Across the Western World, while new legal decisions and regulations aim to address and mitigate the disruption and harm caused by the business models of large gig economy platforms, these platforms continue to grow exponentially, amassing more power by the day. The implications of their growth as well as the continued growth of other internet giants extend to the whole of society including civil society, consumers, workers, small businesses, entrepreneurs, venture capital investors, and others.
A small set of online platforms now control virtually all of consumers’ online transactions. These firms often deploy novel online business models, with new sources of power and new forms of abuse of that power, which in turn may require new forms of regulation.
Regulation often seems like a rather abstract subject, but online abuse of power and the future regulation of Google, Apple, Facebook, and Amazon actually affects all of us.
Regulators, legislators, and the courts need to understand how today’s giant companies are different from their predecessors. They need to understand when the forms of regulatory control that were designed for the industrial economy may no longer be effective today, even if they seemed fully adequate as recently as ten years ago.
A small set of online platforms now control virtually all of consumers’ online transactions
Executives need to understand their current and future vulnerability, even if they lead companies that may appear dominant in their industries today. Walmart, Lidl, and Carrefour will be dependent upon online platforms for access to their customers as smart homes and digital assistants like Google and Alexa begin to dominate automated online ordering. Google will route orders to companies that pay the highest prices for access to consumers, duly weighted by quality scores, as they do with search today. This will increase companies’ costs of doing business. Alexa will route orders to Amazon and Whole Foods, reducing or in some cases eliminating competitors’ access to Alexa’s shoppers. Additionally, companies as diverse as BMW and GM, Walmart and Bosch will likewise be dependent upon these platforms for access to their consumers’ smart appliances. Consumers already have Alexa, Google Android, and iOS devices. We do not need another life control interface from BMW, and another from Walmart, and another from Bosch.
Entrepreneurs need to understand where it is currently impossible to compete with existing platform giants, and where regulatory change may open niches for them. Regulatory change may also create opportunities for new online entrants to replicate on a smaller scale the business models that these giants currently totally control.
Likewise, investors need to know when a new company is or is not going to be viable under current regulation, and when future regulation may dramatically reduce the value of their holdings in existing platform giants.
In the Western World a small number of online platform giants have emerged as the most valuable companies in the world. Four of the ten most valuable companies in the world are the American online platform giants Amazon, Alphabet / Google, Apple, and Facebook, while Chinese online platform giants Tencent and Alibaba are included in the list as well.2 Their wealth is truly astounding. Alphabet / Google’s balance sheet as of 31 December 2018 showed just over $109 billion in cash3, which is just over the combined market capitalization of American Airlines, Delta Airlines, United Airlines, and Southwest Airlines, or significantly more than the combined market capitalization of Ford and GM. They are also among the most powerful companies in the world, with the ability to control online commerce in all countries, in all industries. The firms create enormous economic value and enormous economic benefits for their users. Indeed, this should be self-evident; if they did not create value for users they would not have been so widely adopted. They also create significant economic disruption and demonstrable economic harm to entire industries and to large numbers of these same platforms’ own most loyal customers.
Entrepreneurs need to understand where it is currently impossible to compete with existing platform giants, and where regulatory change may open niches for them
Such creative destruction produces economic losers as well. We don’t mourn the loss of TV Guide now that we have online cable and online cable schedules, any more than we mourn the passing of slide rule producers and the reduced importance of the handheld calculators that initially replaced them. But we should all be concerned when new technology and new business models lead to new sources of power, new forms of abuse of power, and new forms of harm to consumers.
There have recently been calls to regulate the giant American platforms as monopolies, focusing on Google, Apple, Facebook, and Amazon.4,5 However, despite their size and their power, and their abuse of their size and their power, it is not apparent that traditional antimonopoly law is the most appropriate way to regulate these companies. The most frequently discussed form of regulatory relief has been the threat to break these giants into smaller competing firms. As we have discussed previously, breaking up Google Search into smaller competing MP3PP companies would not reduce the cost of keywords; paradoxically, it could actually increase the cost of keywords to companies. Recent calls for regulation of Facebook after its complicity in fake news creation and dissemination involve threats to criminalize the action of its most senior executives6; interestingly, while holding Mark Zuckerberg personally liable for Facebook’s actions might significantly alter the company’s behavior, breaking up Facebook would not reduce the harm created by fake news.
Regulation of companies that provide essential infrastructure needs to be analyzed very carefully. Countries should consider regulation only in the presence of the following three conditions:
We should all be concerned when new technology and new business models lead to new sources of power, new forms of abuse of power, and new forms of harm to consumers
The problems with today’s online platform giants include monopoly power and the abuse of that power, but the problems go well beyond just antitrust and abuse of monopoly power. Indeed, the new business models embraced by today’s platform giants create new sources of power and new abuses of power. Before we seek to regulate we need to be certain that there are problems with today’s big tech companies, as of course there are.
Are these problems unprecedented? Are they different from the types of problems that regulators had to address before? That depends on what you mean by unprecedented.
Why would a regulator care? Why would a consumer care? Because these very high prices charged to party 3 sellers invariably result in higher prices to consumers
Of course there are differences between current problems and these historical precedents. Perhaps the most obvious difference is the breadth of industries that are affected when dominant platforms engage in platform envelopment strategies. The Federal Radio Commission intervened because AT&T had the ability to determine, unilaterally, who could and could not operate a radio network. Google used its platform envelopment strategy to destroy Foundem, a comparison shopping site in the UK; when Google launched a competing site it dropped Foundem from number one in its list of search results to a spot hidden five or more pages deep in its listings.15 As we have discussed, home assistants, smart appliances, and smart vehicles will extend platform envelopments’ effects even to companies that appear to have well-designed online strategies. It may not be possible for these companies to escape control by online platforms, or the charges these platforms will impose for allowing the firms to continue to access their customers. As smart homes and smart phones emerge as our new life control interfaces, the scope and power of platform envelopment will increase significantly.
There are differences between current problems and historical precedents. Perhaps the most obvious difference is the breadth of industries that are affected when dominant platforms engage in platform envelopment strategies
And of course there are new forms of problems created by giant online platforms that are without precedent in the industrial economy and that are not mitigated by current antimonopoly regulations. Perhaps the most perverse is the reverse price war in search, a special case of the reverse price war in Mandatory Participation Third Party Payer businesses (MP3PPs).16 The basic form is simple to describe:
Why would a regulator care? Why would a consumer care? Because these very high prices charged to party 3 sellers invariably result in higher prices to consumers. The enormous profits of the party 2 platform operators are a form of tax that the platform imposes on both the sellers and the buyers, but the buyers are unaware of the true cost of relying upon the platform.
Before we recommend regulation, we need to ascertain if current problems are going to be solved by market forces. The answer is almost certainly not, and certainly not quickly!
Markets don’t solve problems caused by lack of transparency. Markets don’t even know about these problems. Most people manipulated by fake news before the Brexit Referendum or before the 2016 US elections have no idea that they have been manipulated. Almost by definition, market participants are not aware of lack of transparency and harm that they may suffer. And even when consumers are aware that problems may exist in their markets, the cost of verification that problems are real and the lack of viable alternatives prevent a market response.
Economists have known for centuries that markets don’t solve problems with externalities. As long as I don’t live down wind of a hog farm I am not directly affected by the smell, and I do benefit from buying ham. Markets do not fix problems caused by externalities because customers are not affected directly. The benefits the business creates go to its customers, and the harm goes to others. Even transparency and increasing customers’ awareness of the problems their purchases cause to others is not effective. Altruism rarely solves problems created by harmful externalities.
Markets don’t solve problems with MP3PPs. Party 3 sellers have no choice, so the high prices they pay don’t matter. Party 1 buyers are rewarded, so they actually visibly benefit from the high prices paid by part 3 sellers, even if they suffer counterbalancing harm in terms of higher prices. The rewards are visible; the higher prices are not. The credit card industry is an MP3PP because of the terms of MasterCard and Visa’s service agreements with their merchants; if a merchant accepts one MasterCard it has to accept all of them, and if seller accepts one Visa card it has to accept all of them. Sellers now hate the most expensive cash back rewards credit cards; the cash back programs are not funded by the banks that issue the cards, but by higher fees paid by merchants on every sale. But why would a customer abandon his or her cash back credit card? The merchant or airline isn’t going to lower the price they charge the buyer, but the buyer is going to lose the 1%, 2%, or more that they receive as their reward for using the card.
And markets don’t solve problems with platform envelopment strategies. Consumers love the obvious superadditive value creation and would lose value if they switched platforms. However, successful platform envelopment strategies limit competition, limit consumers’ choices, and increase consumers’ prices. Still, when comparing the real superadditive value from the platforms they have, against the hypothetical advantages of increased choice and lower prices from competitors who do not yet exist, consumers will predictably and rationally remain with the platform providers and their platform envelopment strategies.
The problems we described above are not problems caused by monopolies. They almost certainly will not be solved by the application of traditional anti-monopoly law.
If current competition law is not going to provide relief from the present and future abuses of Google, Apple, Facebook, and Amazon, what form should regulation take? We offer a few simple suggestions.
Big Tech firms are among the most profitable in the world today, and they are among the largest spenders on public relations and on lobbying. It is not yet clear that any form of regulatory relief is feasible. Prior experience with the Stop Online Piracy Act / Protect Intellectual Property Act is instructive. The idea was to limit giant platforms’ abuse of material under copyright. The largest abuser at the time was Google’s YouTube, but Wikipedia felt threatened as well. The bills initially seemed certain to receive approval in the House and Senate. Google equated it with censorship, and Google’s home page had the image of CENSORED stamped across it. Wikipedia asked us to imagine a world without free access to knowledge and then took itself offline for a day. Seven million people signed petitions against the bills. The bills didn’t have a chance of passing after that, since the opposition involved millions of voters.
We expect that consumers could easily be rallied to sign petitions arguing that regulations would destroy the basis of the internet as free, that they would add considerably to users’ costs, and that the current regulatory regime does not subject them to any harm. It is not clear that regulation of giant platforms is feasible until the nature of the harm they cause is much more clear both to regulators and to consumers.
It is not clear that regulation of giant platforms is feasible until the nature of the harm they cause is much more clear both to regulators and to consumers
Welfare Economics acknowledges that not all individuals are able to function in our industrial society at all times, and seeks to provide some form of economic social safety net.
This paper is part of an ongoing research program in Social Welfare Computing, which is being conducted with my colleagues at Copenhagen Business School’s Departments of LAW and of Management, Politics and Philosophy and at the Technical University of Munich’s Chair for Information Systems in the Department of Informatics. Social Welfare Computing specifically addresses developing societal mechanisms to mitigate the disruption and harm caused by digital transformation. It does not address using technology to address existing social problems. It does not address use of computing to improve rural access to health care or to higher education, or the improvement of government services, as important as these topics are. Social Welfare Computing addresses developing mechanisms to mitigate the harm caused by new forms of online power, or by abuse of private information, or by fake news and manipulation of elections.