At the end of May, online privacy campaigners scored a significant victory against large tech firms such as Google and Facebook. Four years in the making, the European Union’s General Data Protection Regulation (GDPR) came into force, forcing every company that either deals with the EU or has EU citizens as customers to take steps to allow individuals to control their personal data.
The impact of GDPR goes far beyond Europe. Because of the size of the European market, large tech firms have simply found it easier to change their rules globally, rather than adopt a two-tier system. Other companies have followed, creating a seismic shift in the industry.
That is the case for the Middle East, too. GDPR will impact every tech company in the region, whether in Amman, Abu Dhabi or Alexandria.It may not be a positive impact, however. In fact, in the race to compete with global giants like Google and Facebook – in other words, to use the language of Silicon Valley, finding the next tech “unicorn,” that rare tech company that achieves a valuation above $1 billion – the new European regulations have made it harder for Arab tech companies to compete.
Here’s why. The new regulations have actually handed established tech companies a huge competitive advantage. Firstly, the requirements of GDPR are wide-ranging and apply to even small companies that handle user data. Tech start-ups are small, sometimes merely individuals, and the requirements might be too onerous, in terms of time and money. The large companies, on the other hand, have teams that can handle it.
Small companies also generally have difficulty getting the attention of users. In the run-up to GDPR coming into force, it became a running joke that inboxes were flooded with emails asking permission to keep people on their mailing lists. But whereas a company like Google might have multiple chances to speak to users – because individuals might use, for example, Gmail, Youtube or Google Drive, all of which are owned by Google – a smaller company will only have one chance. And individuals may simply ignore emails from small companies asking for them to opt-in, whereas they wouldn’t want to lose access to Facebook or Instagram. So there is a built-in advantage to established companies.
The second aspect is that, with issues of privacy and the sale of data in the headlines for the past few months, consumers might be less willing to trust smaller companies.
This particularly applies to GDPR, which requires companies to explain how they plan to use the data of individuals in simple language. Faced with the reality of what they are sharing, some users will simply opt-out of sharing with smaller companies, but will agree to share their data with the tech giants. That small psychological advantage is multiplied by the apparent “foreignness” of some Arab startups, which are named after Arabic words and concepts that may be less familiar in the West.
Indeed, the entrenchment of the big firms is already happening. At the end of May, The Wall Street Journal reported that Google was gaining GDPR consent at a much higher rate than other online advertising services, pushing even more advertising dollars toward Google.
In order to compete with the big firms, then, Middle East tech companies will need to grow rapidly. And that is a problem, because, despite some notable successes, the region lacks the infrastructure, access to capital and the mechanisms to attract the best global talent that would allow tech companies to grow.
So far, the Gulf, and in particular the UAE, has produced two unicorns: Souq.com, the e-commerce site acquired last year by Amazon for an undisclosed sum, reported to be close to a billion dollars, and Careem, a Middle East-wide Uber rival. (Turkey’s food-ordering app Yemeksepeti, and Talabat, a similar company from Kuwait, were both acquired for hundreds of millions of dollars, but were not quite unicorns.)
The UAE leads the Middle East’s tech start-up market, with an estimated 42 percent of all regional tech companies based there. Indeed, one estimate suggested that half of all the venture capital funds in tech companies in the Middle East went into UAE-based companies.
Yet although the Gulf has a great deal of capital, very little of it has gone toward funding the early-stage growth of tech companies.
In the US and Europe, for example, it is usually private venture capitalists who first invest in start-ups, because they are close enough to the companies to do due diligence on the risks. Institutional investors such as sovereign wealth funds then follow. But in the Gulf, these networks of private VC investors are more limited, creating a knock-on effect.
Infrastructure and visas are another problem. All Gulf countries tie residential visas for foreigners to jobs, making it harder for those building unicorns to even stay in the country. So far, Gulf governments have not responded to the need with more innovative entry mechanisms – as Singapore, for instance, has done.
So, what seems like a victory for privacy in one market (Europe) at the expense of tech firms in another (the US) has actually had the knock-on effect of entrenching already established players in the West, at the cost of emerging markets like the Gulf. Arab governments will need to respond rapidly to ensure that rules written in the capitals of Europe do not delay the development and discovery of unicorns in the Arab world.
Faisal Al Yafai is currently writing a book on the Middle East and is a frequent commentator on international TV news networks. He has worked for news outlets such as The Guardian and the BBC, and reported on the Middle East, Eastern Europe, Asia and Africa.
Josh Edelson / AFP