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.