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Archive for November 6th, 2014

Modularity and competition for bundles: is à la carte Android à la carte enough?

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Smart a la carte

The slides on the Android investigation Alfonso uploaded a few weeks ago got me thinking. In many ways, this is a dream case for an academic. As in Macondo, everything is so recent that many things lack names. Fertile ground for categorisation, which is what I enjoy doing and, more important, what I happen to do for a living. On a related note, and since it has become de rigueur, allow me to disclose that I have absolutely nothing to disclose.

As I see it, the Android investigation is guided by two main themes: modularity and competition for bundles.

Modularity – I see in the case a value chain composed of three main layers: mobile handsets, operating systems and, on top of them, a set of core applications. Interestingly, not all firms follow the same business model. The different strategies relate to the different degrees of modularity each of the firms is willing to accommodate. By modularity I mean the extent to which the three layers are integrated with one another. At one extreme, there is Apple, which does not seem to allow for modularity (its handsets, and only its handsets, feature iOS, which comes with its own set of core applications). At the other extreme, there is Google, which allows for maximum modularity, at least in relative terms (Alfonso tells me that this point was not disputed at the conference). Android is offered to third-party manufacturers and made available – at the very least in theory – with or without Google’s core applications.

It is important to bear in mind this issue when trying to make sense of potential competition concerns. Because different degrees of modularity lead to different business models, one may fall into the trap of comparing apples (unintended) and oranges. In other words, one cannot simply cry ‘predatory pricing’ in relation to the distribution of Android to mobile handset manufacturers without taking into consideration that Google’s business model differs from Microsoft’s. It would be like claiming that Metro and the Evening Standard engage in predatory pricing simply because – unlike The Guardian or The Times – their papers are given away for free to tube users.

At the same time, the fact that Apple, Microsoft and Google allow for different degrees of modularity may make us lose sight of the fact that they are rivals and put competitive pressure on one another. ‘Thank you, Captain Obvious’, more than one reader must have thought, ‘otherwise there would be no complainants and no investigation on Google’s practices’. To which I answer: ‘Sure. But before we jump into any conclusions about bundling claims we need to understand how these firms compete with one another’. Which brings me to the second theme.

Competition for Bundles – Competition in the industry very much reminds me of rivalry in pay TV among cable, satellite and broadband operators. These operators try to attract subscribers by offering a combination of channels to viewers. It would be really awkward to claim that bundling in this context is anticompetitive. This is how competition is organised in the industry, and there is a compelling logic behind it. The fact that it would be awkward to bring such a claim does not mean that nobody has tried to do so. The argument was given a shot in California (there must be something in the water) and of course failed miserably before the US Court of Appeals for the Ninth Circuit.

Apple, Google and Microsoft also compete by offering a bundle of core applications. Several important conclusions follow from this fact, in my view. Dominance (that is, the extent to which Google is subject to effective competitive pressure) should be assessed at the level of the bundle, not at the level of individual applications. In other words, the alleged practices should be understood in a context in which players compete by offering a set of applications, not by offering them à la carte. Requiring Google to offer its applications à la carte ignoring industry dynamics would be as awkward as requiring cable operators to offer TV channels à la carte. Wondering if somebody has given this one a shot? Yes, and no other than Senator John McCain.


Written by Pablo Ibanez Colomo

6 November 2014 at 7:26 pm

Posted in Uncategorized