Digital Platforms Are the New Network Industries

It is important to realize that digital network industries rely on network effects just like the traditional network industries did. Direct, indirect, and algorithmic network effects are the reason behind the efficiency and the competitive advantage of digital platforms. Just as traditional network industries transformed the economy and the entire society a century ago, digital network industries are transforming the economy and society today.

Like traditional network industries, the digital network industries rely on standardization and scale. Standardization is a requirement to build scale. Telephone, railways, and electricity infrastructures had to be standardized in order to be integrated into a large-scale network. In the same way, standardization is necessary in order to build large digital networks. For instance, transportation services mediated by digital platforms have to be standardized so that they can be presented to passengers as recognizable services. Even the price must be standardized in order to streamline transactions. Even if digitalization allows the personalization of the services made available to the demand side, such personalization is always a pale mirror image of the rich and often gaudy diversity in reality, based on a profiling strategy that standardizes preferences according to presumed patterns.

Scale is the defining attribute of network industries. Network effects grow as scale grows. Traditional network industries create scale on the supply side by integrating supply into a single monopolistic infrastructure. Demand had to adapt to the single supplier, not always without opposition, as raising prices were feared. Digital network industries build scale as they integrate demand and then connect it with supply. Scale is no longer found in a large supplier, but in a large pool of users of the platform, both on the demand side and on the supply side. It is the size of the platform that creates the network effects, not the size of the suppliers of the underlying service.

These new network effects bring dramatic increases in efficiency. The transformations brought by such efficiencies are as powerful as the transformations brought by economies of scale thanks to industrialization and the corresponding emergence of the traditional network industries during the turn of the twentieth century. Back then, industrialization created tensions and gave rise to social movements as farmers and artisans were displaced. Millions of workers and organizations are again being substituted and displaced today (for example, written and audiovisual content producers, taxi drivers) and millions of individuals and organizations start working for obscure algorithms. Social movements might again be on the rise.

Now, like then, the new network effects are leading to a new round of concentration and market power, this time no longer only at the national or regional level, but also at the global level. Growing concentration and winner-takes-all effects in media, telecommunications, and transport platforms pose a fundamental challenge not only in economic, but in broader social terms, both with obvious political implications.

The concentration of economic and political power seems to be a source of concern today as it was a century ago when the traditional network industries emerged. There are growing concerns about increasing concentration and the role of antitrust to control it.6 With the traditional networks it took more than 30 years to understand the ultimate reasons behind the concentration of power, both the legitimate (scale and network effects) and the illegitimate ones (systematic strategies to monopolize markets) and to define the legal remedies that allow society to fully benefit from efficiency while ensuring the common good. It should not take as long to adapt the existing regulatory framework to the new network industries, once it is understood that they are not that different from the old network industries.

This situation is becoming urgent given that the concentration of economic and political power today is creating similar problems to those faced a century ago: “Corruption dominates the ballot-box, the Legislatures, the Congress [...]. The people are demoralized; [...] The newspapers are largely subsidized or muzzled, public opinion silenced, business prostrated, homes covered with mortgages, labor impoverished, [...], imported pauperized labor beats down their wages, [...]. The fruits of the toil of millions are badly stolen to build up colossal fortunes for a few, unprecedented in the history of mankind; and the possessors of these, in turn, despise the Republic and endanger liberty.” This is not the reactionary and xenophobic declaration of a twenty-first-century anti-globalist. This the text of an 1892 Manifesto by I. Donnelly, leader of the Populist Party.

Network effects are at the center of the digital revolution, which is why we propose to label platforms as the new network industries. We believe that digital platforms - for example, in the areas of mobility (such as mobility platforms) or energy (such as energy services platforms) - constitute a new type of infrastructures, albeit a digital form of infrastructure.

 
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