I The Digitalization Dilemma in the Network Industries

Digitalization is disrupting the traditional network industries: communications, transport, and energy. As infrastructures are being digitalized, costs for the construction and operation of infrastructure are being reduced. Smart networks empower infrastructure owners to better manage their assets. However, digitalization also opens the door to more profound transformations.

Once an industry is digitalized, it can be disrupted by new players - the digital platforms - as they build new complementarities on top of pre-existing assets by making use of algorithms to manage the available data, whether they are generated by the company itself or not. Digital platforms build new network effects by coordinating the traditional industries in new and creative ways. We call this process “platformization.”

The network industries are being platformized as well. The infrastructures and services that are owned and operated by traditional players are increasingly intermediated by the new players in the data layer (the digital platforms) to create new and larger network effects on top of the network effects that had already been built by the traditional players in traditional network industries.

However, the ways in which network effects are built differ between the two cases. Traditional infrastructure players build network effects by pooling assets and services under one hierarchical structure that owns the infrastructures, provides the services, and coordinates them to fully exploit the complementarities among all these assets. The larger the scale, the larger the network effects, and the bigger the competitiveness of the operator. Digital platforms, by contrast, do not own the assets and do not provide the services, but merely identify the complementarities in the assets and services operated by third parties, subsequently aggregate them, intermediate them with the users, and coordinate the new ecosystem. Such aggregation, intermediation, and coordination is made in the data layer, using algorithms to exploit big data. Investment is necessary to create the network effects, but not as much as to build and integrate all infrastructure assets into one firm.

From an economic point of view, digital platforms exploit a new form of industrial organization that has been subsumed under the term “multi-sided markets.” As Silicon Valley platforms are disrupting traditional network industries, it is useful to have a better understanding of what a platform in a multi-sided market is. In this first part of our book, we will analyze some early examples of off-line platforms such as newspapers, payment cards, and videogame consoles, as well as how digitalization multiplied the relevance of multi-sided markets. We will analyze the rise of the digital platforms, particularly that of the leaders: Amazon, Google, and Facebook.

From there, we will follow with an analysis of the first cases of disruption in the music and newspaper industries. Platforms can disrupt traditional industries in different ways. We differentiate between disruption by substitution and disruption by “platformization.” There are cases of traditional players being substituted by platforms in the network industries (such as email substituting letter mail, platforms substituting traditional media, and Uber substituting taxis), but substitution is exceptional, as infrastructures are usually indispensable and platforms have no ambition to substitute existing infrastructure. On the contrary, they need the existing infrastructure, so disruption in the network industries mostly takes the form of what we call platformization. Digital platforms create their network effects on top of the pre-existing infrastructure assets and services that continue to be provided by the traditional players. These players are aggregated, intermediated, and coordinated in a new way in order to exploit new complementarities, thus creating new and larger network effects.

The risk of being “platformed” presents traditional players with the “digitalization dilemma.” Should they collaborate with platforms and offer their assets to be coordinated by the platforms in order to exploit the largest network effects possible and create new levels of efficiency, or should they refuse to work with the platforms in order to retain control of their assets and ensure that they can be properly funded and that their traditional public service objectives are met? In terms of regulation, this situation raises the question of how to deal with the new vertical relationship between traditional players and platforms.

Chapter I

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