The internet’s ‘wild west’ days are behind us: many national regulators are trying to develop rules to regulate digital platforms. The trend towards regulatory tightening can be called a new trade war for data which is becoming an increasingly critical resource in the digital age. Not only will national regulators have to develop rules, but they will also have to unify them in the future. It is not unlikely that we will see the emergence of a ‘digital WTO’ as a supranational institution regulating cross-border data exchange in a world of dominant platforms, says Ruben Enikolopov, the rector of the New Economic School, in an interview with Econs.
– In a dystopian movie Surrogates starring Bruce Willis, the whole world is subordinated to a corporation: the government, the army, and the whole population. The corporation issues avatars OR remote-controlled humanoid to people that do everything for them: they go to work, travel, and so on, while the people just stay at home and operate these avatars through neuro devices. And that is satisfying for everyone. That sort of reminds me of how current digital platforms are evolving: while a monopoly is normally seen as a company that dominates the production of one product or service, these platforms cover the widest range of human needs. People find it convenient to operate all-in-one devices, as do manufacturers, who gain access to large markets. On the other hand, this gives rise to unfair competition and monopolization in large areas of life. Can digital platforms be considered the ‘new monopolies’? What does the economic science say about this?
– If we look at the way digital platforms operate from the perspective of economic theory, the emergence of an oligopoly at least, if not a monopoly, may be expected — that is, if not one, there could be at most two or three platforms. What makes digital platforms special is what are called their networking effects. Almost all platforms are bilateral markets that bring together, on the one hand, customers who want to buy a product, and numerous sellers, on the other hand. The objective of a platform is to enable optimal connection between the participants of these two markets. When operations are described in this way, network effects arise: the more clients the platform has on both sides, the more each client benefits from it. If you are, for example, a Vkontakte user, the more users there are on this social platform, the more you as a client and a customer will gain and benefit from it. And you benefit from it directly. Therefore, when users have a choice between connecting to a platform with a large user base or to a new platform with few users, they will naturally register with the one with more users, just because they simply gain more from it, and their quality of life improves. With such network effects at play, this will almost always lead to, if not monopolization by one market player, then a scenario of at most two or three.
What is also special about digital platforms is the almost zero marginal cost of servicing additional customers. Once I have built up a social network, it makes no difference if I have a million users or a million and one: my network maintenance costs are almost the same. Economic principles suggest that the combination of network effects with near-zero marginal costs results in the monopolization of these markets.
This puts regulators in a quite difficult situation. On the one hand, a monopoly is bad because there is less competition, and customer service quality may be not that high than it should be in the absence of competitive pressure. On the other hand, the standard toolkit used by antitrust agencies, for example, the practice of splitting a monopoly in half — a method not once used in the 20th century — does not work here because customers will suffer. Imagine that I am a social network user, for instance, a Vkontakte user, and suddenly, following a regulatory decision, half of my friends turn out to be users of another social network. As a client, I will be extremely dissatisfied. The ultimate goal of antitrust regulation is to increase consumer welfare. Hence, totally different approaches are needed, which, on the one hand, would reduce the negative effects of market monopolization, and, on the other hand, would take into account the network effects thanks to which the more users a platform has, the better it is for users.
– Are there any optimal ways to manage and demonopolize platforms, given what you have said? There are different national approaches to these problems. The United States is trying to regulate mergers and acquisitions, Europe is more likely to insist on equal competitive conditions for all participants, China is very strict in breaking bigger businesses up into smaller separate businesses.
– True, new tools are now being put to the test by national antitrust authorities because this is a new reality, and nobody has any experience in regulating such platforms, so everyone is trying to gain experience and formulate the optimal approach. Each initiative can actually be challenged with counterarguments as to why it may hurt clients.
For instance, start-up owners have spoken out against the new US regulations that complicate the acquisition of minor start-ups. This is because their initial goal is not to compete with, say, Google, but to develop additional services that could subsequently become part of Google’s service portfolio, and make money that way. In other words, if I own a startup, my goal is to develop my project and prove my startup is the best, then say to Google, ‘buy me’. If Google is banned from buying such startups, there will be no incentives to launch them at all. It is a case of either my launching and developing a startup that is complementary to Google services, making everyone happy, or just not starting at all, given that Google won’t buy it anyway. Then it is up to Google to come up with new ideas — and I will focus on other things, no matter if they are less useful. Some regulatory tools such as bans on purchases have their own limitations, though it can be understood why attempts to implement such restrictions are being made. For instance, when Facebook was buying Instagram, there was talk that there was no synergy between them, and the deal was dubbed predatory, driven by the ‘buy your competitor before it swallows you’ strategy, aimed at getting rid of the competitor.
That is why a higher level of technical expertise is now expected from regulators. When a Big Tech firm intends to buy a company, it must be made clear that the company offers a complementary service for the Big Tech firm to include in its product line, so that everyone can benefit from the resulting synergy, then the purchase is warranted. Alternatively, we might be dealing with a potential second Google which could beat Google in competition, then the purchase should be stopped and competition supported. In a situation where the market is being monopolized, the only way to ensure that these monopolies work hard to enhance customer welfare is to keep the threat of a small network growing quickly into a large network and pushing the veteran out of its place. Facebook’s leadership may seem uncontested now, but initially, Facebook was smaller than Myspace. Facebook was able to win the competition, despite the initial advantage of the other social network that originally had more users. So, what we have seen over the last ten years may be a reflection of the fact that, say, Facebook’s decisions to buy its competitors came at the perfect time. It has to operate under pressure, fearing that potential competitors may take its place if it fails to lead with technology.
– Incidentally, many question whether platforms and competition are compatible at all, given the extremely high market entry threshold. That was not at all the case when Facebook was launched.
– That is an interesting question. On the one hand, ‘yes’ might look like the obvious answer, but on the other hand, consumer preferences vary widely indeed. It may turn out that an essentially niche platform can bite away a pretty large chunk of users from Facebook and build up a completely new network from that customer base. Which is the more popular platform — Facebook or Instagram — is increasingly conditional on user age. Instagram could have driven out Facebook altogether, if Facebook had not bought it in time. Platforms are under permanent threat that may push them out of the market, and they cannot be completely relaxed.
Importantly too, there are two types of platform competition to be discerned. One is platform-to-platform, and the other is intra-platform. Look at Amazon as a platform. What do we have in mind when we speak about competition in the case of Amazon? Is it the potential emergence of a second Amazon, or is it about the way Amazon regulates competition within its platform? US authorities claimed Amazon was in breach of antitrust law not because of the way it competed with Amazon-like companies, but because of its intra-platform rules. That is, the platform’s goods are given advantage over other users of the platform and other sellers. Google faced the same accusations. At the time, the antitrust service voiced no intention of breaking up the giant platform but demanded that equal competitive conditions be created within. This is a matter that can only be addressed by the аntitrust agency, considering the huge negotiating power platforms have compared to their users, together with the enormous potential for abuse of this monopoly power.
– Is that to say that the traditional antitrust tools are still fit for regulation…
– Some of them are. They enable better protection of intra-platform competition, and regulators have a better understanding of intra-platform competition regulation. The greatest challenge is competition among platforms. That is where economies of scale are truly at play, creating natural conditions for competitive struggle to result in a monopoly.
– Russian platforms are a special case. Platforms are normally technology companies that have gradually integrated financial services. There seem to be no stories globally of financial institutions — banks — turning into platforms. But there are such cases in Russia. The problem of competition among platforms is attributed to what market players claim is uneven regulation. That is, while financial services, payments and loans are subject to regulation, that means only a small part of the tech platform business is regulated — whereas for a bank platform, the entire bank is regulated, which leads to an uneven playing field. Are there any options here?
– Actually, I feel much sympathy for the Russian regulator. This is a very delicate issue. In other countries, banks and platforms stand apart, so this is less of a problem overseas than in Russia. A bank working to build up a platform of related services falls under tighter supervision than a platform operator like Yandex, for example, seeking to integrate financial services. Although both are subject to regulation, only ten per cent of this Yandex-like business is regulated, but ninety per cent of the bank’s business is regulated. Perhaps that is why, outside of Russia, platforms don’t grow out of banks. This is not to mention the fact that banks are just not very forward-thinking in the advanced economies, so they aren’t expected to build mature platforms.
The reason for the exchange of pleasantries we have seen between the Central Bank and other banks is the problem of inequality between banks and their potential competitors. They want to reach the point where the financial and non-financial sectors meet, but the initial conditions are such that banks fall under tighter regulation. On the other hand, with banks enjoying access to more financial resources, it is not obvious who has the competitive advantage.
The issue is, when a bank gets into non-banking business, it is important to identify which of its services fall into the traditional, non-platform paradigm: these are nothing more than non-core business for a bank. Some other services are consistent with the digital platform paradigm, involving network effects, economies of scale, and the advantages that customers enjoy thanks to the platform’s use of customer data to offer its users a wide variety of services. Imagine a platform with a real estate management service, where there are no network effects involved. If I use a bank’s platform to lease out an office in Vladivostok, I am no better off if the platform owns a lot of properties in Khanty-Mansiysk. As a user, that makes no difference to me at all. But if I watch a film in Vladivostok through the same platform that is owned by a bank, I could definitely benefit from the platform’s having more users, since it would mean more films. At this moment, the regulator needs to make some very careful decisions: some subtle regulation is required for the non-banking business that our banks are trying to develop to build platforms, that is, regulation that differentiates between non-platform business and business with platform characteristics. There should be totally different regulation for these business fields.
Yet, it is no easy thing to distinguish one sphere from the other one because there are a lot of grey areas, where some platform elements are in place and some are missing. There is no global regulatory experience for regulators to use. Each national regulator is trying to draw the line in this grey area in its own way. I am just thrilled to be looking at this intriguing picture of emerging antitrust regulation, because this is where it is critical to have an in-depth understanding of economic processes and where we need to go deep into the very basic economic fundamentals of this market. Are there any networks effect there? No? Is this a bilateral market where it is important to connect customers and, say, sellers, or is it something else? A fundamental understanding of how this market operates directly affects how it should be regulated. It is an exciting new area of study for me as a researcher. I realise that this area is very painful and unpleasant for market participants, but it is just a Klondike for economic research.
– Do you know of any successful examples of such regulation, anything to look into, if not put into practice?
– In my view, we could rely on the very valuable experience of data exchange regulation, given that access to customer data is the competitive advantage of platforms. If you are a bank customer or a search engine user, there are a lot of things they know about you, and they can offer you other services and earn money from it. And here is the subtle moment: you know things about me, you know I did this or that. Who has ownership of that information: you as a platform, or me as a user? It is information about me! In theory, I may have the right to control it. Yes, as long as I provide it to you, you can offer something to me. However, I may have the right to take all this information and transfer it to your competitor, if I believe that competitor will make better use of the information to provide me with some high-quality service.
A good example, from my point of view, is what they call open banking in the UK, and which has become accepted in Europe and is becoming common in the US. As a bank customer, I am entitled to say: my dear bank, please pass all the information on my transactions to this competing bank, because the information is about me.
– Just like a cell number: I take it with me when I switch to another operator.
– Yes! Here, people regain control of data on their financial behaviour. In fact, this is an issue that goes beyond just regulation and increased competition. It is a more fundamental question about ownership of data on individual behaviour. On the other hand, certainly, it greatly increases competition. Imagine I am a big bank with lots of customers, and in fact, I enjoy a sort of monopoly right in communicating with them because I know a lot about them. If they go to my competitors, they will need to start working with these customers from scratch. Now, if my customers can take their information with them, my competitive advantage is not in that I own this information, but in the ways I can use it to offer my customers a more attractive product. And that is honest competition: here is information for you, so try to squeeze the most out of it to come up with a more competitive product. It is true competition.
– Are you following the story of Chinese regulation which is rather tight? Could anything the Chinese authorities are doing perhaps be put into practice, or perhaps, the other way round, is their case a warning against doing so?
– China is definitely a case to look at and learn from. Their course of action may indeed be controversial. In fact, the Chinese authorities allowed almost anything at first, so the market was unregulated. And then they brought in regulation — very tightly and unexpectedly for many market participants. Importantly, it is not always clear how justified this is from an economic point of view or where the line is drawn between political and economic considerations. However, the overall global trend is towards more regulation of these markets, and China is fully in line with this trend.
In the beginning, the internet and data exchange were a kind of Wild West: total freedom, self-regulation, do as you please. It is now obvious that the global trend in recent years is towards much tighter regulation of platforms, data exchange, and especially cross-border data exchange. This is sometimes associated with privacy and the protection of personal data, but it is essentially a new trade war for data, which are increasingly much more important than trade in goods. Some estimates show that global trade in services already exceeds global trade in goods. And services most often mean information.
Currently, everything that all the players — China, the US, Europe, and Russia — are doing is in fact somewhat disorderly. Everyone is doing whatever they see fit and experimenting, because this is uncharted territory indeed, and no one knows how to do it right. However, I forecast that in the next few years we will see an attempt to harmonise [the regulation of platforms] and find common approaches, because national approaches should not differ much: otherwise, firms in some countries will have competitive advantages over firms in others —advantages as potential exporter of services, specifically, digital services. Therefore, some general rules of the game should follow from cross-country agreements. There are common WTO-developed rules for trade in goods, and the regulation of digital platforms is likely to be the same: international, supranational agreements on data exchange. That is, agreements on privacy and customer data transfer, which are likely to become indispensable at some point in the future. It looks like that is what we are on course for. We will eventually come to a certain understanding at the international level of the way this field should be regulated. And how to monitor things so that platforms in one country are not put in an unequal competitive position over platforms in other countries.
– What is your view of the future of digital platforms, not in terms of regulation, but as a phenomenon? The Wild West age in the digital world is over. What next? Will the whole world be made of platforms? Are we on course for the total domination of TV, or will “theatre and books” also remain in place?
– It is important to note that each individual sector is getting its own Ozon or Amazon — its own major platform. It seems we will live in a world dominated by platforms in many areas, a very small number of platforms, even in old industries such as banking. However, at the same time, we can see that even Amazon failed to force out other producers of video content. Also, there will be platforms within it — as the same forces are at play — but these will be different platforms. It is thus reasonable to say that cinemas will have their own competition (they are most likely to be mostly virtual), and theatres will have their own competition (incidentally, theatres have difficulty going online). Alternatively, one could assume that a platform might unite both cinema and music. But it turns out that it does not work that way. For all the monopolization in that area, the platforms for music and films remain separate.
I don’t really believe in the idea that we will have one super app for everything — banking, television, a place to watch a theatre production, buy food and drinks. Honestly, I do not really believe in that because, first, there are limits to economies of scale and synergy. That is, for example, information about how financial behaviour affects film preferences is useful only to a certain extent. Second, people do not like to be locked into one platform: people really like to take control of their lives, people as customers can easily run away. So, I am not sure that they will be happy with one large super app that covers everything. Most probably, there are going to be many platforms, but in different areas.