The Case for the Digital Platform Act: Market Structure and Regulation of Digital Platforms Harold Feld May 2019 This document is released under Creative Commons license Attribution-NonCommercial-ShareAlike 4.0 International License (CC BY-NC-SA 4.0) ROOSEVELTINSTITUTE.ORG | PUBLICKNOWLEDGE.ORG Foreword by Tom Wheeler A late 1970’s television commercial for stock brokerage firm E.F. Hutton closed with the tagline, “When E.F. Hutton talks, people listen.” On technology-related policy matters in the 21st century, when Harold Feld talks, people listen. We now have the advantage of Harold’s speaking between two covers. The volume you hold in your hands is a tour de force of the issues raised by the digital economy and internet capitalism. Whether you agree or disagree with Harold, these thoughts will stretch your intellect and stimulate your thinking. Digital platforms are a unique creation of the late 20th and early 21st centuries. The digital economy may have replaced the industrial economy, but the rules created to oversee the fair operation of the industrial economy have not kept pace with that evolution. This volume sets out numerous thoughts about the kinds of policy changes necessary to reflect the realities of our new era. Thus far, the companies of the digital economy have been successful in keeping government oversight at bay. The growth of these companies happened to coincide with the era of deregulation. The companies seized that momentum to spin the story that somehow “digital is different” than traditional analog activities and thus needed to be left alone. It has always been true in history that the pioneers made the rules … until their activities infringed on the rights of individuals and the public interest. We have now reached that watershed. Just as rules were established for industrial capitalism, it is now time to think about guardrails to protect competition, consumers, and workers in the era of internet capitalism. In the process, such policies will also protect internet capitalism from its own incentives to excess while embracing its ability to stimulate new and innovative products and services. Digital information—the basis of the new economy—is unlike any other asset in history. All other assets, such as oil or gold, are finite, both in supply and demand. Produced by the interconnection of microcomputers, digital information is inexhaustible. Every action on the network produces data that is used to create a new data product, which then creates additional data, which creates a new product. It is a digital perpetual motion machine. ROOSEVELTINSTITUTE.ORG | PUBLICKNOWLEDGE.ORG 2 It is this new reality of an inexhaustible and manipulatable asset that has reshaped our economy to create internet capitalism. There are at least four consequences of the digital economy that require oversight. The first is the “digital alchemy” that turns personal information into a corporate asset and how this inexhaustible supply of data is harvested by a handful of companies for their commercial gain. The new information economy is based on the mining of this data to develop ever more granular insights into each of us that can be sold to marketers seeking to promote their product or idea to targeted audiences. Once having collected this data, the companies create a bottleneck to its use in order to maximize its monetization. In Medieval times, information was hoarded by the powerful as a tool to control the masses. Over half a millennium later, the hoarding of information is now used for a new kind of control: to control markets. Controlling access to the collected data, for instance, allows the platform companies to cannibalize local businesses by knowing more about the neighbors than even the locals do. Third, the hoarding of concentrated data is also used to keep new competitors from entering the market. A new company has the “cold start problem,” which is the challenge of beginning a new business without the data asset for which customers are willing to pay. Because innovators do not have the data assets of the incumbents, they are at a huge handicap entering new markets—a handicap that further reinforces the power of those who siphon personal information and turn it into a corporate asset. Finally, such control of data also gives the digital companies the ability to control the future. As machine learning and artificial intelligence become the tools by which data is manipulated, those with the greatest storehouse of data thus have a leg up to control the development of ever-more intelligent algorithms—and ultimately, to control the future. It is through this forest of challenges that Harold Feld charts a path. This volume is a thoughtful and creative effort to put forth new proposals for the oversight of those who control the networks and platforms that determine our economic and individual digital reality in the 21st century. ROOSEVELTINSTITUTE.ORG | PUBLICKNOWLEDGE.ORG 3 EXECUTIVE SUMMARY Digital platforms play a central role in the economy and our everyday lives. Their rapid development since the birth of the public commercial internet over 20 years ago has produced many societal benefits and new opportunities for free expression and innovation. Each platform has distinct characteristics, but in recent years specific concerns have grown around their dominance in the marketplace and impact on key parts of daily life. This book provides a framework for the ongoing debate on the regulation of digital platforms. It aims to unite ongoing debates on competition, content moderation, consumer protection, and public safety/law enforcement into a unified whole. Drawing on the lessons of the last 100+ years of telecommunications and media law, we see that digital platforms raise many of the same policy challenges that the rise of the telephone and radio broadcasting created in their day. Like today’s digital platforms, the advent of electronic communication and electronic mass media raised similar questions as to what responsibilities the new broadcast networks owed to maintaining a democratic society, how to protect consumers from new opportunities for fraud or abuse through the technologies coming directly into their homes, and how to address the alarming tendencies of these businesses to gravitate to monopoly absent regulatory intervention. As with Silicon Valley, the rise of broadcasting and the telephone went through an initial stage of techno-euphoria to a subsequent “techlash” as the enormous economic, political, and social power of these increasingly concentrated industries became clear. Specifically, I propose the following to comprise a federal “Digital Platform Act”: Definition of “Digital Platforms”: Sector-specific regulation requires a definition of the sector. I define a digital platform as: (1) A service accessed via the internet; (2) the service is two- sided or multisided, with at least one side open to the public that allows the public to play multiple roles (e.g., content creator as well as content consumer); and (3) which therefore enjoys particular types of powerful network effects. As I explain in Chapter 1, these characteristics create a set of abilities and incentives unique to the defined sector. While the debate around competition generally focuses on a handful of dominant players, concerns about consumer protection and content moderation extend to small companies as well. For example, the perpetrator of the mosque shooting in New Zealand uploaded his video of the shooting not only to massive platforms such as Facebook and YouTube, but to ROOSEVELTINSTITUTE.ORG | PUBLICKNOWLEDGE.ORG 4 numerous small platforms as well. This allowed the content to continue to spread and reappear on the larger platforms despite literally millions of takedowns over a period of 24 hours. Cost of Exclusion, A New Measure of Platform Dominance Behaviors that are harmless, or even positive, in competitive markets may become anticompetitive or anti-consumer when a market becomes concentrated. For that reason, sector-specific regulation often distinguishes between dominant firms and non-dominant firms. This is especially true when sector regulators are trying to affirmatively promote competition in a concentrated industry, or where the economics of the industry create an unusually strong tendency toward concentration. “Dominance,” however, is a tricky concept. Definitions of, and tests for, economic dominance vary enormously depending on the specific characteristics of the specific market. Therefore, I propose a new measure of dominance: the “cost of exclusion” (CoE). This measures the cost to a business or individual of being excluded from a specific platform. If that cost is sufficiently high, then we should assume that the firm under scrutiny is a dominant firm and that the economic power and social impact of firms with high CoE requires targeted regulation to promote competition and protect consumers. I anticipate that many of the pro- competitive policies described in Chapter 4 will apply, if they apply at all, only to firms with a high CoE (i.e., dominant firms). Adopt a Set of Specific Values to Govern Regulation of Platforms We have long recognized that the object of regulation is to achieve particular social goals that express our values as a society, not to promote some abstract state of economic efficiency for its own sake. Indeed, it is the vital role of Congress to decide when to sacrifice “economic efficiency” for such social goals as ensuring access to vital services for all Americans, promoting democratic discourse, and protecting consumers from harm. I recommend that any regulation of digital platforms, particularly any regulation that hopes to address the wide scope of concerns in a comprehensive manner, must begin by embracing these fundamental and enduring values. Sector-Specific Regulation: Policy Proposals After outlining the aforementioned general principles, I propose the following specific policy changes for consideration by Congress and regulators. Designate a federal agency to have ongoing and continuous oversight of the sector.