II Platforms in the Communications Industries

To date, the communications industries are the network industries that have been most deeply affected by the rise of the digital platforms. Communications platforms are the most mature platforms; their pools of users have grown into the billions and display the largest network effects in human history.

Network effects are particularly relevant in the communications industries. This part of the book starts by describing how network effects drove the business strategy of the early telephone companies. Lessons from the early days of telephony, and from the regulatory response to concentration driven by corresponding network effects, are still of interest today. Clear parallels can be drawn between the rise of the telephone monopoly and the rise of the digital platforms. We will also show how the new network effects driven by connecting computers to the network were the reason for the divestiture of the telephone monopoly in the US and the liberalization of telecommunications all over the world. In short, the telephone monopoly was the first victim of digitalization.

Furthermore, postal services are among the best examples of disruption by digital platforms. Web-based email services have substituted traditional letter mail services provided by postal operators. The US Post Service identified the threat of email as early as 1976, but could still not avoid the substitution of mail.

Telecom services, both telephony and messaging services, have also been disrupted by platforms such as Skype and WhatsApp. However, disruption has taken a different form. Traditional telecom carriers have not been substituted. Their infrastructures and services remain relevant, as they are used by platforms to build their own network effects on top of the network effects built by traditional carriers. Platforms extract value from the telecoms market and threaten the position of traditional carriers as organizers of the market. Finally, platforms such as Apple’s and Google’s app stores have excluded carriers from the value chain around mobile apps.

Media services are also disrupted by digital platforms. On one hand, they have been substituted as new platforms such as YouTube and Facebook have attracted the attention of larger audiences, and therefore an increasing share of advertising revenue, thanks also to the new algorithmic network effects. On the other hand, traditional media are platformed, as Google and Facebook are increasingly intermediating them. Traditional media receive a significant share of the traffic to their digital sites from the platforms. Platforms such as Facebook aggregate content from all sources, as well as traditional media, and drive audiences to the content of their choice. Content producers are increasingly working for Facebook’ and Google’s algorithms. At the same time, Google already intermediates in thecommercialization of advertisement space by traditional media, capturing an important share of advertising value.

These evolutions are posing new regulatory challenges. As traditional networks and platforms compete, there have been calls for a more level playing field. The different liability regimes are an issue. An additional issue is the divergence in the way regulation reacts to concentration. While fragmentation is an explicit goal in the regulation of traditional telecom carriers and media, platforms have been allowed to grow to global domination, as no specific regulation limits their growth, and antitrust enforcement has been timid, to say the least.

As platforms get to intermediate traditional services, the vertical relationship between platforms and the underlying communications service providers becomes more relevant, particularly the conflicts of interest in the management of platforms, as they vertically integrate and self-preference their services. The net neutrality regulation imposed on telecom carriers seems increasingly misdirected, as platforms grow larger network effects and are in the position to commoditize telecom and media services. On the contrary, there are growing voices calling to regulate platforms and take into consideration the impact of platforms on the general interest that has always driven public intervention in the telecoms and media industries.

Chapter 6

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