November 30, 2020: Written by Viswanath Pingali and D Daniel Sokol
An important question from a regulatory standpoint is to what extent is user experience improved or compromised by these platforms. Overall, what is lacking in the debates is a discussion of the value creation aspect of platforms.
Globally, regulators have been expressing concerns about digital platforms across a number of areas. One concern is the size of these platforms, which critics are concerned — size means influence in the daily lives of people that may harm consumers. In some cases, the concern is the allegation that platforms provide undue preference to their own products and services on their platforms, a so-called “self-preferencing” claim. Some proposals would limit other behaviour of Big Tech, such as merger limits or the ability for competitors to access the data of a platform.
In each case, the critics are focussed on the potential negative effects of platforms. What is missing in their criticism is that each factor also has a positive side and it is for regulators to undertake a careful case by case analysis of these issues. An important question from a regulatory standpoint is to what extent is user experience improved or compromised by these platforms. Overall, what is lacking in the debates is a discussion of the value creation aspect of platforms.
There is a lot more nuance to how platforms operate. Each platform has a different business model and a different way of orchestrating the relationships of users and third party companies on its platform. Ultimately, a balanced approach to understanding platforms is imperative to ensure that there are no unintended consequences of harming innovation and growth.
Having explained the potential negative aspects, let us focus on the positive aspects of platforms. One potential overarching point is tech’s contribution to growth and innovation. According to a 2019 Progressive Policy Institute report, the top 25 investment heroes invested $226 billion in the United States in 2018, where four of the five so-called “GAFAM” (Google, Apple, Facebook, Amazon and Microsoft) companies appeared in the top 10 and all were in the top 25. We do not have equivalent stats for India but, this past year has witnessed massive investments into India, in particular in the technology sector. Such investment really is the bloodline of economic growth.
The global and India mobile app ecosystems continue to grow, offering more choices to consumers. As more choices emerged, consumers have greatly benefited. In AppAnnie’s recent report titled the Mobile App Evolution, India’s mobile app downloads growth rate is higher than the worldwide average. India has catapulted into second place globally since 2017 (after China).
Platforms have the potential to positively impact physical and mental health. COVID-19 is a real life and recent example where physical distancing and shutdowns have meant citizens and businesses rely on technologies to connect and to continue doing business. It is not the only such example. For example, social networking websites have contributed heavily towards safety efforts and fundraising activities during the Chennai floods last year. In a recent article, one of us discussed the role of open source software and mobile phone operating system (Android) in controlling the COVID-19 pandemic. In all these cases, the data and the size of the network ensured faster information dissemination, which is highly essential in the circumstances. Therefore, some of the solutions that are being proposed in order to limit the influence of these platforms need to be understood more carefully.
A Harvard Business Review article last year argued that network effects are not sufficient in creating and sustaining a dominant position; a differentiating edge is almost always essential for the platforms to survive over a period of time. In this context, implications to the users of the platforms of one of the proposed solutions — the extreme step of breaking up of platforms in order to discourage self-preferencing behaviour — are more complex. In markets where switching costs are low, multi-homing (usage of multiple platforms for same services) platforms invest heavily in innovation and create mechanisms through which user experience improves. This raises an important question: Is the distinction between innovation and self-preferencing behaviour clear enough? If the platforms are broken up, the synergies that exist between the platform and the products it creates could be disrupted. A second solution that is being proposed is that the competitor should have the right to access the data. Prima facie it looks great, but it opens up other issues on data privacy: Who is responsible if the data were to be misused? Finally, there has also been a proposal to limit the acquisition of other companies by these platform companies. Platforms acquire other companies for various reasons including increasing the size and offerings of the network. Acquisitions also help in mitigating innovation related risk. As discussed earlier, increases in the size of networks need not result in negative outcomes, and indeed, can provide greater value to users in terms of improved functionality and integrated platform solutions.
Therefore, in short, a broad question from the regulatory standpoint is to further investigate how user experience is shaping up in the digital world and weighing the potential benefits against the potential concerns for platforms. We think both the platform businesses and the regulators need to come together on a common platform in order to understand these emerging business models and the resulting user experiences.
Pingali is with the Indian Institute of Management Ahmedabad, and has provided consulting services to leading platform companies. Sokol is a law professor at the University of Florida and has provided legal services to various platform companies.