Differences between the Old and the New Network Industries

However, one should not conclude that the traditional and the new network industries end up being identical in all their dynamics. Just as there are significant differences among the different traditional network industries, there will be differences in the new network industries as well.

The main specificity of the new network industries is the relevance of indirect network effects. Value is created by coordinating multiple groups (at least two) rather than one as is common in traditional network industries. This distinguishes these companies not only from other network industries, but from most of the firms in the industrial economy.

Digital platforms do not need to build and own the assets they are coordinating. As they reduce transaction costs, they can rely on the market to make the assets available for other users. They do not need to integrate the assets into the firm under a hierarchical structure. They can build the complementarities empowering network effects without owning the assets.

This is actually the only way to build the complex ecosystems around digital platforms. Traditional network industries were mostly a single infrastructure, a single service market, exploiting direct network effects. Because the new network industries build complementarities between multiple types of assets and services, indirect network effects are relevant. Value is created by coordinating a large and varied constellation of players around the platform. Any analysis of a platform, and also the regulatory analysis, must take into consideration the entire ecosystem around them.

Another fundamental difference is that the complementarities empowering network effects in the platform markets are built in a data layer, while in the traditional network industries they were built on the infrastructure layer (single infrastructure or interconnected infrastructures) or on the services layer (scheduled coordinated services such as in air and maritime transport).

As a direct consequence, network effects can be more easily built in the data layer. Digital platforms require a smaller investment to create network effects than the infrastructurebased network industries. Traditional network industries, railways in particular, pushed the frontier of the capital markets and were behind the creation and growth of such relevant capitalistic institutions as corporations, banks, stock exchanges, etc. The industrial age infrastructures required a concentration of capital that was previously unknown. Digital network effects also require massive capital to grow to a global presence. As explained, growing platforms is a business in itself, a capital-intensive business, but the amount of capital required to build digital platforms is far from the amount needed to build physical infrastructures.

Another direct consequence is dynamism. Physical infrastructures are static and, once deployed, usually have a long life-cycle that can easily run into decades. Technological developments and progress certainly plays a significant role in the infrastructures and many improvements have taken place over the last century. But improvements have been incremental, not revolutionary; they have been slowly implemented. Digital network industries rely on software that can be easily modified. Actually, platforms are constantly testing new features; responses by users are constantly monitored and measured. New features that are deployed and tested with limited parts of the customer base are expanded to the entire community if successful, from small changes in color in the graphical interface to new incentives for the different sides in the multi-sided market. In any case, it is important to recognize that dynamism is more relevant in the early stages of a new digital market, and that once a business model proves successful, platforms become more stable. This has been the case with search engines, social networks, etc. The short life-spans of the early internet frontrunners (Netscape, Lycos, MySpace, and so many forgotten internet stars) have given way to the solid position of companies such as Google, Facebook, and Amazon, which have been leaders in their segments for ten or 15 years.

The geographic scope differs between traditional and new network industries. Infrastructure-based networks have always tended to be limited within the borders of a country. Large countries such as the US or China have large networks. Some operators have expanded across jurisdictions, with irregular success, but no global players have emerged in telecommunications, energy, and most of the transport industries (maritime is the exception). Platforms, on the contrary, have easily grown global. This is the case with multi-platforms around Google, Facebook, Amazon, and Apple. The only limitation seems to be political, as some governments in large countries have blocked the expansion of USbased platforms to support their own local platforms, particularly in China and Russia (with great success in China, the most populated country in the world).

Finally, regulation is another significant difference. Infrastructure-based networks are very heavily regulated by the authorities of the territories where they are deployed. Much of the regulation has been designed over the decades in order to maximize network effects: monopoly rights, access and interconnection obligations, etc. By contrast, digital networks are subject to very light regulation. There are various explanations for this phenomenon. First, deployment usually does not require the previous consent of the authorities in the form of licenses, concessions for the use of public land, etc. Second, market failures can only be identified once new services mature and are better understood by the regulators, so it is understandable that only at this stage, once platforms start to mature and the downsizes of their operations become apparent, does regulation start to be discussed. Third, the large scale and multinational presence of the leading platforms are a challenge for national authorities. Only very large countries or regional institutions such as the European Union have the power and reach to really subject the new giants to their regulations.

 
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