Pro-competition Behavioral Obligations
Behavioral obligations can be imposed on platforms with market power to promote competition and make the markets contestable. Traditional network industries have experimented with different behavioral obligations to promote competition. In the early days of the network industries, monopolies were promoted by public authorities, and subsequently subjected to control. More recently, regulation has focused on the re-creation of competition in the different network industries, if necessary through the regulation of the existing bottlenecks, including the regulation of the network effects. This experience seems to be of the highest value to define the regulation of platforms in multi-sided markets. At least four obligations can be identified, many of which replicate regulatory measures already implemented in the traditional network industries, mostly in telecoms: data portability, prohibition of exclusivity to foster multi-homing, interoperability, and data openness.
First, data portability is an instrument to reduce lock-in effects.25 Reducing switching costs is a traditional strategy for fostering competition in deregulated network industries. Lock-in effects can be identified and then eliminated through regulatory obligations. The best example is number portability in the telecommunications industry. It was identified that telephone users were reluctant to change carrier if they would have to change their telephone number. All carriers were then obliged to work together to ensure that customers would have the right to take their telephone number with them when switching from one carrier to another.
Data is the raw material in the digital industries and has been identified as one of the barriers to switch platforms, as well as a barrier to entry for newcomers. Data fed by customers is often the obvious barrier to switch platform. Users might have spent years feeding their social network profiles, actually becoming the repository of the content they produce (pictures videos, etc.). They will hardly be in the position to switch to an alternative social network if they cannot take such content with them. The same problem is faced by all kinds of application fed with user data, such as applications tracking exercise, sleep patterns, and so on.
Data portability, clearly inspired by number portably, has been proposed as a solution for this obvious lock-in effect. Platforms would be obliged to create a feasible way for customers to take their data with them to another platform. Data portability is also a consequence of more structural debates on data ownership, namely as to whether the owner of the data is the person generating it, or the platform enabling the management of the data.
Data portability is already included in the EU General Data Protection Regulation (GDPR): “The data subject shall have the right to receive the personal data concerning him or her, which he or she has provided to a controller, in a structured, commonly used and machine-readable format and have the right to transmit those data to another controller without hindrance from the controller to which the personal data have been provided.”26 Data portability under the GDPR applies only to data uploaded by users and not to data that is inferred about them, which is most likely the majority of the data that platforms possess about their users.
However, data portability requires sophisticated management of data, coordinated across platforms by setting common standards. It is necessary to structure data in a way that can be processed by the new platform. Regulatory intervention is necessary to make data portability a reality.
Second, the prohibition of exclusivity clauses and the promotion of multi-homing is a pro-competition intervention. Multi-homing is the parallel and simultaneous use of competing platforms by users, either service providers, final users, or both. Hosts often display their accommodation units in Airbnb and other competing platforms at the same time. Guests often look for accommodation on Airbnb and also in competing platforms. The term “multi-homing” has its origin in computer lingo, when a computer was connected to more than one network, usually to increase reliability.
Multi-homing reduces barriers to entry as newcomers can build scale by selling services to customer already engaging with another platform. Multi-homing enables newcomers to replicate the scale of incumbents, as there is no obstacle to sign as many customers as the largest platform. All market players can build similar network effects by pooling together the same customers.
Multi-homing imposes a burden on users (both service providers and consumers) as they must make concurrent use of more than one system. They have to work with two or more applications, learn to use them, take the potential costs, etc. This is sometimes a cost that can be perfectly assumed, as multi-homing is simple and does not trigger high costs. In the early days of telephony in the US, merchants had to subscribe to two or three carriers in order to be able to reach all telephone users in a town, multiplying the number of contracts. This is still the case today in some African countries.
The burden on users is sometimes so onerous that multi-homing is not feasible. It was already identified how gamers are reluctant to acquire more than one videogame console due to the high cost of the hardware. Gamers tend to avoid multi-homing due to the high cost it entails. Social network users are also reluctant to multi-home, as uploading information and replicating the upload of the same pictures, stories, etc. is perceived as too time-consuming and of little interest, as most users are already on the largest platforms. Therefore, alternative platforms focus on niche markets instead.
Sometimes multi-homing is not feasible because the dominant platform actively disincentivizes it. Dominant platforms can obstruct multi-homing by imposing exclusivity on customers, mostly to service providers. As long as it is feasible, service providers usually prefer to work with more than one platform, so that they do not depend on an exclusive intermediary to commercialize their services. However, facing the choice to exclusively work with the market leader (with the largest pool of users) or be excluded from the largest pool of users and contracting only with a smaller platform, service providers will rationally choose the largest player. This strategy accelerates market concentration, reaching the tipping point where network effects enjoyed by the largest platform cannot be replicated by competitors. There are more subtle ways to impose exclusivity. Platforms can grant rebates to customers, such as to guests in accommodation platforms, incentivizing to grow the volume of business made with the platform. Such rebates disincentivizes working in parallel with another platform.
Competition authorities have identified exclusivity clauses imposed by platforms as the most relevant threat to competition in multi-sided markets. As a consequence, the most common remedy in platform mergers has been to prohibit exclusivity clauses to facilitate multi-homing. This has been common in food delivery27 and ride-hailing mergers.28
This obligation could be extended beyond mergers as a regulatory obligation imposed on platforms beyond certain thresholds in terms of revenue, number of users or market shares. Obligations could also be imposed to actively promote multi-homing.
Third, another pro-competition behavioral obligation to be imposed on network industries is interoperability, which is defined as the “capability to communicate, execute programs, or transfer data among various functional units in a manner that requires the user to have little or no knowledge of the unique characteristics of those units.”29 Interoperability allows the simultaneous use of more than one network, not in parallel -as in the case of multi-homing - but thanks to the forced cooperation of the competing platforms. A network manager is allowed access to the network built by a competitor so that a service can be built for the final customer including elements of both networks.
Interoperability is the key to protecting existing network effects while avoiding the market power that derives from them. Telephony provides the clearest example. Network effects are expanded, as users can reach a larger volume of individuals. As described in Chapter 6, AT&T’s Theodore Vail wanted “one system” ensuring “universal service.” He assumed that “one system” meant a single provider, a monopoly. However, one system can be built by interconnecting all the telephony companies and ensuring the interoperability of their services. All users of a telephone company could contact any other user of the telephony service, even if served by another company. It was only necessary to ensure that all telephony networks would be interconnected. Vail’s AT&T consciously obstructed all request to interconnect telephony networks.
Deregulation of telephony services was based on the obligation to interconnect all telephony networks to ensure interoperability. Such an obligation would be imposed on the incumbent with the largest market share and also on the rest of players to ensure the full interoperability of all the existing networks. Access regulation is imposed on railway infrastructure managers, airports, electricity grids and so on. This form of network access regulation reinforces network effects, as the telephone system is universal in reach: anyone can call anyone else. However, the network effects are not monopolized by a single company; they are shared among all the market players as they are all interconnected and their services are interoperable. Of course, small carriers are happy to share their small network effects with the rest of the carriers. The largest carriers, who would have a competitive advantage due to their larger networks, have little incentive to surrender their competitive advantage. They only provide access to their networks to competitors because they are obliged to do so by the existing regulatory framework.
Both in the US and in Europe, regulated competition in the traditional network industries is focused on the same objective. Market power has to disappear or at least be disciplined by competition from other service providers. Network effects are recognized as a leading source of market power. The objective is not to destroy the network effects, but to impede them from becoming a competitive advantage. The value of such effects is recognized, honored, and protected. Regulatory policy is focused on keeping network effects, while avoiding them becoming a source of market power over other market players.
Regulating interoperability is technically complex. It was not easy to regulate it in telecoms or electricity, it appears to be very difficult in railways, ports, or airports. After more than 40 years of interconnection regulation in telecommunications, one might think that such regulation was easy to implement, but this was not the perception back when access regulation had to be developed after the breakup of the Bell System. For AT&T, even something as simple as a plastic device to be wrapped around the fixed phone to reduce noise and protect the confidentiality of the conversation was a potentially dangerous access to the network that required meticulously detailed technical specification.30 Full regulation of the interoperability of telephony networks was a technical and economic challenge.
Platforms can be forced to share their network effects by allowing interoperability with competitors. From a technical point of view, platform interoperability requires the development of specific APIs (application programming interfaces). No physical access takes place, as is the case with access to infrastructure networks. It all happens at the data layer, in the form of software. APIs allow third parties to interface with proprietary software owned by a platform. The more complex the software of the platforms, the more complex the APIs, but there is no fundamental technical obstacle to open the platforms to third parties, to competing platforms.
Most platforms already have APIs to interoperate with third parties. Mobile operating systems allow third parties to develop apps. Facebook allows third parties to develop games and other applications to be integrated into its platform. Throughout this book we have given examples about how newcomers built network effects on top of preexisting networks. WhatsApp extracts contacts from a smartphone’s directory. It used to be common to identify contacts in a platform to build new networks, but incumbent platforms tend to block this kind of interoperability.31
Incumbent platforms are understanding!}' reluctant to develop APIs to interoperate with competitors in such a way that network effects are shared with newcomers. This can happen in different ways.
The most obvious example of platform interoperability is that of the services provided by communications platforms. Just as emails can be exchanged across platforms, instant messages could be exchanged between communications platforms such as WhatsApp, Google Hangouts, Apple’s Messages, and WeChat. This is not the case at the moment. Facebook even used Federal Criminal Law in the US against a small startup called Power Ventures, which was trying to make different platforms interoperable.32 All the leading communications platforms are closed systems, competing to outgrow other platforms, following Vail’s strategy.
The first example of regulation imposing platform interoperability can again be identified in the European Union. As already described, the new European Electronic Communications Code foresees the possibility of imposing interoperability on “numberindependent interpersonal communications services”; that is, platforms such as WhatsApp and Skype “which reach a significant level of coverage and user uptake.”33
Interoperability can be expanded to more complex interactions intermediated by platforms. In social networks, content uploaded in a platform would be accessible from another social network.34 Even further, a small accommodation platform could interoperate with Airbnb and provide its final users access to hosts in Airbnb. In this way, small providers would have access to Airbnb’s large pool of hosts. The network effects created by Airbnb would be shared with smaller competitors.
From an operational point of view, access to online platforms poses the same challenges as those originally posed to infrastructure networks. Third-party access would force platforms to standardize their rules and procedures to make them available to third parties. Such standardization would introduce an element of rigidity in the management of the platforms, as changes have to be extended to third parties, giving them time to adapt their software and operations. This is more of a problem for platforms than for infrastructure networks, as platforms are more dynamic and evolve faster than infrastructures. However, platforms tend to become more stable as they mature. Small platforms can constantly change conditions and internal rules and procedures as they look for the most effective algorithms to match supply and demand. Larger platforms have massive customer bases and face more rigidity when looking to making substantial changes to their rules and operations. Therefore, and because there is no reason to regulate small platforms with no market power, interoperability regulation should be limited to large mature platforms.
In any case, the main operational challenge derives from the possibility of imbalances derived from feeds introduced by interconnected platforms. For example, small interconnected platforms might increase the number of potential guests in Airbnb’s platform, unbalancing the equilibrium that Airbnb has been between guests and hosts. Again, this is not specific to platforms when compared to infrastructure networks. Telephony networks have always raised the risk of traffic overflow if they would be open to competitors. Specific mechanisms were introduced to avoid such risks, such as in the form of contractual commitment forecasts regarding the traffic to be passed from one network to the other, higher prices and penalties in case of not meeting the forecasts, financial guarantees, etc. Unbalancing incumbent platforms is as dangerous as congesting physical infrastructure with non-forecasted traffic. Even if - or maybe because - they are virtual, digital networks rely on a delicate equilibrium among all the parties in the ecosystem. Opening a digital network to third parties certainly poses a risk to the existing equilibrium, but experience in physical networks has shown that such a risk can be managed.
Network effects would not be diminished by mandating interoperability to platforms, but would actually be reinforced, as more users would join the platform. The experience of traditional network industries suggests that a whole regulatory framework, including institution building, is necessary in order to make access regulation effective. Competition law cannot guarantee the continuous control that is necessary in order to enforce interoperability rules.
Antitrust has instruments to mandate access. The essential facilities doctrine was built in US antitrust to ensure access to facilities that cannot be duplicated and are considered essential for competition by third parties in a downstream market. Actually, railroads were at the origin of the essential facilities doctrine (Terminal Railroad Association case in 1912), which has subsequently been applied in the electricity industry (Otter Trail in Power Co. vs. United States in 1973); telecommunications has provided the leading cases decided by the Supreme Court (MCI vs. AT&T in 1979 &c Verizon vs. Trinko in 2004).
However, the essential facilities doctrine is exceptional in US antitrust. Rather than preventing monopolization through the proscription of exclusionary practices, the essential facilities doctrine comes as close as antitrust ever has to condemning “no-fault” monopolization, to judge the fairness of the monopolist’s behavior, and to impose the traditional common carrier obligation to serve everyone on reasonable terms. Platforms are again raising the interest of antitrust lawyers in the essential facilities doctrine. There is growing academic literature on the topic.
Finally, data openness is a behavioral pro-competition measure proposed in the Furman Report.35 As described above, algorithmic network effects rely on the availability of massive datasets to be used for machine-learning purposes. Access to such datasets is a competitive advantage, such as in the search market. Sharing datasets would reduce the barrier to entry for newcomers and allow them to challenge the position of incumbent platforms.
Being a highly intrusive obligation, and being risky in terms of personal data protection, the Furman Report advised certain checks and balances: data exchanges could be made in a controlled environment with pre-approved entities, under the supervision of the data protection authorities and be limited to opening up raw underlying data that is an input to the service, rather than processed information where companies have invested further in deriving insights and inferences from the original data.