Risk & Economy » Regulation » Can Big Tech survive a backlash?

The tech giants that in recent years have become some of the most powerful businesses of all time are increasingly coming under the microscope.

A debate is raging in the US, where three quarters of the top 20 tech firms are located, about whether they are acting in the public interest. But the main action is taking place in Europe.

Last week Google was fined €1.5bn (£1.28bn) by the European Union for strangling competition in the advertising market. It follows fines levied against the company for its Android phone OS app selection and its shopping service, of €4.3bn and €2.4bn respectively.

Earlier this month in the UK Jason Furman, Barack Obama’s chief economic adviser, concluded that the dominance of the big digital players was curbing innovation and reducing consumer choice in a review conducted for the Treasury.

It follows chancellor Philip Hammond’s announcement last October of a special digital services tax on US technology firms – including Google, Facebook and Amazon – to make sure “these global giants with profitable businesses in the UK pay their fair share”.

But where might these actions end up? Timothy P. Derdenger, associate professor of marketing and strategy at the Tepper School of Business at Carnegie Mellon University, Pittsburgh, believes there is big change ahead for Big Tech.

Prof Derdenger says the Strategic Recommendation B and Recommendation Action 2 from the UK Hammond Report are game changers.  “These two proposals scrutinize, what I believe are, the number one and two methods in which platform firms compete (large or small)—Information/data and acquisitions in related and adjacent markets, respectively,” he says.

“The first dimension is access to data and the quality thereof.  The Hammond Report recommends in action 2 that there should be an opening of data from large tech companies for other companies to leverage.

“This recommendation I believe may have profound effects.  Platforms inherently are information intermediators that facilitating interactions between multiple end users. They do so by developing tools which leverage the data they collect to facilitate the most valuable match possible.

“Firms compete by developing better matching algorithms than their rivals and do so with their most valuable asset, data.  If these platforms had to share its data regarding the activity and users on its platform with rivals, its competitive advantage would be severely diminished and may lead to a fall in users and value of the platform through a decrease in the platforms network effect,” he says.

Takeover strategies considered

The other important area to consider is the area of acquisitions, which Prof Derdenger says typically occur around valuable resources and are based on the principal that a platform business must own the resource whose value is the greatest, e.g., Facebook’s purchase of Instagram.

He says if these acquisitions are not permitted or are severely limited, the mechanism  that led or will lead to the platform’s growth will diminish and a new dominate platform will come into existence, until it is taken over by another platform with a more valuable resource.

“Historically, much of the competition between platforms was based around convergence of devices.  RIM became the number one smart phone device company in the 2000s because of its envelopment into other adjacent markets.

“It first started off as a two-way pager company and then innovated by enveloping the Email, PDA and Mobile phone markets to form its beloved Blackberry. Similarly, Apple and Google enveloped the Blackberry market and overtook them with the envelopment of other markets such as gaming, portable cameras, music players and GPS.  With devices convergence all but complete, platforms are now moving onto services such as video and shopping,” says Prof Derdenger.

When it comes to acquisition strategy, Nico Neumann, assistant professor at the Centre for Business Analytics at Melbourne Business School (MBS), University of Melbourne, says a distinction needs to be made between the business models of the big tech giants and the individual policies that are currently considered in the EU and UK.

He says the most important point raised in the report by Jason Furman is the lack of regulatory interventions regarding the many acquisitions that were made by some of the tech giants.

“I personally don’t see an issue for Amazon here as it is still not a dominating player in terms of category sales apart from books. Apple has made no major acquisition that is of worry and seems mainly under scrutiny for locking users into Apple services and tools.

“This leaves us with Google and Facebook. Google is a tough case to assess as they have expanded vertically across the online universe and not so much horizontally – buying potential competitors – as Facebook did.

“The exception is maybe the purchase of map service Waze, which seemed to have been a clear move by Google to stop a competitor from becoming too important, as Waze was also in talks with Facebook.

“However, Facebook appears to be the most obvious candidate where we must ask: should they have been allowed to buy Instagram or what’s app as well as many other small potential future competitors? Many would certainly say ‘no’ in hindsight,” he says.

Neumann says he doesn’t see the need to break up Facebook, or any of the other companies, but says  regulators should be much stricter with regards to any M&A activity.

“In particular, Facebook must not be allowed to buy any other social-media companies. The natural evolution of social media, whose popularity changes from age group to age group, will then likely change the competitive landscape over time,” he adds.

Business models threatened?

Tepper school’s Prof Derdenger says the platform business model is quite ingenious and flexible. It has shifted a manager’s thinking from a profiting alone strategy to profiting together.

“Businesses now think about whom to cooperate with to bring more value to the ecosystem and the incentives needed to outsource innovation to third parties.  But a platform business does have its rigidities.  The most notable is the reliance on network effects for scale—this is the key to many tech companies.  Thus, any regulation that is detrimental to a platforms network effect will be detrimental to its adoption and the life of its ecosystem,” he says.

Prof Derdenger says historically antitrust laws were built around limiting market power (scale) and incentivizing innovation for the betterment of the consumer.  With platforms, however, scale doesn’t necessarily lead to a lack of innovation.

“If regulators are not careful and incorrectly regulate, we could end up with a revolving door of platforms with no valuable ecosystem. Leaving consumers with higher search/transaction costs and less innovation around the platform’s value unit in movies, games, stays, cars,” he says.

MBS’s Neumann says the only company with a business model that appears under serious threat by the new policies is Facebook. He says the tech giant’s main income is through selling ads, in particular highly-personalised ads that use the trove of consumer data Facebook can access. “In that sense, Facebook is quite inflexible and most vulnerable among the big four. For example, would many people really pay for Facebook?” he asks.

“Any new strict policies on being responsible for content dissemination and user privacy are most likely to hit Facebook the most, as Google’s income is tied to search ads which are less susceptible to privacy concerns and misuse. Any higher scrutiny over new acquisitions by the tech giants would also ensure that Facebook’s power is likely to diminish in the long run,” he adds.