In Europe’s tech firmament, Tech City is one of the brightest stars

Recently valued at £81 billion (second only to Germany at just over £86 billion), the UK’s tech industry has been characterised by many as a key sector which must thrive if the UK is to initiate any semblance of enduring economic recovery.

This allocation of responsibility is not misplaced. The UK digital community is a hotbed of innovation and talent which has manifested itself most recently in the form of start-ups, such as concert service Songkick and online music community Last.fm (which sold for £140 million at the start of the year).

The industry has also spawned grassroots innovation hives, such as Bootcamp, Minibar and Seedcamp, which help the next generation of tech luminaries to meet and plot their future success.

The UK government has in recent months made encouraging noises about its intention to fuel this success and harness it to drive the country’s economic recovery. Attention has fallen on East London as a particularly fertile patch of land on which to erect the UK’s answer to Silicon Valley.

In January, the government pledged to invest £200 million in a series of tech and innovation centres, one of which is earmarked for the Olympic park in Stratford. More recently, it unveiled its Tech City Launchpad competition, offering 10 digital companies from East London’s “Silicon Roundabout” a slice of its £1 million investment, coaxing private equity to chip in the rest.

Yet for all this rhetoric and good intentions, the fact remains that despite being a renowned nation of innovators across many markets – often on (and perhaps as a result of) a tighter budget than their American cousins– the UK’s tech community has so far failed to set the digital world on fire with a Facebook or a Twitter equivalent.

Whatever one may think of these investments (and reactions have not been uniformly positive) one has to say that the spirit appears to be willing. But cash and cash alone does not make a Twitter.

One crucial factor which has been too long overlooked and risks being drowned out once again by the fanfare of these mediagenic announcements is the role of a vibrant, competitive online marketplace to allow these fledgling torch-bearers of economic recovery to gain a foothold in the industry, without being squeezed out or undercut by more established players.

Moreover, without a hospitable environment in which their “investments” can compete on a level playing field, no amount of government subsidy is going to convince a right-thinking venture capitalist that bankrolling a start-up in the online marketplace is likely to turn them a profit.

In the same way that Darwin’s theory on the origin of species posits competition as a catalyst for evolution, so it is one of the fundamental premises of modern economies that robust competition is the driving force behind innovation, choice and ultimately providing the best possible product or service for the end-consumer.

In the online sphere, however, some innovators are effectively being excluded from certain markets such as vertical search, online advertising and mobile search because of the way online markets seem to throw up bottlenecks and gatekeepers.

Google, which currently enjoys a 92% share of the UK search market, is possibly the best example of this and I have encountered several companies from around the world who know exactly what it is like being trapped on the wrong side of Google’s gate. Indeed, experience serves as a cautionary tale of precisely the sort of damage a monopolist can cause in a deregulated marketplace.

UK tech start-up Foundem was disappeared from Google’s search results in June 2006. Google had imposed upon it a search penalty for which, despite repeated attempts to engage with Google, Foundem received neither reason nor remedy. It was only once it garnered some media interest in its plight that Foundem was able to enter into a dialogue with Google. In December 2009 (over 3 years after the penalty was imposed) Google manually lifted the penalty and readmitted Foundem to its search results.

Needless to say, the implications of this conduct were far-reaching for Foundem (as they have been for many others before and since), as well as for competition and consumer choice. Moreover, from an investor’s perspective: in a marketplace where your company can disappear overnight with no explanation or recourse, why invest?

Google’s behaviour is currently under investigation by the European Commission and the Federal Trade Commission in the US (as well the domestic competition authorities of several states). Foundem’s complaint is one of nine now being considered by the EC.

I am committed to encouraging support for a healthy online marketplace. I believe it to be imperative that legislators apply existing competition laws to key online markets, in order to ensure dominant protagonists exercise their market power to promote choice and innovation.

Without such oversight, many of the benefits of the Internet may never be delivered, those delivered risk being captured by monopolists and many of the small businesses operating on the Internet may not survive.

This week, Mark Andreessen (Netscape founder, eBay and Facebook board member and general tech guru) wrote a piece in the Wall Street Journal in which he asked (among other things) why so many of today’s prodigal tech companies hail from the US. The reasons he identified (other than cash and great research facilities) included a pro-risk finance culture and reliable business law.

While legislators are unlikely to be able to do much about the underlying causes of risk-averse investors in this parliament (still less in this economic climate), they can act to ensure that bottlenecks, such as Google’s dominant position in search advertising, are not used to shut the door to competition and innovation.

David Wood is ICOMP’s Legal Counsel and an expert on issues facing the online marketplace; including competition, privacy, security and IPR. David is an English qualified partner and a member of the Brussels Bar based in the Brussels office of Gibson, Dunn & Crutcher, where he serves as Partner-in-Charge of the office. He is a frequent writer and speaker on competition law issues and is a member of the editorial board of Competition Law Insight.