Tuesday, April 10, 2018

"What Makes Tech Platforms So Powerful?" (AMZN; FB; GOOG; TWTR)

From the University of Chicago's ProMarket blog:
What are the bases of the digital platforms’ power? In this third chapter from our Digital Platforms and Concentration ebook in advance of this month’s blockbuster antitrust conference at Chicago Booth, Lina M. Khan points to the gatekeeper power, leveraging power, and information exploitation power of America’s tech giants.

Editors’ note: You can read chapters 1, 2, and 4 of this ebook here, here, and here. This piece is adapted from a forthcoming article in the Georgetown Law Technology Review.

A handful of tech platforms mediate a large and growing share of our commerce and communications. Over the last year, the public has come to realize that the power these firms wield may pose significant hazards. Elected leaders ranging from Senator Elizabeth Warren (D-MA) to Senator Ted Cruz (R-TX) have expressed alarm at the level of control that firms like Amazon, Alphabet, and Facebook enjoy. In a recent poll, a majority of Americans expressed concern that the government wouldn’t do enough to regulate US tech companies. As the editor of BuzzFeed observed, a “major trend in American politics” is “the palpable, and perhaps permanent, turn against the tech industry,” now viewed as “sinister new centers of unaccountable power.”

New revelations continue to unveil the degree of power these firms wield and its consequences. The potential effects range from stifling startups and undermining innovation to manipulating the flow of information and enabling foreign interference in our elections. Despite growing recognition of platform power, public conversation about why this power exists and what to do about it is still in its early stages. This essay seeks to help advance that discussion by identifying forms and sources of platform power, explaining how this power is being or could be exploited, and exploring historical analogies and legal hooks that could help us tackle it.

Forms and Sources of Platform Power and Its Abuses

The markets in which these firms operate and the specific mechanics of their business models somewhat vary. For this reason, more extensive studies of platform power would benefit from being platform-specific. But despite their differences, Amazon, Alphabet, and Facebook share key forms and sources of power.

The first is gatekeeper power. The source of this power is the fact that these companies serve effectively as infrastructure for digital markets. They have captured control over technologies that other firms rely on to do business in the online economy. Fifty-five percent of online shopping searches, for example, now begin on Amazon’s platform; last year the company enjoyed over 40 percent of online revenue in the United States. Alphabet and Facebook together capture 73 percent of all digital advertising in the country and 83 percent of all growth, while Apple and Alphabet jointly account for 99 percent of the world’s smartphone operating systems. For producers, retailers, advertisers, and app developers looking to reach users and consumers, these platforms are vital intermediaries, the railroads of the 21st century.

The degree of market control enjoyed by dominant platforms is protected both by network effects and the self-reinforcing advantages of data, which serve as an entry barrier. Their entrenched positions are reflected partly in their skyrocketing valuations; Wall Street is pricing their stock at multiples that seem to reflect market power. Newcomers that have attempted to compete with a platform in a platform market (like Jet.com) have been acquired by other giants (Walmart).

This means that not only are the platforms vital intermediaries, but—in many instances—they are the only real option. Even when producers, retailers, advertisers, publishers, and app developers manage to find alternate channels, those narrower paths can only really supplement access on the margins. The platforms generate too much business and attract too many eyeballs for firms to bypass them entirely. This renders business users highly dependent on the platforms—a finding confirmed by a recent study undertaken by the European Commission. The EC wrote, “Many of the business users have indicated that they try to avoid any conflict with platforms, fearing a negative impact on their business. This applies especially to conflicts with the largest platforms, as business users indicate that often no viable alternative for these major platforms exists due to their scale, geographic range and the number of (potential) customers active on the platforms.”

Platforms can use their gatekeeper power to extort and extract better terms from the users that depend on their infrastructure. For example, Amazon has disabled the “buy-buttons” for book publishers in order to extract better terms; executives have also described how the company tweaks algorithms during negotiations to remind firms of its power to sink their sales. Recently the company has started offloading costs onto suppliers, subsidizing its shipping costs by raising fees for the companies that sell through its platform. Merchants attempting to negotiate with Amazon risk seeing their accounts suspended, and getting kicked off its platform often means not just seeing lower revenue but having to lay off employees. Google and Facebook’s ad duopoly, meanwhile, gives them ample power to raise prices. Last quarter Facebook hiked the average price per ad by 43 percent.

Platforms also use their gatekeeper power to entrench their gatekeeper power, limiting the ability of third-party merchants to reach users independently. Amazon, for example, closely monitors communications between third-party Marketplace merchants and consumers, penalizing merchants who direct consumers to their own independent websites or other sales channels. Gatekeeper power now also risks shaping the content and production of news. Dependence on Facebook and Google for traffic has led publishers to package news according to the dictates of the platforms’ algorithms. As a bill recently introduced by House Representative David Cicilline stated, “An entity with the power to dictate the terms of distribution of news has the power to dictate the content of news.” The head of the Newspaper Association of America noted, “Facebook and Google are our primary regulators.”

A second form of power is leveraging....MUCH MORE