Competitive markets in the digital era: the digital platform revolution
We previously discussed the suitability of the current Competition Law framework and whether it adequately monitors and regulates digital platforms. In this article, we delve deeper into the disruption which digital platforms have introduced to the long-standing notions of a ‘marketplace’ and a ‘seller’.
Platform business models have rapidly dominated and disrupted markets in the past few years, creating communities of enormous scale by delivering elevated customer experiences and offering new forms of innovation and value creation. Digital-born companies such as Apple and Amazon are currently fuelling the on-demand and sharing economy, by both selling products to consumers, but also offering outcome-based services through digital platforms. Evidently, although this digital platform revolution began in the B2C area through services such as eCommerce and FinTech, it has gradually engulfed the B2B space by providing innovation-based ecosystems and data-enabled business models and give access to growth capital.
Historically, shopping malls linked consumers with merchants, and newspapers connected subscribers with advertisers. Reflecting this, privately-held digital platforms facilitate exchanges between two or more independent groups and bring end users and producers together to transact with each other. Amazon and Apple have succeeded at bringing together market participants on their platforms, or ‘marketplaces’, resulting in attracting consumers and thus further attracting merchants and platform partners to participate.
Intriguingly, however, digital platforms differentiate from traditional ‘marketplaces’ due to the fact that they act on both sides of the value chain. Such is the case since they both facilitate business, but also participate themselves as merchants on their own platforms. The relevant legal issue at this instance is the risk of abuse of the market power digital platforms have created, by leveraging their superior position on their own platforms and by-passing fees and taxes they impose on other market participants transacting through their ecosystems.
The most crucial resource for both Apple and Amazon is consumer data, since they leverage that data to construct their commercial activity either on their platform as participating merchants, or by entering adjacent markets in which that data can be of fundamental use. As will be showcased below, the mass collection of data by ‘Big Tech’ leads to its disparate localisation, while the risk of limiting consumer choice and raising costs of global platform reach is higher.
This is so since global digital platforms dominate unilaterally in the consumer services industry, through tailored application of behavioural economics of consumer behaviour, by taking advantage of their existing data and further attracting consumers. This largely results in SMEs being barred from entering and participating in the digital market without the use of digital platforms, as platforms essentially become the digital market’s gatekeepers. Greater portability and access to consumer data for SMEs could help in gaining critical consumer mass and thus becoming competitive players independently. This could also foster variation in digital business models since more creators will have access to the current most crucial resource; data.
Amazon allows for entrepreneurs acting as suppliers on a platform to have access to a new distribution channel while participating in a global value chain. Amazon’s success lies in its efficient use of customer data to predict demand and form behavioural patterns to optimise business operations and maintain market leadership. In its capacity as a merchant platform, Amazon upholds a vertical relationship with merchants as a host, whereby it uses data to enhance its search and ranking algorithms.
Amazon is no stranger to anti-competitive conduct investigations by the EC, since concerns have been repeatedly raised in light of its dual operative nature. There have been hints of a conflict of interest for Amazon, since operating both on an upstream intermediation market for businesses, and downstream retail markets vis-à-vis end users, has not been in its favour. Due to the duality of Amazon’s platform model, the platform’s own retail offerings may directly compete with those of the merchants selling through its Marketplace.
The most significant concerns with Amazon are precisely with regard to its efficient and tailored leveraging of consumer data. Allegedly, the platform uses data to analyse highly profitable products, irrespective of their merchant, Amazon or other, and then offers an Amazon-own “copy cat” version while undercutting prices to weaken its competitor and gain dominance on a platform in which it already dominates. As a result, concerns are raised since independent dealers can be disadvantaged or squeezed out of the market due to its unfavourable conditions, while e-commerce progressively becomes concentrated in the hands of few specific players.
In a recent US Democratic congressional staff report, following a Big Tech congress hearing and a 16-month long investigation, the Democratic staff conclude that dominant platforms should be prevented from preferencing their own services. Instead, they should offer “equal terms for equal products and services”. It remains to be seen how such prevention will combat Amazon’s dominant behaviour.
Apple’s alleged monopoly power exists in the market for software app distribution on iOS devices, whereby Apple uses its control of its operating system and app store to create and enforce barriers to competition. This is the case since Apple charges app developers competitive prices within the App Store, while its own offerings are preferenced and remain fee-unscathed. Apple seems to have obtained gatekeeper status in the app distribution market for its devices, while it also competes as an app developer against others. Apple’s license agreements seem to be distorting competition, while Apple’s competitors are either disabling the in-app subscription or raise their subscription prices in the app to pass Apple’s 30% sale cut licence fee to consumers.
Platform business models are becoming a key route for the growth and global expansion of SMEs and start-ups, but most importantly, they have become the key route through which incumbent digital market leaders enter adjacent markets and re-invent themselves in the digital era.
Most recently, Apple’s introduction of Apple Fitness+ has been seen as an attempt at entering the Fitness sector and a jab against workout subscription platforms Peloton and Fitbit. Considering that there has been a global expenditure of nearly $1 billion on health and fitness apps in H1 2020, the Apple Fitness+’s launch illustrates the leveraging of data to create rich and personalised experiences. The fitness subscription service is designed to integrate with Apple Watch, which has already seen a large-scale use for its health stats tracking. Once the announcement of the subscription service was made, Peloton shares slipped in premarket trading while Apple rose 1.5%. Considering that Apple’s services segment is one of the company’s fastest growth areas, its progressive entrance into adjacent subscription services should not be underestimated.
The real impact
Platforms are currently reshaping production, consumerism and business transactions, while they have the potential of allowing SMEs to reshape the industrial landscape. For this to happen however, policy leaders should intervene and allow for innovation and collaboration to take place seamlessly in order to preserve contestable markets. As an example, APEC’s MSME Marketplace for micro, small and medium enterprises has been successful in setting up an online portal through which there is facilitation of business matching for MSMEs, funders, innovation centres, incubators and other stakeholders, by providing open access to information and building a network among MSMEs for growth.
Through support of policy makers, both entrepreneurs and traditional incumbents who are currently struggling to make a name for themselves on global digital platforms, can not only take advantage of new avenues of profitability and growth, but also participate in the next wave of industrial transformation.
Want to take a closer look at how tech is transforming other industries? Have a look at our previous article here, on how technology has disrupted the Finance industry through rapid adoption of APIs and FinTech-led services.