In “Regulating Digital Platforms: Business Models, Technology Architectures, and Governance Rules,” Panos Constantinides, of the University of Manchester compares digital platforms with traditional utility networks (i.e. water, electricity) to find out if some of the lessons learned when these natural monopolies were regulated in the ‘90s can be applied to new technologies.
Below, read excerpts of the piece:
Early utility infrastructures, as the new digital platforms also held high market concentration. These infrastructures were thought to be most effectively managed through natural monopolies, with national or state governments often regulating such monopolies to benefit from economies of scale, while avoiding duplication of costs.
Ex ante regulation for breaking these monopolies and establishing more competitive policies that would drive down prices and accelerate innovation were eventually introduced even though many monopolies still remain, especially in energy and water supply.
Some have argued that digital platforms, exactly because of their gatekeeping position, their ability to standardize production and consumption, and generate strong network effects with high switching costs for users should be regulated like early utility infrastructures. However, digital platforms exhibit several differences that make utility regulation broadly inapplicable.
Digital platforms have very distinct technological architectures that enable different business models for the production and consumption of digital products and services. Digital platforms are built on layered modular architectures, which are product agnostic. This means that they are not contained within single industries or market sectors as in the case of utility infrastructures. Market boundaries are permeable although the value that a digital platform generates for users and third parties can produce strong network effects, that value is not solely dependent on supply of services by the platform orchestrator. Much of that value is cocreated through demand-side economies of scale. Without platform participants, including end users and third parties such as app developers and advertisers, the platform itself becomes less valuable.
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By contrast, utilities infrastructures feature strong supply-side economies of scale, with suppliers capturing all the value for themselves. The products and services delivered through these infrastructures, such as electricity and water are standardized and homogeneous with no opportunities for differentiation other than cost. There are limited value creation opportunities for third parties relative to digital platforms, because utility infrastructure offerings are bound within a highly specific market. Innovation is mainly focused on the maintenance and improvement of existing physical infrastructures (e.g. upgrades to 5G telecom networks). In contrast, digital platforms benefit from constant innovation across boundaries and thus new value creation and capture opportunities.
Finally, digital platforms have different governance rules and control mechanisms for orchestrating the production and consumption of services. Governance determines how a digital platform creates, delivers, and captures value, by creating incentives for participation, rules of competition and setting up barriers to entry.
Based on the above discussion, it becomes evident that digital platforms have very distinct market, technology, and governance scopes than utility infrastructures.
The market scope of a digital platform defines its business model. Unlike utility infrastructures that are subjected to ex ante regulation to apply fairly uniform business models, digital platforms operate a spectrum of business models. Digital platforms are often found to set the rules of competition on their platform, while at the same time participating in the same markets and generating revenue and growth from both.
Regulations such as the European Digital Markets Act are good starting points as ex ante regulation for digital platforms because they focus on user base growth and revenue size to scrutinize gatekeeping activity. However, where they need further refinement is in understanding the interdependencies between the market, technology and governance scope of digital platforms that affect competition dynamics both within and across platform ecosystems.
The focus should not be on revenue and user base growth alone, which are the measures used by the Digital Markets Act to define a gatekeeper, but rather the technological architecture that enables apps to interconnect and how and with what impact for competition, as well as the governance rules for how value is created and captured by platform participants.
Digital platforms have the ability to respond to changes in different markets, adapt and even pivot to leverage new growth opportunities exactly because of their digital nature. They are not bound to the type of physical barriers that bound utility infrastructures nor are they constrained by industry boundaries. This makes regulating digital platforms very complex. We need both ex ante and ex post regulatory approaches that can account for this dynamic evolution of digital platforms, by paying attention at their business models, technology architecture and governance rules.
The full article can be found in the TechREG Chronicle , our monthly journal that features articles from experts on technology regulation to drive discussion and debate. To receive this publication, subscribe here.
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