Can we really regulate web giants?

The Inter­net was ini­tially developed as a pub­lic tool. Over time, it has nar­rowed down to a couple of big, found­a­tion­al plat­forms. These plat­forms are more or less man­dat­ory, and they con­trol the way in which users access online ser­vices and share content.

Unable to effect­ively reg­u­late the effects of this dom­in­ance, the European Com­mis­sion recently intro­duced the Digit­al Mar­kets Act (DMA), the final piece in their reg­u­lat­ory tool­box. This would allow them to take pre-empt­ive action against digit­al giants, rather than seek to rem­edy situ­ations after the fact (as is cur­rently the case). This new ex ante reg­u­lat­ory frame­work could be final­ised in 2022, while France holds the pres­id­ency of the European Union.

Coun­tries have dif­fi­culties reg­u­lat­ing these plat­forms (GAFA in the United States and BATX in China) because digit­isa­tion has shaken up the eco­nom­ic prin­ciples cur­rently guid­ing reg­u­lat­ors. These prin­ciples are based on the mod­el of man­u­fac­tur­ing indus­tries, in which rev­en­ue is gen­er­ated by goods pro­duc­tion and organ­ised by price. What’s more, reg­u­la­tion must be enacted through the slow pro­cess of legis­la­tion, using stable, rel­at­ively unchange­able prin­ciples. But digit­al indus­tries are not part of this sys­tem. Some are based around fixed, high costs that can­not be recouped (infra­struc­ture, data col­lec­tion, R&D, etc.) but bene­fit from the effects of net­work­ing. Oth­ers involve change­able, extremely low costs, mean­ing they can evolve very quickly using both the mar­ket of con­tent pro­viders and the user market. 

This has many con­sequences. The digit­al eco­nomy favours eco­nom­ies of scale through what’s called net­work extern­al­it­ies. The more users a ser­vice has, the more attract­ive it is for them, as well as for advert­isers and pro­viders. This means that plat­forms bene­fit from their own devel­op­ment (intern­al innov­a­tions or extern­al acquis­i­tions) to enrich their applic­a­tions, by mak­ing them easi­er to access (and free), con­sol­id­at­ing their user base and becom­ing quasi-mono­pol­ies on their mar­ket. Users and pro­viders stay attached because they are trapped in these eco­sys­tems, and switch­ing costs remain high. 

What’s new about the digit­al world is also how flu­id busi­ness mod­els are, which means that the bor­ders between sec­tors are con­stantly being redefined. This allows com­pan­ies to act very quickly, in oppos­i­tion to the slow grind of the wheels of legis­la­tion and reg­u­la­tion. This, in turn, cre­ates chal­lenges to clas­sic com­pet­i­tion law, which is based on defin­ing and identi­fy­ing rel­ev­ant mar­kets. For example, who would say that Google’s rel­ev­ant mar­ket is the search engine market?

The digit­al eco­nomy pro­motes size through so-called net­work externalities.

To address this situ­ation, coun­tries have shown them­selves to be unwill­ing to take drastic reg­u­lat­ory meas­ures, until now. After ini­tial (pub­lic) injunc­tions and minor fines, fin­an­cial sanc­tions have got­ten heav­ier and heav­ier, but they’ve always been applied too late and pale when com­pared to the digit­al giants’ massive profits. Because avail­able meas­ures are unable to nudge cur­rent forms of dom­in­ance towards com­pli­ance, the epic threat of dis­mant­ling them has even been raised. This option has been a stal­wart in the reg­u­lat­ory tool­box: elec­tri­city (1911), cinema (post-war) and tele­com­mu­nic­a­tions (1995) have already exper­i­enced such func­tion­al sep­ar­a­tions. But we are still a long way from such steps actu­ally being taken, which explains why the DMA ini­ti­at­ive is extremely important.

Like the US, the European Uni­on bene­fits from its size, allow­ing it to act against these plat­forms (regard­less of their pre­dom­in­ance). Reg­u­lat­ors have kept busy and the DMA demon­strates their con­cern regard­ing renewed prin­ciples of action and ana­lys­is, fields of inter­ven­tion (plat­form and ter­min­al neut­ral­ity) and ways in which they can inter­vene (abil­ity to act on their own ini­ti­at­ive before prob­lems occur, reg­u­la­tion “through data and pub­li­cising mar­ket inform­a­tion,” etc.). 

The Inter­net is now at a cross­roads. As shown by Jonath­an Zit­train in The Future of the Inter­net (2008), the world is mov­ing along two oppos­ing tra­ject­or­ies at once. The first is that of open tech­no­lo­gies that favour all kinds of cre­at­ive uses to emerge. This future extends the abil­ity that the Inter­net and tech­no­logy had to gen­er­ate freely adapt­able plat­forms and design applic­a­tions by, and for, all kinds of users. Over time, a second tra­ject­ory has appeared in oppos­i­tion – based around pro­pri­et­ary tethered appli­ances that increase con­trol over the way they can be used. This leads to con­sumers hav­ing no power over these applic­a­tions, data and ser­vices, which can change or dis­ap­pear overnight. The suc­cess of app stores can be put down to their abil­ity to favour innov­a­tion, all the while clos­ing it up in a defined, con­trolled framework. 

These are rad­ic­ally dif­fer­ent vis­ions, espe­cially for reg­u­lat­ors. Tethered appli­ances are not intrins­ic­ally bad – being closed off can rep­res­ent a source of secur­ity and reli­ab­il­ity, as well as ease of use for users. The prob­lem with open sys­tems is that they can gen­er­ate all kinds of innov­a­tion – even bad ones.

The abund­ance of reg­u­lat­ory insti­tu­tions and act­ors also hampers their meas­ures, mak­ing them less effi­cient. At this stage, the DMA is open to the pos­sib­il­ity of start­ing afresh, with the pro­pos­i­tion of an inter­na­tion­al digit­al reg­u­lat­ory body. The Commission’s recent ini­ti­at­ives provide indic­a­tions on the future.

But reg­u­la­tion is not the end of the story. Digit­al plat­forms are even more dom­in­ant in sec­tors where they can bene­fit from com­pan­ies hampered by a lack of digit­iz­a­tion and no online pres­ence. Amazon has been threat­en­ing book­shops for the past 20 years, but it took a pan­dem­ic for them to imple­ment effect­ive col­lect­ive initiatives.

Finally, it’s import­ant to remem­ber that the high level of innov­a­tion and flex­ib­il­ity in ser­vices is also a poten­tial source of fra­gil­ity for plat­forms. Wheth­er it’s AltaV­ista, AOL, Black­berry, Myspace, Nets­cape or Yahoo, the Internet’s short his­tory has shown that, in the digit­al world, com­pan­ies that seemed power­ful and untouch­able can come crash­ing down.