Online Platforms and the Digital Single Market Contents

Chapter 3: Defining ‘online platforms’

38.Before assessing whether specific regulation is required for online platforms, it is important to understand what online platforms are, their common features and their differences. Vice President Andrus Ansip told the Committee: “we do not even have a single definition of platforms accepted by everyone. We have hundreds of good definitions … But when different people are talking about platforms, they have a totally different understanding.”48

The Commission’s definition and description of online platforms

39.As part of its consultation on the subject of platforms, the Commission asked respondents if they agreed with the definition of an online platform that is provided in Box 1.

Box 1: The Commission’s definition of online platforms

“’Online platform’ refers to an undertaking operating in two (or multi)-sided markets, which uses the Internet to enable interactions between two or more distinct but interdependent groups of users so as to generate value for at least one of the groups”.

Source: European Commission, ‘Public Consultation on the regulatory environment for platforms, online intermediaries, data and cloud computing and the collaborative economy’ (September 2015) p 5: https://ec.europa.eu/digital-agenda/en/news/public-consultation-regulatory-environment-platforms-online-intermediaries-data-and-cloud [accessed 23 February 2016]

40.Alongside this definition, the Commission provided a taxonomy of different types of online platforms, as shown in Table 1.

Table 1: The taxonomy of online platforms used in the Commission’s consultation

Type of Online Platform

Example

General search engines

Google, Bing

Specialised search tools

Google shopping, Kelkoo, Twenga, Google Local, TripAdvisor, Yelp

Location-based business directories or maps

Google or Bing maps

News aggregators

Google News

Online market places

Amazon, eBay, Allegro, Booking.com

Audio-visual and music platforms

Deezer, Spotify, Netflix, Canalplay, Apple TV

Video sharing platforms

YouTube

Payment systems

Paypal, Apple Pay

Social networks

Facebook, LinkedIn, Twitter

App stores

Apple App Store, Google Play

Collaborative economy platforms

Airbnb, Uber, Taskrabbit, BlaBlaCar

Source: European Commission, ‘Public Consultation on the regulatory environment for platforms, online intermediaries, data and cloud computing and the collaborative economy’ (September 2015) p 5: https://ec.europa.eu/digital-agenda/en/news/public-consultation-regulatory-environment-platforms-online-intermediaries-data-and-cloud [accessed 23 February 2016]

41.Before launching its consultation, the Commission provided a more wide-ranging description of the roles played by online platforms in its Digital Single Market Strategy. This suggested that online platforms created value by organising and presenting information found on the Internet: “With more than one trillion webpages on the Internet and more appearing every day, platforms are an important means by which consumers find information online and online information finds consumers”49. It said that online platforms did this by collecting data from their customers and using algorithms to “filter, classify and present information to their users.”50 In this way, the Commission suggested, the “relationship between the different sides of the market meeting through the platform is organised by the platform provider.”51 It concluded that:

“This intermediary role gives platforms economic power but also, in some cases, power to shape the online experience of its customers on a personalised basis and to filter what the customer sees.”52

42.The Commission also noted that “the value of these platforms to consumers increases with their size” and explained that this economic phenomenon was known as a “network effect”. The Commission said that, as a consequence, online platforms “may in some cases become very large and act as key players for the wider Internet.” To illustrate this point the Commission provided a diagram which showed that “nearly half of Internet traffic goes to the only 1% of websites that are actively trading in all Member States.53

Strengths of the Commission’s definition and description

Economics of two- or multi-sided businesses

43.The Commission’s definition of online platforms is based on the economic theory of multi-sided firms or platforms. In 2007, David Evans, Lecturer in Law at Chicago Law School, and Richard Schmalenese, Howard W. Johnson Professor of Economics and Management at the Massachusetts Institute of Technology, defined a multi-sided platform as having:

“a) two or more groups of customers, b) who need each other in some way, c) but who cannot capture the value from their mutual attraction on their own; and d) rely on the catalyst (platform) to facilitate value creating transactions between them.”54

44.Dr Evans argued that the core function of a multi-sided platform is to provide a “common (real or virtual) meeting place and to facilitate interactions between members of the two distinct customer groups.”55 In this way, multi-sided platforms play an important role in reducing the transaction costs between groups of users who benefit from meeting. Transaction costs are the costs associated with participating in a market place and can include the search or information costs incurred in identifying relevant opportunities, the cost of negotiating agreements, and the cost of transferring a good or service.

45.Evans and Schmalenese suggested that the common element linking multi-sided platforms which act as intermediaries, was an interdependency between the distinct user groups, such that the “ greater involvement by agents of at least one type increases the value of the platform to agents of other types “—a phenomenon known in economics as an ‘indirect network effect’.56 They observed that, in order to be successful, multi-sided platforms have to entice user groups on both sides of the platform to join them, and that to do so they often charge both sides of the multi-sided market different prices. In this Evans and Schmalenese built on the work of Jean Tirole, the Nobel Prize-winning French economist, who first defined a two or multi-sided market as one in which a business could “affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side by an equal amount; in other words the price structure matters and platforms must design it so as to bring both sides on board.”57

Support for the theory of multi-sided platforms

46.Witnesses accepted that online platforms played an intermediary role between different user groups. The German Monopolies Commission described online platforms as “intermediaries bringing together various groups of users so that they can interact economically or socially”, and emphasised that “this intermediary function is a key common feature of online platforms”.58 Professor Gawer said that online platforms facilitate transactions and exchanges between groups that “would otherwise have difficulty finding each other”, thereby reducing search costs for both groups of users.59

47.A number of platforms described how this intermediary role worked in practice. First Tutors explained that: “Prior to FirstTutors.com, finding a tutor was a very expensive, opaque affair for consumers and for tutors a closed job market unless they met the arbitrary, discretionary requirements of the agency with which they were seeking to register.”60 As intermediaries, many online platforms emphasised that they did not own many of the assets being traded. Etsy described itself as an “intermediary” that “helps buyers and sellers find each other and facilitates transactions, but … does not make any products, hold any inventory, or ship any goods to consumers.”61 Airbnb said it provided “hosts and guests with the tools they need for a safer and more trusted environment where they connect with one another”; it did not “control, manage or rent these properties: hosts do.”62

48.Witnesses including Ofcom, the Competition and Markets Authority (CMA) and Professors Clemons, Ezrachi, Strowel, Stucke and Vergoute recognised that platforms were intermediaries in multi-sided markets.63 Professor Daniel Zimmer, Chairman of the German Monopolies Commission said that, although search engines and social networks appeared to be one-sided platforms because they have “users of the same kind—people who like to communicate over a social network”, they were in fact “a two-sided market” because they were “financed by advertisements” “64 Professor Zimmer explained that Google’s search engine brought together multiple user groups, namely “the people who are searching, the people who are advertising and the people who want their websites to be found” and therefore “appears to be at least a three-sided market”.65

49.Witnesses agreed that multi-sided businesses displayed network effects. Alex Chisholm, Chief Executive of the CMA, noted that these were multi-sided markets, and said that: “As such, they exhibit network effects, meaning that the more users use them, the more valuable they become.”66 Witnesses also commented on the asymmetric pricing structures identified by Evans, Schmalenese, Tirole and Rochet as characteristic of multi-sided platforms. These price structures were most frequently observed in platforms that relied on advertising revenue from one side of the platform to subsidise the user side and make the service commercially viable. Professor Rodden, Director of the Horizon Digital Economy Research Institute, said: “For many online platforms the default business model has become the ‘freemium’ / free to use model that is supported by advertising revenue.”67

Gateways to the Internet

50.Many witnesses shared the Commission’s view that online platforms were an essential means of organising the expanding amount of information found on the Internet. Google described itself as an Internet search engine “that organises the world’s information and makes it universally accessible”.68 Yahoo described itself as “an indispensable guide to digital information”, noting that it was “founded 20 years ago, with the goal of being a guide to everything on the World Wide Web.”69 Skyscanner considered online platforms to be valuable tools to manage “information overload” on the Internet, by reducing “the time the consumer would have otherwise spent searching for such products and services from various different sources.”70 Professor Gawer agreed that the role of online platforms on the Internet was of “huge strategic importance”: she suggested that they were a key part of the digital infrastructure which “has as much importance as electricity, water, highways.”71

The role of data

51.Witnesses also agreed with the Commission’s view that data were central to the operation of online platforms. The amount of personal data collected by online platforms was described by Nesta, the British Hospitality Association, BEUC, and e-Conomics as being “significant”, “huge”, and “massive”.72 The Information Commissioner’s Office said: “it is fairly safe to deduce that very large amounts of data are being collected by the major online technology companies.”73

52.We heard that collecting data was vital to enable online platforms to mediate between different user groups. The CMA wrote: “Data is often central to the activities of platforms, since so many of them are involved in matching disparate parties: if the platform does not know anything about the parties they are matching, they often cannot add value.”74 Skyscape described data as “the lifeblood of online platforms”,75 while Yahoo and TechUK both said the importance of data to online platforms could not be overstated.76 Ariel Ezrachi, Professor of Competition law at the University of Oxford, and Maurice Stucke, Professor of Law at the University of Tennessee, said: “the engine, the fire at the heart of this market, is definitely data.”77

Limitations of the Commission’s definition

Breadth of the Commission’s definition

53.While many witnesses, including the Computer and Communications Industry Association (CCIA), the British Hospitality Association (BHA), the British Academy of Songwriters, Composers and Authors (BASCA), and Professors Broughton and Tambini, agreed that the Commission’s definition was generally accurate, many also expressed concern at its breadth. Getty Images said: “We do not disagree with the Commission’s definition of online platforms but note that this is an extremely wide definition spanning many different industry sectors.”78 Digital Policy Alliance described the definition as “far too vague and wide ranging.”79 Google said there were “arguably more differences between platforms than there are similarities”,80 while Amazon argued that “there are few common threads to link such diverse businesses models”81 as those listed by the Commission. Yahoo told us:

“The specific business models described in the Commission’s questionnaire are extremely diverse. While they share some common characteristics (e.g.: they are all digitally native businesses), they are also very different in terms of their audience (B2B, C2C, B2C, or all three), their purpose (some allow users to connect with each other, others connect buyers with sellers of goods or services) and the sector concerned (e.g.: hospitality, travel, consumer goods, entertainment).”82

54.TechUK said that the problem with such a broad definition was that it was “not instructive in identifying specific problems that may occur in relation to specific platform functions and businesses. A more specific articulation of potential concerns, underpinned by evidence of harm, is needed to address potential problems in relation to platforms.”83 Airbnb said that while the Commission’s definition described a range of services enabled by the Internet, “it does not necessarily illuminate any cross-cutting regulatory issues that may need to be addressed.”84 Ofcom concluded that

“Such broad definitions may not be helpful either in defining the scope of a regulatory regime, the relevant concerns or the obligations applied to service providers. From Ofcom’s experience, effective regulation requires a clear definition of the services that are to be regulated, a specific account of the potential harm to be addressed, and hence a clear rationale for the specific regulation.”85

The inclusion of Netflix

55.Ofcom objected to the Commission’s inclusion of Netflix as an example of an audio-visual and music platform. They said that Netflix was a “service provider, which commissions programmes or buys them wholesale to create a retail service.”86 CCIA agreed, arguing that Netflix was not multi-sided because it did “not connect buyers and sellers on either side of the platform”.87 Google said that: “If Netflix fits this definition, then any digital company that provides consumers access to a good or service would qualify”.88

56.e-Conomics agreed that “Netflix is currently acting as a reseller of content” and that it was not therefore multi-sided, but noted that it might become multi-sided in future by permitting advertising on its platform. In this way, they suggested, “business models may change over time and so does the way in which a platform is operated.”89

57.In addition to concerns about the inclusion of Netflix, CCIA observed that it was problematic that the Commission’s list of examples “only includes companies that were born-digital” and excluded multi-sided businesses such as “commercial television companies, newspapers and magazines” that traditionally operated offline but had recently developed an online presence.90

58.Commission officials acknowledged that the use of examples such as Spotify and Netflix in their consultation had been questioned. Nevertheless, they felt that the inclusion of these examples alongside their proposed definition was justified in order to encourage debate. Mr Bailey, DG Connect, said that, as the Commission was yet to decide on a definition for online platforms, “we have deliberately invited comment where we might have got it wrong or where we want to nuance it … There are arguments that go either way on platforms, whether they are within or without. We will consider all the comments on those. Even Netflix has commented that it is not a platform. Others say it is a platform, so we are still to decide on that.”91

Conclusions

59.The Commission’s primarily economic definition of multi-sided online platforms offers insight into central aspects of these businesses including their intermediary role, the interdependencies that arise between their distinct user groups, and the role that data plays in intermediating between these groups. This provides a helpful way of thinking about online platforms that can usefully inform the work of policymakers and regulators.

60.The boundaries of the definition are, however, unclear. This is illustrated by the Commission’s own list, which excludes traditional platform businesses that now operate online, yet includes some digital platforms that are not multi-sided. Broadly interpreted, the proposed definition could encompass ‘all of the Internet’; strictly applied, it would only capture specific elements of the businesses with which it is concerned.

61.We recommend that further consideration of the need for regulation of online platforms should start by attempting to more precisely define the most pressing harms to businesses and consumers, and then consider the extent to which these concerns are common to all online platforms, sector-specific, or specific to individual firms.


48 Q 150 (Vice President Ansip)

49 Commission Staff Working Document, A Digital Single Market for Europe: Analysis and Evidence, SWD(2015) 100 p 53

50 Commission Staff Working Document, A Digital Single Market for Europe: Analysis and Evidence, SWD(2015) 100 p 53

51 Commission Staff Working Document, A Digital Single Market for Europe: Analysis and Evidence, SWD(2015) 100 p 52

52 Commission Staff Working Document, A Digital Single Market for Europe: Analysis and Evidence, SWD(2015) 100 p 53

53 Commission Staff Working Document, A Digital Single Market for Europe: Analysis and Evidence, SWD(2015) 100 p 53

54 David Evans and Richard Schmalenese, The Antitrust Analysis of Multi-sided Platform Businesses, National Bureau of Economic Research, Working Paper number 18783, (December 2012) p 7: http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1482&context=law_and_economics [accessed 13 April2016]

55 David Evans, Platform Economics: Essays on Multi-sided Businesses, Competition Policy International, (2011) p 2: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1974020 [accessed 3 March 2016]

56 David Evans and Richard Schmalenese, The Antitrust Analysis of Multi-sided Platform Businesses, National Bureau of Economic Research, Working Paper number 18783 (December 2012) p 2: http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1482&context=law_and_economics [accessed 13 April2016]

57 David Evans and Richard Schmalenese, The Antitrust Analysis of Multi-sided Platform Businesses, National Bureau of Economic Research, Working Paper number 18783 (December 2012) p 6: http://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?article=1482&context=law_and_economics [accessed 13 April2016]

58 Written evidence from Monopolkommission (OPL0046)

59 Q 1 (Professor Annabelle Gawer)

60 Written evidence from First Tutors EduNation Ltd (OPL0020)

61 Written evidence from Etsy Inc. (OPL0063)

62 Written evidence from Airbnb (OPL0061)

63 Written evidence from Ofcom (OPL0047), the Competition and Markets Authority (OPL0055), Professor Eric Clemons (OPL0071), Professor Ariel Ezrachi and Professor Maurice Stucke (OPL0043) and from Professor Alain Strowel and Professor Wouter Vergote (OPL0087).

64 81 (Monopolkommission)

65 Q 81 (Monopolkommission)

66 Q43 (Alex Chisholm)

67 Written evidence from Professor Tom Rodden (OPL0074)

68 Written evidence from Google Inc. (OPL0017)

69 Written evidence from Yahoo (OPL0042)

70 Written evidence from Skyscanner Limited (OPL0006)

71 Supplementary written evidence from Professor Annabelle Gawer (OPL0050)

72 Written evidence from Nesta (OPL0027), British Hospitality Association (OPL0023), BEUC (OPL0068) and e-Conomics (OPL0066).

73 Supplementary written evidence from the Information Commissioner’s Office (OPL0069)

74 Written evidence from the Competition and Markets Authority (OPL0055)

75 Written evidence from Skyscape Cloud Services Ltd (OPL0030)

76 Written evidence from Yahoo (OPL0042) and TechUK (OPL0056)

77 Written evidence from Professor Ariel Ezrachi and Professor Maurice Stucke (OPL0043)

78 Written evidence from Getty Images (OPL0045)

79 Written evidence from Digital Policy Alliance (OPL0051)

80 Written evidence from Google Inc. (OPL0017)

81 Written evidence from Amazon (OPL0064)

82 Written evidence from Yahoo (OPL0042). B2B refers to ‘business-to-business’ transactions, where one business makes a commercial transaction with another; C2C refers to ‘consumer-to-consumer’ transactions, and B2C to ‘business-to-consumer’ transactions.

83 Written evidence from TechUK (OPL0056)

84 Written evidence from Airbnb (OPL0061)

85 Written evidence from Ofcom (OPL0047)

86 Written evidence from Ofcom (OPL0047)

87 Written evidence from Computer and Communications Industry Association (OPL0040)

88 Written evidence from Google Inc. (OPL0017)

89 Written evidence from e-Conomics (OPL0066). e-Conomics is an independent consultancy and research network that focusses on digital and telecom related policy studies. Olga Batura, Nicolai van Gorp and Professor Pierre Larouche co-produced their submission, with guidance from Lapo Filistrucchi. Hereafter they will collectively be referred to as e-Conomics.

90 Written evidence from the Computer and Communications Industry Association (OPL0040)

91 Q 98 (Martin Bailey)




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