporate Banking suggests 5G could add £15.7 billion to the UK economy by 2025 but only if network deployment is done faster.

While progress is being made, the Barclays team forecast the current rate of deployment would add £13 billion to UK businesses, though any hurdles could drop this figure to £8.3 billion. By 2030, the size of the UK economy could be increased by between 0.88% and 1.54% compared to a situation where no national 5G network. The middle-ground, development continuing at today’s pace, is an increase of 1.09%

For a country which is courting with controversy and potential regulatory hurdles, this does not necessarily paint the brightest of pictures. But of course, this is entirely dependent on whether UK businesses actually know what 5G is and what can be achieved with the upgraded infrastructure.

“The rollout of 5G offers a huge opportunity for the UK,” said Sean Duffy, Head of TMT at Barclays. “We’re seeing massive potential for business growth, which ultimately delivers a positive knock-on effect for the whole economy.

“While the Government and network providers are already working hard to introduce 5G in the UK, we found that businesses do not yet have enough clarity about how they will benefit in the long-run. What’s more, nearly four in ten business leaders still aren’t entirely sure what 5G is.”

The education issue is perhaps pinned to the telco industry itself. Not only have the telcos been slow to engage potential customers and develop specific usecases, the industry spent years plugging the main benefit of 5G as ‘bigger, faster, meaner’. Both of these points have led to the issue being raised by Barclays.

On the speed side of things, the industry has moved away from plugging faster networks as the primary benefit of 5G. The networks will of course be faster, but the latency and throughout benefits are seemingly becoming much more important. Perhaps this is also a realisation that selling 5G on speed alone will not recoup the vast financial outlay.

In terms of engaging specific industries to develop tailored usecases, this is also being corrected, though European telcos and customers are years behind counterparts in Asia. Whether this has any fundamental impact on digital economies moving forward remains to be seen, as there is still time to catch up while the deployment of 5G continues.

During Mobile World Congress Shanghai two years ago, this point was painfully obvious. At conferences in Europe, telcos were still bickering about the point of 5G, while in Shanghai, almost every operator had vertical specific usecases emblazoned across their stands. The difference is approaches was quite staggering.

That said, progress has been made. According to the Barclays research, 58% of businesses are already benefitting from fast communications technology like 4G and ultrafast broadband, quoting the gains being (1) operating across disparate locations (59%), (2) communicating with customers (49%), and (3) connecting multiple machines and devices (48%). At least the majority are already experiencing the benefits of improved connectivity and should, theoretically, be primed for 5G.

Worryingly however, the research also suggests that while awareness might be high, only 9% are allocating ‘significant’ funds to prepare themselves for the 5G era.

Another very upsetting sign for the UK is uncertainty. This might create obstacles to slow the deployment of the networks and ultimately the economic benefits to the UK. And what is creating this uncertainty; Brexit and Huawei.

Brexit is a tiresome topic, but the current political landscape is not encouraging any form of certainty. This will impact enterprise customers appetite to invest. And in terms of Huawei, the Government’s oversight board has not called for a ban, though it certainly hasn’t completely ruled it out either. Such is the importance of Huawei as a supplier to UK communications networks this uncertainty will make telcos nervous.

The UK is promising the world it will be a leader in the digital economy of tomorrow, but it is proving to be the architect of its own downfall. The Government, telcos and customers are all contributing to this gloomy scene. It’s all very British.

Work with Huawei, or us, but not both – US Government

US Secretary of State Mike Pompeo has upped the ante with the anti-China rhetoric, declaring the US will not partner with countries who work with Huawei.

According to Fox Business, Pompeo has dropped the inference and made a statement which many countries will be cringing to hear. You no-longer have to read between the lines; it them or us Pompeo is declaring.

“If a country adopts this and puts it in some of their critical information systems, we won’t be able to share information with them,” said Pompeo. “In some cases, there’s risk – we won’t even be able to co-locate American resources, an American embassy and American military outpost.”

For countries like the UK and Germany, this is worst case scenario. These are countries which have vested interests from an economic perspective in both countries, and such is the state of affairs in the telco world, few can afford to strip Huawei out of the vendor mix. Pompeo is referring to administrative and military functions right now, but it would be fair to assume this could be extended to US commerce.

It’s a very tricky position to be in.

On one hand, there simply aren’t enough vendors in certain segments of the telco industry to generate suitable levels of competition to create the most viable economic position to fuel future infrastructure ambitions. Secondly, taking a vendor such as Huawei, arguably the leader in radio equipment, out of the mix would-be worst-case scenario for a technologist. Why would you want to ignore the best kit available?

However, on the other side of the coin, the security concerns are persistent, and do have some credibility. Evidence is circumstantial, some of the claims are hearsay, however you cannot ignore the risk. China does have a law which would force nationals to comply with its ambitions.

Should Pompeo’s statement evolve into more than chest-beating, numerous countries will find themselves in a painful tug-of-war. It does look like European nations are resisting the US’ Governments call to stonewall China, but this could come at a cost.

The US and China are two major trade partners of almost every economy in the world. To work with the US, you’ll have to ban Huawei, but if you ban Huawei you can almost guarantee there will be some form of reciprocal action from the Chinese Government.

The UK is an excellent example. Huawei has recently released a statement reiterating the investments the company has made in the UK, as well as the number of people who are employed as a direct and indirect result of its investments. Should the UK Government want to seize the post-Brexit trade carrot which has been dangled by the White House, some sort of action against China will be required. There is going to be a loss somewhere.

Poland is in a similar position. Pompeo is quoted as seeing “real progress” in the country after meeting Ministers in Warsaw, though if Poland was to ban Huawei it would certainly have an economic and societal impact; Huawei currently uses the country as its Eastern European HQ, employing roughly 900 people and investing substantial funds.

Over in Germany, China is a significant market for its automotive and heavy industrial exports, though if it was to submit to the US Government demands, you can guarantee there will be some sort of kickback.

All of these countries are now stuck between a rock and a hard place. Europe is proving to be a critical battleground in the US/Chinese war for technological supremacy, and while some narcissists might crave the attention, this is starting to turn into an impossible decision.

UK growth is slowing, but so is Europe’s

The numbers for 2018 GDP growth are in and, while they’re not great, they’re a lot better than some doom-mongers have expected.

UK annual GDP growth slowed to 1.4% in 2018, the lowest since 2012. Having said that growth was below 2% for the previous two years and historically we seem to have paid the price for few recessions by having smaller peaks too. This ONS chart shows around 2.5% is the long-term historical norm so we’re below par but not by a lot.

Further context can be provided by looking at the rest of Europe. A recently published European Commission report says German GDP grew by 1.5% last year, with the French managing exactly the same. In both cases, however, this was down from 2.2% last year and the UK is actually forecast to slightly out-perform Germany this year, with growth of 1.3%. The whole of the EU27 is only forecast to grow by 1.5% this year.

“GDP slowed in the last three months of the year with the manufacturing of cars and steel products seeing steep falls and construction also declining,” said Rob Kent-Smith, Head of GDP at the ONS. “However, services continued to grow with the health sector, management consultants and IT all doing well.

“Declines were seen across the economy in December, but single month data can be volatile meaning quarterly figures often give a better indication of the health of the economy. The UK’s trade deficit widened slightly in the last three months of the year, while business investment again declined, now for the fourth quarter in a row.”

The EC report defaulted to tried and tested ‘uncertainty’ to explain the slowdown. The main thing flagged up was the current aggro between the US and China, but also “…social tensions and fiscal policy uncertainty in some Member States,” which seems to be a reference to France and Italy, respectively. The uncertainty around Brexit was briefly mentioned at the end of the commentary.

That hasn’t stopped opponents of Brexit jumping on these figures as the next piece of news to support their apocalyptic narrative, with loads of supposed experts jumping on the bandwagon and claiming special insight into the minds of the country’s business people. Many such experts also predicted a recession in the event of a leave vote that never materialised, so we should probably take their latest blurts with a pinch of salt.