Regulating Platforms as Intermediaries

One of the fundamental debates around digital platforms is the nature of their services. Are communications platforms providing telecom and media services, or are they merely intermediating such services? Are transport platforms providing transport services, or are they intermediating transport services provided by third parties?

The answer to these questions carries the most relevant consequences: if they are considered providers of the underlying services, they would have full liability for them, just like editors, transport service providers, and so on.

We believe that a sound understanding of this model of industrial organization naturally leads to the conclusion that platforms are intermediaries facilitating the interaction between third parties. Platforms are not media editors, they are not telecom carriers, nor are they transport companies and so on.

However, platforms as intermediaries are not exempted from regulation. Intermediation has always been an activity prone to conflicts of interest and abuses, so there are many precedents for regulating intermediation services.

We believe that digital platforms should be subject to legislation that imposes upon them the basic obligations traditionally imposed upon intermediaries: namely, the obligation to protect and promote the interest of their users.

Platforms Provide Intermediation Services

Digital platforms provide intermediation services. The regulation of digital platforms must acknowledge the new model of industrial organization. Platforms create network effects by facilitating the interaction of third parties in multi-sided markets. Platforms are not replicating the traditional industrial model of building large, hierarchical, vertically integrated organizations accumulating assets to provide goods and services to consumers. On the contrary, platforms create value by providing the structure that facilitates the most efficient interaction, the optimal coordination among third parties.

The most evident form of intermediation is that of matchmakers. Matchmakers rely on the aggregation of supply and demand and then intermediate so that supply and demand meet in the most efficient way. The larger the pool of suppliers and consumers, the more powerful the network effects. The only way to grow the massive scale to exhaust the network effects is to rely on third-party suppliers. Airbnb would not be able to obtain the investment it would need to build the assets that have been made available through the platform. Uber would not be able to acquire the number of vehicles across the world itwould need to provide the transport services made available through the platform. The ambition of the platforms is not to be the providers of goods and services, but to mobilize the goods and services provided by third parties to coordinate them for the customers in the most efficient way.

Intermediation can take other forms. Search engines such as Google are also facilitating the interaction among third parties. The algorithms developed by the platform facilitate the interaction between the individuals looking for content and the content producers. Interaction with advertisers is then facilitated to finance the platform. Non-transactional platforms facilitate the interaction of advertisers and eyeballs. The audience interacts with the ads produced by advertisers, even if such interaction does not take the form of a contractualized service provision between them. From a legal perspective, platforms are not providing an intermediation service, but they are certainly facilitating interactions among third parties. In this sense, innovation platforms such as operating systems are also intermediating between software developers and users.

Intermediation must be considered as a service in itself. There are many examples of individuals and companies providing intermediation services: real estate agents, insurance agents, stock exchanges, marriage brokers, etc. The disputes and conflicts of interests derived from the provision of intermediation services are well-known. There is legislation, case law, and even codes of conduct governing the provision of intermediation services. The conflicts of interest and potential abuses of platforms as intermediaries are not greatly different from those faced by traditional intermediaries. The regulation of online platforms should be built upon these precedents.

Ancillary services are often provided together with the intermediation service. Platforms often provide information about the service providers, in the form of ratings, comments by users, etc. It is also common for platforms to manage payments on behalf of the service providers. These services are complementary to the intermediation service and they do not modify the fact that intermediation is the main service provided by digital platforms.

In some cases, digital platforms not only intermediate services provided by third parties, but also provide their own services. As already described, this is the case with Amazon, which started as a retailer and was later opened up to other retailers in the Amazon Marketplace. Apple and Google intermediate their own apps in their app stores. Uber started as a platform, but then evolved to include bikes and scooters provided by Uber itself. This evolution does not undermine the nature of the new model of industrial organization.

Once the business model of this form of organization is fully understood, it becomes evident that platforms should not be regulated as the providers of goods and services. They are not providing the underlying goods and services, but they are intermediating in the provision of the underlying goods and services. This is a business and a business model in and of itself.

A basic mistake when regulating platforms is to automatically extend the regulation of the underlying good or service to the platform intermediating it. Platforms are not providing the good or service; they are intermediating it. It is true that platforms have developed contracting procedures that work with minimal friction, in a way that might even make users think they are contracting the provision of the service with the platform itself. Regulators should not fall into such a trap.

Liability is one of the main consequences of the attribution of the provision of the service to the platform. Platforms become fully liable for the services provided when they are considered not an intermediary, but the service provider. The cost of operation is increased as a consequence.

The application of labor law is another consequence of considering the platforms as the provider of the good or service. In most jurisdictions, if the platform is considered the provider of the service, the individuals executing the service are not independent providers, but employees of the platform. This could be the case of Uber drivers, bikers intermediated by delivery platforms, etc. Again, extending labor law to the relationship between platforms and individual service providers increases the cost of running the platform.

Increasing the costs of running platforms by attributing full liability for the provision of the underlying service and characterizing the individuals using the platform to provide services as employees reduces the speed at which platforms create network effects. Network effects can be created quite quickly by mobilizing third-party resources. The higher the regulatory costs imposed on platforms, the slower the speed at which network effects are created.

The creation of network effects can even be made impossible if platforms are declared to be the service providers and high costs are imposed on them. The potential for a platform to grow can be limited to the point of making it unsustainable if, for instance, it is forced to contract as employees all the individuals who have been using the platform to intermediate their services.

If platforms in multi-sided markets are understood as a new model of industrial organization, and if the value derived from the creation of the network effects is honored, it is almost an automatic consequence that the regulatory framework should acknowledge the intermediary nature of the activity of the platforms, and not impose unnecessary regulatory burdens to the creation and growth of network effects. Users and society as a whole will benefit from the value created by platforms.

Regulating platforms as intermediaries does not exempt platforms from regulation. Intermediation services are subject to abundant regulation in all jurisdictions. There is legislation, case-law, and codes of conduct setting rules to ensure fairness and transparency in the provision of intermediation services, as well as specific redress mechanisms. This is necessary because intermediation is an activity prone to conflicts of interest and abuse.

US advertisers were shocked in 2016 when it was disclosed that media agencies they had hired to secure best-performing advertising slots in media were receiving large rebates from media companies.1 When an agency contracted ad space on behalf of an advertiser, the media company would grant a rebate to the agency of 15-20 percent of the total expenditure. Rebates should have been disclosed by agencies to advertisers, if not directly passed on to them. Were agencies acting in the best interest of their customers? Was the undisclosed rebate giving the agencies an incentive to act in the interest of the media company? Was the agency putting its interest ahead of the interest of the customer?

Mistrust in intermediaries is universal, and often justified. Taxicabs traditionally complained about taxi dispatchers manipulating the assignment of services in favor of certain taxi drivers. Real estate agents, insurance brokers, and many other intermediaries are mistrusted to the point where conflicts of interest and abuse become the subject of bad jokes.

Therefore, intermediation activities are often regulated. Most jurisdictions have adopted specific legislation to regulate specific intermediation activities. This is the case of small-scale intermediation, which includes real estate agents, insurance brokers, travel agents, freight forwarders, etc. This is also the case of larger-scale operations, such as payment cards and stock exchanges. There is abundant case-law on conflicts with intermediaries, and codes of conduct self-regulating the activity of intermediaries are also common.

It is surprising that such a vast amount of precedents has not informed the regulation of digital platforms. Platforms have always maintained that they are mere intermediaries, not the providers of the underlying services they intermediate. Nonetheless, as intermediaries, they have at least the same conflicts of interest as those identified for traditional intermediaries. When intermediation is undertaken at a large scale, automated by algorithms, conflicts of interest do not disappear; they grow in scale.

Regulation of intermediation services provided by digital platforms can be inspired by the existing rules on intermediation. For example, an interesting lesson can be drawn from the rules defined for one of the most popular intermediation services, that of real estate agents. The Code of Ethics and Standards of Practice of the US National Association of Realtors2 can be a useful guide to identify the most common conflicts around the intermediation activity, and so are the rules imposed to ensure fairness and transparency in the provision of intermediation services by digital platforms.

 
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