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Can we really regulate web giants?

Pierre-Jean Benghozi
Pierre-Jean Benghozi
CNRS Research Director at I³-CRG* and Professor of Digital Economics at École polytechnique (IP Paris) and the University of Geneva

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.

Contributors

Pierre-Jean Benghozi

Pierre-Jean Benghozi

CNRS Research Director at I³-CRG* and Professor of Digital Economics at École polytechnique (IP Paris) and the University of Geneva

A specialist in the digital economy, from 2013 to 2019 Pierre-Jean Benghozi was a member of the College of the Electronic communication regulations authority (Arcep) and is currently chairing a mission to evaluate the France very high speed internet plan.
*I³-CRG: a joint research unit of CNRS, École Polytechnique - Institut Polytechnique de Paris, Télécom Paris, Mines ParisTech