The Economist - UK (2022-03-26)

68 Business TheEconomistMarch26th 2022

TechnologyinEurope

New kids in the bloc

I

ntheearly1970sa handfulofformer

employees  at  ibm,  then  the  world’s  big­

gest computer­maker, spent weeks pulling

double shifts. During the day they quizzed

the  workers  at  a  nylon  plant  in  southern

Germany  about  what  exactly  made  their

factory  tick.  At  night  they  painstakingly

turned this knowledge into code and test­

ed  it.  The  result  of  all  this  toil  was  one  of

the  world’s  first  comprehensive  pieces  of

business software. The company behind it,

sap, is still Europe’s mightiest technology

titan by revenue, with annual sales of near­

ly  €30bn  ($33bn).  It  has  a  market  value  of

€123bn as it celebrates its 50th anniversary

on April 1st (no joke). 

Such  stamina  is  a  feat,  but  also  raises

worrying  questions  about  the  European

tech  industry.  Why  has  sapremained  Eu­

rope’s top digital firm for so long? Why has

the  continent  spawned  no  trillion­dollar

Apfel  or  Amazonie?  Might  one  eventually

emerge? And could such a development be

speeded  by  the  eu’s  landmark  technology

law,  the  Digital  Markets  Act  (or  dmafor

short), which the bloc was expected to ap­

prove after The Economistwent to press on

March 24th?

sap’s longevity is the easiest to explain.

Once  firms  opt  for  a  certain  type  of  busi­

ness  software,  it  becomes  tedious  (and

sometimes  impossible)  to  replace  it.  That

guarantees the purveyor a regular revenue

stream  and  a  captive  market  for  exten­

sions. sapalso had the foresight to design

its software from the start so that it did not

become  obsolete  when  the  underlying

computing infrastructure changed. As a re­

sult, it is one of the few information­tech­

nology giants that has survived three “plat­

form  shifts”:  from  mainframe  computers

to  more  distributed  “client­server”  sys­

tems, then to the internet and, now, to the

computing cloud.

Why  sap remains  a  lonely  European

presence  in  a  digital  realm  lorded  over  by

American tech behemoths is less obvious.

Oft­heard  explanations  include  the  conti­

nent’s  risk­averse  entrepreneurs  and  con­

sumers,  a  lack  of  venture  capital  (vc),  red

tape and a fragmented home market. Bene­

dict Evans, a former venture capitalist who

now  publishes  a  widely  read  newsletter,

thinks the reason is far simpler: tech grew

big in its birthplace, Silicon Valley. Until a

few years ago, even aspirant American tech

hubs, such as Austin, Miami and New York,

did  little  better  at  spawning  digital  dar­

lingsthanBerlin,LondonorParis.

sapitselfisproofthatappearinginthe

rightplaceattherighttimeisinstrumental

tomakingitintech.Thefirm’sheadquar­

tersmayhaverisenonanasparagusfielda

15­minutedrivesouthofHeidelberg,but

the region combined many factors that

contributed to the firm’s success: more

than one well­organised factory whose

businessprocesseslentthemselvestobe­

ingturnedintosoftware;plentyofaccoun­

tantsandphysicistswhocouldhonesap’s

programs;novcfirmstobadgerittoship

half­bakedproductsinsearchofaquick

buck.BecausetheGermanmarketwasrel­

ativelysmall,sapalsodesigneditscodeto

workwithmanycurrencies—afeaturethat

itsAmericanrivals,includingOracle,had

toaddlaboriouslyafterthefact.

Thesedaysbreedingtechstarsiseasier.

Demandfordigitalservicesisgrowingin

Europe,attractingmoney,experienceden­

trepreneurs and startup­friendly rules,

suchasa morerelaxedattitudetoemploy­

eestockoptions, saysAnnabelleGawer,

whorunstheCentreofDigitalEconomyat

theUniversityofSurrey.Thenumber of

European tech firms worth more than

$1bn,bothlistedandunlisted,hasexplod­

edinrecentyears.WhenMosaicVentures,

avcfirminLondon,surveyedsuchcompa­

niesearlierthisyear,beforeawobblein

techvaluations,itcountedabout 180 new

onessince2010,collectivelyworthsome

$1trn(seechart).

Thedmaismeanttospurevenmore

suchbreedingbycreatinga levelplaying

field on which startups can compete

against America’stech titans. Its provi­

sionswillapplyto“gatekeepers”whichop­

erateoneormore“coreplatformservices”

and,accordingtothelatestleaks,havea

marketcapitalisationofmorethan€75bn

andhadannualrevenueinEuropeofmore

than €7.5bn in the last three financial

years.Theservicesinquestionincludeon­

linesearch,socialnetworks,video­shar­

ing,operatingsystems,cloud­computing

andonlineadvertising:thebreadandbut­

terofAmerica’sbigtech,inotherwords.

Specifically,thedmamay,amongother

things,compelAppletoletiPhone­users

bypassitsappstoreand“sideload”soft­

warefromelsewhere;forceMetatomake

itsWhatsAppandothermessagingservic­

esworkwithrivalones;andrequireGoogle

toshowcontentfromEuropeanpublishers

initssearchengine.Withoutsuchrules,

saysMargretheVestager,theeu’s toptrust­

buster,“otherswillnotgetroomtogrow”.

Perhaps.Butthedmamayalsomakeit

harderforEuropeanfirmstobecomereally

big. Some entrepreneurs may prefer to

avoid the hassle of complying with its

strictures.Investors’enthusiasmforfirms

whosegrowthprospectscouldbecrimped

asa resultmayalsobechilled.Andenforc­

ingthenewrulesagainstdeep­pocketed

Americanfirmsmaybetough,saysThom­

asVinje,a veteranantitrustlawyeratClif­

fordChance,a lawfirm.Toavoidhaving

thedmaapplieddifferentlyintheeu’s 27

memberstates,theEuropeanCommission

willbeincharge.Butthe 80 officialsithas

initiallydelegatedtothetaskmaystruggle

withtheirin­trays.Britain’sCompetition

andMarkets Authority plans to employ

threetimesasmanypeopletoperforma

similarfunctionforjustonecountry.

After 50 yearssapisatlastseeingseri­

ouschallengestoitsdominanceofEuro­

peantechdom.Adyen,a listedDutchdigi­

tal­paymentsprovider,hasa stockmarket

valueofmorethan$60bn.Klarna,a pri­

vately held Swedish one, is valued at

$46bn.Itwouldbeanironyiftheeu’s new

rulesmadeitharderforsuchupstartsto

growbeyonda certainsize—andaneven

biggeroneif theyallowedsap, whosebusi­

nesssoftwareisnotdeemedacoreplat­

formservice, toholdontoitscrown.n

A USTIN AND BERLIN

An eulaw aims to make it easier for startupstoprosper.Willit?

Continental drift

European technology companies*

Valuation or market capitalisation, Dec 31st 2021, $bn

Source:Mosaic Ventures

*Valued at $1bn or more

and founded after 2010

Other

Mobility tech

Customer service

Gambling

AI/machine learning

Developer tools

Food and grocery

Digital media

E-commerce

Gaming

Marketplace

Fintech

1000 200 300

Private Listed

Other

Finland

France

Denmark

Netherlands

Sweden

Germany

Britain

1000 200 300

By sector

By country