Responses to Questions on the Inquiry into ‘Online Platforms and the EU Digital Single Market’ by the Internal Market Subcommittee of the Select Committee on the European Union, House of Lords [For background see the Digital Single Market Strategy for Europe]
Submitted by Professor William H. Dutton and Professor Thomas D. Jeitschko, Quello Center, Michigan State University, USA.
Electronic marketplaces and online platforms are relatively new formats for exchange, and require far more research on their use and impact before there is clarity on their effective regulation and governance. A central motivation for a single market for Europe is the potential for enhancing the competitive position of Europe and its nations in the global economy. If the EU were to move forward on the range of regulatory initiatives that drive this call for evidence, would Britain and the other nations of the EU be in a more competitive position in an increasingly worldwide digital economy? We are concerned that the regulation of online platforms is likely to undermine Internet innovations in Europe, by European entrepreneurs, businesses and industries, and thereby harm the competitive position of the European economy.
Our responses to the questions of the Inquiry explain the rationale behind this concern.
1. Do you agree with the Commission’s definition of online platforms?
The types of platforms identified by the Commission define much of what we identify as the Internet, broadly defined, to include the means by which consumers access and interact with each other and business and public services over the Internet. All devices used to access the Internet, and its various online platforms, and the Web, are critical elements of the Internet’s infrastructure and services. In addition, the types of online platforms identified in the Inquiry are not separate, but interwoven in most real world cases. They are defined by their purposes, such as collaboration, communication, or information propagation, dissemination or exchange, but these various purposes are often supported by the same underlying software and systems.
A contemporary approach to regulating the Internet is analogous to the old Indian parable of the blind men and the elephant: focusing on any one aspect—no matter how accurate in detail, will fail to recognize the interconnectedness and interdependence of the whole. In this sense, the Inquiry puts its hand on different parts of the Internet and seeks to design regulation around each part. The sum total of the regulatory regimes it will yield are likely to create obstacles to innovation of each part and the whole. Moreover, in the process of moving in this direction, the establishment of such a piecemeal regulatory regime will create uncertainties and barriers that will diminish investment and innovation, and potentially advantage dominant businesses within the Internet industry, which have the scale to support the legal and administrative costs of negotiating through this regulatory complexity.
2. How and to what extent do online platforms shape and control the online environment and the experience of those using them?
The platforms enumerated define a large proportion of what people do online, such as collaborating, communicating and furthering information exchange. However, the list provided is already dated, illustrating the degree that any delineation of these platforms will be quickly out-dated and will inevitably be incomplete. For example, they miss most of the developments that will increasingly define the Internet, such as the developments around device-to-device communications and the “Internet of Things”, including, incidentally, the many specific uses and applications that have become instrumental in facilitating access to markets and securing value chains in developing countries today.
Nevertheless, it is clear that the online platforms enumerated by this Inquiry are of growing importance in terms of money transferred, and time spent on them for both accessing information, entertainment, and services. For example, an increasing proportion of time is spent on social media, and the mobile smartphone is rapidly becoming a nearly ubiquitous device for access to the Internet and most online platforms. Yet smartphones are only one of a growing variety of devices, from mobile devices to personal computers and televisions, that users will employ to access information and people online – all parts of an rapidly evolving Internet infrastructure.
3. What benefits have online platforms brought consumers and businesses that rely on platforms to sell their goods and services, as well as the wider economy?
It is difficult to imagine a successful business or industry that does not utilize the Internet for access and use of many of the platforms defined by the Inquiry. In a number of the most rapidly developing economies, such as in China, users are employing many of these platforms, such as social networking, far more than are users within the nations of Europe and North America. Regulation of these platforms in Europe will almost certainly magnify this differential in the coming years, potentially shifting the locus of user-driven innovation to Asia and the global South.
4. What problems, if any, do online platforms cause for you or others, and how can these be addressed? If you wish to describe a particular experience, please do so here.
The key issues are the privacy and security of personal information, and competition – with the advantages of scale fueling increasing concentration in such areas as search. These need to be addressed by adherence to principles that are common across the platforms, and not uniquely designed for each specific platform in ways that must be constantly up-dated. However, it is important to recognize that information—including personal information—is being made readily available by consumers. Increasingly, the questions surrounding the handling of personal information are less about whether information can be kept private, and more about how information is handled and managed in a manner that is consistent with consumers’ expectations and self-identified interests. An analogy is the degree to which governments need to move from traditional information silos to information sharing across departments, and locations. This is a major and long-term evolution of a culture and appropriate practices that support sharing in the ways intended, and that prevent the misuse of information by any one of the many parties involved in this process.
5. In addition to concerns for consumers and businesses, do online platforms raise wider social and political concerns?
Broadly defined, the Internet, including online platforms, has generated a variety of social and political concerns, such as around empowering individual users, for better or worse. However, a great number of these concerns have risen to levels that are not proportionate to the likely harms, approaching contemporary ‘moral panics’ that often accompany most new technologies, such as television in an earlier era. This can lead to inappropriate and disproportionate reactions, such as arresting an individual for a single bad 140 character Twitter message. The democratic empowerment of individuals is a concern in autocratic nations, but even there, this role of the Internet is countered by many levels of control by the state and other institutions in ways that temper the actual consequences of use. The most valuable approach to most of these concerns is learning and education about how to appropriately use the Internet, what some call schooling in ‘digital citizenship’.
6. Is the European Commission right to be concerned about online platforms? Will other initiatives in the Digital Single Market Strategy have a positive or negative impact on online platforms?
Given the growing importance that the Internet, and platform markets in particular, play in modern societies, there is certainly a need to foster a better understanding of how these shape society. However, as noted in our introduction, it would be premature if not outright foolhardy to undertake some of the measures proposed in the Digital Single Market Strategy which are sure to not only reduce innovation and the development of the Internet industry across Europe, but also undermine all government, business and industries that will be increasingly using platforms that will become dated and frozen by regulation. Creative software developers will go elsewhere, and all businesses will be left behind in a worldwide digital economy. Inherently dynamic markets feed off innovation, which is at risk of being curtailed. Our fear is that these initiatives will harm Europe, and innovation in Europe, which is a diminishing portion of the global Internet population.
7. Is there evidence that some online platforms have excessive market power? Do they abuse this power? If so, how does this happen and how does it affect you or others?
There is evidence of concentration in such areas as search and social networking. However, in this context, it is important to emphasize that the understanding of competition in these (multi-sided) markets is at a very early stage of development, although it is quickly evolving: There is a larger literature on competition in these markets in static settings, but it is also recognized that the markets in question are inherently very dynamic markets; and models of dynamic competition in platform markets are only beginning to take shape. Current research addressing competition over time (e.g., entry, exit, foreclosure, growth and decline) in these markets is of high quality, but is still in its infancy. It is likely that some general insights will soon emerge concerning how platform competition is most beneficial to consumers, but we are still a few years away from this knowledge crystalizing. The most important insights to be had concerning the potential for excessive market power and its possible abuse are tied to a better understanding of how potential and actual entry and displacement of incumbent platforms takes place in these markets.
Moreover, as suggested above, these markets are evolving quickly as well—so that general insights that may be gleaned today are likely to be outdated tomorrow. These dramatic changes are primarily driven by innovation, rather than shifting demand. Therefore, anything that serves to solidify or corral market dynamics, such as through regulations, may well have adverse and unanticipated affects. These might be compounded in markets where emerging innovation is likely to take place, but may not have come to fruition yet, such as in the UK where there is a strong creative economy, evidenced by the UK being a net exporter of media.
Another implication of (pre-mature) regulatory efforts is that innovation may be adversely affected in other areas that are not the target of the regulation but where regulation feeds though the market into those other areas. It is not uncommon to see innovation cross media platforms and markets, thus generating new market structures. For example, if one of the sides of a multi-sided market is subject to regulation, then this naturally feeds into the other sides and is likely to affect platform competition in unanticipated ways. This can have further knock-on effects by requiring regulatory responses to the innovation around regulation in other areas. As a result there is a real potential for a regulatory patchwork to emerge from such initiatives that becomes incoherent and internally inconsistent. This will have adverse effects on innovation, without any offsetting benefits to consumers – even in the short run.
8. Online platforms often provide free services to consumers, operate in two- or multisided markets, and can operate in many different markets and across geographic borders. Is European competition law able adequately to address abuse by online platforms? What changes, if any, are required?
Many traditional regulatory approaches cannot be applied easily to the online environment. A central problem with contemporary efforts to regulate the Internet involve the transfer of models from older media to the Internet, such as in treating Internet intermediaries, for instance Internet Service Providers, as if they were broadcasters. Likewise, competition laws and regulations need to be reconsidered for online platforms that are potentially global in their reach. For example, there is an inherent tension between large network effects, and competition on price and quality. Most generally, there is an interconnectedness in multi-sided markets, in which the economic understandings and insights that are known from one-sided markets do not readily carry over to multi-sided markets. This is an area in need of research and development of regulatory principles, and not the simple but most often inappropriate transfer of conventional models to very new and different media.
9. What role do data play in the business model of online platforms? How are data gathered, stored and used by online platforms and what control and access do consumers have to data concerning them?
Data have become an important aspect of the business models of online platforms, but also central to many other aspects in a self-reinforcing manner. Data on search can improve search for example. It is important here to note that in most cases, data is used to provide a better service. For example, data on an individual’s location is obviously critical to providing that person directions to another location. For such reasons, it is often in the consumer or citizen’s interest to provide personal information. The key issues are around the provision of information collected for one purpose by one provider to be sold to third parties for other purposes. In many cases, this can also be advantageous for a consumer, such as in saving time by preventing them from providing the same personal information to every provider—this is the basis for so-called lead-generators. However, there is a need to find suitable mechanisms to insure that users can understand and agree to the provision of personal information. Present approaches to advise and consent agreements appear to be leaving too many consumers with little real choice, should they wish to use a service, and also ill-informed of potential risks.
10. Is consumer and government understanding and oversight of the collection and use of data by online platforms sufficient? If not, why not? Will the proposed General Data Protection Regulation adequately address these concerns? Are further changes required and what should they be?
General Data Protection Regulations are not adequate for traditional services, such as by creating uncertainty over what is personal information or sensitive personal information. Weaknesses of data protection need to be addressed and also brought into the digital age of social media, where most consumers and regulators do not understand how data is collected and used, creating inadequate responses and unnecessary fears. There is a need for innovations that can help consumers and other users know who uses what data for what purposes, such as the development of micro-payments to consumers when their data is utilized. This has been proposed many times over the decades since the 1960s, but is becoming increasingly feasible through developments in big data analytics.
11. Should online platforms have to explain the inferences of their data-driven algorithms, and should they be made accountable for them? If so, how?
Many proprietary businesses develop algorithms that are critical to their services, and define their strategic advantage in their field. Search algorithms are a prime example. Ideally, competition would reduce concerns over the exact features of any algorithm. Consumers would choose the best search firm, for example, based on the criteria critical to the users, whether it be ease of use or the quality of results. Open and transparent algorithms are available for use by developers, but the creation of a globally competitive industry in Europe will not be fostered by any one single model, open or proprietary. Different companies should be able to protect certain algorithms as intellectual property in competition with other service providers.
12. Can you describe the challenges that the collaborative economy brings? What possible solutions, regulatory or otherwise, do you propose?
The concept of a collaborative economy is novel, but it leaves out much of what is critical to online platforms. Unless collaboration is defined very broadly, many activities online are not collaborative directly with other individuals. That said, the success of distributed collaboration, such as in citizen science and conceptions of the wisdom of crowds, is dependent on reaching a scale of users that could not be achieved without truly global reach. For such reasons, one of the greatest threats to reaping the benefits of collaboration within national markets and even more internationally, through the power of online connectivity is the premature stifling of innovation through regulations that curtail innovations in this area.
13. How are online platforms regulated at present? What are the main barriers to their growth in the UK and EU, compared to other countries?
Most of the advanced industrial nations have sought not to regulate or minimally regulate the development of the Internet and its services. This has been largely driven by a technology-led industrial strategy. Light regulation of the Internet has generally supported rapid innovation, moving the Internet from an interesting innovation in the aftermath of the dotcom crash to become a critical infrastructure of contemporary digital economies and societies. Nevertheless, at the very time in which the Internet and its associated platforms, are increasingly basic arenas of rapid innovation potential, regulation and governance of how people use the Internet is expanding. First, it should be clear that laws and policies in the offline context apply in the online context – the Internet or online platforms are not the Wild West. Basic laws, such as around fraud or theft, apply online as well as offline, but require up-dated definitions of traditional conceptions of property, for example, and new perspectives on approaches to enforcement. In addition, many private platforms develop their own regulations to govern users. Indeed many online communities appear to be finding more effective ways to self-regulate and enable social regulation – such as creating mechanisms for members of online communities to provide better feedback (not just a ‘Like’ button). This, too, is a dimension of competition and innovation between platforms and market places.
14. Should online platforms be more transparent about how they work? If so, how?
Not necessarily. There should be opportunities for the development of proprietary systems, as well as open standards and open source software. No one model should be imposed on the Internet industry. A more open approach not only allows for further exploration, development and innovation of new models, but it is also reflective of the highly heterogeneous uses and needs of consumers that access and make use of the Internet. This is clearly an area where the one-size-fits-all approach will restrict what to many is most valuable about the Internet. Indeed, the rapid growth of the Internet is tied precisely to its ability to allow for many different and often unanticipated purposes to be fulfilled by diverse populations of users through bottom-up innovations.
15. What regulatory changes, if any, do you suggest in relation to online platforms? Why are they required and how would they work in practice? What would be the risks and benefits of these changes? Would the changes apply equally to all online platforms, regardless of type or size?
There is a definite value that could be gained by more learning and education about the use of online platforms. This should be aimed at all age groups and levels. For example, children may find it easy to play with a tablet computer, but they need to be taught how to communicate with people online and respect the rights and dignity of other users.
That said, we emphasize our concerns and our resulting recommendation that the EU move slowly and cautiously towards any further regulation of the Internet through online platforms.
16. Are these issues best dealt with at EU or member state level?
There are likely to be local, regional, national and global issues. The future of the Internet and online platforms will be advantaged if most issues can be moved to a global level, where multistakeholder governance can inform approaches. However, a likely but worrisome development is evident around moves toward the so-called ‘Balkanization’ of the Internet as nations increasingly assert national regulatory authority over global technologies, such as in moving towards data localization in order to control the regulatory regime governing personal data. More issues will move to more local levels, and this will most likely undermine the vitality of Internet innovation in those nations that insist on exerting more national sovereignty.
William H. Dutton is the Quello Professor of Media and Information Policy in the College of Communication Arts and Sciences at MSU, where he is Director of the Quello Center. Bill was the first Professor of Internet Studies at the University of Oxford where he was founding director of the Oxford Internet Institute (OII). While at the OII, he served as chair of Ofcom’s Advisory Committee for England.
Thomas D. Jeitschko is a Professor in the Department of Economics and the Associate Dean for Graduate Studies in the College of Social Science at Michigan State University, and a Research Associate of the Quello Center. Professor Jeitschko previously worked as a research economist in the Antitrust Division of the U.S. Department of Justice, where he analyzed mergers and potentially anticompetitive behaviors.