SKEPTIC’S GUIDE TO INVESTING
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Your Hosts - Meet Steve Davenport, CFA and Clem Miller, CFA as they discus the latest in news, markets and investments. They each bring over 25 years in the investment industry to their discussions. Steve brings a domestic stock and quantitative emphasis, Clem has a more fundamental and international perspective. They hope to bring experience, honesty and humility to these podcasts. There are a lot of acronyms and financial terms which confuse more than they help. There are many entertainers versus analysts promoting get rich quick ideas. Let’s cut through the nonsense with straight talk!
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SKEPTIC’S GUIDE TO INVESTING
US Tech Giants in the EU's Regulatory Maze
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How do Europe’s strict regulations ripple through Silicon Valley? Join us on Skeptic's Guide to Investing as Steve Davenport and Clem Miller unpack the labyrinth of European regulations reshaping the landscape for US tech behemoths. Discover how the Digital Markets Act is poised to level the playing field, forcing giants like Alphabet, Apple, and Meta to reassess their global strategies. Learn about the daunting hurdles posed by the General Data Protection Regulation (GDPR), and its wide-reaching implications for data privacy and global data transfers, leaving US companies scrambling to comply.
But that's not all—our conversation takes a sharp turn towards artificial intelligence. Explore the "Brussels effect" and how EU regulations are casting a global shadow over AI practices, compelling tech innovators to adapt in uncertain terrain. We also dissect the competitive dynamics among tech titans like Apple, Microsoft, and Google, and the geopolitical chess game of chip manufacturing. With a keen eye on innovation, we highlight the challenges and opportunities these tech giants face amidst increasing regulatory scrutiny. Don't miss as we also address the pressing need for transparency in AI-generated content on social media, and what this means for the future of digital interactions.
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Welcome everyone to Skeptic's Guide to Investing. I'm Steve Davenport and I'm here with Plu Miller, and today we're going to dive into the ideas of how regulation in Europe regarding privacy and other items is affecting big tech and will affect big tech as we move forward through the AI and other developments over the next few years. This area is more complicated, probably, than we typically talk about, but it's critical to how these big tech companies operate in the US and around the world. When we think of how we are operating with things like happened with CrowdStrike, and we think of how easily interconnected we are, will a regulation in Europe be like the butterfly wings and cause change in the US and China? I think that we have to expect there's going to be reverberations that go around the globe. Clem, where do you see the core issue with Europe and big tech?
Clem Miller:So you know big tech. The reason why we talk about it is, you know, we're talking about US big tech companies like Alphabet and Apple and Microsoft and Meta. These are companies that are highly profitable, that have ecosystems that they basically dominate, and that's what makes them great companies over the long run to invest in for you and me and all of our listeners to invest in over the long run. However, those things the profitability and the growth prospects are all under some threat from regulation, are all under some threat from regulation. Now there's US regulation, but I would argue that the European regulation, coming out of the EU, is perhaps a lot more significant in posing a threat to the profitability of these companies. So let me go through, let me just tell you the four and then we can talk about four types of regulation and then we can go through each type. So I would say, Steve, that you've got. First, you've got.
Clem Miller:The most important is, you've got the Digital Markets Act. The digital markets act, the dma, which is a relatively recent act in the european union which aims at being able to control, uh, what so-called gatekeepers that's the term they use can do within the eu, and it forces these gatekeepers to do things like make sure that smaller companies in Europe have the same access to their systems and software and so on as they themselves do. So it allows for, because the European Union, you know, they kind of focus on trying to help out their small and medium-sized business, and so they want to make sure that they're not disadvantaged by the, you know, the Amazons and the alphabets and the metas. So that's the most important rule, I think, is they're trying to erode the market dominance of the big tech through this Digital Markets Act. So DMA.
Steve Davenport:Do you really think, though, that we're chasing something? That's all right, this horse has left the barn.
Clem Miller:Well, certainly the EU doesn't think so, and one of the things to know about the EU digital acts and so on and so forth that we're talking about today is that they have an extra territorial aspect to them Now that's a fancy word for saying that they apply to, you know, companies operations worldwide, and not just to what these companies do in Europe. So you know, if Meta is doing something outside of Europe, you know that would be touched by what's going on with the European regulation. So that's the Digital Markets Act. So that's really a competition antitrust-type-related act that may, at the end of the day, end up to some degree, breaking apart these companies or breaking apart certain aspects or business lines of these companies. So that's one thing.
Clem Miller:Second thing is you've got the so-called GDPR Act, general Data Protection Regulations Act and GDPR Data Protection Regulations Act and GDPR and what that act does is it covers privacy, personal and business privacy, data and wants to protect against intrusions into that data or, um, improper processing of that data using, you know, machine learning and what have you to try to help out these companies. And you know, there, this has been a long time coming. This data privacy and data protection, uh, in Europe, this kind of regulation. You don't really have that in the Uexcept you have some rules with regard to privacy in California and you've got some related to health care.
Steve Davenport:Medical privacy.
Clem Miller:Yeah, but you don't have a sweeping kind of regulation as is coming out of Europe. And again, as I mentioned, this regulation is extraterritorial, so it affects really any US company or any company from around the world that has some kind of business relationship in the EU, in the EU. Now, one aspect of this that's particularly interesting is there's this concept called data localization, which is in GDPR, general Data Protection Regulations, article 44 to 50. And this regulation says that, in order for the EU to allow cross-border data transfers, the foreign governments, like the US government or what have you, would have to have data protection regulations just as strong as those in the EU, and the US certainly does not have that, and so that frustrates the ability of US-based companies to transfer data out of Europe. Now, what's the practical effect of that?
Clem Miller:Well, you know, cloud computing and data centers are huge components of today's modern digital ecosystem, and you've got, you know, amazon AWS at Amazon, you've got Google Cloud, you've got Microsoft Cloud. You know these are business lines of these companies that operate cloud computing, operate giant data centers, and they are not allowed to transfer data outside of the EU without special contractual provisions at a contract by contract level, so you have to sort of sign it like the healthcare legislation in the US, the healthcare acts in the US, so it's otherwise. They have to have their data centers located in the EU, so it's really a localization of data, and so you have a lot of companies that are actually setting up local data centers in Europe and keeping data generated in Europe local. Some of the push for this came from the fact that you had Edward Snowden revealing that the NSA was collecting all of this information out of Europe, and so that gave a real push to the implementation of that GDPR data legislation.
Clem Miller:Now, moving on to the third one, you have something called the Digital Services Act, which sounds like the Digital Markets Act but is actually a different thing, and that has to do with content moderation, mal-information, misinformation, disinformation you know coming from, you know entering the digital sphere and you know causing harmful effects in terms of being able to influence people negatively.
Clem Miller:So you don't have anything like that in the US. In fact, companies like Meta, facebook, meta, which runs Facebook, instagram you've got YouTube are protected under US regulation because of the First Amendment, but this Digital Services Act is really the first big act anywhere in the world which tries to deal with, you know, these issues of disinformation coming out of Russia, coming out of China, and we're seeing a lot of this in even in the US elections right now. This disinformation, so what it does is it requires this DSA, requires the US tech companies who have these social media platforms to provide to the EU their algorithms, to provide to the EU data on how many bots are involved in their systems and other types of what you might call proprietary data, in order to make sure that their systems aren't being abused by bad agents that are out there, including, you know, including governments like the Russian government, iranian government and so on.
Steve Davenport:So would this be where AI would be eventually regulated under.
Clem Miller:Well, it's, it's interesting. You's interesting. You should mention that because there is a fourth act Now. I've mentioned the GDPR, the Data Act, I've mentioned the Digital Markets Act and I've called the EU AI Act artificial intelligence, and that really the way to look at that act is. It provides a framework, a set of general guidelines for regulating AI. It hasn't gotten into the details yet, you know, as if it were you know a detailed set of regulations, but it's provided a framework for potentially doing so in the future. So we could end up with a situation where you know the EU is actually regulating what you know NVIDIA and Microsoft and OpenAI, what they're all doing with respect to AI that could be regulated in Europe under EU AI data regulation in Europe under EU AI data regulation.
Steve Davenport:Well, can I understand this? How does it work if they're using US data and they're using US resources and US servers for storage? You're saying that that would still be extraterritorially covered by this Europe. I mean, or I understand, if you're taking data from europe and you're using it, that that would be something that would be covered by european rules, but if I'm using us data and I'm using us resources, it feels like that's something that would.
Clem Miller:If there's, if there's a total segregation, complete segregation, a wall between the EU and the US, then the data and operations in the US would not be affected by what's going on in Europe. However let's think about that for a second. The companies have to put a lot of resources into complying with what's going on in the EU, and so, in order to do that, it makes sense for them in terms of profitability and in terms of just minimizing costs it makes sense for these companies to apply these EU standards globally. So I mean, let me give you an example of that. You turn over a plastic milk carton. Example of that. You know you turn over a plastic milk carton, uh. Or you know, you turn over anything that's plastic and you see these, uh, you know sort of recycling symbol and with numbers on it and so on.
Clem Miller:That all comes out of the eu. You know. You see these. You see the, the sort of stylized e on some packaging. That's EU. So EU regulations on lots of different things are being applied worldwide, and it started with products and now it's going into digital services. It's extraterritorial. There's actually a term that some people use for this, called the Brussels effect, which means that Brussels is actually the capital of the European Union, that Brussels is actually driving the regulatory agenda worldwide, which some people are saying gives EU companies an advantage globally in terms of their economics and finance.
Steve Davenport:Yeah, I mean I think that they certainly understand the regulations better and are closer to the regulators in Brussels. The European companies probably know a lot more about what their intent is, and some of that is an advantage. There were five issues. With a company succeeding globally, this would be probably on the list. But you still need a product, you still need recognition, you still need other things for this to be significant because, quite honestly, I love my chocolates and I love my Belgian items, but I'm not sure that the regulation of them is necessarily going to change my demand curve.
Steve Davenport:So I understand that these areas are being more progressively instituted in these countries, but I also understand that it's really hard to take things from one region and transfer it to another. It's just not as easy as we all think that, hey, we're going to home source these things, or oh, we're going to resource these things to closer on our North America, south America, and there's a lot of details and a lot of items that go into these decisions and I think you know I'm glad that we're getting some regulations. It's just that it feels to me like in this election with AI, stuff pretty new. I'm not sure. Think you're right about that.
Clem Miller:I mean we're seeing the beginning of a new technological revolution with AI, and regulation always is trying to catch up with what's going on technologically.
Steve Davenport:What inning do you think we are in?
Clem Miller:What inning? Yeah, it's a nine inning game, I don't know. Second inning Second inning.
Steve Davenport:I was going to say second or third. I think it's early. I think that you know right now NVIDIA is the clear leader, but as new chips and new ideas and new software gets developed, it feels to me like some of the people pushing it are so large and have so much demand of their own that it's going to be a battle in some of these middle innings that we haven't even touched yet. That is going to really, in my mind, create opportunities but also create dangers for companies that might have thought that they were free from some of this regulation or free from some of this controls on what a computer and what AI can do. So AI, to me, is still the wild card in this market and still the wild card in what the future is going to be for the markets for the next few years. Do you think it's been determined how big and how much AI will influence things, or do you think we're? You know, I feel like we're only seeing the beginnings of where it will truly influence a lot of different industries.
Clem Miller:You know, I think you know, there are a lot of things that are AI that we don't even consider AI anymore because they've become a part of our daily lives. For example, when you get robocalls or you call into some calling center and talk, at least initially, to a robot, right, I mean, that's AI. And yet it's become so much a daily part of our lives that we no longer really think of it as AI anymore. You see, you know facial recognition. You know, when you come in and out of the various countries, you know, right now that seems very AI, but you, you know, eventually that's going to to not be considered ai, it's not going to be, we're not going to think of it as ai anymore. So, to the degree ai gets embedded in our daily lives, we sort of, you know, say, well, that's not futuristic.
Clem Miller:Right and right now, this whole generative ai with, you know, ai, writing things, helping us write things, helping us with imagery and so on, that seems awfully, you know, futuristic. But you know, three, four years from now, that's not going to seem so futuristic anymore, maybe even sooner than that. And then we'll be moving on to our next thing. I mean, I would say even assisted, you know AI-assisted driving. You know that used to be. I mean, that's something that five, 10 years ago would have seemed amazing, right to people, and yet today we have, you know, things that seem pretty simple, such as lane assist. You know you've got LIDAR and radar and so on on automobiles that help you, help keep you safe.
Steve Davenport:We've talked about AI on our podcast, in terms of how AI goes through the text and converts it and then looks for you know trains of thought and ideas and tries to summarize it with the. You know the overall evaluation of these podcasts and I see now that Zoom has the same feature. Zoom will take the verbiage that we use in our podcast and they'll create a real-time text of what we're doing so that we can edit it as we go along. So we know that these things are becoming more and more prevalent. I guess I'd like to take a step prevalent.
Steve Davenport:I guess I'd like to take a step, maybe sideways, and ask you, as investors, do you feel that there are companies that have more risk in this space, with Europe less risk in this space? And if we were to say, hey, this company is obviously a leader and they're not likely to face resistance or regulation because they're already doing the right things and segregating the data and keeping the privacy and protecting the end users, I mean, are there leaders and laggards in the big tech? And should we be looking at the item not for the number of chips they have but for how they're following some of these regulations and creating kind of a? I don't want to say a winner and loser early on, but it feels to me like some of these companies are given a lot of room and have a lot of potential in this space and others, I think, are trying. But I mean, who are the winners and losers so far in your mind with the regulation in Europe? I mean, as Google has been beaten up for the last year, I don't know if you know, is it that they're just not timing wise where they need to be and they will come back? Or is it the people who have a lead now are going to have a lead always, and it's very hard to leapfrog and have a Google come back and overtake Microsoft or Amazon in the service space.
Clem Miller:Microsoft or Amazon in the service space, I think, of these companies, I think Apple is in the best position. Their main risk is really with respect to the market dominance. But who are they dealing with? They're dealing with Samsung as a competitor. They're dealing with Huawei as a competitor, but Huawei has its own big problems. So I don't see Apple as being particularly affected, except insofar as there'll be regulation from Europe as to what goes into its app store.
Clem Miller:The Digital Services Act and DMA also will affect what can go into or the rules by which things can go into its app store. It'll affect the profitability of those apps for Apple. So there'll be some impact on Apple, but not as much as there will be on Google slash, alphabet, which you mentioned, where YouTube is affected by the DSA, and you've got their cloud services and they're not as big a cloud service provider as Amazon and Microsoft are, but their cloud services will be impacted as well, have big impacts on their data, on the GDPR aspects of it in terms of the data localization. I think there are big issues with that and if you look on their websites for their services, for their cloud services, you see that they're already trying to do things to honor the EU GDPR, including things like opting out. Actually it's an opt-in. They've flipped the switch on that In terms of regulation regulation, you know, in the U S it's like uh, the company can do anything with your data unless you opt out. In Europe it's the other way around company Can't can't do anything with your data unless you opt in. That's a principle embedded in the GDPR. So you know, microsoft and uh, uh and uh and Amazon, uh, have those kinds of rules embedded there and they don't have to deal as much with, you know, issues around social media.
Clem Miller:So I think you know that's why we're seeing Alphabet slash, google getting beat up because they're in all of these EU regulatory agencies pretty much across the board. So that's why you're seeing them get beat up more than you are the others. But I think Apple comes out of this in better shape than Microsoft and Amazon, and those two come out in better shape than Google. And then Meta, I think probably is in the worst shape. The two you haven't mentioned are Meta and NVIDIA. Yeah, I think Meta is in the worst shape actually than those, primarily because of all the concerns around the Digital Services Act, concerns around disinformation and misinformation and sort of the seemingly cavalier attitude that Meta is taking towards these issues, so I think that really concerns the EU. You were asking about NVIDIA.
Steve Davenport:Yeah, I was just saying that.
Steve Davenport:I think that when you think about those top three yeah, that discussion and then Google but the ones that really kind of have a little more hair on them are you know, how is NVIDIA going to react if AMD and others start to develop chips that are competitive? Will people have to have some of that because they don't want to be on the front runner a whole way and then find out that they get leapfrogged by one of their competitors? You know how is Facebook, which has been at the center of all, like to me? We're near all-time highs on Facebook or Meta and all of a sudden I'm hearing about how much trouble Google is having with regulation and I'm sitting there saying, gee, if Google's having trouble with this space, why is it that Meta is reaching new highs? It feels to me like if I were. You know, just simplistically looking at it, nobody's more engaged in the social media than meta is. So therefore, if social media is what people are worried about with privacy and other issues, then you know whatever troubles Google's having meta should be having.
Clem Miller:Yeah Well, meta has been, you know, as you's having, meta should be having. Yeah well, meta has been, you know, as you pointed out, doing quite well. But I think that was because of uh, of a recovery from a period of time when they were spending most of their uh effort and resources and attention on the whole metaverse uh thing which, uh, you know, proved, at least from my perspective, to be kind of a debacle, and so I think that europe will start now to focus on metamore and there will be some relief on google, or is it just?
Steve Davenport:is this going to be like a piling on where you pile?
Clem Miller:on. That's what's been happening. It's it's been a piling on, and AI is next on that pylon. But you know, let me mention, you mentioned NVIDIA and AMD and so on. So far, those have not been impacted by the kinds of regulations that I've been talking about. Instead, what's going on is that the EU, just like the US, is trying to promote local development of chip manufacturing, and so you have the EU Chips Act, which is basically the same thing as the US Chips Act, basically the same thing as the US Chips Act trying to promote local manufacturing of chips, trying to create a more secure supply chain so that the world isn't reliant so much on Taiwan Semiconductor and, to use these time-worn expressions, on-shoring or re-shoring back into the EU. No-transcript Right.
Steve Davenport:I think that the complexity of all of these different you know, where is the value add taking place and how do we evaluate how much offshore is producing versus is being produced in the US or in the EU it's going to be more and more complex as we start to look at how these regulations. But I was hoping that we would start to get some movement on something like you know, this is AI generated Because I think that right now when I look at various videos and things on TikTok and other places, I can't tell it's close to reality. It's very tough to you know. Know that this item was. You know, I would love to see some type of a marker or some type of an item on you know video and images, because I think it's becoming more and more difficult to differentiate between what's.
Steve Davenport:I think when you look at an essay or a chat GPT, you know essay and you say this was created by AI, it's kind of you can see certain trends, but as we get closer and closer to those things having no foreseeable or no easily identifiable difference, it feels like we need to get ahead of that and have you know. I think it would be so much easier in social media. If you just said, hey, this is AI created and it might be 5%, 10%, I don't know. I don't know how we're going to use, like I was developing a logo on Canva and I'm sitting there saying, okay, this is what AI is recommending. Here's some of the images that they want me to use.
Steve Davenport:You know, I'm not going to put on it that it was AI generated. I mean, I'm going to say, you know, I created it. I used AI to create it, and so I think that this area has a, you know, a major step will be how do we, how do we start to socialize this idea that an image created by AI, or a story created or a video created by AI is legitimate, and as is something that was created by a human? I mean, is it going to be better written? Is it going to have more information? Is it going to have more information? Is it going to be more thorough?
Clem Miller:I don't know. And not only that. Not only that, steve, but there are concerns about intellectual property rights Right and about how AI programs are pulling their information from a lot of different sources, including proprietary sources. Who get paid for this?
Steve Davenport:I think it comes down you know, it seems to me a lot like music, right, and we talked about all the use of music in different spaces, and they, you know, I think, the use of voices, the use of, you know, our mellow voices, could become hot items and we, you know, somebody could create an artificial bot that talks like a skeptic and we would have to, you know, fight for our rights to control that voice and to control that message that's being delivered. So it feels to me like there's.
Clem Miller:I hope they have better voices than we do Steve. Huh, I hope they have better voices than we do, Steve.
Steve Davenport:Oh, come on now. I think we know that these are the voices of true skeptics, and I think they're deep, I think they're older, I think they have a certain mellow. But how would we wrap this up If we were to look and say the next two years are going to be critical in the development of regulation? For that we will be able to say you know, big tech avoided a real bomb, or big tech has faced this problem and looks like they're going to continue to dominate because they have the resources to satisfy the regulators.
Clem Miller:I think there are going to be some giant fines that come out of this. Some of these rules have, uh, fines that, uh that are several percent of overall revenues of these companies. So there, uh, I think we're going to see some giant fines. I think we're going to see massive changes, uh, in behavior, uh, by these companies, and I think we're going to see um, you know, I'm I think we're going to see, you know, I think we're going to see efforts by some in the United States to try to come up with similar or maybe somewhat competing legislation. That is assuming we can fix our broken political process here in the US.
Steve Davenport:We can fix our broken political process here in the US. Yeah, that's a big if. So I'm going to say that this is going to be very hard to implement in the US, as just because I think there are so many parties.
Clem Miller:Yeah, which means the US and the world will default to the EU standards, which it's been doing anyway, correct?
Steve Davenport:I think that if there is no leadership, we strive to find some level of semi-leadership, and so I think that we're moving in that direction, all right. Anything else? No, I think that's it.
Clem Miller:Thank you everybody for listening. All right, thanks everybody, I you know. Thank you everybody for listening.
Steve Davenport:All right, thanks everybody, and I hope you enjoyed this episode of Skeptic's Guide to Investing and you continue to listen, continue to share and we look forward to bringing you the next episode, also dealing with an issue close to everyone's mind and inflation. Thank you,
