Congressional hearings, a plethora of regulatory investigations, multi-billion dollar fines and the seemingly endless stream of exposés on how online platforms negatively impact our global polity. It seems like the jig is up for Big Tech. Gone are the days when Silicon Valley was viewed as a purpose-driven utopia, filled with carefree engineers on beanbags, excitedly running unicorns destined to change humanity for the better — and coincidentally making billions doing it. The passing of the European Union’s landmark regulation, the Digital Markets Act (DMA), in April 2022 exemplifies this. The regulation, despite the best efforts of tech giants like Meta and Google to water down the act, was able to pass and contains wide-ranging obligations on the largest technology companies. The DMA stands to significantly alter the competitive landscape of digital markets, with the EU hoping that the regulation will reinvigorate competition in a sector that is seen by many as being dominated by a handful of extraordinarily large and increasingly unaccountable companies.
In truth, the DMA has come as a surprise to no one. It is the culmination of decades of growing scepticism and concern over the size and power of companies like Amazon, Google and Meta. It is not just regulators that are worried about Big Tech. The general public is now vividly aware of the enormous influence that these firms have on our lives. John Oliver’s ‘Tech Monopolies’ segment on Last Week Tonight in June is evidence of a Big Tech Backlash’s inclusion into our collective cultural psyche.
“Ending a monopoly is almost always a good thing”John Oliver on Last Week Tonight
Oliver raised concerns over the “anti-competitive conduct” of large technology companies, calling for regulation in the United States to constrain such behaviour. Oliver’s segment on tech companies is emblematic of a cultural and intellectual Zeitgeist surrounding Big Tech; an acknowledgement of their collective utility, but growing distrust of platforms that are becoming ever bigger and more powerful, arguably to the detriment of society. And much of this is understandable. Scandals like Amazon being accused of manipulating its search results and unfairly promoting its own products to undermine competitors, to Meta’s role in instigating the January 6th attack on the US Capitol spring to mind when we think of the decay that technology companies are helping fuel in our societies.
While some of the troubles associated with Big Tech relate to inadequate content regulation, the greater worry is that a lack of competition and consumer choice in digital markets is exacerbating the worst excesses of these platforms. For instance, Google dominates online search, enjoying a whopping 90% market share. Apple and Google’s parent company Alphabet have a duopoly on the global mobile operating system market. In October 2021, Meta had 3.6 billion active monthly users across its platforms, nearly half of the world’s population. Not only has their dominance been Brobdingnagian, but it has proved to be durable. Meta, Alphabet and Amazon have all maintained dominant positions in their respective markets for well over a decade, and it does not look like that will change anytime time soon. Given the monumental challenges that the power and influence of these companies pose to our global, interconnected communities, it makes sense that we try and regulate them. One way of doing this would be through competition or antitrust law.
Antitrust laws are rules and regulations that seek to control the behaviour of companies in a way that fosters competition in markets, for the benefit of consumers. The goal of antitrust is to ensure that companies compete fairly against each other, resulting in lower prices, greater product variety and quality, and innovation, all of which benefit consumers. Antitrust takes the form of rules against predatory pricing, collusion among companies, or investigations into anticompetitive conduct by dominant companies. As the great American Supreme Court Justice Thurgood Marshall once remarked, antitrust laws are the “Magna Carta of free enterprise”. Through safeguarding free and fair competition, we can cultivate a market economy where ordinary people stand to benefit from free enterprise, not just business owners.
“Antitrust laws… are the Magna Carta of free enterprise.”United States Supreme Court Justice Thurgood Marshall
Although stronger antitrust laws will not fix issues like misinformation or our increasingly polarised political discourse, it is believed by regulators worldwide that they will help give consumers more choice. More variety in the social platforms market could mean that we are not stuck with Facebook, Instagram, or TikTok as the de facto platforms to connect with friends, family and creators. Merchants may benefit from more favourable terms if they are not subject to the domineering power of Amazon. App developers would finally be free from paying a 15-30% commission to Apple and Google on all purchases made on their platforms. From this perspective, greater antitrust looks like an unqualified good; the panacea to unlocking the dreams of a digital utopia that first sparked the digital age. So why don’t we have more antitrust?
In the age of the internet, the business models that companies such as Google employ, with services being offered to consumers ‘for free’ in exchange for their data, make antitrust laws ill-equipped to deal with the competition issues that these companies present. Many of the laws on the books are decades old, meant for a time when companies competed purely on price, with readily defined markets. That world does not exist anymore. Competition is far more dynamic, uncertain and ever-changing. Though antitrust reform is not the panacea some market (or hope) it to be, it could be a useful tool to help address some of the competition issues that Big Tech raises. However, to address the myriad of harms caused by Big Tech’s dominance, we need solutions that are fit for the digital age. Any policy that attempts to reinvigorate competition in digital markets must be constructed in a way that reflects competition in the digital sector as it exists, not as we wish it to be.
It is for this reason that the DMA is troubling. As will be explained, the landmark regulation fails to inspire confidence. This is not because it fails, in spirit, to attempt to address important antitrust concerns that Big Tech firms raise. Rather, it is because much of the regulation exposes a lack of appreciation by the EU of the nature of competition in the digital sector, and therefore fails to promote the most effective forms of competitive pressures on Big Tech companies. By properly regulating competition in digital markets, we stand a chance to reinvigorate markets, and increase innovation and consumer choice. But this will only be achieved if we get the regulation right. As will be demonstrated, the DMA, so far, fails to do this. But to understand what is wrong with the DMA and the solutions required to deal with its inefficiencies, we must first have an appreciation of the economics of digital markets.
The Economics of Digital Markets: A Crash Course
Competition in the digital sector operates in a markedly different way from more traditional industries. Digital markets are far more susceptible to ‘tipping’ toward a small number of large, very dominant players. This can be explained by several features which together create superb competitive advantages for the winners of the game. These are namely; network effects, extreme returns to scale, and the role of data as a competitive advantage. Each shall be dealt with in turn:
- Network effects: these refer to the benefit that platforms accrue as more people join their network. Think of popular messaging apps like WhatsApp. One of the major benefits of using WhatsApp instead of, for instance, Signal, is that more people are likely to use WhatsApp. This creates a snowball effect; the more people that use an application, the greater the benefit the application has to prospective users/consumers and so forth.
- Economies of scale/extreme returns to scale: economies of scale are the cost advantages that companies experience as their operations and efficiency increase. Essentially, the scale at which a company’s output increases is greater than the value of its total costs, making it cheaper for the company to offer its services at lower prices, despite increasing production. Although economies of scale do exist in non-technology industries, this effect is accentuated in digital markets. Once a platform or software is developed, the cost of distributing it to millions (or billions) of people is comparatively low. For example, Instagram has approximately 450 employees operating a business with over a billion active monthly users. This allows firms to increase the scale of their operations in an extremely short period.
- The role of data as a competitive advantage: as mathematician Clive Humby remarked in 2006, “Data is the new oil”. Large, detailed datasets are not only useful for companies to sell customer data to advertisers. Big data can be leveraged to extract insights on, for example, when, where and how customers use platforms. This information can then be used to further develop and improve platforms, helping lock in the competitive advantage of the firm that manages to collect a large dataset first.
In digital markets, it is not just the individual presence of network effects, economies of scale, or the power of big data. Rather, it is the coalescence of these features that create colossal and, more importantly, durable competitive advantages. Take Meta for example. With billions of people around the world using its platforms on a monthly basis, it has endless opportunities to extract data on how consumers use its applications, as well as sell their data to advertisers. Because of the sheer scale of Meta, they are able to generate large revenues from their advertising business and use their scale to better design and improve their products. Similarly, companies like Amazon have been able to leverage network effects, extreme returns to scale and data to generate immense levels of revenue. But this is only possible because they tend to dominate their respective markets. As a result of these characteristics, competition in the digital sector is not for a slice of the market. Instead, competition is for the market. It is only when a firm effectively controls a market can it reap the extreme returns to scale that come with being a dominant player in the digital sector.
Firms in digital markets understand the combined power of data, scale and network effects and try to dominate a market before it matures. Take Amazon for example. Its sheer size and scale enables it to dominate the e-commerce space. That is why, in its early years, the company had a manic obsession with growth. Quarter after quarter, year after year, Amazon reinvested the majority of its profits into research and development, pursuing growth and dominance over profit. It paid off. With a market capitalisation of over $1 trillion and profits of nearly $470 billion last year, Amazon is one of the largest companies in the world. Now, having an appreciation of the special features present in digital markets, the idea that we can have more conventional competition, with several companies offering similar (or differentiated) services, is a bit naïve. Antitrust reforms should be centred around administering reform in a manner that acknowledges the realities of the competitive dynamics in digital markets.
The Economics of Digital Markets: Introducing Digital Platform Ecosystems
In antitrust circles, the aforementioned features of digital markets are well-known. An independent report on digital markets commissioned by the European Commission in part highlighted the above as reasons for the presence of very large and influential technology companies. However, another important but underappreciated aspect of digital competition is the business model all Big Tech companies employ; the platform ecosystem model.
The platform ecosystem has become a crucial component of Big Tech business models. It is popular because it enables firms to capitalise on the psychological or behavioural dynamics of consumers in digital markets. The internet is a vast dominion, filled with more information than any human will ever be able to process. Technology companies like Google, Meta or Amazon act as intermediaries: sifting and sorting through the wide expanse of the internet, and delivering to their users the most relevant information. Technology companies can therefore be viewed as digital portals, helping individuals sift through what can be a chaotic internet. Companies that provide services with the lowest cognitive burden to consumers are often the most successful ones. The notion of providing the lowest cognitive burden applies to other services offered by digital platforms. The existence of cognitive burdens means that consumers are unlikely to switch between platforms (or portals). Therefore, if companies can create ecosystems where consumers do not have to leave their ‘walled gardens’, this increases opportunities for platform ecosystems to further monetise their user base.
Alphabet Inc. is a great example of this. It is not merely an internet search company. In addition to Google Search, among other things, it owns YouTube, Google Maps and recently acquired the fitness watch maker Fitbit in 2021. These product lines offer Alphabet a plethora of avenues to lock in potential and existing users, as well as increase opportunities to monetise them, further strengthening their advantage over their competitors. A start-up trying to unseat Alphabet will have to compete with a digital Goliath that, among other things, is an advertising company, fitness watchmaker, cloud computing services provider and internet search platform. Our upstart David would have to contend with a sophisticated enterprise that can leverage its various arms to outcompete smaller players. But that does not mean that competition is impossible in a world of digital platform ecosystems. It just means that certain preconceived forms of competition, such as our upstart David unseating the social media Goliaths through direct competition, are unrealistic. But there is another way. Before that, a brief overview of some of what the DMA entails.
The Digital Markets Act: In a Nutshell
The DMA imposes a series of obligations on ‘gatekeepers’ providing ‘core platform services’ that serve as important gateways for business users to reach end users. Additionally, these gatekeepers must enjoy an entrenched and durable position in their operations. To be subject to these obligations, companies must, among other things, have an annual turnover in the European Economic Area exceeding €7.5 billion and a market capitalisation of €75 billion. Said platforms must have at least 45 million active monthly users in the EU. This ensures that all Big Tech companies will likely fall within the scope of the regulation.
Obligations imposed on gatekeepers under the DMA include a ban on self-preferencing, the perceived abuse of business user data by some platforms to gain an unfair advantage, as well as unspecified requirements for greater interoperability between platforms. Besides the new obligations imposed on Big Tech, the DMA is significant in another important sense. It marks a move from traditional antitrust enforcement, which was backwards-looking and waited for companies to engage in behaviour perceived as anticompetitive before intervening, to a system that is more forward-looking and seeks to prevent anticompetitive conduct from occurring in the first place. Under the DMA, Big Tech companies will be obliged to comply with the stipulated requirements ex-ante (before the fact), as opposed to waiting for an investigation to take place before changes are made.
This is significant because it addresses a key criticism of EU antitrust law before the DMA; enforcement was often seen as slow and ineffective. For instance, in the Google Shopping case, the Commission fined Alphabet €2.4 billion for abusing its dominant position in online search through self-preferencing its search results. However, the investigation took the Commission seven years to complete, with a further four years of appeals by Alphabet, before a final decision was made for Alphabet to pay the fine in 2021. The DMA is hoped to mark a shift to more proactive antitrust regulation, with regulators avoiding costly investigations which take years to complete and fines that constitute a small portion of many Big Tech companies’ overall revenues.
The Digital Markets Act: Promoting Ineffective Competition?
While it is true that the DMA is a welcomed attempt to curb the power of Big Tech companies, the content of the regulation itself is underwhelming. This is primarily because it fails to properly account for the competitive dynamics described in this piece. The failure of the DMA to properly incorporate the economics of digital platform ecosystems into the regulation will arguably result in ineffective regulation for digital markets. This is because the DMA is largely promoting rivalrous competition. Rivalrous competition refers to the rose-tinted version of competition in the digital sector; where our upstart Davids compete head-on with digital Goliaths in the latter’s home market, which is unrealistic given competitive dynamics in digital markets. Failing to address the competitive dynamics that make the competitive power of Big Tech companies durable and potent threatens to hinder the effectiveness of the DMA altogether.
Firstly, as was discussed, the largest technology companies employ the platform ecosystem model as it enables them to maximise the benefits accrued from the existence of network effects, extreme returns to scale and the role of data as a competitive advantage. Though technology companies have strong competitive advantages, this does not mean that they do not face competitive pressures. An inadequately explored aspect of digital competition is the role of inter-platform competition in creating a more competitive landscape in digital markets. In 2021, The Economist published an article detailing an interesting phenomenon in the digital sector; the largest digital platforms were entering into other platforms’ ‘home’ markets. For instance, Apple, though primarily generating revenue from the sale of its hardware and software, has begun to venture into music and video streaming, podcasts and digital books, competing with the likes of Spotify, Netflix and Amazon. Microsoft and Google are competing with Amazon Web Services to offer cloud computing services. Facebook, through its e-commerce wing Marketplace, is trying to break into e-commerce. In other words, Big Tech companies are competing in each other’s home turfs.
Such competitive pressures have helped slow down the level of concentration in many of the markets that the largest technology platforms compete. Of the 11 largest tech markets analysed by The Economist, the pace of the increase in market share by Big Tech slowed significantly. This is not surprising. It is the coalescence of network effects, extreme returns to scale and the role of data that create the immense competitive advantages present in digital markets. Therefore, large technology platforms that also possess the same competitive advantages are best placed to compete against Big Tech firms. It is this type of effective competition, between platforms, which ultimately benefits consumers.
Instead of promoting inter-platform competition, the DMA does the opposite. Under the DMA, the Commission has powers to stop technology platforms like Apple and Amazon from leveraging their dominance in one market (software or e-commerce) to another (streaming). Such an eventuality would be detrimental as it would force Big Tech companies to altogether stop pursuing their contemporaries’ home markets and instead focus on consolidating their own markets. This would be damaging for upstart Davids. If the digital Goliaths are preoccupied with competing against each other for more market share, it gives start-ups more room to grow, and perhaps challenge large platforms in the future. If Big Tech platforms are artificially siloed into a fixed number of industries, then they will pursue all lawful means to consolidate their existing markets, to the disadvantage of any nascent competitors.
Moreover, the obsession with rivalrous competition leads to erroneous regulation, especially in the context of the DMA’s data portability and interoperability requirements. Under the new rules, gatekeepers will allow for “effective portability” of business and user-generated data. This was included in an attempt to enable users to freely transfer their data across platforms, therefore reducing the cost of, for instance, switching from an established Goliath to a quirky, more interesting David. The issue with this requirement is that it is unlikely to be of benefit to either business users or consumers. Though the requirement would attempt to address a key problem— accentuated data-related competitive advantages enjoyed by incumbent platforms— neither the DMA, nor competition law more generally, can address the advantages gained from network effects.
A study by researchers at the New York University School of Law (NYU) demonstrates this. Researchers at NYU interviewed Meta’s (then-Facebook) potential competitors to assess the effectiveness of a data portability initiative. The study found that even when user data (with consent) was transferred to a platform, this was not helpful. This is because the start-ups in question found that a lot of the user data provided was not useful without context. For example, a single user’s comment data was of little use if it was not accompanied by other information, such as the type of content the user commented on, how other users reacted to the post, and so forth. To maximise the utility derived from being able to transfer comment data across platforms, the start-up would need tens if not hundreds of thousands of users to derive meaningful insights. In essence, the start-up would need to benefit from network effects. As a result, network effects and the competitive advantage of having data for years before any competitor effectively challenges your market dominance means that it becomes difficult to beat behemoths like a Meta or Apple.
Promoting Effective Competition: The Case for Complements-based Antitrust policy
Complementary goods are products which are usually bought and used together. Think about the relationship between tires and cars. If there is increased demand for cars, usually there will be a higher demand for rubber tires as well. This is, in contrast, to substitute goods, whereby increased demand for one product results in lower demand for the other. So far, this article has critiqued the position that the DMA largely promotes rivalrous and substitute-based competition, which is unfit for many markets. By promoting complements-based competition, we can lay the groundwork for an antitrust policy that allows start-ups meaningfully compete against Big Tech companies.
Research from management literature suggests that complements, in the face of seemingly impenetrable incumbents, can over time shift value from the incumbent platform onto their own business. This form of competition is effective because, in the context of digital markets, the competing firm gains market power over a longer time horizon compared to substitute-based competition. Therefore, smaller firms are less likely to be viewed as threats by the incumbents and are less likely to be killed off.
Rather than competing with incumbents head-on, complementors focus on adding value to an ecosystem through, for instance, enhancing end-user experiences. TikTok in this respect is a spectacular example. In 2022, the app firmly rooted itself in social media royalty, forcing competitors like Snapchat, Alphabet, Instagram and Facebook to reimagine their platforms in a bid to avoid obsolescence. What TikTok did really well, like all great complementors, was that it did not attempt to directly compete with Instagram or Facebook in its early days. Instead, it acted effectively as an ancillary service in the form of Musical.ly, allowing users to record short-form videos that were uploaded to Instagram or Facebook. Over time, TikTok gained credibility and market knowledge by operating on the periphery of the Facebook and Instagram value chain and slowly began to differentiate itself as a unique social media experience. As a result of its impressive entrepreneurial capabilities, ByteDance was able to develop a product and algorithm capable of crafting an experience so enjoyable for users that they began to ditch the incumbent Instagram and Facebook to become permanent residents of TikTok.
TikTok exemplifies the potency of complements-based competition. TikTok, the proverbial David that regulators have been searching for, was able to rise under the radar of Big Tech incumbents, develop market knowledge, expertise and credibility among its target users and then eventually shift from Instagram and Facebook’s ecosystem to create its own. TikTok’s success shows us that there is a pathway for the little guy. That digital markets can still be contestable. That perhaps, one day, competition will truly be ‘just a click away’.
The Digital Markets Act: A Final Verdict
TikTok’s ascendancy tells us two things. Firstly, it is still possible for smaller players to meaningfully compete against the Goliaths of the digital world. Secondly, we do not know how this works exactly. Rather than the latter point being a source of disquiet or unease, the fact that we are not entirely sure of how complements-based competition functions presents an excellent opportunity for economic and legal research to iron out the details. By focusing our efforts on finding out what the most effective forms of competition are in the digital sector, as well as antitrust laws that will best promote these competitive pressures, we can design a regulatory system that empowers competition to flourish in digital markets. As Thurgood Marshall so brilliantly enunciated, antitrust laws are indeed the “Magna Carta of free enterprise”. So let us begin to craft an economic Magna Carta fit for the digital age.