The EU’s Vision for a Robust Immersive Tech Sector is Irreconcilable With Its Regulations of Internet Services

The European Commission presented on July 11 the European Union’s (EU) strategy for Web 4.0 and virtual worlds. The strategy establishes objectives for the EU in this space, which includes fostering a supportive business environment to position the region as a hub for technological innovation. While a laudable goal, this objective is largely incompatible with the EU’s current regulations for Internet services, such as the Digital Markets Act (DMA), the Digital Services Act (DSA), and the General Data Protection Regulation (GDPR), which are costly regulations that have limited the growth of the European tech sector.

As its name indicates, this strategy sets up a roadmap for the adoption of immersive technologies and adjacent products, such as metaverse platforms, which the strategy refers to as virtual worlds. In this document, the Commission highlights how immersive technologies can transform how citizens can interact with their governments, improve urban planning, and develop the European workforce. The strategy lines up various objectives for the EU: promote tech literacy and develop a competent tech workforce in the region, foster a robust immersive tech sector, and leverage these technologies to modernize government services.

Most of the objectives and priorities set in the strategy are likely to have a positive impact. For example, the goal of preparing the workforce for the popularization of immersive technologies will ensure that workers across many sectors can make use of these technologies in the future. To pursue this goal, the strategy recommends increasing funding for educational institutions to bolster their technological capacity, creating multi-stakeholder partnerships to promote open and interoperable standards, and ensuring that the EU becomes an attractive destination for high-skilled technology professionals from non-EU countries. This last measure could improve the development of the immersive tech sector in the region, especially as competing countries like the United States are struggling to bring in high-skilled migrants due to their restrictions on employer-sponsored immigration visas.

The strategy also establishes that the EU is prioritizing the creation of digital twins—virtual replicas of existing locations or objects—of cities, oceans, and vital infrastructure such as the European electricity grid. The strategy recognizes that digital twins can transform how cities conduct urban planning, build infrastructure, preserve cultural heritage, and increase tourism. Supporting the development of more digital twins would be a strong step for the integration of immersive technologies into the European digital government services toolbox.

The Commission also states that it intends to position the EU as a “thriving and world-leading” industrial ecosystem for Web 4.0 and virtual worlds. It aims to do so through increased financing of business projects in the field, financially supporting the digital creative industry, introducing regulatory sandboxes, and the promotion of a start-up friendly environment. Some of these measures could help this nascent industry to grow in the region. For example, regulatory sandboxes allow businesses to experiment and take risks with new technological innovations without some of the constraints imposed by existing regulations.

However, the potential benefits of these measures are likely to be shadowed by the negative impact of current regulations for Internet services, such as the DMA, the DSA, and the GDPR. For example, the DMA introduces a threshold effect for small and mid-sized firms, where companies are punished if they scale up and grow to become a large firm. The DMA designates an Internet service as a “large gatekeeper” when its userbase grows over a certain size. Companies that are considered large gatekeepers are subject to significantly more regulations that are costly to implement and comply with. By introducing this distinction between large and small businesses, businesses have less incentive to grow and scale their operation, as falling into the large gatekeeper category introduces new regulatory costs that could upend a company’s business model.

The DSA introduces a similar problem, where companies considered “very large platforms” are subject to more stringent reporting and monitoring standards, yearly external audits, and higher fines. This limitation on growth also hinders a business’s access to funding, as venture capital firms are less likely to invest in a firm that is unlikely to grow and provide a return on that initial investment. The strategy itself highlights that European startups have constantly struggled to get access to funding, which limits the region’s capacity for innovation. If regulations like the DMA and the DSA are still in place, this is unlikely to change. These threshold effects and lack of access to funding, in addition to the high compliance costs and complexity of the GDPR, create a hostile environment for startups in Europe.

Ultimately, while well-intentioned, the EU’s business approach for Web 4.0 and virtual worlds is largely incompatible with its current regulatory environment. If the EU really wishes to fulfill its stated objective of making Europe an innovation hub for virtual worlds, it must first reconsider its approach to regulating Internet services. These regulations have introduced onerous regulatory costs, are complicated to implement, and incentivize companies to remain small. Unfortunately, the strategy reaffirms the Commission’s commitment to the DSA, the DMA, and the GDPR as the core regulations for the industry. This means that most of the strategy’s objectives are unlikely to be met.