Substitution

Just like any other industry, traditional network industries can be disrupted by digital platforms. Disruption can take the form of substitution, but the special characteristics of the network industries makes substitution more difficult than in other industries.

It is only in some exceptional circumstances that digitalization has produced a substitute for the service provided by a network industry; the most illustrative example here is letter mail. One of the very first applications developed over the TCP/IP protocol was electronic mail (email). Subsequently, online platforms started to offer email services (Hotmail, Gmail, Yahoo Mail, etc.) and traditional telecommunications operators also started to provide email services. Email has substituted traditional letter mail services to a substantial extent. In the US, for example, total postal volume decreased by more than 27 percent between 2006 and 2016 (from 213 billion letters to 154 billion).1 Similar substitution, and sometimes even more drastic effects, can be observed among postal operators worldwide.

Email is a prime example of what we will call the product substitution effect. Online platforms develop a new product that substitutes the traditional service provided by a traditional network industry. The new service uses an alternative infrastructure, not the infrastructure of the affected network industry.

However, this effect is of limited relevance in infrastructures, as it is only possible when digitalization completely substitutes the physical element in the provision of the service. This was the case of letters, but it cannot be the case of the provision of physical services such as the transport of goods, people, electricity, or bits. A physical element is indispensable. No purely digital product can substitute the traditional service.

However, digital platforms can substitute traditional players in the network industries, as they build the services on top of new service providers. In fact, it is not the product that is substituted, but the provider. There is always a physical element, which does not disappear, but the provider of the physical service is no longer the traditional service provider; a new one takes its place.

Digital platforms have the power to mobilize small service providers, even nonprofessional ones. The reduction in transaction costs empowers even the smallest provider to compete with traditional well-established players. This phenomenon can be identified in all network industries, even if under different names: user-generated content in communications, the sharing economy in transport, and prosumers in electricity.

In the media industry, user-generated content aggregated by platforms such as YouTube and HuffPost compete with traditional media. The product itself is not substituted, but it is now provided by new players intermediated by digital platforms. Platforms aggregating user-generated content are substituting traditional media.

In transport, taxis are being substituted by small, often non-professional, service providers intermediated by Uber and other platforms. Uber is not deploying its own infrastructures in the form of roads and streets or even acquiring its own vehicles. New service providers (individuals driving their private vehicles or Private Hire Vehicle service providers), aggregated by platforms, are substituting the traditional transport service providers (taxis).

This might also be the case in the electricity industry. Platforms cannot substitute the traditional service providers with a purely digital service. Consumers will always consume electricity. However, platforms can substitute the traditional electricity generators by mobilizing new electricity providers, creating a new network of distributed generators (prosumers who generate their own electricity in their properties).

Platforms are in a position to substitute traditional service providers by mobilizing new service providers or service providers that already exist in the market but are active in a fringe segment on a small scale. The “sharing economy” and the creation of distributed networks are good examples.

In any case, the traditional network industries display some features that make disruption by substitution rather exceptional. Traditional network industries rely heavily on infrastructure that is very expensive to deploy and then to maintain. Such infrastructure will only be substituted in exceptional circumstances. This is the case with messages that can be digitalized and sent as emails rather than letters. However, passengers, cargo, and electricity cannot be digitalized and transported over the internet, so they will always be physical and will require a physical infrastructure to be transported.

For the same reason, there are limited chances that alternative infrastructures will be deployed under the coordination of platforms, in competition with traditional service providers. This can be the case with media content and taxis, but not with roads, railways, airports, electricity grids, and so on.

 
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