• Several European software developers, particularly SMEs and startups, are global leaders in their sectors

• Many SMEs rely on third-party hardware to run their software solutions on

• The revision of the EU Radio Equipment Directive can create a legal framework that supports software-producing SMEs’ business models

European tech companies are market leaders. Although giants like Google and Microsoft come to mind when you hear the word “software”, Europe is a world-leading innovator in business-to-business (B2B) solutions, the home turf of its strong SME economy. In areas like Industry 4.0, fin-tech, gaming and logistics, European companies already outshine international competition. As software becomes more and more critical in production and manufacturing, Europe has the potential to emerge as a “software giant” in these areas.

Since nowadays hardware is produced much more cheaply in Asia, European ICT SMEs focus mainly on software innovation. This means that they don’t produce software and hardware at the same time, but rather use third-party hardware to run their innovative software on. For example, Google decided to run Android over a variety of third party smart phones. This offers consumers a wide choice of low price devices, while the software layer ensures high quality features. Thus, for their business model to succeed, European SMEs need a certain degree of hardware “openness”—the opposite of a “lock-in”, where only proprietary software runs on certain devices, causing costs to rise (think of an iPhone). From a regulatory perspective, this is where the EU Radio Equipment Directive comes into play.

Hardware “openness”: Better for SMEs, better for consumers

The legislation on “placing radio equipment on the European market” regulates important aspects of health and safety, electromagnetic compatibility and the radio spectrum of “wireless connective devices and wearables”. That’s all of our mobile phones, laptops, tablets, smartwatches, and many other “IoT” connected devices, making the Directive a key piece of European legislation to enable its SMEs and startups to thrive. It also currently supports the “openness” of hardware devices for third-party software producers by not placing liability squarely on the hardware producers. For example, if there is a software malfunction on an IoT device, the producer of the device itself is not necessarily liable, making hardware producers generally more willing to allow third-party software, thus providing “openness”. This is a good first framework for guaranteeing hardware-software disaggregation, but it should be further improved and clarified.

In addition, as our SME expert Sebastiano Bertani explains, “with hardware and software disaggregation—in other words, when the buyer can choose the software which runs on the hardware without vendor lock-in—the whole solution is less expensive“. He provides the handy example of a school that looks for a WiFi solution. They compare two options: a package of routers with proprietary, “locked-in” software, and a “disaggregated” hardware solution with independent software.

If the school uses the routers with the locked-in proprietary software, they will spend large amounts not only on procurement and installation, but also on maintenance and upgrades. Also, in case the school needs to change hardware in the future, there might be high (and hidden) switching costs. If they instead opt for “open” router devices with third-party software, according to Bertani, “they may cut the cost of hardware by a factor of up to 20 and the total cost of ownership by a fifth.”

The RED is under review. Let’s change it for the better!

The European Commission is currently investigating the extent of applicability and issues of liability related to the RED through open consultations and impact assessments. These investigations could lead to changes in the Directive, which have the potential to empower SMEs and startups to innovate their software by guaranteeing hardware openness and avoiding lock-ins. “Enabling the digital transformation of our powerful SME economy is the key to unlock Europe’s digital sovereignty”, says DIGITAL SME President Oliver Grün. “SMEs need strong legislative support to make sure their investments in software innovation are viable in the mid-to-long term.”

DIGITAL SME is advocating for a clear legal framework that sets the foundation for hardware/software disaggregation and liability issues, allowing SMEs to continue developing software on existing hardware, fostering innovation speed and value generation on the one hand, while lowering capex/opex and increasing allocative efficiency on the other hand. The current review could be a good opportunity for the Commission to incorporate such a framework into the RED and allow ICT SMEs to breathe a sigh of relief. 

Our full position and concrete policy recommendations can be found in our newest position paper responding to the applicability of the Radio Equipment Directive.