Towards a ‘Law of the Platform’? A Regulatory Perspective
Continuing the “inter-platform dialogue” on platforms started by my post last week, we are very pleased to post a guest contribution from Jakob Kucharczyk, Director of Public Policy at CCIA‘s Brussels office, that will also go up on the DisCo blog. I hope you the reader enjoy this exchange of views.
As a trade association representing many of the most popular online platforms, CCIA obviously has some strong views as regards the many elements of the debate on platforms, as well as its roots which Alfonso adequately described in his post. While Alfonso tackled the debate from a competition law perspective, I will look into this debate from a regulatory perspective. As an immediate reaction to Alfonso’s points I have to say that regulation should have one key commonality with competition law enforcement: it should be a fact- and evidence-intensive exercise. However, very often there is a difficulty in Brussels to frame the regulatory debate against actual market dynamics and facts. While regulation is somehow bound to be subject to greater political influence than competition law enforcement because of the legislative process, good regulation should at the minimum be based on the concrete identification of economic or societal problems that merit regulatory intervention.
As the initiator of legislative proposals at European level, the Commission has extraordinary responsibility to base proposals on solid evidence in tune with its recently announced better regulation package. I guess in competition law terms one can say that in light of the Commission’s quasi monopoly on legislative initiatives is carries a special responsibility.
So let me start this dialogue with some good news and insights into Europe’s digital economy which I think are worthwhile to keep in mind when discussing online platforms.
Investment into European E-Commerce Ventures is Booming
Alfonso mentioned how political frustration with competition law enforcement in digital markets led to increased regulatory pressure on platforms. The mythical ineffectiveness of competition law, however, is often accompanied by a political belief that European online players are unable to compete in a market ‘dominated’ by mostly American players. This might explain why European policymakers seem quite willing to explore the regulatory path since intervention would not primarily hit European interests. I will discuss this argument later but for now let’s shed some light on the market. At CCIA we wanted to have insights from investors, people who are detached from Brussels and who invest ‘real’ money into e-commerce ventures. What do they think about the chances of European e-commerce companies?
Well, here is the good news — they seem to be very optimistic. Investments into European e-commerce ventures are booming. Our friends from ‘The Analyst’, an independent equity research house based in London, found investments into their study’s sample group of 25 publicly traded, pure e-commerce companies have increased by 27 times over the last three years. Capital inflows into the sample group of 500 private e-commerce companies, many in the startup/early development phase, increased by 4.5 times in the same period. In aggregate numbers, since 2012 the group of 25 publicly listed e-commerce companies raised €12 billion and the group of 500 private companies raised over €5 billion. Yes, money is essentially pouring in and the report illustrates several success stories in fashion, real-estate, and food delivery, whose range shows how the e-commerce market is becoming more diverse. (You can see Mark Hiley, CEO of The Analyst, speaking about the report here).
While these findings are a snapshot of the e-commerce sector, they confirm the one of the main characteristics of digital markets: very low barriers to entry (see e.g. here for our previous discussion of this theme). European e-commerce ventures are vibrant and in the process of greater diversification. Investors continue to bet on this positive development. All of this is indicative of healthy market dynamics and should send a clear signal to policymakers. European businesses are competing and platform regulation as a tool of industrial policy would be misplaced. In fact, increasing regulatory barriers might go the other way and stifle this development because it benefits today’s ‘incumbents’. In all likelihood they will be able to deal with more regulation which will shield them from more agile competitors. Policymakers need to keep this potentially disproportionate impact of regulation in mind when weighing the pros and cons of intervention.
Definition of ‘Platform’ – The Never Ending Debate
Let me give you examples of Europe’s e-commerce success stories: in only eight years, Germany’s Zalando became Europe’s largest mass-market fashion e-tailer. Rightmove has become the UK’s leading residential property portal, providing services to estate agents. Italian-Swiss Yoox/Net-a-Porter operates the leading online, luxury apparel portal in Europe and after only four years the online food ordering platform Delivery Hero operates in 34 markets across five continents.
Apart from being successful and growing businesses, what else do these companies have in common? Of course, they are all platforms. But is that true? Alfonso rightly suggested that the answer to this question may not be easy as we currently witness a lot of blind men trying to describe the elephant — hence definitions are quite subjective. Therefore, let’s have a look at the definition provided by the Commission in its consultation on platforms. Interestingly, it does make sense but it seems that the consultation is inconsistent in the application of that definition. The consultation states that an online platform is “an undertaking operating in two (or multi)-sided markets, which uses the Internet to enable interactions between two or more distinct but interdependent groups of users”. However, it is not clear why a company like Netflix, which is explicitly mentioned as an example, would fall under that definition because it essentially functions as a retailer for audiovisual content. While there might be network effects, there is no direct interaction between content rights owners and consumers. Netflix negotiates with rights owners, ‘stocks’ the content at own risk and offers it to its subscribers. Amazon as such, for example, does also not fit neatly under the definition. Amazon’s online retail business is a one-sided market while its open marketplace does indeed bring together two distinct but interdependent groups: sellers and consumers. Today Zalando operates an online retail business in a one-sided market. Should it change its business model and open its site to third party sellers, just like Amazon did, it would suddenly fall under the Commission’s definition of an online platform.
These might be nuances but it shows that it is extremely difficult to bring every business model under the term platform, particularly when it’s not clear whether the regulator will stick to the definition of companies operating in at least two-sided markets or whether the debate will encompass all kinds of online companies that are somehow perceived to be important — maybe politically too important to fall outside the scope of the definition. I don’t think that a broad definition of platform makes sense for regulatory purposes as they would essentially encompass every company’s webpage. If the Commission was to strictly stick to its own definition and hence focus on two- or multi-sided platforms the question becomes, just like under competition law, whether two-sidedness is indeed enough to matter. In order words, why should two- or multi-sided online businesses attract greater regulatory intervention than other online businesses? Regulators should think about this carefully as we could end up with asymmetrical regulation that could impact future innovation. Alfonso raised this issue in the context of ex post enforcement and in my opinion regulators should be particularly sensitive to this problem because regulation sends strong signals to the market and influences companies’ future business decisions. Asymmetrical regulation could become particularly problematic, or let’s be more positive and say ‘interesting’, for today’s platforms that have a hybrid business model with both one-sided and multi-sided platforms on one and the same platform. Now imagine a platform innovates from a purely one-sided business model to a hybrid business model. For example, if Netflix was to open up its ‘platform’ to advertisers it would arguably introduce some degree of two-sidedness to its business model. Why should that attract greater regulatory intervention?
Are We Only Talking About Digitally-Born Companies?
Needless to say, in most regulatory initiatives stakeholders fight about the scope of legislation. Being inside or outside a given legislation obviously has an impact on your business — the current debate over the scope of the Network and Information Security Directive (NIS) is a good example of how fierce these fights can be. It is therefore interesting that in the platform consultation the scope of the term ‘platform’ seems to be limited to digitally-born companies. The list of company examples right at the beginning of the consultation principally covers digitally-born services such as Booking.com, Spotify, Netflix and Google News. The problem with this approach is that it potentially turns a blind eye to one of the most fundamental developments in the last decade: the digitalization of the whole economy and widespread platformization.
Today, traditional retail businesses like Carrefour have an online shop, car companies become the ‘smartphone on wheels’ and newspapers have long recognized that their readership has moved from paper to tablet. All of these examples would fall under the Commission’s current definition of ‘platform’ and hence under the scope of this exercise (and potentially under any future regulatory intervention). Furthermore, all of these business models often compete in the same market. For example, if you want to buy diapers you could use Amazon or Windeln.de, the leading online retailer of baby and toddler products. You could also just go to your local store close by or order through Carrefour’s webpage. The key point for regulators to keep in mind is that it would not make sense to treat digitally-born platforms different from traditional companies that have gone digital. Digitally-born companies are just a part of an economy that has largely moved digital. Again, platform regulation would risk catching just about anyone with an online presence.
To be clear, it is totally appropriate for a regulator to seek information and consult before potential regulatory steps. However, the truth is that the debate and consultation on platforms has to been seen, just like most debates in the regulatory world, in its proper context. The consultation essentially functions as a political pressure release mechanism in that it addresses all kinds of problems that are levelled against the biggest and most popular online companies by business players as well as by some of Europe’s politicians. You could probably consider it as living proof of President Juncker’s more political Commission. Accordingly, plenty of room is left for complaints increasing regulatory pressure for the whole sector, not just the often handful of companies that most have in mind when talking about ‘platforms’.
To summarize the above, policymakers and regulators should keep the broader, macro-perspective in mind as the debate on online platforms moves forward. First, online platforms operate in a highly dynamic and competitive environment. Digital markets are characterized by very low barriers to entry which fosters competition. Yes, that also works for the benefit of European online ventures. At least investors, people with real skin in the game, flood European e-commerce ventures with money as they diversify and conquer niche markets. This is indicative of healthy and competitive platform ecosystems which puts the bar for justifying regulatory intervention very high. Second, regulation, which is ultimately expressed in law, needs proper definitions. Currently we don’t debate on the basis of an agreed definition of ‘online platform’. The Commission’s suggested definition in its consultation is applied inconsistently. Are true two- or multi-sided platforms the kind of businesses we want the regulatory debate to focus on? If yes, what is the economic or social justification for it? Last but not least, targeting digitally-born companies simply does not make sense. Digitization runs through just about every sector in our economy and traditional ‘offline’ players have become platforms. Sometimes I do ask myself what companies like BMW, Axel Springer or Carrefour think about this debate.
I hope that this will frame our ongoing ‘inter-platform’ dialogue as we move forward to discuss concrete regulatory matters. For those of you who don’t know, the platform consultation is actually not just about platform macro-issues, but also about detailed questions on some key EU legislation for our sector. Our upcoming posts will deal with these micro-regulatory issues in greater detail.
Jakob Kucharczyk is Director of Public Policy at CCIA’s Brussels office. He covers policy and legal issues on e-commerce, intellectual property, competition and digital markets in general.