Digital business has improved society in many ways — from offering connected healthcare services to making factories more efficient. However, digital business is more than just digitizing and connecting products, services and processes. Digital business also makes certain business models become very competitive and sometimes dominant. While any digitization initiative is a business-outcome-driven approach, it needs secure and reliable access to data sources and the ability to contextualize and aggregate data from a large number of internal and external data sources. Platform business models are beneficiaries of this. Look no further than Alibaba, Alphabet, Amazon or Tencent as examples of the dominance gained via platform business models.
However, platform businesses are heavily dominated by U.S. and Chinese companies due in part to their individual market sizes and the common language and currency. Europe and European companies lag behind and have already largely lost digital sovereignty in core technology areas, such as e-commerce, microprocessors, 5G infrastructure and smartphones, which are necessary to build and run platform businesses.
As illustrated in the graphic below, Europe contributes with only nine companies (or 4% share) to the global platform business market.
The same applies to the foundational technologies to drive digital transformation and build digital business models or a platform business. The market for digital and cloud technology and services is dominated by U.S. and Chinese technology and service providers. As a result, European companies mainly have to access non-European services and technology to build and run digital business models. Hence, data is being stored within non-European cloud and digital service providers, which creates political uneasiness.
As digital services become increasingly important and system-relevant, European companies worry to retain control over their data to stay compliant with local regulations (see “Privacy Shield is Dead; Long Live Privacy?”). Some more regulated industries and governments are particularly concerned by the U.S. and Chinese legal frameworks that might allow government access under specific circumstances to customers’ data. In addition, dependence on non-European providers of digital technologies and services (for example, cloud infrastructure and platform services) also comes with economic concerns, such as providers not paying appropriate taxes on transactions conducted within Europe. To address these circumstances and challenges, the German Federal Ministry for Economic Affairs and Energy (BMWi) initiated the GAIA-X project. The project attempts to establish a digital architecture with sovereignty safeguards and encourages an ecosystem for European industries and users which allows less-established companies to be included in a larger “marketplace.”
Europe Seeks Digital Sovereignty
The platform market is dominated by giants that leave European businesses with no choice but to rely on foreign providers. Five companies that fit Gartner’s definition of platform companies are Alibaba, Alphabet (Google), Amazon, Baidu and Tencent. At the end of 2019, their combined market capitalization was $2.9 trillion, with revenue of almost half a trillion dollars. Other digital giants like Microsoft and Apple bring the total to $5.4 trillion. And they continue to boldly invest in, innovate and disrupt a wider and wider range of B2B, B2C, B2G and public- and private-sector markets. In 2018, Amazon and Alphabet’s combined R&D spend alone totaled just over $50 billion. In May 2020, Tencent announced an investment of $70 billion in new infrastructure such as cloud computing, artificial intelligence and cybersecurity over a period of five years.
While these platform companies must be viewed as more than just technology providers, many dominate the market for fundamental and enabling technologies for digital business. However, to this date, not a single European provider shows the capabilities to compete against the providers discussed above. For lack of a competitive European choice, companies will choose to build upon technology platforms owned by providers from outside Europe. The market dynamics make it almost impossible for a European company to become a strong competitor, especially in the near term. The competitive advantages enjoyed by the hyperscale cloud providers include:
- Market head start and good will
- Technology: They create their own software and hardware, from computers to silicon.
- Process and skills
- Mind share and scale combined with immediate and very rapid availability
- Network effect of customers who can apply the service, and other vendors
- Capital and the ability to operate new data centers at a financial loss indefinitely
European vendors typically invest significantly less than the global players in new infrastructure and thus find themselves essentially playing catch-up. While COVID-19 has highlighted the capabilities of large cloud providers in supporting enterprise productivity and business continuity and thus increased the overall cloud usage, it has left governments facing repaying the cost of massive fiscal interventions to maintain their economies.
GAIA-X: Europe’s Savior to Achieve Digital Sovereignty?
Since digital sovereignty has become a hot topic across European countries and governments, technology and service providers must assess the motivation and strategy behind GAIA-X, to be able to balance the pros and cons of the project. They may even contribute to the initiative. In our research “Market Trends: Europe Aims to Achieve Digital Sovereignty With GAIA-X”, we describe the fundamentals and goals of GAIA-X:
- Establish a significant European presence in technology platforms and services in Europe to improve choice and competitiveness over the vitally important digital infrastructure.
- Provide European-based options for data storage to gain back control over where data is located, who the owner of that data is and where value is created.
- Support European businesses and governments in the implementation and scaling of innovative digital products and solutions.
In addition, the research provides technology and service providers with all the necessary information around GAIA-X for a guided decision regarding how they should apply their go-to-market strategies to support European companies.
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